VirnetX Holding Corp
Annual Report 2014

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 or☐TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________________Commission File Number: 001-33852VirnetX 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 MKT LLCSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No oIndicate 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 xIndicate 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 oIndicate 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 oIndicate 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 xThe aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2014, was $908,164,887based upon the closing price of the common shares of the Registrant on June 30, 2014. This calculation does not reflect a determination that certain personsare affiliates of the Registrant for any other purpose.51,996,701 shares of Registrant’s Common Stock were outstanding as of February 20, 2015.DOCUMENTS INCORPORATED BY REFERENCECertain 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, 2014 in connection with the solicitation of proxies for the Registrant’s 2015Annual Meeting of Stockholders. INDEX Page PART I Item 1.Business4Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments21Item 2.Properties21Item 3.Legal Proceedings22Item 4.Mine Safety Disclosure23 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24Item 6.Selected Financial Data25Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations26Item 7A.Quantitative and Qualitative Disclosures about Market Risk35Item 8.Financial Statements and Supplementary Data36Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure57Item 9A.Controls and Procedures57Item 9B.Other Information57 PART III Item 10.Directors, Executive Officers and Corporate Governance58Item 11.Executive Compensation58Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter58Item 13.Certain Relationships and Related Transactions, and Director Independence58Item 14.Principal Accountant Fees and Services58 PART IV Item 15.Exhibits and Financial Statement Schedules59 2IndexWARNING CONCERNING FORWARD LOOKING STATEMENTSThe Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have included orincorporated by reference in this Annual Report on Form 10-K (including in the section entitled Management’s Discussion and Analysis of FinancialCondition and Results of Operations), and from time to time we may make statements that may constitute “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon ourcurrent expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated futureperformance (including sales and earnings), expected growth, future business plans and costs and potential liability for environmental-related matters. Anystatement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,”“anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions. These statements include our belief and statementsregarding general industry and market conditions and growth rates, as well as general domestic and international economic conditions. Readers arecautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and otherfactors, many of which are outside our control, which could cause actual results to differ materially from such statements and from our historical results andexperience. These risks, uncertainties and other factors include, but are not limited to those described in Item 1A - Risk Factors of this Annual Report on Form10-K and elsewhere in the Annual Report and those described from time to time in our future reports filed with the Securities and Exchange Commission. Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the risksdescribed herein should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made,and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.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. 3IndexPART IItem 1.Business.The Company We are an Internet security software and technology Company with patented technology for secure communications including 4G LTE security. Oursoftware and technology solutions, including our Secure Domain Name Registry and GABRIEL Connection Technology™, are designed to facilitatesecure communications and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voiceover Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and Machine-to-Machine, or M2M communications. Ourtechnology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-timecommunication solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundationof our business model. We currently own approximately 39 U.S. and 66 foreign patents with approximately 75 pending patent applications worldwide. Ourpatent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment andmaintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems andnetwork security for Cloud services, M2M communications in the new initiatives like "Smart City", "Connected Car" and "Connected Home" that wouldconnect everything from social services and citizen engagement to public safety, transportation and economic development to the internet to enable moreproductivity, features and efficiency in our everyday lives. The subject matter of all our U.S. and foreign patents and pending applications relates generallyto securing communication over the internet, and as such covers all our technology and other products. Our issued U.S. and foreign patents expire atvarious times during the period from 2019 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operatingsubsidiary; VirnetX, Inc., from Leidos, Inc., (f/k/a Science Applications International Corporation, or SAIC) in 2006 and we are required to make paymentsto Leidos, based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of value generated, andcertain categories are subject to maximums and other limitations. Our product Gabriel Secure Communication Platform™, unlike other collaboration and communication products and services on the market today, doesnot require access to user’s confidential data and minimizes the threat of hacking and data mining. It enables individuals and organizations to maintaincomplete ownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secureencrypted access from anywhere at any time. Our Gabriel Collaboration Suite™ is a set of applications that run on top of our Gabriel SecureCommunication Platform™. It enables seamless and secure cross-platform communications between user’s devices that have our software installed. Ourproducts have undergone extensive internal testing and are currently undergoing beta testing at over 80 small and medium businesses. Our products areexpected to be released for sale to general public in the first-half of 2015 after successful completion of our public beta testing program. We have executed a number of patent and technology licenses and intend to seek further licensees for our technology, including our GABRIEL ConnectionTechnology™ to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, withinthe IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE Advanced. We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that webelieve are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusivepatent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implementthe technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move intodeploying 4G/LTE Advanced devices and solutions.We have an ongoing Gabriel Licensing Program under which we offer licenses to our patent portfolio, technology and software, including our secure domainname registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our Gabriel ConnectionTechnology™ License is offered to OEM customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secureconnections using secure domain names within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK)to assist with rapid integration of these techniques into existing software implementations with minimal code changes and include object libraries, samplecode, testing and quality assurance tools and the supporting documentation necessary for a customer to implement our technology. Customers who want todevelop their own implementation of the VirnetX patented techniques for supporting secure domain names, or other techniques that are covered by ourpatent portfolio for establishing secure communication links, can purchase a patent license. The number of patents licensed, and therefore the cost of thepatent license to the customer, will depend upon which of the patents are used in a particular product or service. These licenses will typically include aninitial license fee, as well as an ongoing royalty. 4IndexWe have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft, Mitel Networks Corporation, NEC Corporation and NECCorporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain of ourpatents, for a one-time payment and an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current andfuture IP-encrypted products. In December 2014, we received an additional $23,000 cash settlement resulting from subsequent litigation with Microsoft (seeNote 14 “Legal Proceedings”). The 2010 settlement agreement was amended in December 2014 to settle the subsequent lawsuit with Microsoft, raising thetotal cash settlement with Microsoft, as amended, to $223,000. We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part ofsecuring the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and ConnectedHome. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain nameregistry.We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers,communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL ConnectionTechnology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers,laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 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 Leidos, Inc. Leidos, Inc. 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. The team has continued its research and development work started at Leidos, andexpanded the set of patents we acquired in 2006 from Leidos, into a larger portfolio of over 100 U.S. and international patents and with over 75 pendingapplications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority ofour future revenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patentportfolio. Please see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operations – Research andDevelopment Expenses for a description of our research and development expenses for the past 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, forexample, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participationwith leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain nameregistry.Industry OverviewWe believe that the rapid growth of mobile devices (smartphones/tablets/ultra-mobile PCs), with always-on network access, and need to socially interact withfriends and family while maintaining a constant online presence has transformed the “Internet of Web 2.0” in to the “The Internet of the People”. It hasbecome an evolving, rich and complex medium used by individuals and businesses to conduct commerce, share information and engage in real-timecommunications including email, text messaging, IM, and voice and video calls. We believe the user demand for high speed broadband access along with thequality of experience wherever they are and whatever BYOD (bring your own device) they may be using; Mobility, IP video delivery, and the move to cloudhave dramatically changed the way service providers deliver services. While wireline networks remain the primary mechanism for delivering premium andhigh bandwidth services, its growth has held steady compared to the growth of the mobile communications. The cost barrier to obtaining a mobile devicewith data access has disappeared allowing billions of people to have online access on fixed and mobile networks, and those users accessing socialnetworking websites, using peer-to-peer, or P2P applications, and uploading live content over the internet, which in turn is downloaded by millions, has ledto staggering growth in packet traffic. Not only is traffic growing and changing in nature, it’s location of origin and timing has become completelyunpredictable. There is a significant impact on the mobile signaling network, brought on by smartphone penetration and consumer use of “chatty”applications that do frequent network queries.We believe that as the users become more comfortable with using their smartphones/tablets and other connected devices, they will increasingly treat theirmobile and fixed/WiFi networks as a single network and demand seamless transition from one network type to another without any disruption of service. The4G/LTE standard was developed with the goal of creating a single IP network that is efficient, flexible, open up new business models and services revenuesand eventually lead to true “virtual networks” or software-defined networks (SDN). The service providers were forced to perform complete overhaul of theirtelecom network infrastructure in order to move from TDM paradigm to next generation IP networks based on 4G/LTE for dealing with this rapidly growingdemand. Before these network overhauls could be completed, some service providers decided to mislabel their hybrid 3.5G/HSPA+/partial LTEimplementations as 4G networks in order to stem the loss of revenue and protect themselves against the threat of being forever relegated to the role of pipeprovider. This marketing ploy has led to significant confusion and misunderstanding among users.Adding further fuel to the demand for mobile and fixed broadband services is the fast adoption of connected machines or devices, or embedded systemscapable of M2M communication. These M2M communications are made possible by a device (non-phone/tablet/pc such as a sensor) that is attached to amachine to capture an event that is relayed over a network via 3G/4G routers or fixed broadband lines, delivering data or events (such as temperature,location, consumption, heart rate, stress levels, light, movement, altitude and speed) to applications creating an “Internet of Things” or IoT. As the serviceproviders start deploying true 4G (Long Term Evolution-Advanced, or LTE-Advanced) and this pace picks up, we believe that almost every device will getits own unique identity and a high-speed connection to the internet over a high speed IP (Internet Protocol) based telecommunication network making it an“Internet of Everything”. 5IndexWe believe that growing security concerns and vulnerabilities in a large number of use-case scenarios due to the inherent “open” nature of this architecturecan throttle the successful adoption of these technologies. Security can no longer exist as a point solution, and enterprises everywhere are currentlyupgrading core IT infrastructure (systems, networks, and management) to integrate security into everything. Because of the complexity of today’s networksand the requirement to connect users from any location at any time on any device, enterprise buyers looking to improve security posture have to evaluateeverything from software solutions for smartphones to routers and switches with integrated security, massive security appliances for data centers, cloud-basedsecurity services, and security solutions for virtualized environments and public and private clouds. The portions of the IP-telephony, mobility, fixed-mobile convergence and unified communications markets that could benefit from our software andtechnology solutions, as forecasted by Infonetics and by our internal estimates, are expected to grow from approximately $96 billion of worldwide revenuesin 2012 to approximately $342 billion by 2017, representing a compound annual growth rate, or CAGR, of approximately 29%. We believe that this growingtrend represents a significant opportunity for us to license our technology and software, and establish our secure domain name registry.Enterprise Telephony – Unified Communications, VoIP, Telepresence and Video ConferencingEnterprise 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 EnterpriseTelephony has helped businesses significantly lower network operating costs by using a common network for voice and data. As the workforce becomesincreasingly dispersed, mobile features enabled by Internet protocol-based communications such as presence, unified messaging, peer-to-peer applications,find me/follow me, white-boarding and document sharing have become more commonplace. However, the development of the related security infrastructurehas lagged behind, leaving next-generation networks vulnerable to a multitude of threats including man-in-middle, eavesdropping, domain hijacking,distributed denial of service, or DDoS, spam over Internet telephony, or SPIT, and spam over instant messaging, or SPIM. These threats continue to highlightthe need for securing next-generation networks. As the use of Enterprise Telephony systems extends beyond the boundaries of an organization’s privatenetwork, security is likely to become an even bigger concern. Enterprises are increasingly deploying an array of communication methodologies integratedinto a single communications experience is often referred to as unified communications. We believe that unified communications have higher utility and canincrease productivity for users. The basic components of unified communications include: a directory for storing addresses, various modes of communicationwith each user/contact (desk phone, mobile phone, IM, etc.), message storage for all messages regardless of communication method and secure presence of auser's status for each mode of communication (available, away, busy, etc.).Based on our estimates using Infonetics and other market data, we believe that worldwide revenue from IP telephony products like IP-PBX including IPphones, service provider VoIP and IMS equipment, VoIP gateways, Enterprise Telepresence and Video Conferencing for businesses and UnifiedCommunication clients, is expected to grow from approximately $38 billion in 2012 to approximately $60 billion in 2017, representing a CAGR ofapproximately 9%. We believe our unique and patented solution provides the robust security platform required for providing on-demand securecommunication links between enterprises intending to communicate securely without manually configuring the connections. We believe a standard securitysolution such as ours will further accelerate the adoption of Enterprise telephony products in the market and allow enterprises to take full advantage of theserich content applications and real-time communications over the Internet, thereby significantly increasing their return on investment.IP Mobility- Smartphones, Embedded Devices, Machine-to-Machine (M2M) Devices (LTE)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 and support increasingly complex functions includingenhanced data processing, Internet access, e-mail access, calendars and scheduling, contact management and the ability to view electronic documents. Usershave continual access to these applications while on the move making them an increasingly essential business tool for the mobile worker. These devicesenable mobile workers to have similar functionality inside or outside the office thereby increasing employee efficiency. However, it is critical that thismobile environment have the same level of security as an enterprise's internal network.Embedded mobile broadband computing devices include PCs, netbooks, tablets, and mobile Internet devices (MIDs) with embedded mobile broadbandmodems to enable Internet access via a mobile broadband network. A growing number of these devices are now shipping enabled with LTE/4G. MobileInternet devices (MIDs) include handheld mobile Internet devices; e.g. eReader, gaming console, digital picture frame, digital camera, with embedded mobilebroadband modems. Mobile broadband routers have mobile broadband modems or antenna as the broadband connection; have multiple Ethernet ports andintegrated wireless access points for local area connectivity and bandwidth sharing; can have integrated hub or switch; may have an integrated statefulfirewall or IPSec VPN and are also known as mobile hotspot routers. 6IndexMachine-to-Machine, or M2M, connected devices, or embedded systems, connected machines are fast becoming the eyes and ears of the enterprise. Byadding sensors and networking technologies to the products they sell and the equipment they employ, companies are finding new ways to gather powerfulinsights and use new forms of data, thus creating a vast “internet of things”. This communication is made possible by a device (such as an intelligent sensor)that is attached to a machine to capture an event, such as such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude andspeed, that is relayed over a network delivering data to applications. The potential applications for this technology are numerous and as such include smartmeters in energy and utilities (the “smart grid”), connected vehicles in automotive and logistics, heart monitors in healthcare, RFID tagged inventory in retailand manufacturing, and digital signage in media and communications to name a few. Another fast growing application is in the wearable technologyproducts namely, fitness and wellness, infotainment (information-based media content), healthcare and medical, and industrial and military. The fitness andwellness segment comprises products like smart clothing and smart sensors, activity monitors, sleep sensors and others, whereas the Infotainment sectorconsists of products like smart watches, heads-up displays, smart glasses and others. The products like continuous glucose monitor, drug delivery, monitors,wearable patches and others have been covered under healthcare and medical segment and products like hand worn terminals, augmented reality headsetsand others have been mentioned under industrial and military segment. We believe that the large revenue potential for M2M services that has attracted theattention of carriers globally risks being thwarted by the growing security concerns in M2M applications. Porous security is exposing vulnerabilities in alarge number of use-case scenarios, including cars, energy management systems, telemedicine, and telemetry. While built-in security is a high priority in allother information and communication technologies, it is yet to be considered, even at a basic level, in most M2M applications. The rapid and successfuladoption of M2M in automobiles, healthcare, industrial installations, and consumer homes may be jeopardized if communication security is not designed into all M2M devices and applications. All these new devices will require a unique identity addressable by a secure domain name and all theircommunications, with application servers and other devices, completely secured automatically and on-demand.IP mobility services require 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, LTE, WiMAX, WiFi cellular and fixed. Based on our estimatesusing Infonetics and other market data, we believe that worldwide revenue from IP mobility products like smartphones, embedded devices, hotspots andmobile data cards, femtocell equipment, M2M communication devices and services is expected to grow from approximately $57 billion in 2012 toapproximately $282 billion by 2017, representing a CAGR of approximately 37%. We believe in order to realize the full functionality of IP mobility, severalchallenges including security must be overcome. When users are mobile, connections and data need to cross multiple network boundaries, each of whichposes a security threat. Wireless networks may be threatened or compromised by rogue users who enter through (insecure wireless access points. We believethat providing authenticated access to the M2M networks and enterprise applications are important requirements and represent a significant marketopportunity for our patented technology and secure domain names to provide users or machines fully authenticated secure access on a "zero-click" or "single-click" basis.Our SolutionsOur 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. 7IndexOur ProductsOur Gabriel Secure Communication Platform™, unlike other collaboration and communication products and services on the market today, does not requireaccess to user’s confidential data and minimizes the threat of hacking and data mining. It enables individuals and organizations to maintain completeownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted accessfrom anywhere at any time. Our Gabriel Collaboration Suite™ is a set of applications that run on top of our Gabriel Secure Communication Platform™. Itenables seamless and secure cross-platform communications between user’s devices. The following applications are included in the current release and can beeasily accessed through the Gabriel interface:·SECURE CHAT - allows users to quickly send and receive text, files and screen shots ·SECURE SHARE - allows users to grant coworkers read/write access to desired folders ·SECURE VIDEO/VOICE - provides users ability to conduct audio and/or video conferencing securely with any other Gabriel user ·SECURE MAIL - allows users to send email and attachments directly from sender to recipient without requiring a centralized mail server ·SECURE SYNC/BACKUP - allows users to quickly push single files or automatically backup your files to one or multiple Gabriel destinationsGabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ of applications has undergone extensive internal testing with employees,contractors, shareholders and private beta testers and are now in Public Beta at a number of small and medium businesses who chose to sign-up for thisprogram. General Public Release of our products is expected in the first-half of 2015 upon successful conclusion of our ongoing public beta program.Competitive StrengthsWe 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 currently ownapproximately 39 U.S. and 66 foreign patents with approximately 75 pending patents applications worldwide. Our portfolio includes patents andpending patent applications in the United States and other key markets that support our secure domain name registry service for the Internet.·Scalable licensing business model. We are actively engaged in pursuing additional licensing agreements with OEMs, service providers and systemintegrators within the IP-telephony, mobility, mobile-to-mobile communications, 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 Leidos, during which time they invented the technology that is thefoundation of our technology, and software. Based on the collective knowledge and experience of our development team, we believe that we haveone of the most experienced and sophisticated groups of security experts researching vulnerability and threats to real-time communication over theInternet and developing solutions to mitigate these problems. 8IndexOur StrategyOur 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:·Introduce our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products in the general market in the first-half of 2015for sale directly to end-user enterprises.·Continue to grow our technology licensing program to commercialize our intellectual property, including our GABRIEL Connection Technology™by adding more licensees.·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.We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that webelieve are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusivepatent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implementthe technical specifications identified by us. We have also submitted a number of updates to our original declaration, identifying additional technicalspecifications that would also require a license to our US and International patents. License and Service OfferingsWe 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 SDK license. The software development kit consists of object libraries, sample code, testing and quality assurance tools and the supporting documentationnecessary for a customer to implement our technology. These tools are comprised of software for a secure domain name connection test server, arelay test server and a registration test server. We expect that customers would pay an up-front license fee to purchase an SDK license and a royaltyfee 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. 9Index·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.CustomersOver 80 small and medium businesses have installed our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products in theircorporate networks and are actively testing them as a part of our public Beta program. General Public Release of our products is expected in the first-half of2015 upon successful conclusion of our ongoing public beta program.We have signed Patent License Agreements with Aastra USA, Inc. Avaya, Inc., Microsoft, Mitel Networks Corporation, NEC Corporation and NECCorporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain of our patents, for a one-time payment and an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current andfuture IP-encrypted products.We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to developers and original equipmentmanufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE. We have published our royalty rates and guidelines on our website. All forwardmoving licenses have adhered to these guidelines and have met or exceeded these rates and we will use these rates and guidelines in all future licensenegotiations.Marketing and SalesWe 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 Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products, domain name registry services to ourservice provider and system integrator customers. We hope to leverage our relationship with Leidos, to extend our offering to departments and agencieswithin the federal government. Leidos, is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domainknowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure, andhealth. We intend to build a sales force that will be responsible for managing accounts and pursuing technology licensing and sales opportunities with newcustomers.CompetitionWe 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. 10Index·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 RightsOur intellectual property is primarily comprised of trade secrets, patented know-how, issued and pending patents, copyrights and technological innovation.We currently own approximately 39 U.S. and 66 foreign patents with approximately 75 pending patents applications worldwide. Our portfolio includes anumber of patents that describe unique systems and methods for securing real-time communications over the Internet, as well as related services such as theestablishment and maintenance of a secure domain name registry. Our software and technology solutions also have additional applications relating tooperating systems and network security. A complete list of our US patents is available on our website located at www.virnetx.com. Each patent is publiclyaccessible on the Internet website of the U.S. Patent and Trademark Office at www.uspto.gov. The term of each of our issued U.S. and foreign patents willexpire during the period from 2019 to 2024. Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that mightincorporate future filings, the information set forth on the United States Patent and Trademark Office, or the USPTO Website, shall not be deemed to be apart of or incorporated by reference into any such filings. The Company does not warrant the accuracy, or completeness or adequacy of the USPTOWebsite, and expressly disclaims liability for errors or omissions on such website.Assignment of PatentsSome of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, pursuant to anAssignment Agreement dated December 21, 2006, and a Patent License and Assignment Agreement dated August 12, 2005, as amended on November 2,2006, including documents prepared pursuant to the November amendment, and as further amended on March 12, 2008. We recorded the assignment fromLeidos, with the U.S. Patent Office on December 21, 2006.Key terms of these agreements are as follows:Patent Assignment. Leidos, unconditionally and irrevocably conveyed, transferred, assigned and quitclaimed all its right, title and interest in and to thepatents and patent applications, as specifically set forth on Exhibit A to the assignment document recorded with the U.S. Patent Office, including, withoutlimitation, the right to sue for past infringement.License to Leidos, Outside the Field of Use. On November 2, 2006, we granted to Leidos, an exclusive, royalty free, fully paid, perpetual, worldwide,irrevocable, sub licensable and transferable right and license permitting Leidos, and its assignees to make, have made, import, use, offer for sale, and sellproducts and services covered by, and to make improvements to, the patents and patent applications we acquired from Leidos, solely outside our field of use.We have, and retain, all right, title and interest to all our patents within our field of use. On March 12, 2008, Leidos, relinquished the November 2, 2006,exclusive right and license 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 to Leidos, a non-exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sub licensable and transferable right and licensepermitting Leidos, and its assignees to make, have made, import, use, offer for sale, and sell products and services covered by, and to make improvements to,the patents and patent applications we acquired from Leidos, solely outside our field of use.Compensation Obligations. As consideration for the assignment of the patents and for the rights we obtained from Leidos, as amended, we are required tomake payments to Leidos, 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, Leidos, 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. 11IndexGovernment RegulationThe 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 aware of the recent announcements made by ICANN related to the anticipated launch of new domain name extensions and an ICANN-supervisedTrademark Clearinghouse to assist brand owners with protecting their trademarks during the initial launch of the new domain name extensions. We arecurrently evaluating whether we will apply to become an ICANN-accredited registry provider with respect to one or more customized generic top-leveldomain (gTLD), or create our own alternative DNS root directory to manage the assignment of non-standard secure domain names. We have not yet begundiscussions with ICANN and we cannot assure you that we will be successful in obtaining ICANN accreditation for our registry service on terms acceptable tous 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 the U.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. 12IndexEmployeesAs of December 31, 2014, we had 14 full-time employees.Corporate Overview and HistoryVirnetX, Inc., was incorporated in the State of Delaware in August 2005. In November 2006, VirnetX acquired certain patents from Leidos, 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 InformationWe 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. 13IndexItem 1A.Risk FactorsOur operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect ourbusiness, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. You should carefully consider thefollowing information and the other information in this Form 10-K in evaluating our business and prospects before making an investment decision withrespect to our common stock. The risks and uncertainties we describe below are not the only ones facing us. Additional risks not presently known to us orthat we currently deem immaterial may also affect our business.We may not be able to capitalize on market opportunities related to our licensing strategy or our patent portfolio.Our business strategy includes licensing our patents and technology to other companies in order to reach a larger end-user base than we could reach throughdirect sales and marketing efforts. As such, our business strategy and revenues will depend on intellectual property licensing fees and royalties for themajority of our revenues. We currently derive nominal revenue from licensing activities and we cannot assure you that we will successfully capitalize on ourmarket opportunities or that our current business strategy will succeed. Factors that may affect our ability to execute our current business strategy including,but are not limited to:·Although we have to date entered into a limited number of settlement and license agreements, we may not be successful in entering into furtherlicensing relationships and existing settlement and license agreements may not generate the financial results we expect;·Third parties may challenge the validity of our patents;·The pendency of our various litigations may cause potential licensees not to do business with us;·We 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 patent rights, our business would be negatively impacted.We believe our patents are valid, enforceable and valuable. Notwithstanding this belief, third parties may make claims of non-infringement or invalidityclaims with respect to our patents and such claims could give rise to material cost for defense or settlement or both, jeopardize or substantially delay asuccessful outcome of litigation we are or may become involved in, divert resources away from our other activities, or otherwise materially and adverselyaffect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Even if we are successful in enforcing ourrights, our patents may not ultimately provide us with any competitive advantages and may be less valuable than we currently expect. These risks may beheightened in countries other than the United States, and may be negatively affected by the fact that legal standards in the United States and elsewhere forprotection of intellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of UnitedStates and foreign patents and patent applications in our areas of interest, and we expect that significant litigation in these areas will continue, and will adduncertainty to the value of certain patents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual propertyrights or otherwise realize value from them, our business would be negatively affected.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 management resources. The counterparties to our litigation are all large, well-financed companies with substantially greater resources than us. We cannot assure you that any of ourcurrent or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts in particularlitigation matters, they may not be predictive of the ultimate resolution of the dispute. 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. Any future intellectual property litigation, whether or not determined in our favor orsettled by us, is costly, may cause delays (including delays in negotiating licenses with other actual or potential customers). Unfavorable or adverseoutcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to develop and commercializeproducts, which may impact our stock price. 14IndexWe 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 (IPR) policies. This was in response to ourStatement 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.Because 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 to which we may not be able to adapt successfully.The current regulatory environment for our products and services remains unclear. We can give no assurance that our planned product offerings will be incompliance with laws and regulations of local, state, United States federal or foreign authorities. Further, we can give no assurance that we will notunintentionally violate such laws or regulations or that such laws or regulations will not be modified, or that new laws or regulations will be enacted in thefuture which would cause us to be in violation of such laws or regulations. For example, Voice-over-Internet Protocol (or VoIP) services are not currentlysubject to all of the same regulations that apply to traditional telephony, but it is possible that similar regulations may be applied to VoIP in the future andthat these could result in substantial costs and adversely affect the marketability of our products and planned products related to VoIP. Additionally, the useof the Internet and private Internet Protocol (IP) networks for communication is largely unregulated within the United States, but may become regulated inthe future; also several foreign governments have enacted measures that could restrict or prohibit voice communications services over the Internet or privateIP networks. 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.We compete in a rapidly changing competitive environment and the success of our business depends upon continued market acceptance and utilization ofcertain applications and communications channels.Our business depends on deployment of Advanced – LTE products and services, the growth of instant messaging, VoIP, mobile services, streaming video, filetransfer and remote desktop and other next-generation Internet-based applications which are relatively new. A decline in the use of these applications andcommunications channels due to complexity or cost of these applications relative to alternate traditional or newly developed communications channels, ordevelopment of alternative technologies, could cause a material decline in the number of users in these areas.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, court and agency decisions, or rules related to obtaining patents or enforcing patents could significantly increase ouroperating costs and decrease our revenue. For instance, the U.S. Supreme Court has recently modified some tests used by the United States Patentand Trademark Office (USPTO) in granting patents during the past 20 years which may decrease the likelihood that we will be able to obtain patentsand increase the likelihood of challenge of any patents we obtain or license. In addition, the Leahy-Smith America Act (“AIA”) has implementedsweeping changes to the United States patent system including changes that transition the United States from a “first-to-invent” system to a “first tofile” system and alter the processes for 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. 15IndexIf 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. Additionally, an actual or perceived security breach of our customers or their end-customers,regardless of whether the breach is attributable to the failure of our data security technologies, could adversely affect the market's perception of our securitytechnologies.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. We may not be able to correct any security flaws or vulnerabilities promptly, or at all. These matters could harm our operating results andfinancial condition.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;·Even if successful there can be no assurance that our technologies will be used in a product that is ultimately brought to market, achievescommercial acceptance or results in significant royalties to us;·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. If our sales and licensingefforts are very lengthy or unsuccessful, it may adversely affect our business and results of operations as a result of failure to obtain or an undue delay inobtaining royalties.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.Our products Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ are expected to be released for sale in the first half of 2015. Therevenue from the sale of these products is expected to take some time to ramp before it can contribute a large portion to our overall revenue. Until such time,we expect that in the future, a significant portion of our revenues will be generated from a limited number of customers that have signed Settlement andLicense Agreements with us over the last few years. There can be no guarantee that we will be able to obtain additional customers, or if we do so, to sustainour revenue levels from these prospective customers. If we are not able to establish, maintain or replace the limited group of prospective customers that weanticipate 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. 16IndexOur 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, could contain errors or defects. Despite rigorous internal and external beta testing, someerrors in our products may only be discovered after a product has been installed and used by customers. Any errors or defects discovered in our products aftercommercial release could result in failure to achieve market acceptance, loss of revenue or delay in revenue recognition, loss of customers and increasedservice and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims forproduct liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. The performance of ourproducts could have unforeseen or unknown adverse effects on the networks over which they are delivered as well as on third-party applications and servicesthat utilize our services, which could result in legal claims against us, harming our business. Furthermore, we expect to provide implementation, consultingand other technical services in connection with the implementation and ongoing maintenance of our products, which typically involves working withsophisticated software, computing and communications systems. We expect that our contracts with customers will contain provisions relating to warrantydisclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attentionand adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or futurecoverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.Compatibility issues between 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 our offerings. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not those third parties will upgradeor improve their equipment. We depend on these companies to maintain the operational integrity of our connections. If one or more of these companies isunable or unwilling to supply or expand its levels of service to us in the future, our operations could be severely interrupted. Also, to the extent the numberof users of networks utilizing our future products suddenly increases, the technology platform and secure hosting services which will be required toaccommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response time couldresult in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. In addition, users depend on real-time communications; outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users 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 that the number of users of networks utilizing our future products suddenly increases, thetechnology platform and hosting services which will be required to accommodate a higher volume of traffic may result in slower response times, serviceinterruptions or delays 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 controlSystem 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 or isincapable of adapting to system interruptions, which could 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 system, to meet the demands of an increasing number of secure domain name requests, could result in the breakdown of our customersupport service to and inhibit our ability to process registration requests in a timely manner. 17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 or are perceived as not effectively assisting our customers in deploying our products, helping them quickly resolve post-deploymentissues and providing effective ongoing support, our ability to sell our products would be adversely affected, and our reputation with potential customerscould be harmed. In addition, as we expand our operations internationally, our technical support team will face additional challenges, including thoseassociated with delivering support, training and documentation in languages other than English. Our failure to deliver and maintain high-quality technicalsupport services to our customers in the U.S. and internationally could result in customers choosing to use our competitors’ products instead of ours in thefuture.We rely upon the accuracy of our customers' recordkeeping, and any inaccuracies or payment disputes for amounts owed to us under our licensingagreements may harm our results of operationsMany of our license agreements require our customers to document the manufacture and sale of products that incorporate our technology and report this datato us. While licenses with such terms give us the right to audit books and records of our customers to verify this information, audits rarely are undertakenbecause they can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our customers. Therefore, we typicallyrely on the accuracy of the reports from customers without independently verifying the information in them. Our failure to audit our customers' books andrecords may result in our receiving more or less royalty revenue than we are entitled to under the terms of our license agreements. If we conduct royalty auditsin the future, such audits may trigger disagreements over contract terms with our customers and such disagreements could hamper customer relations, divertthe efforts and attention of our management from normal operations and impact our business operations and financial condition.Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of onlinecommunication, and such an 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 and President. We have no employment agreements with any of our key executives that prevent them from leaving us at any time. The loss of the services of any keyemployees could be disruptive to our ability to execute our strategic plan and could cause our business and operations to suffer. 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, engineering, sales and executive personnel as wellas engineers. Inability to attract and retain such personnel could adversely affect our business. Competition for operations, marketing, engineering, sales andexecutive personnel is intense, particularly in the technology sector and in the region in which our facility is located. We can provide no assurance that wewill attract or retain such personnel.Our consolidated financial statements were restated in 2011 in connection with our identification of a material weakness in our internal control overfinancial reporting; we may identify future material weaknesses 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. If we experience any material weaknesses in our internal control over financial reporting in the future or areunable to provide unqualified management or attestation reports about our internal controls, we may be unable to meet financial and other reportingdeadlines and may incur costs associated with remediation, any of which could cause our share price to decline. 18IndexWe do not currently pay dividends on our common stock and thus stockholders must look to appreciation of our common stock to realize a gain on theirinvestments.Although we paid a special cash dividend to holders of our common stock in 2010, we do not pay regular dividends on our common stock. Instead, we intendto retain our cash and future earnings, if any, to fund our business plan. Our future dividend policy is within the discretion of our Board of Directors and thedecision to declare a dividend will depend upon various factors, including our business, financial condition, results of operations, capital requirements, andinvestment opportunities. We therefore cannot determine whether our Board of Directors will determine to pay regular or special dividends in the future.Accordingly, unless our Board of Directors determines to pay dividends, stockholders will be required to look to appreciation of our common stock, whichmay or may not occur, to realize a gain on their investment. 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, 2014, we hadoutstanding options and restricted stock units to purchase an aggregate of 4,806,922 shares of common stock (representing 9.24% of our total sharesoutstanding as of December 31, 2014) of which 3,975,630 are vested and therefore exercisable. To the extent outstanding stock options are exercised,additional shares of common stock will be issued, and such issuance would dilute non-exercising stockholders' percentage voting interests and increase thenumber of shares eligible for resale in the public 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 Own Equity.” These derivative liabilities are reported at fair value each reporting period with changes in the fair value recognized as gain or loss during each reportingperiod. 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 of our warrantliability and a non-cash charge during the period of such increase, which could materially and negatively impact our results of operations in future periods. Trading 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 MKT LLC, but its daily trading volume has been limited, sporadic and volatile. Over the past years the market price ofour common stock has experienced significant fluctuations. Between January 1, 2014, and December 31, 2014, the reported last sale price for our commonstock ranged between $4.09 and $20.93 per share. The price of our common stock may continue to be volatile as a result of a number of factors, some ofwhich are beyond 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 or derivatives transactions related to our stock;·actual or anticipated announcements of new products or services by us or competitors;·general conditions in the markets in which we compete; and·economic and financial conditionsThe 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 $26.9 million for the year ended December 31, 2012, a net loss of $27.6 million for the year ended December 31, 2013 anda net loss of $9.9 million for the year ended December 31, 2014 with an accumulated deficit of $100.4 million. The following include some of the factors thatmay cause our operating results to fluctuate:·the outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in the future, and the timing thereof;·the amount and timing of receipt of license fees from potential infringers, licensees or customers; 19Index·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 rightsThese 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, 2014, our executive officers and directors beneficially owned approximately 18% of our then outstanding common stock. In addition, agroup of stockholders that, as of December 31, 2007, held 4,766,666 shares, or approximately 11%, 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 currently owns. Because of their beneficial ownership interest, our officers and directors could significantly influence stockholder actions of which you disapprove or that arecontrary to your interests. This ability to exercise significant influence could prevent or significantly delay another company from acquiring or merging withus.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.·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. 20IndexIn 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.NoneItem 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 2015. We have no other properties and believe that our officefacility is suitable and appropriately supports our current business needs. 21IndexItem 3.Legal ProceedingsWe have three intellectual property infringement lawsuits pending against Apple, Inc. in the United States District Court for the Eastern District of Texas,Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief in all the complaints.VirnetX Inc. et al., v. Microsoft Corporation (Case 6:13-CV-00351-LED)On April 22, 2013, we initiated a lawsuit by filing a complaint against Microsoft Corporation in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that Microsoft has infringed U.S. Patent Nos. 6,502,135, 7,188,180, 7,418,504, 7,490,151, 7,921,211, and7,987,274. We seek an unspecified amount of damages and injunctive relief. A hearing on claims construction and multiple motions by both parties was heldon September 4, 2014. On September 10, 2014, the court issued an order granting in part and denying-in-part our sealed motion to compel interrogatoryresponses, denying Microsoft’s sealed motion to enter order focusing patent claims and prior art, denying Microsoft’s sealed motion to compel, denyingMicrosoft’s sealed motion to stay the case and granting our request for leave to file a Motion for Partial Summary Judgment. On December 17, 2014, weentered into an Amended Settlement and License Agreement with Microsoft Corporation. The agreement amends and restates certain terms of the originalSettlement and License Agreement, dated May 14, 2010, between VirnetX, Inc. and Microsoft Corporation. As a result of the agreement, both parties havesettled their pending patent disputes including the patent infringement case brought by us against Microsoft before the U.S. District Court for the EasternDistrict of Texas and jointly move to terminate the pending Inter Partes Review (IPR) proceedings between Microsoft and VirnetX as to Microsoft.Under the terms of the amended agreement, Microsoft paid us $23 million to settle the patent dispute and expand Microsoft’s license. Under the amendedagreement, Microsoft received a worldwide, irrevocable, nonexclusive, non-sublicensable, royalty-free, fully paid-up license to all our patents.VirnetX Inc. v. Cisco Systems, Inc. et al (13-1489-LP VirnetX, Case 6:10-CV-00417-LED)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 alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief.Subsequently, on February 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC, to assert U.S. PatentNo. 7,418,504 against Apple and Aastra. On April 5, 2011, we further amended our complaint to include Apple’s iPad 2 in the list of Apple products that areaccused of infringing our patents and to assert our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit. A claimconstruction hearing was held on January 5, 2012 and the court issued a Markman ruling on April 25, 2012. Aastra and NEC agreed to sign licenseagreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separatejury trial for each defendant, and just try the case against Apple on the scheduled trial date. The jury trial against Cisco was held on March 4, 2013. The juryagainst Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trialand Cisco’s infringement of certain VirnetX patents was denied and the case against Cisco was closed.The jury trial against Apple was held on October 31, 2012 and on November 6, 2012, a jury in the United States Court for the Eastern District of Texas, TylerDivision, awarded us over $368 million in a verdict against Apple Corporation for infringing four of our patents. On February 26, 2013, the court issued itsMemorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awardedby the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted ourmotions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 in daily interest up tofinal judgment and $330 in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied ourrequest for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend thejudgment to the United States Court of Appeals for the Federal Circuit (USCAFC). On October 16, 2013 Apple filed its opening appeal brief to the USCAFC.Our response to the opening brief was filed on December 2, 2013, and on December 19, 2013, Apple filed its final response to complete the briefing of thecourt. A hearing was held on March 3, 2014 at the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 ofour patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, andconfirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In itsopinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents andremanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decisionconcerning VirnetX’s litigation against Apple Inc. In our petition, we have asked the court to rehear its decision with respect to damages and affirm thedistrict court’s damages award against Apple in full because the Federal Circuit’s decision is contrary to the patent statute and Supreme Court precedent. Weare also asking the Federal Circuit to reinstate the jury’s award that Apple infringed the ’504 and ’211 patents on the basis that the district court correctlyconstrued the claim term “secure communication link”. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc ofthe Federal Circuit's September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedingsconsistent with its opinion. We are currently awaiting a scheduling order from the court. 22IndexVirnetX, Inc. v. Apple, Inc. (Case 6:13-CV-00211-LED)The Court ordered the parties to mediate over an ongoing license in the following 45 days for Apple’s future infringing use not covered by the Court’s Order,and ordered us to file an appropriate motion with the court if the parties fail to agree to a license. On March 28, 2013, Apple filed a motion to alter or amendthe judgment entered by the Court. The mediation was held on April 9, 2013 and the parties did not come to an agreement on an ongoing royalty rate forinfringing Apple products. We filed our opposition to this motion on April 10, 2013. As ordered by the Court, we filed a sealed motion with the Court onApril 16, 2013, requesting the Court’s assistance in deciding an appropriate royalty rate for all infringing products shipped by Apple that are “not more thancolorably different” with regards to the accused functionality. On August 1, 2013, a hearing was held in the United States District Court for the EasternDistrict of Texas, Tyler Division on our motion for an ongoing royalty. On March 6, 2014, the court issued a public version of the order previously issuedunder seal on March 3, 2014, awarding us an on-going royalty of 0.98% on adjudicated products and products “not colorably” different from thoseadjudicated at trial that incorporate any of the FaceTime or VPN on Demand features found to infringe at trial. On March 27, 2014, Apple filed its notice ofappeal to the United States Court of Appeals for the Federal Circuit. On March 28, 2014 Apple also filed a motion for Entry of Final Judgment by Apple Inc.with the United States District Court for the Eastern District of Texas, Tyler Division. The Court had stayed the proceedings in this matter while the Court’sruling in the Case 6:10-CV-00417-LED was pending. With the denial of the rehearing request by USCAFC on December 16, 2014, this case has also beenremanded back to the Eastern District of Texas, Tyler Division, for further processing with the Case 6:10-CV-00417-LED. We are currently awaiting ascheduling order from the court.VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)On November 6, 2012, we filed a new complaint against Apple Inc., in the United States District Court for the Eastern District of Texas, Tyler Division forwillfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damagesand injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintoshcomputers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 thatwas subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we fileda consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, wefiled an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief.The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summaryjudgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In aseparate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Applefrom asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Ciscoet. al., Case 6:10-CV-00417-LED). The jury trial in this case is scheduled for October 13, 2015.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 any governmental authority or other party.Item 4.Mine Safety Disclosure.Not applicable 23IndexPART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock currently trades under the symbol “VHC” on the NYSE MKT LLC.The following table shows the price range of our common stock, as reported on the NYSE MKT LLC, for each quarter ended during the last two fiscal years.Quarter Ended High Low 3/31/13 $36.84 $17.98 6/30/13 $26.25 $16.10 9/30/13 $22.41 $16.70 12/31/13 $23.20 $17.16 3/31/14 $25.49 $12.68 6/30/14 $18.57 $12.10 9/30/14 $18.24 $4.18 12/31/14 $6.85 $3.80 The closing price of our common stock on the NYSE MKT LLC on February 20, 2015 was $6.27 per share.HoldersAs of February 20, 2015, we had 36 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.DividendsOn June 15, 2010, our Board of Directors declared a special cash dividend of $0.50 per share of our common stock to holders of record on July 1, 2010. Wedo not currently intend to begin paying a regular dividend in the foreseeable future. Any future determination to declare cash dividends will be made at thediscretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and otherfactors that our board of directors may deem relevant.Performance GraphThis performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), 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 expressly set forthby specific reference in such filing. 24IndexThe stock price performance reflected on this graph is not necessarily indicative of future stock price performance. See the disclosure in part I, Item 1A. “Risk Factors” 12/09 12/10 12/11 12/12 12/13 12/14 VirnetX Holding Corp 100.00 547.55 920.69 1079.61 715.68 202.43 S&P 500 100.00 115.06 117.49 136.30 180.44 205.14 RDG Technology Composite 100.00 111.01 110.85 126.07 167.16 193.22 Recent Sales of Unregistered SecuritiesDuring the year ended December 31, 2014, we had no sales of unregistered securities and no repurchases of stock.Item 6.Selected Financial Data.The consolidated statement of operations data for the three years ended December 31, 2014, 2013 and 2012 and the balance sheet data at December 31, 2014and 2013, are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement ofoperations data for the two years ended December 31, 2011 and 2010 and the balance sheet data at December 31, 2012, 2011 and 2010 are derived from ouraudited 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, 2014 2013 2012 2011 2010 Consolidated Statement of Operations Data: Revenue $1,249 $2,197 $412 $20 $68 Gain on settlement $23,000 $— — — $200,000 Other operating expenses $(36,414) $(30,784) $(39,273) $(17,396) $(95,383)Income tax (expense) benefit $(15) $(751) $12,535 $5,480 $(34,062)Net (loss) income $(9,902) $(27,608) $(26,924) $(17,263) $41,417 Earnings (loss) per share $(0.19) $(0.54) $(0.53) $(0.35) $0.91 Dividends declared per common share $0.00 $0.00 $0.00 $0.00 $0.50 Consolidated Balance Sheet Data: Cash and cash equivalents $18,658 $19,173 $19,661 $49,482 $34,635 Investments available for sale $22,571 $19,815 $26,493 $14,438 $43,457 Total assets $45,090 $39,398 $61,313 $74,633 $81,694 Long-term obligation — — — — --- Stockholders’ equity (deficit) $32,627 $34,024 $53,944 $68,277 $59,453 25IndexItem 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.Company OverviewWe develop software and technology solutions for securing real-time communications over the Internet. Our patented GABRIEL Connection Technology™combines industry 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 and tablets.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 over 100 U.S. and international patents with over 75pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as theestablishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of deviceoperating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home.We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that webelieve are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusivepatent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implementthe technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into4G.We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part ofsecuring the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and ConnectedHome. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain nameregistry.We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers,communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL ConnectionTechnology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers,laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE.We have published our royalty rates and guidelines on our website. All forward moving licenses have adhered to these guidelines and have met or exceededthese rates and we will use these rates and guidelines in all future license negotiations. Our software and technology solutions, including our Secure Domain Name Registry and GABRIEL Connection Technology™, are designed to facilitatesecure communications and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voiceover Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and, or M2M communications. Our technology generatessecure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions byeliminating the need for end-users to enter any encryption information. Our product Gabriel Secure Communication Platform™, unlike other collaboration and communication products and services on the market today, does notrequire access to user’s confidential data and minimizes the threat of hacking and data mining. It enables individuals and organizations to maintain completeownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted accessfrom anywhere at any time. Our Gabriel Collaboration Suite™ is a set of applications that run on top of our Gabriel Secure Communication Platform™. Itenables seamless and secure cross-platform communications between user’s devices that have our software installed. Our products have undergone extensiveinternal testing with employees, contractors, shareholders and private beta testers and are now in Public Beta at a number of small and medium businesseswho chose to sign-up for this program. General Public Release of our products is expected in the first-half of 2015 upon successful conclusion of our ongoingpublic beta program.We have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft, Mitel Networks Corporation, NEC Corporation and NECCorporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain of ourpatents, for a one-time payment and an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current andfuture IP-encrypted products. In December 2014, we received an additional $23,000 cash settlement resulting from subsequent litigation with Microsoft (seeNote 14 “Litigation”). The 2010 settlement agreement was amended in December 2014 to settle the subsequent lawsuit with Microsoft, raising the total cashsettlement with Microsoft, as amended, to $223,000.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 Leidos, is a FORTUNE 500® scientific, engineering and technologyapplications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energyand the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos, and expanded the set ofpatents we acquired in 2006 from Leidos, into a larger portfolio with over 100 U.S. and international patents with over 75 pending applications. Thisportfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenuein license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio. See –Operations – Research and Development Expenses for a description of our research and development expenses for the past three fiscal years discussed below. 26IndexWe intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, forexample, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participationwith leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers, and others) and build our secure domain nameregistry.Developments in the Year Ended December 31, 2014LitigationWe have three intellectual property infringement lawsuits pending against Apple, Inc. in the United States District Court for the Eastern District of Texas,Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief in all the complaints.VirnetX Inc. et al., v. Microsoft Corporation (Case 6:13-CV-00351-LED)On April 22, 2013, we initiated a lawsuit by filing a complaint against Microsoft Corporation in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that Microsoft has infringed U.S. Patent Nos. 6,502,135, 7,188,180, 7,418,504, 7,490,151, 7,921,211, and7,987,274. We seek an unspecified amount of damages and injunctive relief. A hearing on claims construction and multiple motions by both parties was heldon September 4, 2014. On September 10, 2014, the court issued an order granting in part and denying-in-part our sealed motion to compel interrogatoryresponses, denying Microsoft’s sealed motion to enter order focusing patent claims and prior art, denying Microsoft’s sealed motion to compel, denyingMicrosoft’s sealed motion to stay the case and granting our request for leave to file a Motion for Partial Summary Judgment. On December 17, 2014, weentered into an Amended Settlement and License Agreement with Microsoft Corporation. The agreement amends and restates certain terms of the originalSettlement and License Agreement, dated May 14, 2010, between VirnetX, Inc. and Microsoft Corporation. As a result of the agreement, both parties havesettled their pending patent disputes including the patent infringement case brought by us against Microsoft before the U.S. District Court for the EasternDistrict of Texas and jointly move to terminate the pending Inter Partes Review (IPR) proceedings between Microsoft and VirnetX as to Microsoft.Under the terms of the amended agreement, Microsoft paid us $23 million to settle the patent dispute and expand Microsoft’s license. Under the amendedagreement, Microsoft received a worldwide, irrevocable, nonexclusive, non-sublicensable, royalty-free, fully paid-up license to all our patents.VirnetX Inc. v. Cisco Systems, Inc. et al (13-1489-LP VirnetX, Case 6:10-CV-00417-LED)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 alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief.Subsequently, on February 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC, to assert U.S. PatentNo. 7,418,504 against Apple and Aastra. On April 5, 2011, we further amended our complaint to include Apple’s iPad 2 in the list of Apple products that areaccused of infringing our patents and to assert our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit. A claimconstruction hearing was held on January 5, 2012 and the court issued a Markman ruling on April 25, 2012. Aastra and NEC agreed to sign licenseagreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separatejury trial for each defendant, and just try the case against Apple on the scheduled trial date. The jury trial against Cisco was held on March 4, 2013. The juryagainst Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trialand Cisco’s infringement of certain VirnetX patents was denied and the case against Cisco was closed.The jury trial against Apple was held on October 31, 2012 and on November 6, 2012, a jury in the United States Court for the Eastern District of Texas, TylerDivision, awarded us over $368 million in a verdict against Apple Corporation for infringing four of our patents. On February 26, 2013, the court issued itsMemorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awardedby the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted ourmotions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 in daily interest up tofinal judgment and $330 in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied ourrequest for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED. 27IndexOn July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend thejudgment to the United States Court of Appeals for the Federal Circuit (USCAFC). On October 16, 2013 Apple filed its opening appeal brief to the USCAFC.Our response to the opening brief was filed on December 2, 2013, and on December 19, 2013, Apple filed its final response to complete the briefing of thecourt. A hearing was held on March 3, 2014 at the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 ofour patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, andconfirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In itsopinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents andremanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decisionconcerning VirnetX’s litigation against Apple Inc. In our petition, we have asked the court to rehear its decision with respect to damages and affirm thedistrict court’s damages award against Apple in full because the Federal Circuit’s decision is contrary to the patent statute and Supreme Court precedent. Weare also asking the Federal Circuit to reinstate the jury’s award that Apple infringed the ’504 and ’211 patents on the basis that the district court correctlyconstrued the claim term “secure communication link”. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc ofthe Federal Circuit's September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedingsconsistent with its opinion. We are currently awaiting a scheduling order from the court.VirnetX, Inc. v. Apple, Inc. (Case 6:13-CV-00211-LED)The Court ordered the parties to mediate over an ongoing license in the following 45 days for Apple’s future infringing use not covered by the Court’s Order,and ordered us to file an appropriate motion with the court if the parties fail to agree to a license. On March 28, 2013, Apple filed a motion to alter or amendthe judgment entered by the Court. The mediation was held on April 9, 2013 and the parties did not come to an agreement on an ongoing royalty rate forinfringing Apple products. We filed our opposition to this motion on April 10, 2013. As ordered by the Court, we filed a sealed motion with the Court onApril 16, 2013, requesting the Court’s assistance in deciding an appropriate royalty rate for all infringing products shipped by Apple that are “not more thancolorably different” with regards to the accused functionality. On August 1, 2013, a hearing was held in the United States District Court for the EasternDistrict of Texas, Tyler Division on our motion for an ongoing royalty. On March 6, 2014, the court issued a public version of the order previously issuedunder seal on March 3, 2014, awarding us an on-going royalty of 0.98% on adjudicated products and products “not colorably” different from thoseadjudicated at trial that incorporate any of the FaceTime or VPN on Demand features found to infringe at trial. On March 27, 2014, Apple filed its notice ofappeal to the United States Court of Appeals for the Federal Circuit. On March 28, 2014 Apple also filed a motion for Entry of Final Judgment by Apple Inc.with the United States District Court for the Eastern District of Texas, Tyler Division. The Court had stayed the proceedings in this matter while the Court’sruling in the Case 6:10-CV-00417-LED was pending. With the denial of the rehearing request by USCAFC on December 16, 2014, this case has also beenremanded back to the Eastern District of Texas, Tyler Division, for further processing with the Case 6:10-CV-00417-LED. We are currently awaiting ascheduling order from the court.VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)On November 6, 2012, we filed a new complaint against Apple Inc., in the United States District Court for the Eastern District of Texas, Tyler Division forwillfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damagesand injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintoshcomputers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 thatwas subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we fileda consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, wefiled an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief.The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summaryjudgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In aseparate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Applefrom asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Ciscoet. al., Case 6:10-CV-00417-LED). The jury trial in this case is scheduled for October 13, 2015.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 any governmental authority or other party. 28IndexPatentsOn June 5, 2014, the United States Patent and Trademark Office (“USPTO”) denied all seven petitions for inter partes review filed by RPX. These petitionssought review of certain claims of our U.S. Patent Nos. 6,502,135, 7,418,504, 7,490,151 and 7,921,211. The USPTO found that Apple is an unlisted realparty-in interest in all the petitions filed by RPX and the Petitions were not filed within the time limit imposed by the applicable statute. The USPTO therebydeclined to institute inter partes reviews of the challenged patents.On July 23, 2014, the USPTO denied three petitions for inter partes review (IPR) filed by Microsoft. These petitions sought review of certain claims of ourU.S. Patent Nos. 6,502,135 and 7,188,180.On July 31, 2014, the USPTO granted two petitions for inter partes review (IPR) filed by Microsoft Corporation. These petitions seek review of certain claimsof our U.S. Patent No. 7,987,274.On September 19, 2014, the USPTO has terminated partially certain inter partes reexamination proceedings initiated by Cisco Systems Inc. In particular, theUSPTO has terminated the reexamination proceedings with respect to certain claims of our U.S. Patent Nos. 6,502,135; 6,839,759; 7,418,504; and 7,921,211.On November 20, 2014, we announced that our updated licensing declaration to European Telecommunications Standards Institute (ETSI) and the Alliancefor Telecommunications Industry Solutions (ATIS) has been accepted. In the updated declaration, we identified one (1) additional developing specificationsin the 3GPP LTE, SAE project to which our patents and patent applications are or may become essential and identified current Releases (12 or 13) ofpreviously-identified specifications.On December 19, 2014, we submitted a joint motion, along with Microsoft, to the USPTO, to terminate all the pending inter partes review proceedings, filedby Microsoft, seeking review of certain claims of our U.S. Patent No. 7,188,180, 7,987,274, 7,418,504, 7,490,151 and 7,921,211. On January 27, 2015, theUSPTO accepted our joint motion and terminated inter partes review (IPR) of claims of our U.S. Patent Nos. 7,188,180, 7,418,504, 7,490,151, and 7,921,211and subsequently terminated all of them on February 17, 2015. CommitmentsOur lease agreement for our corporate headquarters commenced in October 2011 and includes monthly payments of $5 until the lease term expired in October2013. In August 2013, we extended the terms of the lease agreement for two years to expire in October 2015. 29IndexCritical Accounting PoliciesThe 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.Use of EstimatesWe 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.Basis of ConsolidationThe consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balancesand transactions have been eliminated.Revenue Recognition We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, includingthe specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements.These agreements may include, without limitation, elements related to the settlement of past patent infringement liabilities, up-front and non-refundablelicense fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership ofintellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the FinancialAccounting Standards Board (“FASB”) revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requiresconsideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such asthose agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts andcircumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all of thefollowing criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services havebeen rendered; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.Patent License Agreements: Upon signing a patent license agreement, including licenses entered into upon settlement of litigation, we provide the licenseepermission to use our patented technology in specific applications. We account for patent license agreements in accordance with the guidance for revenuerecognition for arrangements with multiple deliverables, with amounts allocated to each element based on their fair values. We have elected to utilize theleased-based model for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Under our patent licenseagreements, we do or expect to typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to useour patented inventions in specific applications and products:·Consideration for Past Sales: Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with alicensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation, disagreementor arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales in connection withthe settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typically based uponapplication of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, since delivery has occurred, werecord the consideration as revenue when we have obtained a signed agreement, identified a fixed or determinable price, and determined thatcollectability is reasonably assured.·Current Royalty Payments: Ongoing royalty payments cover a licensee’s obligations to us related to its sales of covered products in the currentcontractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterly or semi-annual royaltyreports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reportssubsequent to the period in which our licensees’ underlying sales occurred. As a result, it is impractical for us to recognize revenue in the period inwhich the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and otherrevenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is limited. 30Index·Non-Refundable Up-Front Fees and Minimum Fee Contracts: For licenses that provide for non-refundable up-front or fixed minimum fees over theirterm, for which we have no future obligations or performance requirements, revenue is generally recognized over the license term. For licenses thatprovide for fees that are not fixed or determinable, including licenses that provide for extended payment terms and/or payment of a significantportion of the fee after expiration of the license or more than 12 months after delivery, the fees are generally presumed not to be fixed ordeterminable, and revenue is deferred and recognized as earned, but generally not in advance of collection.·Non-Royalty Elements: Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, ifany, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidatedstatements of operations.Deferred revenue In August 2013 we began receiving annual payments on a contract that requires payments to us over 4 years of $10,000 ("August 2013, ContractSettlement"). From the inception of that license to December 31, 2014, we received cash totaling $5,000, all of which is non-refundable. We recognized$1,167 and $1,833 of revenue related from the August 2013 Contract Settlement during the years ended December 31, 2014 and 2013.Activity under the August 2013 Contract Settlement was as follows: 2014 2013 Deferred Revenue, beginning of year $667 $- Payment received 2,500 2,500 Less: Amount amortized as revenue 1,167 1,833 Deferred Revenue, end of year $2,000 $667 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 the years ended 2014, 2013 and 2012 we incurred losses. Therefore, the effect of any Common Stock equivalent is anti-dilutive during thoseperiods.Concentration of Credit Risk and Other Risks and UncertaintiesOur cash and cash equivalents are primarily maintained at two major financial institutions in the United States. A portion of those balances are insured by theFederal Deposit Insurance Corporation. During the year ended December 31, 2014, and 2013 we had, at times, funds which were uninsured. We do notbelieve that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships with major financialinstitutions. We have not experienced any losses on our deposits of cash and cash equivalents.Derivative InstrumentsOur Series I Warrants contain an anti-dilution provision which prevents them from being considered indexed to our stock. As a result, the warrants arerequired to be accounted 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 AssetsWe 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. 31IndexIncome TaxesWe account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilitiesfor expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets andliabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the incometax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferredtaxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing if we will realize our deferred tax assets,we consider whether it is more likely than not that some portion of the deferred tax assets will not be realized.A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it ismore likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance isbased on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in differenttaxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance toreduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in theUnited States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuationallowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider allavailable evidence, both positive and negative. Consistent with our policy, and because of our history of operating losses, we do not currently recognize thebenefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our abilityto generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than notthat we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.We account for our uncertain tax positions in accordance with U.S. GAAP. The purpose of this method is to clarify accounting for uncertain tax positionsrecognized. The U.S. GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one, recognition,requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two,measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit,determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position doesnot meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely thannot standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are derecognizedwhen we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, andmeasurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.Stock-based CompensationWe account for stock-based compensation using the fair value recognition method. We recognize these compensation costs net of the applicable forfeiturerate and recognize the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, whichis generally the option vesting term of 4 years. We estimate the forfeiture rate based on our historical experience, if any.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 ValueWe apply fair value accounting to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair valueinto three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair valuemeasurement:Level 1 – Quoted prices in active markets for identical assets or liabilities.Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets orliabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of theassets or liabilities.Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricingthe asset or liability.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. 32IndexNew Accounting PronouncementsIn August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, “Presentation of FinancialStatements – Going Concern”, Subtopic 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendmentsin this ASU apply to all entities and require management to assess an entity’s ability to continue as a going concern by incorporating and expanding uponcertain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2)require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4)require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and otherdisclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements areissued (or available to be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periodsand interim periods thereafter. Early application is permitted. We are currently evaluating the impact this guidance will have on our financial position andresults of operations. In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)," which makes amendments to the codification topic718, "Accounting for Share-Based Payments," when the terms of an award provide that a performance target could be achieved after the requisite serviceperiod. The new guidance becomes effective for annual reporting periods beginning after December 15, 2015, early adoption is permitted. We are currentlyevaluating the impact this guidance will have on our financial position and results of operations.In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers" (Topic 606). Topic 606 supersedes the revenue recognitionrequirements in Topic 605, “Revenue Recognition”, including most industry-specific revenue recognition guidance throughout the Industry Topics of theCodification. In addition, the amendments create a new Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers”. In summary, thecore principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments in this Update areeffective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is notpermitted. We are currently evaluating the impact this guidance will have on our financial position and statement of operations.Operations (all amounts in this section are expressed in thousands)Revenue 2014 2013 2012 Revenue $1,249 $2,197 $412 Revenue generated for the year ended December 31, 2014 was $1,249 compared to December 31, 2013 of $2,197, and the December 31, 2012 revenue ofapproximately $412. Revenue for the year ended December 31, 2014 of $1,249, was largely a result of the 2013 Contract Settlement described under“Deferred Revenue” above. Under the terms of the 2013 Contract Settlement we are to be paid minimum annual payments of $2,500 over the contract periodfor a total of $10,000. During the year ended December 31, 2013 we recognized $1,500 of revenue for historical royalties (a portion of the settlementallocated to the use of our patented technology prior the execution of the license agreement) and $697 of revenue for royalties earned subsequent to thesettlement, and other licensees. Revenues for historical royalties were estimated based on estimated past and future usage of our IP on our customer'sproducts. During the year ended December 31, 2014 we recognized $1,167 of revenue for royalties from the 2013 Contract Settlement and $82 of revenue forroyalties from other licensees.In addition to the settlement discussed above, during 2014, 2013 and 2012 we recognized royalty revenue as part of license agreements entered into withcustomers during the patent infringement actions (see Note 14 "Litigation"). These revenues relate to both payment for use of our patented technology priorto the signing of a license agreement, and royalty payments after the execution of the license agreements. No amounts were allocable to settlement fees,expense reimbursement, damages or any other amounts other than historical and future sales as no such amounts were requested or received. Research and Development Expenses 2014 2013 2012 Research and Development $2,004 $1,782 $1,555 Research and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff.Research and development costs are expensed as incurred.Our research and development expenses for the year ended December 31, 2014 was $2,004 compared to December 31, 2013 of $1,782 and $1,555 for the yearended December 31, 2012. The increase in 2014 was primarily due to the increase in wages and bonuses paid in 2014 compared to 2013. Similarly, theincrease in 2013 was primarily due to the increase in wages and bonuses paid in 2013 compared to 2012. 33IndexSelling, General and Administrative Expenses 2014 2013 2012 Selling, General and Administrative $28,310 $29,002 $37,718 Selling, 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, 2014 was $28,310 compared to December 31, 2013 of $29,002 and$37,718 for the year ended December 31, 2012. The decreases in 2014 and 2013 were primarily due to the decrease in legal fees. The higher level of expensein 2012 was associated with the settlement of the Aastra, Mitel and NEC cases as well as the ongoing Apples, Cisco and Avaya cases in 2012. Legal feesrepresent approximately 50% of general and administrative expenses for 2014 as compared to 56% for 2013 and 71% for 2012.Within selling, general and administrative expenses, legal fees for the year ended December 31, 2014 were $14,012 compared to December 31, 2013 of$16,363 and $26,537 for the year ended December 31, 2012. The increase in 2012 was associated with the settlement of the Aastra, Mitel and NEC cases aswell as the ongoing Apple, Cisco and Avaya cases in 2012.Also included in operating expense in 2014 is royalty expense of $6,100, to be paid to Leidos, in connection with the settlement with Microsoft in December2014. There were no royalty expenses in 2013 and 2012.Gain on Settlement 2014 2013 2012 Gain on Settlement $(23,000) $— $— In December 2014, we received a $23,000 cash settlement resulting from litigation with Microsoft (see Note 14 “Litigation”). In June 2010, we received a$200,000 cash settlement from litigation with Microsoft, in which we agreed to dismiss the pending lawsuits and any damages. The 2010 settlementagreement was amended in December 2014 to settle a subsequent lawsuit with Microsoft, raising the total cash settlement with Microsoft, as amended, to$223,000. In both the original settlement and the December 2014 amendment, we could not practically and objectively separate any settlement portion fromthe revenue element as discussed under the guidance of Accounting Standards Codification, or ASC, 605 and as a result, the settlement proceeds areclassified as a gain on settlement in our statement of operations.Other Income and Expenses 2014 2013 2012 Other Income and Expense $2,238 $1,608 $(927) Our non-cash gain (loss) related to the periodic revaluation of our Series I Warrants liability for the year ended December 31, 2014 was $2,238 compared to$1,608 for the year ended December 31, 2013 and ($927) for the year ended December 31, 2012. Our non-cash gain (loss) related to the periodic revaluationof our Series I Warrants liability decreased by $630 in the year ended December 31, 2014, as compared to the comparable period in 2013 as a result of a lowercommon share price during the year ended December 31, 2014.Interest income for the year ended December 31, 2014 was $40 compared to $122 for the year ended December 31, 2013, and $329 for the year endedDecember 31, 2012. These changes are due to timing on the maturity of the investments as well as the amount of cash available for investments.Effective Income Tax RateA reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 United States federal statutory rate 35.00% 35.00% 35.00%State taxes, net of federal benefit (0.02)% (1.48)% 1.07%Valuation allowance (41.67)% (37.11)% (4.41)%Stock options 0.39% (0.17)% 0.14%Prior year adjustment ( 0.13)% ( 1.32)% 1.03%Warrants 7.92% 2.10% (0.82)%Other (1.64)% 0.18% (0.32)%Effective income tax rate (0.15)% (2.80)% 31.69% 34IndexIn 2014 and 2013, we had taxable losses of $10 and $27 million, respectively, which are available for carried forward to offset future taxable income. Wemade determinations to provide full valuation allowances for our net deferred tax assets at the end of 2014 and 2013, including NOL carryforwards generatedduring the years, based on our evaluation of positive and negative evidence, including our history of operating losses and the uncertainty of generatingfuture taxable income that would enable us to realize our deferred tax assets. The small provision in 2014 was related to the payment of miscellaneouspenalties and minimum taxes. The 2013 tax provision of $0.75 million was due primarily to a change in our estimate of taxable income for the 2012 periodand a tax reserve for the California research & development credit utilized in the 2010 tax return.The income tax benefit for the year ended December 31, 2012 resulted from recognition of net operating losses (“NOLs”) generated during the year that couldbe carried back to generate refunds of taxes paid in prior years. Generally, NOLs can be carried back to the two years preceding the loss year and then forwardfor twenty years following the loss year. In 2010, we had a taxable income of $75 million, which allowed us to carry back its 2012 NOL in the amount $42million for tax refunds. Due to the tax refunds derived from carrying back the 2012 NOLs, we recognized the tax benefit of $12 million in 2012. In addition,we made a determination to provide a full valuation allowance for its net deferred tax assets at the end of 2012 based on its evaluation of positive andnegative evidence, including our history of operating losses and the uncertainty of generating future taxable income that would enable it to realize itsdeferred tax assets.Liquidity and Capital ResourcesFor the year ended December 31, 2014, our cash and cash equivalents totaled $18,658 and our short-term investments totaled $22,571 compared to $19,173and $19,815, respectively, for the year ended December 31, 2013 and $19,661 and $26,493, respectively, as of December 31, 2012.We expect that our cash and cash equivalents as of December 31, 2014, will be sufficient to meet our short-term capital needs. While we do not expect togenerate net income in the near term, generally attributable to the Microsoft Settlement, we do expect to derive the majority of our future revenue fromlicense fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other marketsaround the world over the long term. However, we will not receive any proceeds from these claims unless and until they may be resolved in our favor, and weexpect to continue to incur substantial legal and other costs associated with pursuit of our claims.Contractual Commitments Total 2015 There after Leases 46 46 — Total $46 $46 — Off-Balance Sheet ArrangementsAs of December 31, 2014, we had no off-balance sheet arrangements.Item 7A.Quantitative and Qualitative Disclosures about Market RiskWe invest our excess cash primarily in highly liquid debt instruments including municipal and federal agency securities. By policy, we limit the amount ofcredit 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 couldsignificantly increase in the near term but we believe it would have an immaterial impact to our consolidated balance sheets and statement of operations asthere are only approximately 157,000 warrants outstanding as of December 31, 2014, that matures in March 2015.35IndexItem 8.Financial Statements and Supplementary Data.FINANCIAL STATEMENTSFinancial Statements Index PageReport of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm37Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2014 and December 31, 201338Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2014, December 31, 2013 and December31, 201239Consolidated Statements of Comprehensive Loss of VirnetX Holding Corporation for the years ended December 31, 2014, December 31, 2013 andDecember 31, 201239Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2014, December 31, 2013 andDecember 31, 201240Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2014, December 31, 2013 and December31, 201241Notes to Financial Statements of VirnetX Holding Corporation4236IndexREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersVirnetX Holding CorporationWe have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2014 and 2013, andthe related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2014. VirnetX Holding Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to expressan opinion on these consolidated 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, 2014 and 2013, and the consolidated results of their operations, and cash flows for each of the three years in the periodended December 31, 2014, 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, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2015 expressed an unqualified opinion as tothe effectiveness of the Company’s control over financial reporting. /s/ Farber Hass Hurley LLP Chatsworth, California March 2, 2015 37IndexVirnetX Holding CorporationCONSOLIDATED BALANCE SHEETS(in thousands, except share amounts) As ofDecember 31,2014 As ofDecember 31,2013 ASSETS Current assets: Cash and cash equivalents $18,658 $19,173 Investments available for sale 22,571 19,815 Prepaid expenses - current 653 357 Total current assets 41,882 39,345 Prepaid expenses – non-current 3,144 — Property and equipment, net 64 53 Total assets $45,090 $39,398 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $3,554 $1,748 Royalty payable 6,100 — Related-party payable 81 — Income tax liability 408 395 Deferred revenue, current portion 1,500 667 Derivative liability 320 2,564 Total current liabilities 11,963 5,374 Deferred revenue, non-current portion 500 — Commitments and contingencies (Note 5) — — Stockholders' equity: Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2014 and 2013, Issued and outstanding: 0 shares at December 31, 2014 and 2013 — — Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at December 31, 2014 and 2013, Issued and outstanding: 51,996,701 shares and51,236,141 shares, at December 31, 2014 and 2013, respectively 5 5 Additional paid-in capital 133,072 124,589 Accumulated deficit (100,435) (90,533)Accumulated other comprehensive loss (15) (37)Total stockholders' equity 32,627 34,024 Total liabilities and stockholders' equity $45,090 $39,398 The accompanying notes are an integral part of these consolidated financial statements 38IndexVirnetX Holding CorporationCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share amounts) Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Revenue $1,249 $2,197 $412 Operating expenses: Royalty expense 6,100 — — Research and development 2,004 1,782 1,555 General, selling and administrative 28,310 29,002 37,718 Gain on settlement (Note 3) (23,000) — — Total operating expenses 13,414 30,784 39,273 Loss from operations (12,165) (28,587) (38,861)Gain (loss) on change in value of embedded derivative and warrants 2,238 1,608 (927)Interest income, net 40 122 329 Loss before taxes (9,887) (26,857) (39,459)Income tax (expense) benefit (15) (751) 12,535 Net loss $(9,902) $(27,608) $(26,924)Basic and diluted loss per share: $(0.19) $(0.54) $(0.53)Weighted average shares outstanding basic and diluted 51,570,472 51,188,006 50,934,266 VirnetX Holding Corporation CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Net loss $(9,902) $(27,608) $(26,924)Other comprehensive income (loss), net of tax: Change in equity adjustment from foreign currency translation, net of tax — (12) — Change in unrealized gain (loss) on investments, net of tax 22 (33) 12 Total other comprehensive income (loss), net of tax 22 (45) 12 Comprehensive loss $(9,880) $(27,653) $(26,912)The accompanying notes are an integral part of these consolidated financial statements 39IndexVirnetX Holding CorporationCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in thousands, except share amounts) Common Stock AdditionalPaid-in Accumulated OtherComprehensiveIncome TotalStockholders'Equity Shares Amount Capital Deficit (Expense) (Deficit) Balance at December 31, 2011 50,619,136 $5 $104,277 $(36,001) $(4) $68,277 Stock issued for cash exercise of warrantsat $3.93-3.59 per share, net 44,941 161 161 Stock-based compensation 6,162 6,162 Deferred tax benefit related to stockbased compensation 3,111 3,111 Derivative liability 1,454 1,454 Exercise of options 486,165 1,691 1,691 Comprehensive income: Net loss (26,924) (26,924)Other comprehensive income net of tax 12 12 Comprehensive loss (26,912)Balance at December 31, 2012 51,150,242 $5 $116,856 $(62,925) $8 $53,944 Stock-based compensation 7,563 7,563 Exercise of options 39,833 170 170 Vested RSUs 46,066 Comprehensive income: Net loss (27,608) (27,608)Other comprehensive income net of tax (45) (45)Comprehensive loss (27,653)Balance at December 31, 2013 51,236,141 $5 $124,589 $(90,533) $(37) $34,024 Stock issued for cash exercise of warrantsat 3.59 per share, net 2,500 9 9 Stock-based compensation 8,189 8,189 Exercise of options 679,321 278 278 Vested RSUs 78,739 Derivative liability 7 7 Comprehensive income: Net loss (9,902) (9,902)Other comprehensive income net of tax 22 22 Comprehensive loss (9,880)Balance at December 31, 2014 51,996,701 $5 $133,072 $(100,435) $(15) $32,627 40IndexVirnetX Holding CorporationCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Cash flows from operating activities: Net (loss) $(9,902) $(27,608) $(26,924)Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 25 36 71 Stock-based compensation 8,189 7,563 6,162 Net change in deferred taxes — — 3,158 Change in value of derivative liability (2,238) (1,608) 927 Changes in assets and liabilities: Prepaid expenses and other current assets (296) (243) (23)Prepaid expenses – Non-current (3,144) — — Prepaid taxes — 14,963 (4,934)Deferred revenue 1,333 667 — Accounts payable and accrued liabilities 1,806 (1,449) 1,970 Royalty payable 6,100 — — Related-party payable 81 — — Income tax liability 13 395 — Net cash provided by (used in) operating activities 1,967 (7,284) (19,593)Cash flows from investing activities: Purchase of property and equipment (35) (7) (37)Purchase of investments (45,500) (92,729) (59,342)Proceeds from sale, maturity of investments 42,766 99,362 47,299 Net cash provided by (used in) investing activities (2,769) 6,626 (12,080)Cash flows from financing activities: Proceeds from exercise of options 278 170 1,691 Proceeds from exercise of warrants 9 — 161 Net cash provided by financing activities 287 170 1,852 Net decrease in cash and cash equivalents (515) (488) (29,821)Cash and cash equivalents, beginning of year 19,173 19,661 49,482 Cash and cash equivalents, end of year $18,658 $19,173 $19,661 Supplemental disclosure of cash flow information: Cash paid during the year for taxes $2 $— $— Cash paid during the year for interest $— $— $— The accompanying notes are an integral part of these consolidated financial statements 41IndexVirnetX Holding CorporationNOTES TO FINANCIAL STATEMENTS(in thousands except share and per share amounts)Note 1 - Formation and Business of the CompanyVirnetX Holding Corporation, which we refer to as” we”, “us”, “our”, “the Company” or “VirnetX”, is engaged in the business of commercializing a portfolioof patents. We seek to license our technology, including GABRIEL Connection Technology™, to various original equipment manufacturers, or OEMs, thatuse our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence and unifiedcommunications markets. Prior to 2012 our revenue was limited to an insignificant amount of software royalties pursuant to the terms of a single licenseagreement. During 2013 and 2012 we had revenues from settlements of patent infringement disputes whereby we received consideration for past sales oflicensees that utilized our technology, where there was no prior patent license agreement (see “Revenue Recognition”).Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 39 U.S. and 66 foreign patents withapproximately 75 pending patent applications worldwide. Our patent portfolio is primarily focused on securing real-time communications over the Internet,as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additionalapplications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, ConnectedCar and Connected Home. The subject matter of all our U.S and foreign patents and pending applications relates generally to securing communications overthe internet and such covers all our technology and other produtcs. Our issued U.S. and foreign patents expire at various times during the period from 2019 to2024. Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, (f/k/aScience Applications International Corporation or SAIC) in 2006 and we are required to make payments to Leidos, based on cash or certain other valuesgenerated from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximums andother limitations.Note 2 - Summary of Significant Accounting PoliciesThe 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.Use of EstimatesWe 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. Basis of ConsolidationThe consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balancesand transactions have been eliminated.Revenue RecognitionWe derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, includingthe specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements.These agreements may include, without limitation, elements related to the settlement of past patent infringement liabilities, up-front and non-refundablelicense fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership ofintellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the FinancialAccounting Standards Board (“FASB”) revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requiresconsideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such asthose agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts andcircumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all of thefollowing criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services havebeen rendered; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.42IndexPatent License Agreements: Upon signing a patent license agreement, including licenses entered into upon settlement of litigation, we provide the licenseepermission to use our patented technology in specific applications. We account for patent license agreements in accordance with the guidance for revenuerecognition for arrangements with multiple deliverables, with amounts allocated to each element based on their fair values. We have elected to utilize theleased-based model for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Under our patent licenseagreements, we do or expect to typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to useour patented inventions in specific applications and products: ·Consideration for Past Sales: Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with alicensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation,disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales inconnection with the settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typicallybased upon application of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, since delivery hasoccurred, we record the consideration as revenue when we have obtained a signed agreement, identified a fixed or determinable price, anddetermined that collectability is reasonably assured. ·Current Royalty Payments: Ongoing royalty payments cover a licensee’s obligations to us related to its sales of covered products in the currentcontractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterly or semi-annual royaltyreports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reportssubsequent to the period in which our licensees’ underlying sales occurred. As a result, it is impractical for us to recognize revenue in the period inwhich the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and otherrevenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is limited. ·Non-Refundable Up-Front Fees and Minimum Fee Contracts: For licenses that provide for non-refundable up-front or fixed minimum fees overtheir term, for which we have no future obligations or performance requirements, revenue is generally recognized over the license term. Forlicenses that provide for fees that are not fixed or determinable, including licenses that provide for extended payment terms and/or payment of asignificant portion of the fee after expiration of the license or more than 12 months after delivery, the fees are generally presumed not to be fixedor determinable, and revenue is deferred and recognized as earned, but generally not in advance of collection. ·Non-Royalty Elements: Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, ifany, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidatedstatements of operations.Deferred revenueIn August 2013 we began receiving annual payments on a contract that requires payment to us over 4 years of $10,000 ("August 2013 Contract Settlement").From the inception of that license to December 31, 2014, we received cash totaling $5,000, all of which is non-refundable. We recognized $1,167 and$1,833 of revenue related from the August 2013 Contract Settlement during the years ended December 31, 2014 and 2013. Activity under the August 2013 Contract Settlement was as follows: 2014 2013 Deferred Revenue, beginning of year $667 $- Payment received 2,500 2,500 Less: Amount amortized as revenue 1,167 1,833 Deferred Revenue, end of year $2,000 $667 43IndexCash and Cash EquivalentsWe consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. Our cashand cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments.Prepaid Expenses and Other Current AssetsPrepaid Expense and Other Current Assets at December 31, 2014 includes the current portion of prepaid rent for a facility lease for corporate promotional andmarketing purposes. Beginning March 2014, the prepayment totaling $4,000 is being amortized over the 10 year term of the lease. The unamortized non-current portion of the prepayment is included in Prepaid expenses-Non-current on the consolidated balance sheet. InvestmentsInvestments are classified as available-for-sale and are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income.Realized gains and losses are recorded in income in the period they are realized. We invest our excess cash primarily in highly liquid debt instrumentsincluding municipal and federal agency securities, with contractual maturities less than two years. By policy, we limit the amount of credit exposure to anyone issuer.Property and EquipmentProperty 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 UncertaintiesOur cash and cash equivalents are primarily maintained at two major financial institutions in the United States. Deposits held with these financialinstitutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit InsuranceCorporation, or FDIC. During the year ended December 31, 2014 and 2013, we had, at times, funds that were uninsured. We do not believe that we aresubject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experienced any losses on ourdeposits of cash and cash equivalents.Fair ValueThe carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because oftheir generally short maturities.Intangible AssetsWe 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 AssetsWe 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 DevelopmentResearch and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred.Income TaxesWe account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilitiesfor expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets andliabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the incometax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferredtaxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing if we will realize our deferred tax assets,we consider whether it is more likely than not that some portion of the deferred tax assets will not be realized. 44IndexA valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it ismore likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance isbased on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in differenttaxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance toreduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in theUnited States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuationallowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider allavailable evidence, both positive and negative. Consistent with our policy, and because of our history of operating losses, we do not currently recognize thebenefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our abilityto generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than notthat we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.We account for our uncertain tax positions in accordance with U.S. GAAP. The purpose of this method is to clarify accounting for uncertain tax positionsrecognized. The U.S. GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one, recognition,requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two,measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit,determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position doesnot meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely thannot standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are derecognizedwhen we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, andmeasurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.Derivative InstrumentsOur Series I Warrants are accounted for as derivative instruments as a result of an anti-dilution provision which, in accordance with U.S. GAAP, prevents themfrom being considered indexed to our stock and qualified for an exception to derivative accounting.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 CompensationWe account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costsnet of the applicable forfeiture rate and recognize the compensation costs for only those shares expected to vest on a straight-line basis over the requisiteservice period of the award, which is generally the vesting term of 4 years. We estimate the forfeiture rate based on our historical experience if any. See Note 7- Stock-Based Compensation for additional information concerning our share-based compensation awards.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 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 2014, 2013 and 2012 we incurred losses; therefore the effect of any common stock equivalent would be anti-dilutive during these periods. 45IndexNew Accounting PronouncementsIn August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, “Presentation of FinancialStatements – Going Concern”, Subtopic 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendmentsin this ASU apply to all entities and require management to assess an entity’s ability to continue as a going concern by incorporating and expanding uponcertain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2)require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4)require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and otherdisclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements areissued (or available to be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periodsand interim periods thereafter. Early application is permitted. We are currently evaluating the impact this guidance will have on our financial position andresults of operations. In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)," which makes amendments to the codification topic718, "Accounting for Share-Based Payments," when the terms of an award provide that a performance target could be achieved after the requisite serviceperiod. The new guidance becomes effective for annual reporting periods beginning after December 15, 2015, early adoption is permitted. We are currentlyevaluating the impact this guidance will have on our financial position and results of operations.In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers" (Topic 606). Topic 606 supersedes the revenue recognitionrequirements in Topic 605, “Revenue Recognition”, including most industry-specific revenue recognition guidance throughout the Industry Topics of theCodification. In addition, the amendments create a new Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers”. In summary, thecore principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments in this Update areeffective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is notpermitted. We are currently evaluating the impact this guidance will have on our financial position and statement of operations.Note 3 - Gain on SettlementIn December 2014, we received a $23,000 cash settlement resulting from litigation with Microsoft (see Note 14 “Litigation”). In June 2010, we received a$200,000 cash settlement from litigation with Microsoft, in which we agreed to dismiss the pending lawsuits and any damages. The 2010 settlementagreement was amended in December 2014 to settle a subsequent lawsuit with Microsoft, raising the total cash settlement with Microsoft, as amended, to$223,000. In both the original settlement and the December 2014 amendment, we could not practically and objectively separate any settlement portion fromthe revenue element as discussed under the guidance of Accounting Standards Codification, or ASC, 605 "Revenue Recognition", and as a result, thesettlement proceeds are classified as a gain on settlement in our consolidated statement of operations.Note 4 - Property and EquipmentOur major classes of property and equipment were as follows: December 31 2014 2013 2012 Office furniture $70 $70 $70 Computer equipment 157 121 115 Total 227 191 185 Less accumulated depreciation (163) (138) (115) $64 $53 $70 Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $25, $24 and $23 respectively.Note 5 – Commitments and Related Party TransactionsWe lease our offices under an operating lease with a third party expiring in October 2015. We recognize rent expense on a straight-line basis over the term ofthe lease. Rent expense was $56, $56 and $56 for the years ended December 31, 2014, 2013 and 2012, respectively.During 2014 we leased the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurredapproximately $296 in rental fees (including fees and other reimbersements) to the LLC during the year ended December 31, 2014 for such use of which $81remains payable at December 31, 2014. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control theequity interests of the LLC. Subsequent to the year ended December 31, 2014, on January 31, 2015 we entered into a 12 month non-exclusive lease with theLLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal insuch transactions and can be cancelled by either us or the LLC with 30 days notice. 46IndexNote 6 - Stock PlanWe have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the "Plan"), which has beenapproved by our stockholders. The 2013 Plan provides for the issuance of up to 2,500,000 shares of our common stock. To the extent that any award shouldexpire, become un-exercisable or is otherwise forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan. The2013 Plan provides for the granting of stock options and restricted stock purchase rights (“RSU”) to our employees and consultants. Stock options grantedunder the 2013 Plan may be incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may only be granted to our employees(including officers and directors). Nonqualified stock options ("NSO") and stock purchase rights may be granted to our employees and consultants.The 2013 Plan will expire in 2023. Options may be granted under the 2013 Plan with an exercise price determined by our Board of Directors, or a dulyappointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100% of the fair marketvalue at the date of grant in the case of ISO or 85% of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSOgranted to one of our Named Executive Officers shall not be less than 100% fair market value of the shares at the date of grant and the exercise price of an ISOgranted to a 10% shareholder shall not be less than 110% of the fair market value of the shares on the date of grant. Stock options granted under the 2013Plan typically vest over four years and have a 10 year term. All RSUs are considered to be granted at the fair value of our stock on the date of grant becausethey have no exercise price. RSUs typically vest over four years. At December 31, 2014 there were 1,886,217 shares available for grant under the 2013 Plan. Note 7 - Stock-Based Compensation The following tables summarize information about stock-options and RSUs outstanding at December 31, 2014:Options Outstanding Options Vested and Exercisable Date ofOption Issue Range ofExercisePrices NumberOutstanding WeightedAverageRemainingContractualLife (Years) WeightedAverageExercise Price NumberExercisable WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice 2006 $0.24 41,516 1.22 $0.24 41,516 1.22 $0.24 2007 $4.20 1,277,574 2.56 4.20 1,277,574 2.56 4.20 2007 $5.88-6.47 563,931 2.99 5.88 563,931 2.99 5.88 2008 $1.74-6.20 129,500 3.40 5.00 129,500 3.40 5.00 2009 $1.15- 1.58 922,986 4.26 1.16 922,986 4.26 1.16 2010 $5.48-6.03 259,896 5.17 5.49 259,896 5.17 5.49 2011 $19.85-23.62 405,000 6.37 23.62 367,499 6.37 23.62 2012 $23.84 – 35.25 357,500 7.40 27.03 242,083 7.38 27.03 2013 $23.72 – 35.05 269,625 8.37 25.40 128,717 8.37 25.41 2014 $14.52-15.40 261,500 9.50 15.21 41,928 9.46 14.97 4,489,028 4.61 $9.33 3,975,630 4.11 $7.79 47IndexThe following tables summarize activity under the Plan for the indicated periods: Options Number ofShares WeightedAverageExercise Price WeightedAverageRemainingContractualLife (Years) AggregateIntrinsicValue Outstanding at December 31, 2011 4,906,998 $5.12 — — Options granted 367,500 26.97 — — Options exercised (486,165) 3.48 — — Options cancelled (12,109) 17.34 — — Outstanding at December 31, 2012 4,776,224 6.94 — — Options granted 274,625 25.37 — — Options exercised (39,833) 4.27 — — Options cancelled (34,167) 20.57 — — Outstanding at December 31, 2013 4,976,849 7.86 — — Options granted 261,500 15.21 — — Options exercised (679,321) 0.41 — — Options cancelled (70,000) 13.38 — — Outstanding at December 31, 2014 4,489,028 $9.33 4.61 $6,000 RSUs Number ofRSUs WeightedAverageGrant DateFair Value AggregateIntrinsicValue Outstanding at December 31, 2011 — — — RSUs granted 151,665 25.60 — Outstanding at December 31, 2012 151,665 $25.60 $— RSUs granted 156,415 23.72 — RSUs vested (55,832) 27.06 — RSUs cancelled (3,333) 24.75 — Outstanding at December 31, 2013 248,915 $24.10 $— RSUs granted 154,332 15.30 — RSUs vested (88,686) 24.08 — RSUs cancelled (4,167) 24.13 — Outstanding at December 31, 2014 310,394 $19.74 $— Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of 2014, which was $5.49, andthe exercise price of the options. For options exercised, the intrinsic value is the difference between market price and the exercise price on the date ofexercise. We received cash proceeds of $278, $170 and $1,691 from stock options exercised in 2014, 2013 and 2012 respectively. The total intrinsic value ofoptions exercised was $3,575, $676 and $11,509 during the years ended December 31, 2014, 2013 and 2012, respectively. For RSUs vested, the intrinsicvalue is the difference between market price and the vested price on the date of vest. The total intrinsic value of the RSUs vested was zero during the yearended December 31, 2014. 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 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Employee stock options $5,951 $6,488 $5,171 RSUs 2,238 1,075 991 Total stock-based compensation expense $8,189 $7,563 $6,162 48IndexAs of December 31, 2014, there was $8,583 of unrecognized stock-based compensation expense expected to be recognized related to unvested employeestock options and $4,814 of unrecognized stock-based compensation expense to be recognized related to unvested RSUs. These costs are expected to berecognized over a weighted-average period of 2.38 and 2.58 years, respectively.The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted averageassumptions: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Expected stock price volatility 88% 93% 111%Risk-free interest rate 2.56% 2.04% 1.90%Expected life term (in years) 6.0 years 6.10 years 6.8 years Expected dividends 0% 0% 0%Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock options granted was $11.26, $19.24 and$23.17 per share during the years ended December 31, 2014, 2013 and 2012, respectively.The expected life was determined using the simplified method outlined in ASC 718, “Compensation - Stock Compensation”, taking the average of thevesting term and the contractual term of the option. Expected volatility of the stock options was based upon historical data and other relevant factors, suchas the volatility of comparable publicly-traded companies at a similar stage of life cycle. We have not provided an estimate for forfeitures because we havehad nominal forfeited options and RSUs and believe that all outstanding options and RSUs at December 31, 2014, will vest. In the future, we may changethis estimate based on actual and expected future forfeiture rates.Note 8 - Earnings Per ShareBasic 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, under our stock plan and warrants. During 2014, 2013 and 2012 we incurred losses; therefore the effect of any common stock equivalent would beanti-dilutive during those periods.The table below sets forth the basic loss per share calculations: Year Ended December 31, 2014 2013 2012 Net loss $(9,902) $(27,608) $(26,924)Basic weighted average number of shares outstanding 51,570 51,188 50,934 Diluted weighted average number of shares outstanding 51,570 51,188 50,934 Basic and diluted loss per share $(0.19) $(0.54) $(0.53)Note 9 - Common StockEach 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 to dividends. Our restated articles of incorporation authorize us to issue up to 100,000,000 shares of $.0001 par value common stock. 49IndexNote 10 - WarrantsInformation about warrants outstanding during the twelve months ended December 31, 2014 follows: OriginalNumber ofWarrantsIssued ExercisePrice perCommonShare Exercisable atDecember 31,2013 BecameExercisable Exercised Terminated /Cancelled /Expired Exercisable atDecember 31,2013 ExpirationDate 2,619,036 (1) $3.59 159,967 — 2,500 — 157,467 March 2015Total 159,967 — 2,500 — 157,467 (1)Referred to as our Series I Warrants.Note 11 - Employee Benefit PlanWe sponsor a defined contribution, 401k plan, covering substantially all our employees. Our matching contribution to the plan was approximately $45 in2014, $47 in 2013 and $41 in 2012.Note 12 - Income Taxes The benefit (provision) for income taxes is comprised of the following: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Current: Federal $(13) $(354) $12,154 State (2) (397) 428 Foreign - - - (15) (751) 12,582 Deferred: Federal - - (40)State - - (7) - - (47)Total (provision) benefit for income taxes $(15) $(751) $12,535 A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 United States federal statutory rate 35.00% 35.00% 35.00%State taxes, net of federal benefit (0.02)% (1.48)% 1.07%Valuation allowance (41.67)% (37.11)% (4.41)%Stock options 0.39% (0.17)% 0.14%Prior year true-up (0.13)% (1.32)% 1.03%Warrants 7.92% 2.10% (0.82)%Other (1.64)% 0.18% (0.32)%Effective income tax rate (0.15)% (2.80)% 31.69%In 2014 and 2013, we had taxable losses of $10,000 and $27,000 respectively, which are available for carried forward to offset future taxable income. Wemade determinations to provide full valuation allowances for our net deferred tax assets at the end of 2014 and 2013, including NOL carryforwards generatedduring the years, based on our evaluation of positive and negative evidence, including our history of operating losses and the uncertainty of generatingfuture taxable income that would enable us to realize our deferred tax assets. The small provision in 2014 was related to the payment of miscellaneouspenalties and minimum taxes. The 2013 tax provision of $750 was due primarily to a change in our estimate of taxable income for the 2012 period and a taxreserve for the California research & development credit utilized in the 2010 tax return. 50IndexThe income tax benefit for the year ended December 31, 2012 resulted from recognition of net operating losses (“NOLs”) generated during the year that couldbe carried back to generate refunds of taxes paid in prior years. Generally, NOLs can be carried back to the two years preceding the loss year and then forwardfor twenty years following the loss year. In 2010, we had a taxable income of $75,000, which allowed us to carry back our 2012 NOL in the amount$42,000 for tax refunds. Due to the tax refunds derived from carrying back the 2012 NOLs, we recognized the tax benefit of $12,000 in 2012. In addition, wemade a determination to provide a full valuation allowance for its net deferred tax assets at the end of 2012 based on our evaluation of positive and negativeevidence, including our history of operating losses and the uncertainty of generating future taxable income that would enable it to realize its deferred taxassets. Deferred tax assets (liabilities) consist of the following: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Deferred tax assets: Reserves and accruals $- $58 State tax 1 1 Research and development credits and other credits 924 907 Net operating loss carry forward 11,190 8,249 Stock based compensation 8,452 6,600 Other 127 154 Total deferred tax assets 20,694 15,969 Valuation allowance (20,679) (15,955)Deferred tax assets after valuation allowance 15 14 Deferred tax liability: Depreciation and amortization (15) (14) Total deferred tax liability (15) (14) Net deferred tax assets $- $- 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, management believes it is more likely than not that the net deferred tax assets at December 31, 2014 will not befully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at December 31, 2014. The netchange in the total valuation allowance for the 12 months ended December 31, 2014 was an increase of $4,724. At December 31, 2014, we had federal andstate net operating loss carry-forwards of approximately $31,617 and $37,993, respectively, expiring beginning in 2028 and 2017, respectively. AtDecember 31, 2014, we had federal research and development credit carry-forwards of approximately $924 expiring beginning in 2031. Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income that can be offset by net operatingloss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Ourcapitalization described herein may have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct net operating losscarry forwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation.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 provided contingent reserve under ASC 740-10 of $316 and $316 at December 31, 2014, andDecember 31, 2013, respectively. Our tax returns are subject to review by various tax authorities. The returns are 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 have accrued interestor penalties during the 12 month period ended December 31, 2014 in the amount of $79. 51IndexA reconciliation of beginning and ending amounts of unrecognized tax benefits follows: Year EndedDecember 31,2014 Year EndedDecember 31,2013 Year EndedDecember 31,2012 Balance at the beginning of the year $316 $128 $128 Additions based on tax positions related to the current year - - - Additions for tax positions of prior years - 188 - Settlements - - - Lapse of applicable statute of limitations - - - Balance at the end of the year $316 $316 $128 Note 13 - Fair Value MeasurementWe apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value inthe financial statements on a recurring basis. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fairvalue into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair valuemeasurement:Level 1 – Quoted prices in active markets for identical assets or liabilities.Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets orliabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of theassets or liabilities.Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use inpricing the asset or liability.The carrying amounts for cash and cash equivalents, investments in certificates of deposit, accounts payable and accrued expenses approximate their fairvalues due to the short period of time until maturity. Mutual Funds: Valued at the quoted net asset value (NAV) of shares held.Corporate, Municipal and U.S. Agency securities: Fair value measured at the closing price reported on the active market on which the individualsecurities are traded.Series I Warrants: Fair value measured by using a Binomial valuation model. As of December 31, 2014, 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 $5.49, a discountrate of 1.65%, and a volatility of 89.69%. As of December 31, 2013, the assumptions used to measure fair value of the liability embedded in our outstandingSeries I Warrants included a warrant exercise price of $3.59 per share, a common share price of $19.41, a discount rate of 1.75%, and a volatility of 91.55%.The following table shows our cash and available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significantinvestment category recorded as cash and cash equivalents of investments available for sale as of December 31, 2014 and 2013 (in thousands): December 31, 2014 AdjustedCost UnrealizedGains UnrealizedLosses FairValue Cashand CashEquivalents InvestmentsAvailablefor Sale Cash $1,183 $- $- $1,183 $1,183 $- Level 1: Mutual funds 10,139 - - 10,139 10,139 - Corporate securities 9,405 1 (3) 9,403 1,645 7,758 U.S agency securities 20,504 2 (2) 20,504 5,691 14,813 40,048 3 (5) 40,046 17,475 22,571 Total $41,231 $3 $(5) $41,229 $18,658 $22,571 52Index December 31, 2013 AdjustedCost UnrealizedGains UnrealizedLosses FairValue Cashand CashEquivalents InvestmentsAvailablefor Sale Cash $11,699 $- $- $11,699 $11,699 $- Level 1: Mutual funds 73 - - 73 73 - Corporate securities 10,782 - - 10,782 2,325 8,457 Municipal securities 2,172 - - 2,172 665 1,507 U.S agency securities 14,287 - (25) 14,262 4,411 9,851 27,314 - (25) 27,289 7,474 19,815 Total $39,013 $- $(25) $38,988 $19,173 $19,815 The maturities of our marketable securities generally range from within one to two years. Actual maturities could differ from contractual maturities due to callor prepayment provisions.The following table sets forth, by level within the fair value hierarchy, our financial instrument liabilities as of December 31, 2014 (in thousands): QuotedPrices inActiveMarkets forIdenticalAssets SignificantOtherObservableInputs SignificantUnobservableInputs (Level 1) (Level 2) (Level 3) Total Series l Warrants $— $— $320 $320 Total $— $— $320 $320 The following table sets forth, by level within the fair value hierarchy, our financial instrument liabilities as of December 31, 2013 (in thousands): QuotedPrices inActiveMarkets forIdenticalAssets SignificantOtherObservableInputs SignificantUnobservableInputs (Level 1) (Level 2) (Level 3) Total Series l Warrants $— $— $2,564 $2,564 Total $— $— $2,564 $2,564 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, 2014, 2013and 2012 (in thousands): Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) Year endedDecember 31,2014 Year endedDecember 31,2013 Year endedDecember 31,2012 Beginning Balance $2,564 $4,172 $4,699 (Gain) losses included in net losses (2,237) (1,608) 927 Settlements (7) — (1,454)Ending Balance $320 $2,564 $4,172 53IndexNote 14 - LitigationWe have three intellectual property infringement lawsuits pending against Apple, Inc. in the United States District Court for the Eastern District of Texas,Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief in all the complaints.VirnetX Inc. et al., v. Microsoft Corporation (Case 6:13-CV-00351-LED)On April 22, 2013, we initiated a lawsuit by filing a complaint against Microsoft Corporation in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that Microsoft has infringed U.S. Patent Nos. 6,502,135, 7,188,180, 7,418,504, 7,490,151, 7,921,211, and7,987,274. We seek an unspecified amount of damages and injunctive relief. A hearing on claims construction and multiple motions by both parties was heldon September 4, 2014. On September 10, 2014, the court issued an order granting in part and denying-in-part our sealed motion to compel interrogatoryresponses, denying Microsoft’s sealed motion to enter order focusing patent claims and prior art, denying Microsoft’s sealed motion to compel, denyingMicrosoft’s sealed motion to stay the case and granting our request for leave to file a Motion for Partial Summary Judgment. On December 17, 2014, weentered into an Amended Settlement and License Agreement with Microsoft Corporation. The agreement amends and restates certain terms of the originalSettlement and License Agreement, dated May 14, 2010, between VirnetX, Inc. and Microsoft Corporation. As a result of the agreement, both parties havesettled their pending patent disputes including the patent infringement case brought by us against Microsoft before the U.S. District Court for the EasternDistrict of Texas and jointly move to terminate the pending Inter Partes Review (IPR) proceedings between Microsoft and VirnetX as to Microsoft.Under the terms of the amended agreement, Microsoft paid us $23 million to settle the patent dispute and expand Microsoft’s license. Under the amendedagreement, Microsoft received a worldwide, irrevocable, nonexclusive, non-sublicensable, royalty-free, fully paid-up license to all our patents.VirnetX Inc. v. Cisco Systems, Inc. et al (13-1489-LP VirnetX, Case 6:10-CV-00417-LED)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 alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief.Subsequently, on February 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC, to assert U.S. PatentNo. 7,418,504 against Apple and Aastra. On April 5, 2011, we further amended our complaint to include Apple’s iPad 2 in the list of Apple products that areaccused of infringing our patents and to assert our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit. A claimconstruction hearing was held on January 5, 2012 and the court issued a Markman ruling on April 25, 2012. Aastra and NEC agreed to sign licenseagreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separatejury trial for each defendant, and just try the case against Apple on the scheduled trial date. The jury trial against Cisco was held on March 4, 2013. The juryagainst Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trialand Cisco’s infringement of certain VirnetX patents was denied and the case against Cisco was closed.The jury trial against Apple was held on October 31, 2012 and on November 6, 2012, a jury in the United States Court for the Eastern District of Texas, TylerDivision, awarded us over $368 million in a verdict against Apple Corporation for infringing four of our patents. On February 26, 2013, the court issued itsMemorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awardedby the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted ourmotions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 in daily interest up tofinal judgment and $330 in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied ourrequest for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend thejudgment to the United States Court of Appeals for the Federal Circuit (USCAFC). On October 16, 2013 Apple filed its opening appeal brief to the USCAFC.Our response to the opening brief was filed on December 2, 2013, and on December 19, 2013, Apple filed its final response to complete the briefing of thecourt. A hearing was held on March 3, 2014 at the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 ofour patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, andconfirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In itsopinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents andremanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decisionconcerning VirnetX’s litigation against Apple Inc. In our petition, we have asked the court to rehear its decision with respect to damages and affirm thedistrict court’s damages award against Apple in full because the Federal Circuit’s decision is contrary to the patent statute and Supreme Court precedent. Weare also asking the Federal Circuit to reinstate the jury’s award that Apple infringed the ’504 and ’211 patents on the basis that the district court correctlyconstrued the claim term “secure communication link”. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc ofthe Federal Circuit's September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedingsconsistent with its opinion. We are currently awaiting a scheduling order from the court. 54IndexVirnetX, Inc. v. Apple, Inc. (Case 6:13-CV-00211-LED)The Court ordered the parties to mediate over an ongoing license in the following 45 days for Apple’s future infringing use not covered by the Court’s Order,and ordered us to file an appropriate motion with the court if the parties fail to agree to a license. On March 28, 2013, Apple filed a motion to alter or amendthe judgment entered by the Court. The mediation was held on April 9, 2013 and the parties did not come to an agreement on an ongoing royalty rate forinfringing Apple products. We filed our opposition to this motion on April 10, 2013. As ordered by the Court, we filed a sealed motion with the Court onApril 16, 2013, requesting the Court’s assistance in deciding an appropriate royalty rate for all infringing products shipped by Apple that are “not more thancolorably different” with regards to the accused functionality. On August 1, 2013, a hearing was held in the United States District Court for the EasternDistrict of Texas, Tyler Division on our motion for an ongoing royalty. On March 6, 2014, the court issued a public version of the order previously issuedunder seal on March 3, 2014, awarding us an on-going royalty of 0.98% on adjudicated products and products “not colorably” different from thoseadjudicated at trial that incorporate any of the FaceTime or VPN on Demand features found to infringe at trial. On March 27, 2014, Apple filed its notice ofappeal to the United States Court of Appeals for the Federal Circuit. On March 28, 2014 Apple also filed a motion for Entry of Final Judgment by Apple Inc.with the United States District Court for the Eastern District of Texas, Tyler Division. The Court had stayed the proceedings in this matter while the Court’sruling in the Case 6:10-CV-00417-LED was pending. With the denial of the rehearing request by USCAFC on December 16, 2014, this case has also beenremanded back to the Eastern District of Texas, Tyler Division, for further processing with the Case 6:10-CV-00417-LED. We are currently awaiting ascheduling order from the court. VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)On November 6, 2012, we filed a new complaint against Apple Inc., in the United States District Court for the Eastern District of Texas, Tyler Division forwillfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damagesand injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintoshcomputers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 thatwas subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we fileda consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, wefiled an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief.The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summaryjudgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In aseparate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Applefrom asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Ciscoet. al., Case 6:10-CV-00417-LED). The jury trial in this case is scheduled for October 13, 2015.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 any governmental authority or other party. Note 15 - Quarterly Financial Information (unaudited) First Second Third Fourth (in thousands except per share) 2014 Revenue $250 $268 $292 $439 Gain on settlement — — — 23,000 Income (loss) from operations (6,953) (6,171) (6,250) 6,870 Net Income/ (loss) (6,087) (6,670) (4,468) 7,325 Basic earnings (loss) per common share $(0.12) $(0.13) $(0.09) $0.14 Diluted earnings (loss) per common share $(0.12) $(0.13) $(0.09) $0.14 First Second Third Fourth (in thousands except per share) 2013 Revenue $293 $6 $1,612 $286 Loss from operations (9,529) (6,578) (5,133) (7,347)Net loss (7,891) (7,029) (5,134) (7,554)Basic and diluted loss per common share $(0.15) $(0.14) $(0.10) $(0.15) 55IndexReport of Independent Registered Public Accounting Firm To the Board of Directors andStockholders of VirnetX Holding CorporationWe have audited the internal control over financial reporting of VirnetX Holding Corporation (the “Company”) as of December 31, 2014, based on criteriaestablished in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express 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, 2014, based on thecriteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission.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, 2014, of the Company and our report dated March 2, 2015, expressed an unqualified opinion on thosefinancial statements./s/ Farber Hass Hurley LLPChatsworth, CaliforniaMarch 2, 2015 56IndexItem 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A.Controls and Procedures.Evaluation of Disclosure Controls and ProceduresUnder 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, 2014.The purpose of this evaluation was to determine whether as of December 31, 2014 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, 2014, our disclosure controls andprocedures were effective. Changes in Internal Control Over Financial Reporting There were no changes in our internal controls over financial reporting (as such term is defined in rules 13a-15 (f) under the Securities Exchange Act of 1934,as amended) during the fiscal year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controlsover financial reporting. Management's Report on Internal Control Over Financial ReportingOur 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 (2013) 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, 2014. There were no changes in our internal controlover financial reporting during the period ended December 31, 2014 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, 2014; their report isincluded elsewhere herein.Item 9B.Other Information.None. 57IndexPART IIICertain 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 2014 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 will be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” inour Proxy Statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.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 2014 Fiscal Year-End,” and “Option Exercises in Fiscal Year 2014.”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 the Equity Compensation PlansWe have a stock incentive plan for employees and others called the “VirnetX Holding Corporation 2013 Stock Plan”, or the Plan, which has been approvedby our stockholders. The Plan provides for the granting of up to 14,124,469 shares of our common stock, including stock options and stock purchase rights,and will expire in 2023. As of December 31, 2014, there were 1,886,217 shares available to be granted under the Plan. We had 4,489,028 and 4,976,849options outstanding at December 31, 2014, and December 31, 2013, respectively, with an average exercise price of $9.33 and $7.86, respectively. We had317,894 and 248,915 restricted stock units outstanding at December 31, 2014 and December 31, 2013 respectively with a weighted average grant price of$19.74 and $24.10 respectively. Plan Category Number ofSecurities to beIssued UponExercise ofOutstandingOptions,Warrants andRights Weighted-AverageExercise Price ofOutstandingOptions, Warrantsand Rights Number ofSecuritiesRemainingAvailable forFuture IssuanceUnder EquityCompensationPlans Equity compensation plans approved by security holders 4,964,389 $9.81 1,886,217 Equity compensation plans not approved by security holders — — Total 4,964,389 $9.81 1,886,217 On May 22, 2014 the Compensation Committee granted 55,000 options and 16,666 RSUs to the Board of Directors of VirnetX Inc. On July 8, 2014 theCompensation Committee granted 206,500 options and 137,666 RSUs 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 2014 Annual Meetingof Stockholders under “Principal Accountant Fees & Services.” 58IndexPART IVItem 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 isshown in the financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which theyare required or because 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.59IndexSIGNATURESPursuant 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 PresidentDated: March 2, 2015 60IndexPOWER OF ATTORNEYKNOW 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 March 2, 2015Kendall Larsen (Principal Executive Officer) /s/ Richard H. Nance Chief Financial Officer March 2, 2015Richard H. Nance (Principal Financial Officer andPrincipal Accounting Officer ) /s/ Robert D. Short III Director March 2, 2015Robert D. Short III /s/ Gary Feiner Director March 2, 2015Gary Feiner /s/ Michael F. Angelo Director March 2, 2015Michael F. Angelo /s/ Thomas M. O'Brien Director March 2, 2015Thomas M. O'Brien 61IndexEXHIBIT INDEX ExhibitIncorporated by reference herein NumberDescriptionFormExhibit No.Filing DateFile No.3.1Certificate of Incorporation of the Company.8-K3.111/01/2007000-268953.2By-Laws of the Company.8-K3.211/01/2007000-268954.1Form of Warrant Agency Agreement by and between the Company andCorporate Stock Transfer, Inc. as Warrant Agent.S-1/A4.101/16/2009333-1536454.2Form of Series I Warrant.8-K4.109/03/2009001-3385210.1Form of Indemnification Agreement by and between the Company andeach of Kendall Larsen, Robert D. Short III, Gary Feiner, Michael F.Angelo, Thomas M. O'Brien and Richard Nance.8-K10.307/12/2007000-2689510.2*2007 Stock Plan, as amended on April 13, 2012.10-Q10.205/10/2012001-3385210.3*Amended Form of Stock Option Agreement – 2007 Stock Plan.10-Q4.505/10/2011001-3385210.4*Form of Restricted Stock Unit Award Agreement – 2007 Stock Plan.10-Q10.305/10/2012001-3385210.5*2013 Equity Incentive Plan.DEF 14AAppendix A04/12/2013001-3385210.6*Form of Stock Option Agreement – 2013 Equity Incentive Plan. 10.7*Form of Restricted Stock Unit Agreement – 2013 Equity Incentive Plan. 10.8Voting Agreement among the Company and certain of its stockholders,dated as of December 12, 2007.10-K10.1103/31/2008001-3385210.9Securities Purchase Agreement, dated as of September 2, 2009, by andbetween the Company and the Purchasers (as defined therein).8-K10.109/03/2009001-3385210.10Form of Registration Rights Agreement by and between the Companyand the Purchasers (as defined therein).8-K10.209/03/2009001-3385210.11Form of Underwriting Agreement between VirnetX Holding Corporationand Gilford Securities Incorporated.S-1/A1.101/16/2009333-15364510.12Patent License and Assignment Agreement by and between theCompany and Leidos, Inc. (formerly Science Applications InternationalCorporation) dated as of August 12, 2005.8-K10.407/12/2007000-2689510.13Amendment No. 1 to Patent License and Assignment Agreement by andbetween the Company and Leidos, Inc. dated as of November 2, 2006.8-K10.607/12/2007000-2689510.14Amendment No. 2 to Patent License and Assignment Agreement by andbetween VirnetX, Inc. and Leidos, Inc. dated as of March 12, 2008.8-K10.103/18/2008001-3385210.15Security Agreement by and between the Company and Leidos, Inc.dated as of August 12, 2005.8-K10.507/12/2007000-2689510.16Assignment Agreement between the Company and Leidos, Inc. dated asof December 21, 2006.8-K10.707/12/2007000-2689510.17Professional Services Agreement by and between the Company andLeidos, Inc. dated as of August 12, 2005.8-K10.807/12/2007000-2689510.18IP Brokerage Agreement by and between ipCapital Group, Inc. andVirnetX, Inc., effective as of March 13, 2008.8-K10.203/18/2008001-3385210.19Engagement Letter by and between VirnetX Holding Corporation andipCapital Group, Inc. dated March 12, 2008.8-K10.303/18/2008001-33852 62ExhibitIncorporated by reference hereinNumberDescriptionFormExhibit No.Filing DateFile No.10.20**Engagement Letter dated June 8, 2009, by and between McKool Smith,a professional corporation, and VirnetX, Inc.10-Q10.108/10/2009001-3385210.21**Engagement Letter dated April 15, 2010, by and between McKoolSmith, a professional corporation, and VirnetX, Inc.10-Q10.105/07/2010001-3385210.22**Settlement and License Agreement, by and between MicrosoftCorporation and VirnetX, Inc., dated May 14, 2010.10-Q/A10.101/31/2011000-3385210.23***Amended Settlement and License Agreement, by and between MicrosoftCorporation and VirnetX, Inc., dated December 17, 2014. 10.24*Employment Offer Letter from VirnetX, Inc. to Richard H. Nance.10-Q10.405/10/2012001-3385221.1Subsidiaries of VirnetX Holding Corporation. 23.1Consent of Farber Hass Hurley LLP, Independent Registered PublicAccounting Firm. 31.1Chief Executive Officer Certification pursuant to Rule 13a-14(a) of theSecurities Exchange Act. 31.2Chief Financial Officer Certification pursuant to Rule 13a-14(a) of theSecurities Exchange Act. 32.1†Chief Executive Officer Certification pursuant to 18 U.S.C. Section1350 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 1350as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS††XBRL Instance Document 101.SCH††XBRL Taxonomy Extension Schema Document 101.CAL††XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF††XBRL Taxonomy Extension Definition Linkbase Document 101.LAB††XBRL Taxonomy Extension Label Linkbase Document 101.PRE††XBRL Taxonomy Extension Presentation Linkbase Document * Indicates management contract or compensatory plan.**Confidential treatment has been granted by the U.S. Securities and Exchange Commission as to certain portions of this Exhibit.***Portions of this Exhibit have been omitted pending a determination by the Securities and Exchange Commission as to whether these portions should begranted confidential treatment. † 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 or prospectus forpurposes 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 of 1934, andotherwise is not subject to liability under these sections. 63Initials: _________Date:___________EXHIBIT 10.6 VIRNETX HOLDING CORPORATION 2013 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”) will have the samedefined meanings in this Stock Option Agreement, including the Notice of Stock Option Grant (the “Notice of Grant”) and the Terms and Conditions of StockOption Grant, attached hereto as Exhibit A (all together, the “Agreement”). NOTICE OF STOCK OPTION GRANT Participant: «Name» Address: Participant has been granted an Option to purchase Common Stock of VirnetX Holding Corporation (the “Company”), subject to the terms andconditions of the Plan and this Agreement, as follows: Grant Number Date of Grant«Grant_Date» Vesting Commencement Date«VCD» Number of Shares Granted«Number_of_Shares» Exercise Price per Share$«Price_Per_Share» Total Exercise Price$«Exercise_Price» Type of Option_____ Incentive Stock Option X Nonstatutory Stock Option Term/Expiration Date «Expiration_Date» Vesting Schedule: Subject to accelerated vesting as set forth below or in the Plan, this Option will be exercisable, in whole or in part, in accordance with the followingschedule: - 1 -Initials: _________Date:___________«VestingSchedule» Notwithstanding the foregoing, the vesting of the Shares subject to the Option shall be subject to any vesting acceleration provisions contained inthe Plan and/or any employment or service agreement, offer letter, change in control severance agreement, or any other agreement that has been or is, after thedate of this Agreement, entered into between Participant and the Company or any Parent, Subsidiary, or Affiliate (such agreement a “Separate Agreement”). Termination Period: Except as otherwise provided in a Separate Agreement: If on the date of grant, Participant was (a) a member of the Company’s board of directors (the “Board”) or (b) an employee of the Company that wasdesignated by the Board as an “officer” for the purposes of Section 16 of the Securities Exchange Act of 1934 (a “Section 16 Officer”), this Option will beexercisable for twelve (12) months after Participant ceases to be a Service Provider, unless such termination is due to Participant’s death, Disability, or Cause. If on the date of grant, Participant was a Service Provider to the Company but was not a Section 16 Officer or a member of the Board, this Option willbe exercisable for thirty (30) days after Participant ceases to be a Service Provider, unless such termination is due to Participant’s death, Disability, or Cause. If Participant ceases to be a Service Provider as a result of the Participant’s Disability, this Option will be exercisable for six (6) months afterParticipant ceases to be a Service Provider. If Participant ceases to be a Service Provider as a result of Participant’s death, or in the event of Participant’s death within one (1) month followingthe date Participant ceases to be a Service Provider, this Option will be exercisable for twelve (12) months from the earlier of the date of Participant’s death orthe date Participant ceases to be a Service Provider. If Participant ceases to be a Service Provider as a result of Participant’s termination for Cause, this Option will immediately terminate and cease to beexercisable. In the event Participant’s status as a Service Provider is suspended pending investigation of whether such status shall be terminated for Cause,all of Participant’s rights under this Option, including the right to exercise this Option, shall be suspended during the investigation period. Notwithstanding the foregoing, in no event may this Option be exercised after the Term/Expiration Date as provided above and may be subject toearlier termination as provided in Section 15(c) of the Plan. - 2 -Initials: _________Date:___________By Participant’s signature and the signature of the Company’s representative below, Participant and the Company agree that this Option is grantedunder and governed by the terms and conditions of the Plan and this Agreement, all of which are made a part of this document. Participant has reviewed thePlan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands allprovisions of the Plan and Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of theAdministrator upon any questions relating to the Plan and Agreement. Participant further agrees to notify the Company upon any change in the residenceaddress indicated below. PARTICIPANT VIRNETX HOLDING CORPORATION Signature By «Name» Print Name Title Address: - 3 -Initials: _________Date:___________EXHIBIT A TERMS AND CONDITIONS OF STOCK OPTION GRANT 1. Grant of Option. The Company hereby grants to the Participant named in the Notice of Grant (the “Participant”) an option (the “Option”) topurchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the “Exercise Price”), subjectto all of the terms and conditions in this Agreement and the Plan, which is incorporated herein by reference. Subject to Section 20(c) of the Plan, in the eventof a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan will prevail. (a) For U.S. taxpayers, the Option will be designated as either an Incentive Stock Option (“ISO”) or a Nonstatutory Stock Option (“NSO”). Ifdesignated in the Notice of Grant as an ISO, this Option is intended to qualify as an ISO under Section 422 of the Internal Revenue Code of 1986, as amended(the “Code”). However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) itwill be treated as an NSO. Further, if for any reason this Option (or portion thereof) will not qualify as an ISO, then, to the extent of such nonqualification,such Option (or portion thereof) shall be regarded as a NSO granted under the Plan. In no event will the Administrator, the Company or any Parent,Subsidiary, or Affiliate, or any of their respective employees or directors have any liability to Participant (or any other person) due to the failure of the Optionto qualify for any reason as an ISO. (b) For non-U.S. taxpayers, the Option will be designated as an NSO. 2. Vesting Schedule. Except as provided in Section 3, the Option awarded by this Agreement will vest in accordance with the vesting provisionsset forth in the Notice of Grant. Shares scheduled to vest on a certain date or upon the occurrence of a certain condition will not vest in Participant inaccordance with any of the provisions of this Agreement, unless Participant will have been continuously a Service Provider from the Date of Grant until thedate such vesting occurs. 3. Administrator Discretion. The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, ofthe unvested Option at any time, subject to the terms of the Plan. If so accelerated, such Option will be considered as having vested as of the date specifiedby the Administrator. 4. Exercise of Option. (a) Right to Exercise. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during suchterm only in accordance with the Plan and the terms of this Agreement. In the event Participant’s status as a Service Provider is suspended pendinginvestigation of whether such status shall be terminated for Cause, all of Participant’s rights under this Option, including the right to exercise this Option,shall be suspended during the investigation period. - 4 -Initials: _________Date:___________(b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit B (the “ExerciseNotice”) or in a manner and pursuant to such procedures as the Administrator may determine, which will state the election to exercise the Option, the numberof Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by theCompany pursuant to the provisions of the Plan. The Exercise Notice will be completed by Participant and delivered to the Company. The Exercise Noticewill be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares together and of any Tax-Related Items (as defined in Section6(a)). This Option will be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregateExercise Price. 5. Method of Payment. Payment of the aggregate Exercise Price will be by any of the following, or a combination thereof, at the election ofParticipant: (a) cash or check; (b) cancellation of indebtedness; (c) at the discretion of the Administrator on a case by case basis, if Participant is a U.S. employee, surrender of other Shares which have aFair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares, provided that accepting such Shares, in the solediscretion of the Administrator, will not result in any adverse accounting consequences to the Company; or (d) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with thePlan; 6. Tax Obligations. (a) Withholding of Taxes. Notwithstanding any contrary provision of this Agreement, no certificate representing the Shares will be issuedto Participant, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by Participant with respect to thepayment of income, employment, social insurance, payroll tax, fringe benefit tax, payment on account or other tax-related items related to Participant’sparticipation in the Plan and legally applicable to Participant (“Tax-Related Items”) which the Company determines must be withheld with respect to suchShares. If Participant is a non-U.S. employee, payment of Tax-Related Items may not be effectuated by surrender of other Shares with a Fair Market Valueequal to the amount of any Tax-Related Items. To the extent determined appropriate by the Company in its discretion, it will have the right (but not theobligation) to satisfy any Tax-Related Items by reducing the number of Shares otherwise deliverable to Participant. If Participant fails to make satisfactoryarrangements for the payment of any required Tax-Related Items hereunder at the time of the Option exercise, Participant acknowledges and agrees that theCompany may refuse to honor the exercise and refuse to deliver the Shares if such amounts are not delivered at the time of exercise. Further, if Participant issubject to tax in more than one jurisdiction between the Date of Grant and the date of any relevant taxable or tax withholding event, as applicable,Participant acknowledges and agrees that the Company and/or Participant’s employer (the “Employer”), or former employer, as applicable, may be requiredto withhold or account for tax in more than one jurisdiction. - 5 -Initials: _________Date:___________(b) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Participant herein is an ISO, and if Participant sells orotherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two (2) years after the Date of Grant, or (ii) the dateone (1) year after the date of exercise, Participant will immediately notify the Company in writing of such disposition. Participant agrees that Participant maybe subject to income tax withholding by the Company on the compensation income recognized by Participant. (c) Code Section 409A. Under Code Section 409A, an option that vests after December 31, 2004 (or that vested on or prior to such datebut which was materially modified after October 3, 2004) that was granted with a per share exercise price that is determined by the Internal Revenue Service(the “IRS”) to be less than the fair market value of a share on the date of grant (a “Discount Option”) may be considered “deferred compensation.” A DiscountOption may result in (i) income recognition by Participant prior to the exercise of the option, (ii) an additional twenty percent (20%) federal income tax, and(iii) potential penalty and interest charges. The Discount Option may also result in additional state income, penalty and interest charges to Participant. Participant acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share Exercise Price of this Option equals orexceeds the Fair Market Value of a Share on the Date of Grant in a later examination. Participant agrees that if the IRS determines that the Option was grantedwith a per Share Exercise Price that was less than the Fair Market Value of a Share on the Date of Grant, Participant will be solely responsible for Participant’scosts related to such a determination. 7. Rights as Stockholder. Neither Participant nor any person claiming under or through Participant will have any of the rights or privileges of astockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued,recorded on the records of the Company or its transfer agents or registrars, and delivered to Participant. After such issuance, recordation and delivery,Participant will have all the rights of a stockholder of the Company with respect to voting such Shares and receipt of dividends and distributions on suchShares. 8. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TOTHE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (OR THEPARENT, SUBSIDIARY, OR AFFILIATE EMPLOYING OR RETAINING PARTICIPANT) AND NOT THROUGH THE ACT OF BEING HIRED, BEINGGRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER. PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THISAGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTEAN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, ORAT ALL, AND WILL NOT INTERFERE IN ANY WAY WITH PARTICIPANT’S RIGHT OR THE RIGHT OF THE COMPANY (OR THE PARENT,SUBSIDIARY, OR AFFILIATE EMPLOYING OR RETAINING PARTICIPANT) TO TERMINATE PARTICIPANT’S RELATIONSHIP AS A SERVICEPROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. - 6 -Initials: _________Date:___________9. Nature of Grant. In accepting the Option, Participant acknowledges, understands and agrees that: (a) the Plan is established voluntarily by the Company, it is discretionary in nature, and may be amended, suspended or terminated by theCompany at any time, to the extent permitted by the Plan; (b) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of options,or benefits in lieu of options, even if options have been granted in the past; (c) all decisions with respect to future option or other grants, if any, will be at the sole discretion of the Company; (d) Participant is voluntarily participating in the Plan; (e) the Option and any Shares acquired under the Plan are not intended to replace any pension rights or compensation; (f) the Option and Shares acquired under the Plan and the income and value of same, are not part of normal or expected compensation forpurposes of calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, long-service awards, pension orretirement or welfare benefits or similar payments; (g) the future value of the Shares underlying the Option is unknown, indeterminable, and cannot be predicted with certainty; (h) if the underlying Shares do not increase in value, the Option will have no value; (i) if Participant exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below theExercise Price; (j) for purposes of the Option, Participant’s engagement as a Service Provider will be considered terminated as of the date Participant is nolonger actively providing services to the Company or any Parent, Subsidiary, or Affiliate (regardless of the reason for such termination and whether or notlater found to be invalid or in breach of employment laws in the jurisdiction where Participant is a Service Provider or the terms of Participant’s engagementagreement, if any), and unless otherwise expressly provided in this Agreement or determined by the Administrator, (i) Participant’s right to vest in theOption under the Plan, if any, will terminate as of such date and will not be extended by any notice period (e.g., Participant’s period of service would notinclude any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction whereParticipant is a Service Provider or Participant’s engagement agreement, if any, unless Participant is providing bona fide services during such time); and (ii)the period (if any) during which Participant may exercise the Option after such termination of Participant's engagement as a Service Provider will commenceon the date Participant ceases to actively provide services and will not be extended by any notice period mandated under employment laws in thejurisdiction where Participant is employed or terms of Participant’s engagement agreement, if any; the Administrator shall have the exclusive discretion todetermine when Participant is no longer actively providing services for purposes of his or her Option grant (including whether Participant may still beconsidered to be providing services while on a leave of absence); - 7 -Initials: _________Date:___________(k) unless otherwise provided in the Plan or by the Company in its discretion, the Option and the benefits evidenced by this Agreement donot create any entitlement to have the Option or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out orsubstituted for, in connection with any corporate transaction affecting the Shares; and (l) the following provisions apply only if Participant is providing services outside the United States: (i)the Option and the Shares subject to the Option are not part of normal or expected compensation or salary for anypurpose; (ii)Participant acknowledges and agrees that none of the Company, the Employer, or any Parent, Subsidiary, or Affiliate shallbe liable for any foreign exchange rate fluctuation between Participant’s local currency and the United States Dollar thatmay affect the value of the Option or of any amounts due to Participant pursuant to the exercise of the Option or thesubsequent sale of any Shares acquired upon exercise; and (iii)no claim or entitlement to compensation or damages shall arise from forfeiture of the Option resulting from thetermination of Participant’s engagement as a Service Provider (for any reason whatsoever, whether or not later found to beinvalid or in breach of employment laws in the jurisdiction where Participant is a Service Provider or the terms ofParticipant’s engagement agreement, if any), and in consideration of the grant of the Option to which Participant isotherwise not entitled, Participant irrevocably agrees never to institute any claim against the Company, any Parent, anySubsidiary, any Affiliate or the Employer, waives his or her ability, if any, to bring any such claim, and releases theCompany, any Parent, any Subsidiary, any Affiliate, and the Employer from any such claim; if, notwithstanding theforegoing, any such claim is allowed by a court of competent jurisdiction, then, by participating in the Plan, Participantshall be deemed irrevocably to have agreed not to pursue such claim and agrees to execute any and all documentsnecessary to request dismissal or withdrawal of such claim. - 8 -Initials: _________Date:___________10. No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making anyrecommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares. Participant is hereby advisedto consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to thePlan. 11. Data Privacy. Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, ofParticipant’s personal data as described in this Agreement and any other Option grant materials by and among, as applicable, the Employer, the Company andany Parent, Subsidiary, or Affiliate for the exclusive purpose of implementing, administering and managing Participant’s participation in the Plan.Participant understands that the Company and/or the Employer may hold certain personal information about Participant, including, but not limitedto, Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, jobtitle, any shares of stock or directorships held in the Company, details of all Options or any other entitlement to stock awarded, canceled, exercised, vested,unvested or outstanding in Participant’s favor (“Data”), for the exclusive purpose of implementing, administering and managing the Plan.Participant understands that Data will be transferred to a stock plan service provider as may be selected by the Company in the future, which isassisting the Company with the implementation, administration and management of the Plan. Participant understands that the recipients of the Data may belocated in the United States or elsewhere, and that the recipient’s country (e.g., the United States) may have different data privacy laws and protections thanParticipant’s country. Participant understands that if he or she resides outside the United States, he or she may request a list with the names and addresses ofany potential recipients of the Data by contacting his or her local human resources representative. Participant authorizes the Company and any otherpossible recipients which may assist the Company (presently or in the future) with implementing, administering and managing the Plan to receive, possess,use, retain and transfer the Data, in electronic or other form, for the sole purposes of implementing, administering and managing Participant’s participation inthe Plan. Participant understands that Data will be held only as long as is necessary to implement, administer and manage Participant’s participation in thePlan. Participant understands that if he or she resides outside the United States, he or she may, at any time, view Data, request additional information aboutthe storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, bycontacting in writing his or her local human resources representative. Further, Participant understands that he or she is providing the consents herein on apurely voluntary basis. If Participant does not consent, or if Participant later seeks to revoke his or her consent, his or her engagement as a Service Providerand career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing Participant’s consent is that theCompany would not be able to grant Participant Options or other equity awards or administer or maintain such awards. Therefore, Participant understandsthat refusing or withdrawing his or her consent may affect Participant’s ability to participate in the Plan. For more information on the consequences ofParticipant’s refusal to consent or withdrawal of consent, Participant understands that he or she may contact his or her local human resources representative. - 9 -Initials: _________Date:___________12. Address for Notices. Any notice to be given to the Company under the terms of this Agreement will be addressed to (a) the Company at VirnetXHolding Corporation, 308 Dorla Court, Suite 206, Zephyr Cove, NV 89448 and (b) the Company’s Stock Transfer Agent, Carylyn K. Bell, at Corporate StockTransfer, 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209 or at such other address as the Company may hereafter designate in writing. 13. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent ordistribution and may be exercised during the lifetime of Participant only by Participant. 14. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon andinure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 15. Additional Conditions to Issuance of Stock. If at any time the Company will determine, in its discretion, that the listing, registration,qualification or rule compliance of the Shares upon any securities exchange or under any state, federal or foreign law, the tax code and related regulations orthe consent or approval of any governmental regulatory authority is necessary or desirable as a condition to the purchase by, or issuance of Shares to,Participant (or his or her estate) hereunder, such purchase or issuance will not occur unless and until such listing, registration, qualification, rule compliance,consent or approval will have been completed, effected or obtained free of any conditions not acceptable to the Company. The Company will make allreasonable efforts to meet the requirements of any such state, federal or foreign law or securities exchange and to obtain any such consent or approval of anysuch governmental authority or securities exchange. Assuming such compliance, for income tax purposes the Exercised Shares will be considered transferredto Participant on the date the Option is exercised with respect to such Exercised Shares. 16. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions ofthis Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined in this Agreement willhave the meaning set forth in the Plan. 17. Administrator Authority. The Administrator will have the power to interpret the Plan and this Agreement and to adopt such rules for theadministration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to,the determination of whether or not any Shares subject to the Option have vested). All actions taken and all interpretations and determinations made by theAdministrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator willbe personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. - 10 -Initials: _________Date:___________18. Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to Options awardedunder the Plan or future options that may be awarded under the Plan by electronic means or request Participant’s consent to participate in the Plan byelectronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through any on-line orelectronic system established and maintained by the Company or a third party designated by the Company. 19. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 20. Language. If Participant has received this Agreement, or any other document related to the Option and/or the Plan translated into a languageother than English and if the meaning of the translated version is different than the English version, the English version will control. 21. Agreement Severable. In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will be severablefrom, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement. 22. Amendment, Suspension or Termination of the Plan. By accepting this Award, Participant expressly warrants that he or she has received anOption under the Plan, and has received, read and understood a description of the Plan. Participant understands that the Plan is discretionary in nature andmay be amended, suspended or terminated by the Company at any time. 23. Governing Law and Venue. This Agreement will be governed by the laws of Nevada, without giving effect to the conflict of law principlesthereof. For purposes of litigating any dispute that arises under this Option or this Agreement, the parties hereby submit to and consent to the jurisdiction ofthe State of Nevada, and agree that such litigation will be conducted in the courts of Douglas County, Nevada, or the federal courts for the United States forthe District of Nevada, and no other courts, where this Option is made and/or to be performed. 24. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. Participantexpressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other than those containedherein. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. Notwithstanding anything to the contrary in the Plan or this Agreement, the Company reserves the right to revise this Agreement as it deems necessary oradvisable, in its sole discretion and without the consent of Participant, to comply with Code Section 409A or to otherwise avoid imposition of any additionaltax or income recognition under Section 409A of the Code in connection with the Option. 25. Waiver. Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construedas a waiver of any other provision of this Agreement, or of any subsequent breach by Participant or any other Participant. - 11 -Initials: _________Date:___________EXHIBIT B VIRNETX HOLDING CORPORATION 2013 EQUITY INCENTIVE PLAN EXERCISE NOTICE VirnetX Holding Corporation308 Dorla Court, Suite 206Zephyr Cove, NV 89448 Carylyn K. BellPresidentCorporate Stock Transfer3200 Cherry Creek Drive South, Suite 430,Denver, CO 80209Attention: Stock Administration1. Exercise of Option. Effective as of today, ________________, _____, the undersigned (“Purchaser”) hereby elects to purchase______________ shares (the “Shares”) of the Common Stock of VirnetX Holding Corporation (the “Company”) under and pursuant to the 2013 EquityIncentive Plan (the “Plan”) and the Stock Option Agreement, dated ________ and including the Notice of Grant and the Terms and Conditions of StockOption Grant (all together, the “Agreement”). The purchase price for the Shares will be $_____________, as required by the Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price of the Shares and any Tax-Related Items (as definedin Section 6(a) of the Agreement) to be paid in connection with the exercise of the Option. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Agreement andagrees to abide by and be bound by their terms and conditions. 4. Rights as Stockholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transferagent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject tothe Option, notwithstanding the exercise of the Option. The Shares so acquired will be issued to Purchaser as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of thePlan. - 1 -Initials: _________Date:___________5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or dispositionof the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase ordisposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Agreement are incorporated herein by reference. This Exercise Notice, the Plan and theAgreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings andagreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except bymeans of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, ofNevada. Submitted by:Accepted by: PURCHASER VIRNETX HOLDING CORPORATION Signature By «Name» Print Name Its Address: Date Received - 2 - Initials: _________Date:___________EXHIBIT 10.7VIRNETX HOLDING CORPORATION2013 EQUITY INCENTIVE PLANRESTRICTED STOCK UNIT AGREEMENTUnless otherwise defined herein, the terms defined in the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”) will have the samedefined meanings in this Restricted Stock Unit Agreement, including the Notice of Restricted Stock Unit Grant (the “Notice of Grant”) and the Terms andConditions of Restricted Stock Unit Grant, attached hereto as Exhibit A (all together, the “Award Agreement”).NOTICE OF RESTRICTED STOCK UNIT GRANTParticipant Name:«Name»Address:Participant has been granted the right to receive an Award of Restricted Stock Units, subject to the terms and conditions of the Plan and this AwardAgreement, as follows:Grant Number Date of Grant«Date of Grant» Vesting Commencement Date«Vesting Commencement Date» Number of Restricted Stock Units«Number of Shares» Vesting Schedule:Subject to any acceleration provisions contained in the Plan or set forth below, the Restricted Stock Units will vest in accordance with the followingschedule:«VestingSchedule»Notwithstanding the foregoing, the vesting of the Restricted Stock Units shall be subject to any vesting acceleration provisions contained in thePlan and/or any employment or service agreement, offer letter, change in control severance agreement, or any other agreement that has been or is, after thedate of this Award Agreement, entered into between Participant and the Company or any Parent, Subsidiary, or Affiliate (such agreement a “SeparateAgreement”).In the event Participant ceases to be a Service Provider for any or no reason before Participant vests in the Restricted Stock Units, the RestrictedStock Units and Participant’s right to acquire any Shares hereunder will immediately terminate. Initials: _________Date:___________By Participant’s signature and the signature of the representative of VirnetX Holding Corporation (the “Company”) below, Participant and theCompany agree that this Award of Restricted Stock Units is granted under and governed by the terms and conditions of the Plan and this Award Agreement,which are made a part of this document. Participant has reviewed the Plan and this Award Agreement in their entirety, has had an opportunity to obtain theadvice of counsel prior to executing this Award Agreement and fully understands all provisions of the Plan and Award Agreement. Participant hereby agreesto accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Award Agreement. Participant further agrees to notify the Company upon any change in the residence address indicated below.PARTICIPANT: VIRNETX HOLDING CORPORATION Signature By «Name» Print Name Title Residence Address: - 2 -Initials: _________Date:___________EXHIBIT ATERMS AND CONDITIONS OF RESTRICTED STOCK UNIT GRANT1. Grant. The Company hereby grants to the individual named in the Notice of Grant (the “Participant”) under the Plan an Award of RestrictedStock Units, subject to all of the terms and conditions in this Award Agreement and the Plan, which is incorporated herein by reference. Subject to Section20(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Award Agreement, the terms andconditions of the Plan will prevail.2. Company’s Obligation to Pay. Each Restricted Stock Unit represents the right to receive a Share on the date it vests. Unless and until theRestricted Stock Units will have vested in the manner set forth in Sections 3 or 4, Participant will have no right to payment of any such Restricted StockUnits. Prior to actual payment of any vested Restricted Stock Units, such Restricted Stock Units will represent an unsecured obligation of the Company,payable (if at all) only from the general assets of the Company. Any Restricted Stock Units that vest in accordance with Sections 3 or 4 will be paid toParticipant (or in the event of Participant’s death, to his or her estate) in whole Shares, subject to Participant satisfying any obligations for Tax-Related Items(as defined in Section 7). Subject to the provisions of Section 4, such vested Restricted Stock Units shall be paid in whole Shares as soon as practicable aftervesting, but in each such case within the period sixty (60) days following the vesting date. In no event will Participant be permitted, directly or indirectly, tospecify the taxable year of the payment of any Restricted Stock Units payable under this Award Agreement.3. Vesting Schedule. Except as provided in Section 4, and subject to Section 5, the Restricted Stock Units awarded by this Award Agreement willvest in accordance with the vesting provisions set forth in the Notice of Grant. Restricted Stock Units scheduled to vest on a certain date or upon theoccurrence of a certain condition will not vest in Participant in accordance with any of the provisions of this Award Agreement, unless Participant will havebeen continuously a Service Provider from the Date of Grant until the date such vesting occurs.4. Administrator Discretion. The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance,of the unvested Restricted Stock Units at any time, subject to the terms of the Plan. If so accelerated, such Restricted Stock Units will be considered as havingvested as of the date specified by the Administrator. The payment of Shares vesting pursuant to this Section 4 shall in all cases be paid at a time or in amanner that is exempt from, or complies with, Section 409A.Notwithstanding anything in the Plan or this Award Agreement to the contrary, if the vesting of the balance, or some lesser portion of thebalance, of the Restricted Stock Units is accelerated in connection with Participant’s termination as a Service Provider (provided that such termination is a“separation from service” within the meaning of Section 409A, as determined by the Company), other than due to death, and if (x) Participant is a “specifiedemployee” within the meaning of Section 409A at the time of such termination as a Service Provider and (y) the payment of such accelerated Restricted StockUnits will result in the imposition of additional tax under Section 409A if paid to Participant on or within the six (6) month period following Participant’stermination as a Service Provider, then the payment of such accelerated Restricted Stock Units will not be made until the date six (6) months and one (1) dayfollowing the date of Participant’s termination as a Service Provider, unless Participant dies following his or her termination as a Service Provider, in whichcase, the Restricted Stock Units will be paid in Shares to Participant’s estate as soon as practicable following his or her death. It is the intent of this AwardAgreement that it and all payments and benefits hereunder be exempt from, or comply with, the requirements of Section 409A so that none of the RestrictedStock Units provided under this Award Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and anyambiguities herein will be interpreted to be so exempt or so comply. Each payment payable under this Award Agreement is intended to constitute a separatepayment for purposes of Treasury Regulation Section 1.409A-2(b)(2). For purposes of this Award Agreement, “Section 409A” means Section 409A of theCode, and any final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time. - 3 -Initials: _________Date:___________5. Forfeiture upon Termination of Status as a Service Provider. Notwithstanding any contrary provision of this Award Agreement, the balance ofthe Restricted Stock Units that have not vested as of the time of Participant’s termination as a Service Provider for any or no reason and Participant’s right toacquire any Shares hereunder will immediately terminate. The date of Participant’s termination as a Service Provider is detailed in Section 10(h).6. Death of Participant. Any distribution or delivery to be made to Participant under this Award Agreement will, if Participant is then deceased, bemade to Participant’s designated beneficiary, or if no beneficiary survives Participant, the administrator or executor of Participant’s estate. Any suchtransferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish thevalidity of the transfer and compliance with any laws or regulations pertaining to said transfer.7. Withholding of Taxes. Notwithstanding any contrary provision of this Award Agreement, no certificate representing the Shares will be issuedto Participant, unless and until satisfactory arrangements (as determined by the Administrator) will have been made by Participant with respect to thepayment of income, employment, social insurance, payroll tax, fringe benefit tax, payment on account or other tax-related items related to Participant’sparticipation in the Plan and legally applicable to Participant (“Tax-Related Items”) which the Company determines must be withheld with respect to suchShares. Prior to vesting and/or settlement of the Restricted Stock Units, Participant will pay or make adequate arrangements satisfactory to the Companyand/or Participant’s employer (the “Employer”) to satisfy all withholding and payment obligations of Tax-Related Items of the Company and/or theEmployer. In this regard, Participant authorizes the Company and/or the Employer to withhold any Tax-Related Items legally payable by Participant fromhis or her wages or other cash compensation paid to Participant by the Company and/or the Employer or from proceeds of the sale of Shares. Alternatively, orin addition, if permissible under applicable local law, the Administrator, in its sole discretion and pursuant to such procedures as it may specify from time totime, may permit or require Participant to satisfy such tax withholding obligation, in whole or in part (without limitation) by (a) paying cash, (b) electing tohave the Company withhold otherwise deliverable Shares having a Fair Market Value equal to the minimum amount required to be withheld, (c) selling asufficient number of such Shares otherwise deliverable to Participant through such means as the Company may determine in its sole discretion (whetherthrough a broker or otherwise) equal to the amount required to be withheld, or (d) if Participant is a U.S. employee, delivering to the Company already vestedand owned Shares having a Fair Market Value equal to the amount required to be withheld. To the extent determined appropriate by the Company in itsdiscretion, it will have the right (but not the obligation) to satisfy any obligations for Tax-Related Items by reducing the number of Shares otherwisedeliverable to Participant. Further, if Participant is subject to tax in more than one jurisdiction between the Date of Grant and a date of any relevant taxableor tax withholding event, as applicable, Participant acknowledges and agrees that the Company and/or the Employer (or former employer, as applicable) maybe required to withhold or account for tax in more than one jurisdiction. If Participant fails to make satisfactory arrangements for the payment of any Tax-Related Items hereunder at the time any applicable Restricted Stock Units otherwise are scheduled to vest pursuant to Sections 3 or 4 or Tax-Related Itemsrelated to Restricted Stock Units otherwise are due, Participant will permanently forfeit such Restricted Stock Units and any right to receive Shares thereunderand the Restricted Stock Units will be returned to the Company at no cost to the Company. - 4 -Initials: _________Date:___________8. Rights as Stockholder. Neither Participant nor any person claiming under or through Participant will have any of the rights or privileges of astockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued,recorded on the records of the Company or its transfer agents or registrars, and delivered to Participant. After such issuance, recordation and delivery,Participant will have all the rights of a stockholder of the Company with respect to voting such Shares and receipt of dividends and distributions on suchShares.9. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF THE RESTRICTED STOCKUNITS PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THECOMPANY (OR THE PARENT, SUBSIDIARY, OR AFFILIATE EMPLOYING OR RETAINING PARTICIPANT) AND NOT THROUGH THE ACT OF BEINGHIRED, BEING GRANTED THIS AWARD OF RESTRICTED STOCK UNITS OR ACQUIRING SHARES HEREUNDER. PARTICIPANT FURTHERACKNOWLEDGES AND AGREES THAT THIS AWARD AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTINGSCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICEPROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND WILL NOT INTERFERE IN ANY WAY WITH PARTICIPANT’S RIGHTOR THE RIGHT OF THE COMPANY (OR THE PARENT, SUBSIDIARY, OR AFFILIATE EMPLOYING OR RETAINING PARTICIPANT) TO TERMINATEPARTICIPANT’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.10. Nature of Grant. In accepting the grant, Participant acknowledges, understands and agrees that:- 5 -Initials: _________Date:___________(a)the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminatedby the Company at any time, to the extent permitted by the Plan;(b)the grant of the Restricted Stock Units is voluntary and occasional and does not create any contractual or other right to receive future grantsof Restricted Stock Units, or benefits in lieu of Restricted Stock Units, even if Restricted Stock Units have been granted in the past;(c)all decisions with respect to future Restricted Stock Units or other grants, if any, will be at the sole discretion of the Company;(d)Participant is voluntarily participating in the Plan;(e)the Restricted Stock Units and the Shares subject to the Restricted Stock Units are not intended to replace any pension rights orcompensation;(f)the Restricted Stock Units and the Shares subject to the Restricted Stock Units, and the income and value of same, are not part of normal orexpected compensation for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end-of-servicepayments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;(g)the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;(h)for purposes of the Restricted Stock Units, Participant’s status as a Service Provider will be considered terminated as of the date Participantis no longer actively providing services to the Company or any Parent, Subsidiary, or Affiliate (regardless of the reason for such terminationand whether or not later to be found invalid or in breach of employment laws in the jurisdiction where Participant is a Service Provider orthe terms of Participant’s service agreement, if any), and unless otherwise expressly provided in this Award Agreement or determined by theAdministrator, Participant’s right to vest in the Restricted Stock Units under the Plan, if any, will terminate as of such date and will not beextended by any notice period (e.g., Participant’s period of service would not include any contractual notice period or any period of“garden leave” or similar period mandated under employment laws in the jurisdiction where Participant is a Service Provider or the terms ofParticipant’s service agreement, if any, unless Participant is providing bona fide services during such time); the Administrator shall have theexclusive discretion to determine when Participant is no longer actively providing services for purposes of the Restricted Stock Units grant(including whether Participant may still be considered to be providing services while on a leave of absence);- 6 -Initials: _________Date:___________(i)unless otherwise provided in the Plan or by the Company in its discretion, the Restricted Stock Units and the benefits evidenced by thisAward Agreement do not create any entitlement to have the Restricted Stock Units or any such benefits transferred to, or assumed by,another company nor be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares; and(j)the following provisions apply only if Participant is providing services outside the United States:i.the Restricted Stock Units and the Shares subject to the Restricted Stock Units are not part of normal or expected compensation orsalary for any purpose;ii.Participant acknowledges and agrees that none of the Company, the Employer, or any Parent, Subsidiary, or Affiliate shall beliable for any foreign exchange rate fluctuation between Participant’s local currency and the United States Dollar that may affectthe value of the Restricted Stock Units or of any amounts due to Participant pursuant to the settlement of the Restricted StockUnits or the subsequent sale of any Shares acquired upon settlement; andiii.no claim or entitlement to compensation or damages shall arise from forfeiture of the Restricted Stock Units resulting from thetermination of Participant’s status as a Service Provider (for any reason whatsoever whether or not later found to be invalid or inbreach of employment laws in the jurisdiction where Participant is a Service Provider or the terms of Participant’s serviceagreement, if any), and in consideration of the grant of the Restricted Stock Units to which Participant is otherwise not entitled,Participant irrevocably agrees never to institute any claim against the Company, any Parent, any Subsidiary, any Affiliate, or theEmployer, waives his or her ability, if any, to bring any such claim, and releases the Company, any Parent, any Subsidiary, anyAffiliate, and the Employer from any such claim; if, notwithstanding the foregoing, any such claim is allowed by a court ofcompetent jurisdiction, then, by participating in the Plan, Participant shall be deemed irrevocably to have agreed not to pursuesuch claim and agrees to execute any and all documents necessary to request dismissal or withdrawal of such claim.11. No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making anyrecommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares. Participant is hereby advisedto consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to thePlan.12. Data Privacy. Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, ofParticipant’s personal data as described in this Award Agreement and any other Restricted Stock Unit grant materials by and among, as applicable, theEmployer, the Company and any Parent, Subsidiary, or Affiliate for the exclusive purpose of implementing, administering and managing Participant’sparticipation in the Plan.- 7 -Initials: _________Date:___________Participant understands that the Company and the Employer may hold certain personal information about Participant, including, but not limited to,Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title,any shares of stock or directorships held in the Company, details of all Restricted Stock Units or any other entitlement to shares of stock awarded, canceled,exercised, vested, unvested or outstanding in Participant’s favor (“Data”), for the exclusive purpose of implementing, administering and managing the Plan.Participant understands that Data will be transferred to a stock plan service provider as may be selected by the Company in the future, which isassisting the Company with the implementation, administration and management of the Plan. Participant understands that the recipients of the Data may belocated in the United States or elsewhere, and that the recipients’ country (e.g., the United States) may have different data privacy laws and protections thanParticipant’s country. Participant understands that if he or she resides outside the United States, he or she may request a list with the names and addresses ofany potential recipients of the Data by contacting his or her local human resources representative. Participant authorizes the Company, any stock planservice provider selected by the Company and any other possible recipients which may assist the Company (presently or in the future) with implementing,administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing,administering and managing his or her participation in the Plan. Participant understands that Data will be held only as long as is necessary to implement,administer and manage Participant’s participation in the Plan. Participant understands if he or she resides outside the United States, he or she may, at anytime, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw theconsents herein, in any case without cost, by contacting in writing his or her local human resources representative. Further, Participant understands that he orshe is providing the consents herein on a purely voluntary basis. If Participant does not consent, or if Participant later seeks to revoke his or her consent, hisor her status as a Service Provider and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawingParticipant’s consent is that the Company would not be able to grant Participant Restricted Stock Units or other equity awards or administer or maintain suchawards. Therefore, Participant understands that refusing or withdrawing his or her consent may affect Participant’s ability to participate in the Plan. For moreinformation on the consequences of Participant’s refusal to consent or withdrawal of consent, Participant understands that he or she may contact his or herlocal human resources representative.13. Address for Notices. Any notice to be given to the Company under the terms of this Award Agreement will be addressed to (a) the Company atVirnetX Holding Corporation, 308 Dorla Court, Suite 206, Zephyr Cove, NV 89448 and (b) the Company’s Stock Transfer Agent, Carylyn K. Bell, atCorporate Stock Transfer, 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209, or at such other address as the Company may hereafter designate inwriting.14. Grant is Not Transferable. Except to the limited extent provided in Section 6, this grant and the rights and privileges conferred hereby will notbe transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution,attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferredhereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediatelywill become null and void.- 8 -Initials: _________Date:___________15. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Award Agreement will be binding uponand inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.16. Additional Conditions to Issuance of Stock. If at any time the Company will determine, in its discretion, that the listing, registration,qualification or rule compliance of the Shares upon any securities exchange or under any state, federal or foreign law, the tax code and related regulations orthe consent or approval of any governmental regulatory authority is necessary or desirable as a condition to the issuance of Shares to Participant (or his or herestate) hereunder, such issuance will not occur unless and until such listing, registration, qualification, rule compliance, consent or approval will have beencompleted, effected or obtained free of any conditions not acceptable to the Company. Where the Company determines that the delivery of the payment ofany Shares will violate federal securities laws or other applicable laws, the Company will defer delivery until the earliest date at which the Companyreasonably anticipates that the delivery of Shares will no longer cause such violation. The Company will make all reasonable efforts to meet therequirements of any such state, federal or foreign law or securities exchange and to obtain any such consent or approval of any such governmental authorityor securities exchange.17. Plan Governs. This Award Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or moreprovisions of this Award Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined inthis Award Agreement will have the meaning set forth in the Plan.18. Administrator Authority. The Administrator will have the power to interpret the Plan and this Award Agreement and to adopt such rules for theadministration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to,the determination of whether or not any Restricted Stock Units have vested). All actions taken and all interpretations and determinations made by theAdministrator in good faith will be final and binding upon Participant, the Company and all other interested persons. No member of the Administrator willbe personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.19. Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to Restricted StockUnits awarded under the Plan or future Restricted Stock Units that may be awarded under the Plan by electronic means or request Participant’s consent toparticipate in the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in thePlan through any on-line or electronic system established and maintained by the Company or a third party designated by the Company.- 9 -Initials: _________Date:___________20. Language. If Participant has received this Award Agreement or any other document related to the Plan translated into a language other thanEnglish and if the meaning of the translated version is different than the English version, the English version will control.21. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this AwardAgreement.22. Agreement Severable. In the event that any provision in this Award Agreement will be held invalid or unenforceable, such provision will beseverable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Award Agreement.23. Amendment, Suspension or Termination of the Plan. By accepting this Award, Participant expressly warrants that he or she has received anAward of Restricted Stock Units under the Plan, and has received, read and understood a description of the Plan. Participant understands that the Plan isdiscretionary in nature and may be amended, suspended or terminated by the Company at any time.24. Governing Law and Venue. This Award Agreement will be governed by the laws of Nevada without giving effect to the conflict of lawprinciples thereof. For purposes of litigating any dispute that arises under this Award of Restricted Stock Units or this Award Agreement, the parties herebysubmit to and consent to the jurisdiction of the State of Nevada, and agree that such litigation will be conducted in the courts of Douglas County, Nevada, orthe federal courts for the United States for the District of Nevada, and no other courts, where this Award of Restricted Stock Units is made and/or to beperformed.26. Modifications to the Award Agreement. This Award Agreement constitutes the entire understanding of the parties on the subjects covered. Participant expressly warrants that he or she is not accepting this Award Agreement in reliance on any promises, representations, or inducements other thanthose contained herein. Modifications to this Award Agreement or the Plan can be made only in an express written contract executed by a duly authorizedofficer of the Company. Notwithstanding anything to the contrary in the Plan or this Award Agreement, the Company reserves the right to revise the AwardAgreement as it deems necessary or advisable, in its sole discretion and without the consent of Participant, to comply with Section 409A or to otherwiseavoid imposition of any additional tax or income recognition under Section 409A in connection to this Award of Restricted Stock.27. Waiver. Participant acknowledges that a waiver by the Company of breach of any provision of this Award Agreement shall not operate or beconstrued as a waiver of any other provision of this Award Agreement, or of any subsequent breach by Participant or any other Participant. - 10 - EXHIBIT 10.23AMENDED SETTLEMENT AND LICENSE AGREEMENTThis AMENDED SETTLEMENT AND LICENSE AGREEMENT (together with all Exhibits attached hereto, the “Agreement”), is made and entered into asof the date last executed by a Party (“Amendment Effective Date”) and amends and restates that certain Settlement and License Agreement dated May 14,2010, by and among Microsoft Corporation, a Washington corporation (Microsoft Corporation together with its Affiliates, “Microsoft” as defined below),on the one hand, and VirnetX, Inc., a Delaware corporation (VirnetX, Inc. together with its Affiliates, “VirnetX” (as defined below), on the other hand. Asused herein, “Party” refers to any of VirnetX or Microsoft individually, and “Parties” refers to VirnetX and Microsoft, collectively.RECITALSA.SAIC and VirnetX, Inc. have accused Microsoft of infringing U.S. Patent Nos. 6,502,135 B1; 7,188,180 B2; 7,490,151 B2; 7,987,274 B2; 7,418,504B2; and 7,921,211 B2 (the “Patents-In-Suit”) in actions filed in the U.S. District Court for the Eastern District of Texas (“the Court”), designated Civ.Action No. 6:07CV80 (LED), Civ. Action No. 6:10CV94 (LED) and Civ. Action No. 6:13CV351 (the “Actions”).B.Microsoft Corporation has denied any such infringement of the Patents-in-Suit and challenged the validity thereof. Microsoft has also challenged theenforceability of the Patents-in-Suit and raised other defenses.C.Microsoft admits no liability with respect to any of the claims asserted in the Actions.NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:AGREEMENT1.Compromise Only. This Agreement is entered into for purposes of settlement and compromise only. Nothing contained in this Agreement, or done oromitted in connection with this Agreement, is intended as or shall be construed as an admission of or by any Party, or on behalf of any MicrosoftReleased Party (as defined below), of any fault, liability or wrongdoing whatsoever, or an admission of or by any Microsoft Released Party that anyLicensed Patents (as defined below) are infringed, valid, or enforceable.2.Definitions.“Licensed Patents” shall mean (a) all patents and patent applications worldwide, now or in the future, that are owned (in whole or in part) orcontrolled by, or assigned to, VirnetX, Inc. or any entity that, as of the Amendment Effective Date, Controls, is Controlled by, or is under commonControl with VirnetX, Inc. (including, without limitation, the Patents-In-Suit and the patents and applications set forth on Exhibit A); and (b) allpatents and applications related to such patents and applications (including, without limitation, originals, divisionals, provisionals, re-exams, re-exam certificates, extensions, reissues, counterparts, parents, continuations, and continuations-in-part) in all countries of the world.“Microsoft” shall mean Microsoft Corporation and its Affiliates.“VirnetX” shall mean VirnetX, Inc. and its Affiliates.“Effective Date” shall mean May 14, 2010.“Affiliate” means any entity that Controls, is Controlled by, or is under common Control with a Party. For the avoidance of doubt, this definitionapplies to entities that became or become Affiliates at any time, whether in the past, currently, or in the future. For the avoidance of doubt, allSkype entities Controlled by Microsoft at any time are deemed to be Affiliates of Microsoft for purposes of this definition. 1“Control” of an entity means the possession, directly or indirectly, through the ownership of voting securities, other voting interests, or otherwise,of the right to direct or cause the direction of management and policies of that entity. Control also includes the following: (a) direct or indirectownership of 50% or more of the voting power, securities, or capital of that entity; or (b) direct or indirect ownership of interests representing 50%or more of the voting power to elect the board of directors or other governing body for that entity; or (c) in relation to a partnership, limitedliability company, or other unincorporated association, the direct or indirect right to a share of 50% or more of its net assets or net income.“Licensees” means Microsoft’s direct and indirect distributors, licensees and customers, but only to the extent such third parties utilize MicrosoftProducts.“Microsoft Products” means any past, present, or future Microsoft products or services, including without limitation, Microsoft software,Microsoft hardware, or Microsoft protocols. For the avoidance of doubt, Microsoft Products include, without limitation, any past, present, or futureproducts or services (including without limitation, Microsoft software, Microsoft hardware, or Microsoft protocols) designed, branded, made, sold(or leased), offered for sale (or offered for lease), purchased, obtained, made available, exported, imported, supplied, licensed, distributed, hosted,used, streamed, exploited, encoded, decoded, or otherwise provided to, by or for Microsoft. For the avoidance of doubt, Microsoft products orservices (including without limitation, Microsoft software, Microsoft hardware, or Microsoft protocols) remain “Microsoft Products” even ifcombined with any past, present, or future products or services, but only as to those portions of the combination consisting of Microsoft Products.For clarity, a patent, by itself, is an intellectual property right and not a product.“Pending IPR’s” means the inter partes review proceedings brought by Microsoft Corporation challenging the patents asserted in the Actions, andconsists of: IPR2014-00614 (which has been consolidated with IPR2014-00613); IPR2014-00610; IPR2014-00615 (which has been consolidatedwith IPR2014-00618); IPR2014-00403; IPR2014-00404; IPR2014-01418; and IPR2014-01421.“SAIC” means Science Applications International Corporation (SAIC Inc.) and Leidos, Inc., and their respective Affiliates.“Third Party” means any entity that is neither a Party nor an Affiliate of a Party.“Third Party Products” means products, and services, including protocols, of a Third Party designed or developed by such Third Party, butspecifically excluding Microsoft Products.3.Releases3.1Effective upon receipt of the payment set forth in Section 5.2, VirnetX, on behalf of itself and its predecessors, successors, assigns, attorneys,directors, shareholders, employees, and officers (collectively, the “VirnetX Releasing Parties”), hereby voluntarily, irrevocably andunconditionally fully and forever releases, discharges, acquits, covenants not to sue, and holds harmless Microsoft and predecessors toMicrosoft’s businesses (including without limitation the previous owners of Microsoft’s businesses acquired from such persons or entities) andtheir predecessors, successors, assigns, attorneys, insurers, agents, servants, subcontractors, officers, directors, shareholders, representatives,employees, and Licensees (collectively, the “Microsoft Released Parties”) from and for any and all rights, claims, debts, liabilities, demands,suits, obligations, promises, damages, causes of action and claims for relief of any kind, manner, nature and description, known or unknown(collectively, “Claims”), which any of the VirnetX Releasing Parties have, may have had, might have asserted, may now have or assert, or mayhereafter have or assert against the Microsoft Released Parties, or any of them, arising, accruing or occurring, in whole or in part, at any timeprior to the Amendment Effective Date, including, without in any way limiting the generality of the foregoing, any claims or causes of actionarising out of or related to any of the facts, transactions, matters or occurrences giving rise to or alleged, or that could have been alleged in ordiscovered in, the Actions or under any of the Licensed Patents. (For the avoidance of doubt, this release and covenant applies to MicrosoftAffiliates both before and after the time they become an Affiliate of Microsoft). Notwithstanding the foregoing or anything to the contrary, thisrelease does not apply to any Third Party (other than a Licensee) with respect to Third Party Products, except to the extent such Third Party isutilizing Microsoft Products. 23.2Microsoft, on behalf of itself and its predecessors, successors and assigns (collectively, the “Microsoft Releasing Parties”), hereby voluntarily,irrevocably and unconditionally fully and forever releases, discharges, covenants not to sue, and holds harmless VirnetX and its predecessors,successors, assigns, attorneys, insurers, agents, servants, subcontractors, officers, directors, representatives, and employees (collectively, the“VirnetX Released Parties”) from and for any and all Claims which any of the Microsoft Releasing Parties have, may have had, might haveasserted, or may now have or assert against the VirnetX Released Parties, or any of them, arising, accruing or occurring, in whole or in part, atany time prior to the Amendment Effective Date arising out of or related to any of the facts, transactions, matters or occurrences giving rise toor alleged, or that could have been alleged in or discovered in, the Actions as to VirnetX’s assertion of the Patents-in-Suit, except that theMicrosoft Releasing Parties do not release or discharge (or grant a covenant or hold harmless as to) their Claims that the Licensed Patents areinvalid, unenforceable, and/or not infringed by any Microsoft Releasing Parties. For the avoidance of doubt, the Microsoft Releasing Partiesmay raise any defense of invalidity, unenforceability or non-infringement in any later proceeding in any court or administrative agency(including without limitation any review in the U.S. Patent & Trademark Office) regardless of whether such defense was previously alleged oradjudicated in any forum.3.3With respect to all claims released herein, the VirnetX Releasing Parties and Microsoft Releasing Parties expressly waive any and all statutes,legal doctrines and other similar limitations upon the effect of general releases. By way of example, and without limitation, the foregoingparties waive the benefit of California Civil Code Section 1542, which states as follows:“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TOEXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVEMATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”Each Party hereto acknowledges that the inclusion of such unknown claims in the releases above was separately bargained for and was a keyelement of this Agreement. Each Party hereto acknowledges that they may hereafter discover facts which are different from or in addition tothose that they may now know or believe to be true with respect to any and all claims herein released and agree that all such unknown claimsare nonetheless released and that the releases above shall be and remain effective in all respects even if such different or additional facts aresubsequently discovered.4.Grant of Licenses and Covenants4.1 VirnetX hereby grants to Microsoft a worldwide, irrevocable, nonexclusive, non-sublicensable, royalty-free, fully paid-up (subject to paymentunder Section 5.2) license and covenant not to sue under the Licensed Patents. The license and covenant granted hereunder shall apply, withoutlimitation, to all Microsoft Products and past, present and future activities of Microsoft. The license granted hereunder fully exhausts all of theLicensed Patents as to Microsoft Products.4.2VirnetX hereby grants to Licensees a worldwide, irrevocable, nonexclusive, non-sublicensable, royalty-free, fully paid-up (subject to paymentunder Section 5.2) license and covenant not to sue under the Licensed Patents solely as to Microsoft Products, including past, present and futureactivities of Licensees with respect to Microsoft Products.34.3Without limiting the scope of the forgoing Sections 4.1 and 4.2, VirnetX, Inc., and any entity that, as of the Amendment Effective Date,Controls, is Controlled by, or is under common Control with VirnetX, Inc., hereby covenants that it, directly or indirectly, will not assert aclaim of infringement of any patent (including without limitation the Licensed Patents) or other intellectual property or proprietary rightsclaim, based in any way, in whole or any part, on any Microsoft Products. For the avoidance of doubt, VirnetX hereby covenants and agreesthat no Microsoft Products shall be used or relied on (in whole or in part, and whether in litigation, mediation, arbitration, demand, cease anddesist communication, licensing negotiation, PTO proceeding or otherwise) by VirnetX to satisfy (in whole or in part) any claim or anyelement, step, means, or limitation of any claim (including without limitation any in the preamble) of any of the Licensed Patents against anyentity.4.4The license and covenants by VirnetX in this Section 4 shall extend to each Affiliate or business of Microsoft. If Microsoft divests an Affiliateor business, the licenses and covenants granted in this Amended Settlement Agreement will continue as to the Affiliate or business for thoseproducts and services existing at the time of divestiture, and direct derivatives thereof.4.5The releases, licenses and covenants not to sue are expressly set forth in Sections 3 and 4 above and no other releases, licenses or covenants notto sue are granted or conveyed under this Agreement, whether expressly or by implication, estoppel, reliance or otherwise, all of which areexpressly disclaimed.5.Consideration.5.1.Dismissals.To the extent not already dismissed pursuant to that certain Settlement and License Agreement, dated on or about May 14, 2010, byand between Microsoft Corporation and VirnetX, Inc, VirnetX shall dismiss with prejudice (and cause SAIC to join in such dismissal) all claimsagainst Microsoft in the Actions, and Microsoft Corporation shall dismiss with prejudice all counterclaims in the Actions (except thatMicrosoft Corporation’s affirmative defenses and counterclaims of (i) non-infringement and invalidity shall be dismissed without prejudiceand (ii) unenforceability shall be dismissed without prejudice by filing (and VirnetX causing SAIC to file) on or before December 19, 2014,Stipulations of Dismissal and Proposed Order substantially in the form attached as Exhibit E that provide that each of VirnetX, Inc., MicrosoftCorporation and SAIC will bear its own costs, expenses and attorney’s fees in connection with the Actions. No Party shall take any action tooppose the Court’s entry of such dismissal, nor subsequently take any action to vacate, modify, or appeal such dismissal of the Actions. Inaddition, VirnetX, Inc. and Microsoft Corporation agree to execute such additional papers and motions as may be necessary to cause the Courtto effect a disposal of all issues before it with respect to the Parties and a dismissal of the Actions for these Parties. For the avoidance of doubtonly, the dismissal of the Actions (i.e., the prior lawsuits and the current lawsuit) are based solely on the consent of the parties, not the merits ofany past ruling or present motions. Notwithstanding the foregoing or anything to the contrary in this Section 5.1, VirnetX shall not beobligated to dismiss any separate pending proceedings against any Third Party, but henceforth shall not include Microsoft Products as a basisin whole or in part for its allegations against any Third Party.5.2.Payment. In full and complete settlement of all claims asserted against Microsoft in the Actions, and in full and complete consideration of thelicenses, releases, waivers, and other covenants and rights in this Agreement, to the extent not already paid, Microsoft Corporation shall pay atotal lump sum amount of two-hundred, twenty-three million U.S. Dollars (USD $223,000,000) (“Payment”), as set forth in this Section 5.2. Ofthat Payment, two-hundred million U.S. Dollars (USD $200,000,000.00) was already paid on or about June 7, 2010 by Microsoft Corporationto VirnetX, Inc. The balance of the Payment (twenty-three million U.S. Dollars (USD $23,000,000)) shall be paid by Microsoft Corporation toVirnetX, Inc. by wire transfer into the following account within twenty(20) business days after the later of (i) the Amendment Effective Date, or(ii) the provision to Microsoft by VirnetX, Inc. and its counsel of an IRS Form W-9 and a letter on its letterhead with payment instructionsconsistent with this paragraph:4Account Name:Texas IOLTA Trust Account – Caldwell Cassady & CurryAccount No.: 8094381388ABA Number: 111014325Bank Name and Address: Bank of Texas6215 Hillcrest Avenue Dallas, TX 75205Beneficiary Name: VirnetX, Inc.VirnetX, Inc. shall be solely responsible for any taxes incurred as a consequence of the Payment or this Agreement. Microsoft shall not beresponsible for any payment to SAIC.6.Term. This Agreement shall remain in full force and effect until after the period ends in which any rights associated with the Licensed Patents mightbe exercised (for example, currently, as to U.S. patents: after six years after the expiration of the last patent to expire that is part of the LicensedPatents). Sections 3.1 (provided that the payment in Section 5.2 has been made), 3.2, 3.3, 4 (provided that the payment in Section 5.2 has been made)and 7.1 shall survive termination of the Agreement.7.Miscellaneous.7.1.Confidentiality. The mere existence of this Agreement (including, without limitation, the identification of the Parties and any LicensedPatents) is not confidential. Within five (5) days after the Amendment Effective Date, Microsoft agrees that VirnetX may issue the press releasein the form attached as Exhibit B. Microsoft may also issue the press release in the form attached as Exhibit B. Subject to the foregoing, noParty may issue a press release or otherwise affirmatively attempt to publicize the terms or existence of this Agreement, except as set forthbelow. The Parties further agree that the terms and conditions of this Agreement are confidential and shall not be disclosed by any Party to anyother person except (a) as may be required by law (including, without limitation, SEC reporting requirements, or any other United States orforeign regulatory requirements) or stock exchange rule (after prior written notice to the other Party with opportunity to comment on thedisclosure), (b) during the course of litigation so long as the disclosure of such terms and conditions are restricted in the same manner as is theconfidential information of the litigating Party, which includes designating the Agreement under the highest available level of protectionunder a protective order; (c) in confidence to the professional legal, advisory, and financial counsel representing or auditing such Party; (d) inconfidence, in connection with the enforcement of this Agreement or rights under this Agreement; (e) in confidence, in connection with amerger, or acquisition, divestiture, or proposed merger, acquisition, or divestiture of a Party, or the like; (f) in confidence by Microsoft toLicensees and any third parties covered by the terms of this Agreement; (g) in confidence to potential acquirers of all or substantially all ofVirnetX; (h) in confidence to the insurers and third party claim administrators of Microsoft; (i) in confidence to any person covered by thereleases, licenses, waivers or other covenants and rights granted herein; or (j) as otherwise agreed in writing by the Parties executing thisAgreement. Prior to any disclosure by VirnetX pursuant to the foregoing subsection (a), VirnetX will provide Microsoft with a draft copy of theproposed disclosure or filing (including, without limitation, any filing with the SEC) at least three business days before such disclosure orfiling is made, and the Parties will consult in good faith with respect to the content of the proposed disclosure and the potential for VirnetX torequest confidential treatment with respect to portions of the Agreement that VirnetX reasonably believes must be disclosed or filed.7.2.Representations and Warranties. VirnetX represents, warrants, and covenants to Microsoft that:5(a)VirnetX, Inc. represents and warrants that it is the sole, exclusive, and lawful owner of all right, title, and interest in and to the LicensedPatents (including, without limitation, the Patents-in-Suit). VirnetX, Inc. represents and warrants that it has all rights necessary to enforceand license the Licensed Patents and, together with any corporate or other authority required to bind VirnetX, thus the right to enter intothis Agreement and grant all of the releases, licenses, waivers, and other covenants and rights under this Agreement. VirnetX, Inc.represents and warrants that from time to time in the Actions and in the Settlement and License Agreement between Microsoft Corporationand VirnetX, Inc. made and entered into on May 14, 2010, VirnetX, Inc. was referenced as “VirnetX Inc.” but that was a typographical errorand at all times “VirnetX Inc.” should be considered to refer to VirnetX, Inc. VirnetX represents and warrants that the list of properties setforth on Exhibit A is a complete listing of all patents and applications owned or controlled by (in whole or in part), or assigned to VirnetX.(b)VirnetX further represents and warrants that, as of June 30, 2010, SAIC no longer has any right of reversion to the Licensed Patents. VirnetX further represents and warrants that SAIC has no right, title or interest in or to the Licensed Patents, and further represents andwarrants that SAIC no longer holds the power to assert any claim or claims of the Licensed Patents against Microsoft Released Parties orLicensees. VirnetX further represents and warrants that SAIC holds no right to review this Agreement prior to its execution and that SAICholds no right or ability to control the actions or decisions of VirnetX.(c)VirnetX represents and warrants that all releases, licenses, covenants, and other executory obligations made in this Agreement bind bothSAIC and VirnetX, and fully encompass any and all rights and interests in the Licensed Patents. VirnetX further represents and warrantsthat the review, consent and approval of SAIC is not needed for this Agreement to be binding and enforceable.(d)In the event of any act (including without limitation, the assertion or threatened assertion of any of the Licensed Patents) by SAICinconsistent with, or contrary to, any of the representations and warranties made by VirnetX in this Agreement, VirnetX agrees to defend,indemnify and hold harmless affected Microsoft Released Parties against SAIC’s actions, including any liability and attorneys’ feesincurred by Microsoft Released Parties.(e)No Claim released herein, and no portion of any such Claim, has been assigned or otherwise transferred by VirnetX to any other person orentity, either directly, indirectly, or by subrogation or operation of law. VirnetX has not filed, commenced, served, or otherwise instituted(in each case, either on its own, or in conjunction with any third party) any complaints, claims, causes of action, or demands againstMicrosoft or Licensees other than those asserted in connection with the Actions.(f)During the term of this Agreement any consideration required to be paid to any other person, corporation, or entity, if any, on account ofany or all of the releases, licenses, waivers, or other covenants or rights granted under this Agreement to any Microsoft Released Partiesshall be paid by VirnetX, and no additional consideration shall be required of any of the Microsoft Released Parties. VirnetX has notgranted and will not grant any licenses, covenants, and/or other rights under the Licensed Patents and/or otherwise, that would conflictwith, impair, and/or prevent any or all of the releases, licenses, waivers, or other covenants or rights granted under this Agreement. VirnetX,Inc. will cause its Affiliates to comply with the terms and conditions of this Agreement where applicable.(g)VirnetX has been represented by competent and independent counsel of their own choice throughout all negotiations preceding theexecution of the Agreement, and have executed this Agreement upon the advice of said competent and independent counsel regarding themeaning and legal effect of this Agreement, and regarding the advisability of making the agreements provided for herein, and fullyunderstand the same.7.3.Representations and Warranties. Microsoft represents, warrants, and covenants to VirnetX that:6(a)No Claim released herein, and no portion of any such Claim, has been assigned or otherwise transferred by Microsoft to any other personor entity, either directly, indirectly, or by subrogation or operation of law. On or prior to the date of the execution of this Agreement,Microsoft has not filed, commenced, served, or otherwise instituted (in each case, either on its own, or in conjunction with any third party)any complaints, claims, causes of action, or demands against VirnetX other than those asserted in connection with the Actions and priorPatent Office proceedings, including the Pending IPRs, of the Licensed Patents.(b)Microsoft has been represented by competent and independent counsel of its own choice throughout all negotiations preceding theexecution of the Agreement, and has executed this Agreement upon the advice of said competent and independent counsel regarding themeaning and legal effect of this Agreement, and regarding the advisability of making the agreements provided for herein, and fullyunderstands the same.7.4Mutual Representations and Warranties. Each Party and each person signing this Agreement on behalf of a Party represents and warrants to theother that:(a)Such Party has not entered this Agreement in reliance upon any promise, inducement, agreement, statement, or representation other thanthose contained in this Agreement.(b)Such Party is duly organized, validly existing and in good standing under the laws of the state, province or country of its organization orincorporation, and has the full right and power to enter into this Agreement, and the person executing this Agreement has the full right andauthority to enter into this Agreement on behalf of such Party and the full right and authority to bind such Party to the terms andobligations of this Agreement.7.5Notices. All notices and requests which are required or permitted to be given in connection with this Agreement shall be in writing and shall bedeemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid,certified or registered, return receipt requested, and addressed as follows, or to such other address as the Party to receive the notice or request sodesignates by written notice to the other:If to VirnetX, Inc.:By Regular Mail to: Attn: Kendall Larsen, Chief Executive Officer VirnetX, Inc.P.O. Box # 439Zephyr Cove, NV 89448Facsimile: (831) 438-3078By Any Other Service (Fedex, UPS, etc.) to:Attn: Kendall Larsen, Chief Executive Officer VirnetX, Inc.308 Dorla Ct.Zephyr Cove, NV 89448Facsimile: (831) 438-3078with a copy to:Caldwell Cassady & Curry2101 Cedar Springs Road, Suite 1000, Dallas, TX 75201Telephone: 214.888.4848 Facsimile: 214.888.4849 7If to Microsoft:Attn: Director of Licensing, LCA Patent Group Microsoft CorporationOne Microsoft Way Redmond, WA 98052Fax: (425) 936-7329with a copy to:Attn: Law & Corporate Affairs Microsoft CorporationOne Microsoft Way Redmond, Washington 98052Facsimile: (425) 936-73297.6.Governing Law; Venue. This Agreement shall be construed and controlled by the internal laws of the State of Texas (excluding conflict of lawsprinciples) and applicable federal laws. The sole and exclusive venue for any lawsuit arising out of or relating to this Agreement shall be theUnited States District Court for the Eastern District of Texas.7.7.Costs. Each Party shall bear its own costs, expenses and attorneys’ fees incurred in connection with the Actions, the making of this Agreement,and its performance under this Agreement. Each Party expressly waives any claim of costs and attorneys’ fees from or against the other Party.7.8.Successors and Assigns. The terms, covenants, conditions, provisions and benefits of this Agreement shall be binding upon and inure to thebenefit of the Parties and their respective successors and assigns. For the avoidance of doubt only, the releases, licenses and covenants inSection 3.1 and Section 4 run with each of the Licensed Patents covered by this Agreement and are binding on any entity claiming a right, titleor interest therein at any time, and VirnetX will inform any such transferee in writing of this restriction prior to transfer.7.9.No Construction Against Drafter. This Agreement results from negotiations between the Parties and their respective legal counsel, and eachParty acknowledges that it has had the opportunity to negotiate modifications to the language of this Agreement. Accordingly, each Partyagrees that in any dispute regarding the interpretation or construction of this Agreement, no statutory, common law or other presumption shalloperate in favor of or against any Party by virtue of his, her or its role in drafting or not drafting the terms and conditions set forth herein.7.10.Captions. Captions or headings used in this Agreement are for the convenience of the Parties only, and shall not be considered part of thisAgreement or used to construe the terms of this Agreement.7.11.Construction. If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable orotherwise in conflict with law, the remaining provisions shall remain in full force and effect. If any provisions of this Agreement are deemednot enforceable, they shall be deemed modified to the extent necessary to make them enforceable. The Parties undertake to replace the invalidprovision or parts thereof by a new provision which will approximate as closely as possible the intent of the Parties. Provisions shall apply, asapplicable, to past, current and successive events, parties, and transactions.7.12.Counterparts. This Agreement may be executed in any number of counterparts and by the different Parties on separate counterparts and eachsuch counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.Execution of this Agreement may be accomplished by signing this Agreement and transmitting the signature page to opposing counsel byfacsimile or email. The Parties so executing and delivering shall promptly thereafter deliver signed originals of at least the signature page(s),but failure to do so shall not affect the validity or enforceability of this Agreement.87.13.Waiver. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or notsimilar, nor shall any waiver constitute a continuing waiver unless expressly stated in writing by the Party making the waiver. No waiver ofany provision shall be binding in any event unless executed in writing by the Party making the waiver.7.14.Entire Agreement.This Agreement (including, without limitation, all Exhibits attached hereto) constitutes the entire agreement between theParties with respect to the subject matter hereof, and supersedes all prior and contemporaneous written or oral agreements (including, withoutlimitation, the Settlement and License Agreement between Microsoft Corporation and VirnetX, Inc. made and entered into on May 14, 2010),memorandums of understanding (including, without limitation, the Memorandum of Understanding between Microsoft Corporation andVirnetX, Inc. dated May 12, 2010), or communications as to such subject matter, all of which are superseded, merged and fully integrated intothis Agreement. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf ofthe Parties by their respective duly authorized representatives. 7.15.Inter Partes Review. Microsoft and VirnetX shall cooperate (and if necessary, VirnetX will cause SAIC to cooperate) to file in each of thePending IPRs, a joint motion to terminate with respect to Microsoft Corporation pursuant to 35 U.S.C. §317(a) in the form set forth in ExhibitC, and a joint request to keep this agreement confidential pursuant to 35 U.S.C. 317(b) and 37 C.F.R. § 42.74(c) in the form set forth in ExhibitD. Microsoft and VirnetX will contact (and if necessary, VirnetX will cause SAIC to contact) the Patent Trial and Appeal Board (“PTAB”) torequest permission to file in each of the Pending IPRs the motion and the request within five (5) business days of the filing of the dismissalsunder Section 5.1, and upon receiving permission, file in each of the Pending IPRs the motion and the request within two (2) business days ofthe PTAB granting such permission. The parties will work together to modify the motion and request to address any issues raised by the PTAB.If the PTAB denies the motions to terminate, the Parties will take such other permitted steps to have Microsoft withdraw from the Pending IPRs.For example, Microsoft will not actively seek to participate in the Pending IPRs, and will not be bound by the results of the Pending IPRs. Thiscovenant shall not be construed as preventing Microsoft from complying with any court or Patent Office order or applicable law. 7.16.[***] [***]Certain information on this page has been omitted and filed separately with the Securities Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. 9IN WITNESS WHEREOF, VirnetX, Inc. and Microsoft Corporation, being fully authorized and empowered to bind themselves to this Agreement,have caused this Agreement to be made and executed by duly authorized officers as of the Amendment Effective Date.VIRNETX, INC. MICROSOFT CORPORATION /s/ Sameer Mathur /s/ David Howard Name:Sameer MathurName:David HowardTitle:VP of Corporate Development & Product MarketingTitle:Corporate VPDate:12/17/14Date:12/17/14 10EXHIBIT A 11CountryApp. No.Filing datePatent No.Issue DateWOPCT/US99/2532510/29/1999 AU00/1455310/29/1999761,38809/18/2003CA2,349,51910/29/1999 08/09/2011CA2,723,50410/29/1999 04/29/2014EP99971606.110/29/1999112541908/26/2009EP-GB99971606.110/29/1999112541908/26/2009EP-DE99971606.110/29/1999112541908/26/2009EP-FR99971606.110/29/1999112541908/26/2009EP-IT46406/BE/200910/29/1999112541908/26/2009JP2000-58035010/29/19994,451,55602/05/2010JP2009-24603310/29/19994,824,10809/16/2011US09/429,64310/29/19997,010,60403/07/2006US10/401,55103/31/20037,133,93011/07/2006US11/301,02212/13/20057,996,53908/09/2011US11/839,93708/16/20078,874,77110/28/2014US13/475,63705/08/2012 US13/620,55009/14/2012 US13/620,53409/14/2012 US09/429,64302/15/20006,502,13512/31/2002WOPCT/US01/0434002/12/2001 EP14172837.806/17/2014 HK14111309.711/07/2014 EP01910528.702/12/2001 JP2001-56006202/12/2001 US10/082,16402/26/20026,618,76109/09/2003US10/401,88803/31/20036,907,47306/14/2005US10/082,28502/26/20026,834,31012/21/2004US10/259,49409/30/20027,490,15102/10/2009US11/839,96908/16/20077,933,99004/26/2011US13/075,08103/29/2011 US13/093,78505/11/20118,516,11708/20/2013US13/890,20605/08/2013 WOPCT/US99/2532310/29/1999 AU00/1600310/29/199976591401/15/2004CA2,349,52010/29/1999 EP99958693.610/29/1999 EP-DE99958693.610/29/1999112541412/22/2010EP-FR99958693.610/29/1999112541412/22/2010EP-GB99958693.610/29/1999112541412/22/2010EP10011949.409/30/2010 JP2011-08141604/01/2011519861702/15/201312CountryApp. No.Filing datePatent No.Issue DateJP2014-00005104/01/2011 05/15/2014WOPCT/US01/1326104/25/2001 EP01932629.704/25/2001130204708/01/2012EP06014499.504/25/2001 EP06014500.004/25/2001 EP-CH01932629.704/25/2001130204708/01/2012EP-DE01932629.704/25/2001130204708/01/2012EP-NL01932629.704/25/2001130204708/01/2012EP-GB01932629.704/25/2001130204708/01/2012EP1001235709/30/2010 EP1001223609/30/2010 EP11005789.007/15/2011 EP11005792.407/15/2011EP11005793.207/15/2011 EP1001235609/30/2010 EP12004353.406/08/2012 HK07109112.708/21/2007 HK07109113.608/21/2007 JP2001-58300604/25/2001476581106/10/2011JP2010-239225 537745510/25/2013JP2011-08505104/07/2011537453510/25/2013JP2011-08505204/07/2011537453610/25/2013US10/702,48611/07/20037,188,18003/06/2007US11/679,41602/27/20078,051,18111/01/2011US11/839,98708/16/20077,987,27407/26/2011US10/702,52211/07/20036,839,75901/04/2005US10/702,58011/07/20036,826,61611/30/2004US13/181,04107/12/2011 US13/285,96210/31/2011 US14/526,66910/29/2014 WOPCT/US01/1326004/25/2001 EP01932628.904/25/2001128407901/18/2006EP-CH01932628.904/25/2001128407901/18/2006EP-DE60116754.604/25/2001128407901/18/2006EP-GB01932628.904/25/2001128407901/18/2006EP-IT01932628.904/25/2001128407901/18/2006EP-NL01932628.904/25/2001128407901/18/2006EP05102086.504/25/2001154242906/12/2013EP-CH05102086.504/25/2001154242906/12/2013EP-DE05102086.504/25/2001154242906/12/201313CountryApp. NoFiling datePatent No.Issue DateEP-IT05102086.504/25/2001154242906/12/2013EP-GB05102086.504/25/2001154242906/12/2013EP-NL05102086.504/25/2001154242906/12/2013EP10184542.809/30/2010 EP10184502.209/30/2010 JP2002-50114404/25/2001 JP2010-23919704/25/2001518027401/18/2013JP2011-08341404/05/2011516577612/28/2012JP2012-25621311/22/2012547869702/21/2014JP2012-25622811/22/2012547869802/21/2014JP2011-08341504/05/2011537756210/04/2013US10/714,84911/18/20037,418,50408/26/2008US11/840,56008/17/20077,921,21104/05/2011US11/840,50808/17/20077,945,65405/17/2011US13/049,55203/16/20118,572,24710/29/2013US13/080,68004/06/2011 US13/337,75712/27/20118,504,69608/06/2013US13/336,95812/23/20118,513,13108/20/2013US13/336,79012/23/20118,458,34106/04/2013US13/342,79501/03/20128,560,70510/15/2013US13/343,46501/04/20128,521,88808/27/2013US13/339,25712/28/20118,504,69708/06/2013US13/474,39705/17/20128,554,89910/08/2013US13/617,37509/14/2012 US13/617,44609/14/2013US13/615,52809/13/2012 US13/615,53609/13/2012 US13/615,55709/13/20128,868,70510/21/2014US13/903,78805/28/2013 US13/911,79206/06/20138,850,00909/30/2014US13/911,81306/06/20138,904,51610/02/2014US13/950,87707/25/2013 US13/950,89707/25/2013 US13/950,91907/25/20138,843,64309/23/2014US14/482,95609/10/2014 WOPCT/US02/0107001/17/2002 EP02 0718836.601/17/2002136080311/30/2011EP-CH02 0718836.601/17/2002136080311/30/2011EP-DE02 0718836.601/17/2002136080311/30/2011EP-FR02 0718836.601/17/2002136080311/30/201114CountryApp. No.Filing datePatent No.Issue DateEP-GB02 0718836.601/17/2002136080311/30/2011EP-IT02 0718836.601/17/2002136080311/30/2011EP-NL02 0718836.601/17/2002136080311/30/2011EP10012248.012/22/2010226495210/09/2013EP-CH10012248.012/22/2010226495210/09/2013EP-DE10012248.012/22/2010226495210/09/2013EP-FR10012248.012/22/2010226495210/09/2013EP-GB10012248.012/22/2010226495210/09/2013EP-IT10012248.012/22/2010226495210/09/2013EP-NL10012248.012/22/2010226495210/09/2013EP10012245.612/22/2010226495107/31/2013EP-CH10012245.612/22/2010226495107/31/2013EP-DE10012245.612/22/2010226495107/31/2013EP-GB10012245.612/22/2010226495107/31/2013EP-IT10012245.612/22/2010226495107/31/2013EP-NL10012245.612/22/2010226495107/31/2013US09/874,25806/06/20017,209,47904/24/2007US11/532,00209/14/20067,986,68807/26/2011US11/840,57908/17/20077,944,91505/17/2011US13/110,50905/18/20118,571,02510/29/2013US13/110,35305/18/20118,761,16806/24/2014US13/620,36809/14/20128,780,90607/15/2014US13/620,35809/14/20128,780,90507/15/2014US14/294,47606/03/2014 US13/554,58207/09/2012 WOPCT/US12/4592107/09/2012 CA284116601/07/2014 CN201280034033.701/08/2014 EP12743274.802/05/2014 HK14110584.510/23/2014 JP2014-51909701/07/2014 AU201228284107/09/2012 US14/037,30109/25/2013 WOWO2008US74886A08/29/2008 DEDE69943057A10/29/1999 DEDE69941338A10/29/1999 US11/924,46010/25/2007 US09/558,2094/26/2000 US09/588,2104/26/2000 US60/262,0631/18/2001 15CountryApp. No.Filing datePatent No.Issue DateUS60/969,22608/31/2007 AUAU200138123D02/12/2001 AUAU200159140D04/25/2001 AUAU200159141A04/25/2001 JPJP201451A01/06/2014 ATAT2002718836T01/17/2002 ATAT1999958693T10/29/1999 ATAT1999971606T10/29/1999 JP2000-58035410/29/1999 EPEP2008799013A8/29/2008 EPEP20103518A02/12/2001 CACA2696665A08/29/2008 AUAU2008292833A08/29/2008 AUAU2001238123A02/12/2001 AUAU2001259140A04/25/2001 AUAU2001259141A04/25/2001 AUAU2002249950A01/17/2002 JPJP201452A01/06/2014 JPJP201181417A04/01/2011 JPJP2010523173A08/29/2008 JPJP2000580354A10/29/1999 WOPCT/US08/748868/29/2008 AU20082928338/29/2008 CA26966658/29/2008 EP08799013.18/29/2008 JPPCT/US08/748868/29/2008 16EXHIBIT BVirnetX and Microsoft Settle Pending Patent Disputes andAgree to Jointly Petition to Terminate IPR Proceedings as to MicrosoftZEPHYR COVE, Nevada and REDMOND, WA – December XX, 2014 – VirnetX Holding Corporation (NYSE MKT: VHC) and Microsoft Corporationannounced today that on December XX, 2014, VirnetX, Inc. and Microsoft Corporation have signed an Amended Settlement and License Agreement. Thisagreement amends and restates certain terms of the original Settlement and License Agreement, dated May 14, 2010, between VirnetX, Inc. and MicrosoftCorporation. As a result of the agreement, the parties have settled their pending patent disputes.Under the terms of the amended agreement, Microsoft has agreed to pay $23 million to VirnetX to settle the patent dispute and expand Microsoft’s license.The parties have also agreed to dismiss the patent infringement case brought by VirnetX, Inc. before the U.S. District Court for the Eastern District of Texasand jointly move to terminate the pending inter partes review proceedings between Microsoft and VirnetX, Inc. as to Microsoft. All other aspects of theagreement were not disclosed.“We are pleased to have come to an agreement with Microsoft Corporation and put all our legal disputes behind us,” said Kendall Larsen, Chief ExecutiveOfficer and Chairman of VirnetX, Inc. “This agreement allows us to focus our resources towards the release of our Gabriel Secure Communication Platform™and Gabriel Collaboration Suite™ products in the first-half of 2015 and our ongoing licensing and strategic partnership efforts.”“Microsoft Corporation is pleased to have come to an agreement with VirnetX and that the settlement includes an expanded license to VirnetX’s entire patentportfolio,” said a Microsoft spokesperson.About MicrosoftFounded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services, devices and solutions that help people and businesses realizetheir full potential.About VirnetXVirnetX Holding Corporation is an Internet security software and technology company with patented technology for secure communications including 4GLTE security. The Company’s software and technology solutions, including its secure domain name registry and GABRIEL Connection Technology™, aredesigned to facilitate secure communications and to create a secure environment for real-time communication applications such as instant messaging, VoIP,smartphones, eReaders and video conferencing. The Company’s patent portfolio includes over 107 U.S. and international patents with over 100 pendingapplications. For more information, please visit www.virnetx.com.17Forward Looking StatementsStatements in this press release that are not statements of historical or current fact, including statements regarding the strength of Virnetx’s intellectualproperty, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-lookingstatements are based on expectations, estimates and projections about the markets in which the Company operates, management’s beliefs, and certainassumptions made by management and involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of theCompany to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements, includingbut not limited to (1) the outcome of any legal proceedings that have been or may be initiated by the Company or that may be initiated against theCompany;, including pending and future inter partes review proceedings in the Patent and Trademark Office (2) the ability to capitalize on the Company’spatent portfolio and generate licensing fees and revenues; (3) the ability of the Company to be successful in entering into licensing relationships with itstargeted customers on commercially acceptable terms; (4) potential challenges to the validity of the Company’s patents underlying its licensingopportunities; (5) the ability of the Company to achieve widespread customer adoption of the Company’s GABRIEL Communication Technology™ and itssecure domain name registry; (6) the level of adoption of the 3GPP Series 33 security specifications; (7) whether or not the Company’s patents or patentapplications may be determined to be or become essential to any standards or specifications in the 3GPP LTE, SAE project or otherwise; (8) the extent towhich specifications relating to any of the Company’s patents or patent applications may be adopted as a final standard, if at all; and (9) the possibility thatCompany may be adversely affected by other economic, business, and/or competitive factors. In addition to statements which explicitly describe such risksand uncertainties, readers are urged to consider statements labeled with the terms “believes,” “belief,” “expects,” “intends,” “anticipates,” or “plans” to beuncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are describedfrom time to time in the Company’s reports and registration statements filed with the Securities and Exchange Commission, including those under theheading “Risk Factors” in Company’s Quarterly Report on Form 10-Q filed with the SEC on November 10, 2014. Many of the factors that will determine theoutcome of the subject matter of this press release are beyond the Company’s ability to control or predict. Except as required by law, the Company is underno duty to update any of the forward-looking statements after the date of this press release to conform to actual results. Contact:Greg WoodVirnetX Holding Corporation775.548.1785greg_wood@virnetx.com 18David CuddyMicrosoft Corporation425.421.2502dcuddy@microsoft.com VirnetX and GABRIEL Connection Technology are trademarks of VirnetX Holding Corporation. Other company and product names may be trademarksof their respective owners. 19EXHIBIT C1 JOINT MOTION TO TERMINATEIPR2014-01418, AND IPR2014-01421 20Joint Motion to Terminate ProceedingIPR2014-000XXU.S. Patent No. X,XXX,XXX[Parties will edit the following caption and the motion as appropriate depending on the IPR and Board’s guidance.]Filed on behalf of Microsoft Corporation and VirnetX, Inc.UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE THE PATENT TRIAL AND APPEAL BOARD MICROSOFT CORPORATIONPetitioner v. VIRNETX, INC.Patent Owner Case IPR2014-000XXU.S. Patent No. X,XXX,XXX JOINT MOTION TO TERMINATE PROCEEDING 21IPR2014-000XXU.S. Patent No. X,XXX,XXX I.Precise Relief Requested Pursuant to 35 U.S.C. § 317(a), Petitioner Microsoft Corporation (“Microsoft” or “Petitioner”) and Patent Owner VirnetX, Inc. (“Patent Owner” or“VirnetX”) jointly request that this inter partes review proceeding (“this Review”) involving U.S. Patent No. X,XXX,XXX (“the ’XXX patent”) be terminatedbased on a settlement between Petitioner and Patent Owner (“the Parties”). II.Reasons for Granting the Motion Generally, the Board expects that a proceeding will terminate after the filing of a settlement agreement. See, e.g., Office Patent Trial Practice Guide,77 Fed. Reg. 48,756, 48,768 (Aug. 14, 2012). The Board authorized the filing of the instant motion in [the order/email] dated [MONTH DAY, YEAR]. IPR2013-00428, Paper No. 56 provides guidance as to the content of a motion to terminate. There, the Board indicates that a joint motion, such as this one,should (1) include a brief explanation as to why termination is appropriate; (2) identify all parties in any related litigation involving the patents at issue; (3)identify any related proceedings currently before the Office, and (4) discuss specifically the current status of each such related litigation or proceeding withrespect to each party to the litigation or proceeding. Id. at 2. This motion satisfies each of the above requirements and is accompanied by a copy of theParties’ settlement agreement, as required by 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b). 22IPR2014-000XXU.S. Patent No. X,XXX,XXX (1)Brief Explanation of Why Termination is Appropriate Termination is appropriate because a final written decision has not been reached in this Review. Indeed, Petitioner filed its petition for inter partesreview on [MONTH DAY, YEAR]. Patent Owner filed its preliminary response on MONTH DAY, YEAR]. The Board has not yet instituted this proceeding. Termination of this proceeding is appropriate because, if this Motion is granted, Microsoft will not be participating as a party in this proceedinggoing forward, and the Board has not decided the merits of the proceeding. The Parties have settled their dispute and executed a settlement agreement toterminate this proceeding, as well as the Parties’ related district court litigation regarding the ’XXX patent: VirnetX, Inc. and Science ApplicationsInternational Corporation v. Microsoft Corporation, Case No. 6:13-cv-00351 (E.D. Tex.). The Parties expect that this district court litigation will bedismissed per the parties’ settlement agreement. For all these reasons, the Parties respectfully request termination of this proceeding.(2)All parties in any pending related litigation involving the patents at issue Patent Owner, but not Petitioner, is also involved in several other pending related litigations involving the ’XXX patent. These related litigations,and their current status with respect to the litigating parties, are as follows: 23IPR2014-000XXU.S. Patent No. X,XXX,XXX Related Case(s)DefendantsStatus (3)Related proceedings currently before the Office Aside from this inter partes review proceeding, the ’XXX patent is also the subject of the following proceeding(s) currently before the Office: Related Proceeding(s)Requester/PetitionerStatusControl No. XX/XXXXXX IPR2014-000XX (4)Current status of each such related litigation or proceeding with respect to each party to the litigation or proceedingAbove, a status field indicates the status of each such related litigation or proceeding with respect to each party to the litigation or proceeding. 24IPR2014-000XXU.S. Patent No. X,XXX,XXX III.Settlement Agreement Pursuant to 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b), the Parties’ settlement agreement is in writing, and a true and correct copy is being filedconcurrently herewith as Exhibit [XXXX].1 The Parties are also filing concurrently herewith a joint request under 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(c)to treat the settlement agreement as business confidential information and keep it separate from the files of the involved patent. Respectfully submitted, [Name] [Name] [Address] [Address] Counsel for Petitioner Counsel for Patent Owner Microsoft Corporation VirnetX, Inc. Dated: [MONTH DAY, YEAR] 1 The settlement agreement is being filed electronically via the Patent Review Processing System (PRPS) with access to the “Parties and Board Only.” 25EXHIBIT C2JOINT MOTION TO TERMINATEIPR2014-00610, IPR2014-00614 (CONSOLIDATED WITH IPR2014-00613),IPR2014-00615 (CONSOLIDATED WITH IPR2014-00618) 26Joint Motion to Terminate ProceedingIPR2014-000XXU.S. Patent No. X,XXX,XXX [Parties will edit the following caption and the motion as appropriate depending on the IPR and Board’s guidance.]Filed on behalf of Microsoft Corporation and VirnetX, Inc. UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE THE PATENT TRIAL AND APPEAL BOARD MICROSOFT CORPORATIONPetitioner v. VIRNETX, INC.Patent Owner Case IPR2014-000XXU.S. Patent No. X,XXX,XXX JOINT MOTION TO TERMINATE PROCEEDING 27IPR2014-000XXU.S. Patent No. X,XXX,XXX I.Precise Relief Requested Pursuant to 35 U.S.C. § 317(a), Petitioner Microsoft Corporation (“Microsoft” or “Petitioner”) and Patent Owner VirnetX, Inc. (“Patent Owner” or“VirnetX”) jointly request that this inter partes review proceeding (“this Review”) involving U.S. Patent No. X,XXX,XXX (“the ’XXX patent”) be terminatedbased on a settlement between Petitioner and Patent Owner (“the Parties”). II.Reasons for Granting the Motion Generally, the Board expects that a proceeding will terminate after the filing of a settlement agreement. See, e.g., Office Patent Trial Practice Guide,77 Fed. Reg. 48,756, 48,768 (Aug. 14, 2012). The Board authorized the filing of the instant motion in [the order/email] dated [MONTH DAY, YEAR]. IPR2013-00428, Paper No. 56 provides guidance as to the content of a motion to terminate. There, the Board indicates that a joint motion, such as this one,should (1) include a brief explanation as to why termination is appropriate; (2) identify all parties in any related litigation involving the patents at issue; (3)identify any related proceedings currently before the Office, and (4) discuss specifically the current status of each such related litigation or proceeding withrespect to each party to the litigation or proceeding. Id. at 2. This motion satisfies each of the above requirements and is accompanied by a copy of theParties’ settlement agreement, as required by 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b). 28IPR2014-000XXU.S. Patent No. X,XXX,XXX (1)Brief Explanation of Why Termination is Appropriate Termination is appropriate because a final written decision has not been reached in this Review. Indeed, Petitioner filed its petition for inter partesreview on [MONTH DAY, YEAR]. The Board instituted this proceeding on [MONTH DAY, YEAR]. Patent Owner has not filed a Patent Owner’s Response,and one is not due until [MONTH DAY, YEAR]. Termination of this proceeding is appropriate because, if this Motion is granted, Microsoft will not be participating as a party in this proceedinggoing forward, and the Board has not decided the merits of the proceeding. The Parties have settled their dispute and executed a settlement agreement toterminate this proceeding, as well as the Parties’ related district court litigation regarding the ’XXX patent: VirnetX, Inc. and Science ApplicationsInternational Corporation v. Microsoft Corporation, Case No. 6:13-cv-00351 (E.D. Tex.). The Parties expect that this district court litigation will bedismissed per the parties’ settlement agreement. For all these reasons, the Parties respectfully request termination of this proceeding. 29IPR2014-000XXU.S. Patent No. X,XXX,XXX (2)All parties in any pending related litigation involving the patents at issue Patent Owner, but not Petitioner, is also involved in several other pending related litigations involving the ’XXX patent. These related litigations,and their current status with respect to the litigating parties, are as follows: Related Case(s)DefendantsStatus (3)Related proceedings currently before the Office Aside from this inter partes review proceeding, the ’XXX patent is also the subject of the following proceeding(s) currently before the Office: Related Proceeding(s)Requester/PetitionerStatusControl No. XX/XXXXXX IPR2014-000XX (4)Current status of each such related litigation or proceeding with respect to each party to the litigation or proceedingAbove, a status field indicates the status of each such related litigation or proceeding with respect to each party to the litigation or proceeding. 30IPR2014-000XXU.S. Patent No. X,XXX,XXX III.Settlement Agreement Pursuant to 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b), the Parties’ settlement agreement is in writing, and a true and correct copy is being filedconcurrently herewith as Exhibit [XXXX].2 The Parties are also filing concurrently herewith a joint request under 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(c)to treat the settlement agreement as business confidential information and keep it separate from the files of the involved patent. Respectfully submitted, [Name] [Name] [Address] [Address] Counsel for Petitioner Counsel for Patent Owner Microsoft Corporation VirnetX, Inc. Dated: [MONTH DAY, YEAR] 2 The settlement agreement is being filed electronically via the Patent Review Processing System (PRPS) with access to the “Parties and Board Only.” 31EXHIBIT C3JOINT MOTION TO TERMINATEIPR2014-00403 AND IPR2014-00404 32Joint Motion to Terminate ProceedingIPR2014-000XXU.S. Patent No. X,XXX,XXX [Parties will edit the following caption and the motion as appropriate depending on the IPR and Board’s guidance.]Filed on behalf of Microsoft Corporation and VirnetX, Inc. UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE THE PATENT TRIAL AND APPEAL BOARD MICROSOFT CORPORATIONPetitioner v. VIRNETX, INC.Patent Owner Case IPR2014-000XXU.S. Patent No. X,XXX,XXX JOINT MOTION TO TERMINATE PROCEEDING WITH RESPECT TO MICROSOFT CORPORATION 33I.Precise Relief Requested Pursuant to 35 U.S.C. § 317(a), Petitioner Microsoft Corporation (“Microsoft” or “Petitioner”) and Patent Owner VirnetX, Inc. (“Patent Owner” or“VirnetX”) jointly request that this inter partes review proceeding (“this Review”) involving U.S. Patent No. X,XXX,XXX (“the ’XXX patent”) be terminatedwith respect to Microsoft based on a settlement between Petitioner and Patent Owner (“the Parties”). II.Reasons for Granting the Motion Generally, the Board expects that a proceeding will terminate after the filing of a settlement agreement. See, e.g., Office Patent Trial Practice Guide,77 Fed. Reg. 48,756, 48,768 (Aug. 14, 2012). The Board authorized the filing of the instant motion in [the order/email] dated [MONTH DAY, YEAR]. IPR2013-00428, Paper No. 56 provides guidance as to the content of a motion to terminate. There, the Board indicates that a joint motion, such as this one,should (1) include a brief explanation as to why termination is appropriate; (2) identify all parties in any related litigation involving the patents at issue; (3)identify any related proceedings currently before the Office, and (4) discuss specifically the current status of each such related litigation or proceeding withrespect to each party to the litigation or proceeding. Id. at 2. This motion satisfies each of the above requirements and is accompanied by a copy of theParties’ settlement agreement, as required by 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b). 34IPR2014-000XXU.S. Patent No. X,XXX,XXX (1)Brief Explanation of Why Termination is Appropriate With respect to Microsoft, termination is appropriate because a final written decision has not been reached in this Review. Indeed, Petitioner filedits petition for inter partes review on [MONTH DAY, YEAR]. The Board instituted this proceeding on [MONTH DAY, YEAR]. Patent Owner filed a PatentOwner’s Response on [MONTH DAY, YEAR], but Petitioner has not filed its Reply, which is not due until [MONTH DAY, YEAR]. Termination of this proceeding with respect to Microsoft is appropriate because, if this Motion is granted, Microsoft will not be participating as aparty in this proceeding going forward, and the Board has not decided the merits of the proceeding. The Parties have settled their dispute and executed asettlement agreement to terminate this proceeding as to Microsoft, as well as the Parties’ related district court litigation regarding the ’XXX patent: VirnetX,Inc. and Science Applications International Corporation v. Microsoft Corporation, Case No. 6:13-cv-00351 (E.D. Tex.). The Parties expect that this districtcourt litigation will be dismissed per the parties’ settlement agreement. For all these reasons, the Parties respectfully request termination of this proceedingwith respect to Microsoft.35IPR2014-000XXU.S. Patent No. X,XXX,XXX (2)All parties in any pending related litigation involving the patents at issue Patent Owner, but not Petitioner, is also involved in several other pending related litigations involving the ’XXX patent. These related litigations,and their current status with respect to the litigating parties, are as follows: Related Case(s)DefendantsStatus (3)Related proceedings currently before the Office Aside from this inter partes review proceeding, the ’XXX patent is also the subject of the following proceeding(s) currently before the Office: Related Proceeding(s)Requester/PetitionerStatusControl No. XX/XXXXXX IPR2014-000XX (4)Current status of each such related litigation or proceeding with respect to each party to the litigation or proceedingAbove, a status field indicates the status of each such related litigation or proceeding with respect to each party to the litigation or proceeding. 36IPR2014-000XXU.S. Patent No. X,XXX,XXX III.Settlement Agreement Pursuant to 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(b), the Parties’ settlement agreement is in writing, and a true and correct copy is being filedconcurrently herewith as Exhibit [XXXX].3 The Parties are also filing concurrently herewith a joint request under 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(c)to treat the settlement agreement as business confidential information and keep it separate from the files of the involved patent. Respectfully submitted, [Name] [Name] [Address] [Address] Counsel for Petitioner Counsel for Patent Owner Microsoft Corporation VirnetX, Inc. Dated: [MONTH DAY, YEAR] 3 The settlement agreement is being filed electronically via the Patent Review Processing System (PRPS) with access to the “Parties and Board Only.” 37EXHIBIT DJOINT REQUEST TO TREAT SETTLEMENTAGREEMENT AS CONFIDENTIAL 38[Parties will edit the following caption and the request as appropriate depending on the IPR and Board’s guidance.]Filed on behalf of Microsoft Corporation and VirnetX, Inc.UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE THE PATENT TRIAL AND APPEAL BOARD MICROSOFT CORPORATIONPetitionerv.VIRNETX, INC.Patent Owner Case IPR2014-000XXU.S. Patent No. X,XXX,XXX JOINT REQUEST TO TREAT SETTLEMENTAGREEMENT AS BUSINESS CONFIDENTIALUNDER 35 U.S.C. § 317(b) AND 37 C.F.R. § 42.74(c) 39Pursuant to 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(c), and the Board’s [order/email] of [MONTH DAY, YEAR], authorizing the filing of this jointrequest, Petitioner Microsoft Corporation (“Petitioner”) and Patent Owner VirnetX, Inc. (“Patent Owner”), hereby jointly request that a true copy of thesettlement agreement filed concurrently herewith as Exhibit [XXXX] be treated as business confidential information and be kept separate from the file of U.S.Patent No. X,XXX,XXX (“the ’XXX Patent”). Exhibit [XXXX] is being submitted in the PRPS system as “Parties and Board Only.” The Parties further requestthe Board to not make Exhibit [XXXX] available to any third party, except as provided for in 35 U.S.C. § 317(b) and 37 C.F.R. § 42.74(c). Respectfully submitted, [Name] [Name] [Address] [Address] Counsel for Petitioner Counsel for Patent Owner Microsoft Corporation VirnetX, Inc. Dated: [MONTH DAY, YEAR]40EXHIBIT E UNITED STATES DISTRICT COURTEASTERN DISTRICT OF TEXASTYLER DIVISIONVIRNETX, INC., andLEIDOS, INC., Plaintiffs/Counterclaim Defendants, v. MICROSOFT CORPORATION, Defendant/Counterclaimant. §§§§§§§§§§§ Civil Action No. 6:13-cv-00351-LED JOINT MOTION TO DISMISS BY ALL PARTIES In accordance with a certain agreement between VirnetX, Inc. and Microsoft Corporation, VirnetX, Inc., Leidos, Inc. (formerly Science ApplicationsInternational Corp.) (VirnetX, Inc. and Leidos, Inc. collectively “Plaintiffs”) and Microsoft Corporation (“Microsoft”) file this joint motion to dismiss thelitigation captioned above. Plaintiffs dismiss all claims in this action against Microsoft with prejudice. Microsoft dismisses without prejudice its affirmative defenses andcounterclaims of (i) non-infringement and invalidity and (ii) unenforceability in this action. Microsoft dismisses with prejudice its other counterclaims inthis action. Each party shall bear its own costs, expenses, and attorney’s fees.(signatures follow) 41Dated: February 28, 2015Respectfully submitted, FISH & RICHARDSON, P.C. /s/ Melissa R. Smith (Texas Bar No. 24001351) 303 South Washington Avenue Marshall, Texas 75670 Telephone: 903.934.8450 Facsimile: 903.934.9257 Ruffin B. Cordell (Texas Bar No. 04820550) Indranil Mukerji (Massachusetts Bar No. 644059) FISH & RICHARDSON P.C. 1425 K Street NW, Suite 1100 Washington, DC 20005 Telephone: 202.783.5070 Facsimile: 202.783.5331 David J. Healey (Texas Bar No. 09327980) Benjamin C. Elacqua (Texas Bar No. 24055443) Tony Nguyen (Texas Bar No. 24083565) FISH & RICHARDSON P.C. 1221 McKinney Street, Suite 2800 Houston, Texas 77010 Telephone: 713.654.5300 Facsimile: 713.652.010942 Katrina G. Eash (Texas Bar No. 24074636) FISH & RICHARDSON P.C. 1717 Main Street, Suite 5000 Dallas, Texas 75201 Telephone: 214.747.5070 Facsimile: 214.747.2091 Benjamin K. Thompson (Georgia Bar No. 633211) FISH & RICHARDSON P.C. 1180 Peachtree Street, NE, 21st Floor Atlanta, Georgia 30309 Telephone: 404.892.5005 Facsimile: 404.892.5002 Attorneys for Defendant MICROSOFT CORPORATION Caldwell Cassady & Curry /s/ Bradley W. Caldwell Texas State Bar No. 24040630 E-mail: bcaldwell@caldwellcc.com Jason D. Cassady Texas State Bar No. 24045625 E-mail: jcassady@caldwellcc.com John Austin Curry Texas State Bar No. 24059636 E-mail: acurry@caldwellcc.com Daniel R. Pearson Texas State Bar No. 24070398 E-mail: dpearson@caldwellcc.com Hamad M. Hamad Texas State Bar No. 24061268 E-mail: hhamad@caldwellcc.com Justin T. Nemunaitis Texas State Bar No. 24065815 E-mail: jnemunaitis@caldwellcc.com Christopher S. Stewart Texas State Bar No. 24079399 E-mail: cstewart@caldwellcc.com John F. Summers Texas State Bar No. 24079417 E-mail: jsummers@caldwellcc.com Jason S. McManis Texas State Bar No. 24088032 E-mail: jmcmanis@caldwellcc.com 43 Warren J. McCarty, III Illinois State Bar No. 6313452 E-mail: wmccarty@caldwellcc.com CALDWELL CASSADY CURRY P.C. 2101 Cedar Springs Road, Suite 1000 Dallas, Texas 75201 Telephone: 214.888.4848 Facsimile: 214.888.4849 Robert M. Parker Texas State Bar No. 15498000 Email: rmparker@pbatyler.com R. Christopher Bunt Texas State Bar No. 00787165 Email: rcbunt@pbatyler.com Charles Ainsworth Texas State Bar No. 00783521 Email: charley@pbatyler.com PARKER, BUNT & AINSWORTH, P.C. 100 East Ferguson, Suite 1114 Tyler, Texas 75702 Telephone: 903.531.3535 Telecopier: 903.533.9687 ATTORNEYS FOR PLAINTIFF LEIDOS, INC. /s/ ANDY TINDEL (Lead Counsel) State Bar No. 20054500 MT2 LAW GROUP Mann | Tindel | Thompson 112 East Line Street, Suite 304 Tyler, Texas 75702 Telephone: 903.596.0900 Facsimile: 903.596.0909 Email: atindel@andytindel.com Of Counsel:44 DONALD URRABAZO California State Bar No. 189509 ARTURO PADILLA California State Bar No. 188902 URRABAZO LAW, P.C. 2029 Century Park East, 14th Floor Los Angeles, CA 90067 Direct: 310.388.9099 Facsimile: 310.388.9088 Email: durrabazo@ulawpc.com Email: apadilla@ulawpc.com ATTORNEYS FOR PLAINTIFF LEIDOS, INC., FORMERLY KNOWN ASSCIENCE APPLICATIONS INTERNATIONAL CORPORATION CERTIFICATE OF SERVICE The undersigned certifies that the foregoing document was filed electronically in compliance with Local Rule CV-5(a). As such, this document wasserved on all counsel who have consented to electronic service on this 17th day of December, 2014. Local Rule CV-5(a)(3)(A). /s/ Jason D. Cassady Jason D. Cassady 45IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS TYLERDIVISIONVIRNETX, INC. andLEIDOS, INC., Plaintiffs, v. MICROSOFT CORPORATION, Defendant. §§§§§§§§§§§ Civil Action No. 6:13-cv-00351 JURY TRIAL DEMANDED[PROPOSED] ORDER OF DISMISSALOn this day came on to be heard the parties’ Joint Motion to Dismiss, and the Court having considered same, is of the opinion the dismissal shouldbe GRANTED. IT IS THEREFORE ORDERED that all claims asserted against Microsoft Corporation (“Microsoft”) in this action are dismissed with prejudice. Microsoft’s affirmative defenses and counterclaims of (i) non-infringement and invalidity and (ii) unenforceability in this action are dismissedwithout prejudice. Microsoft’s other counterclaims in this action are dismissed with prejudice. Each party shall bear its own costs, expenses, and attorney’s fees. This is a final judgment. 46EXHIBIT 21.1Subsidiaries of Registrant Name of Entity Jurisdiction ofIncorporation orOrganization Network Research Corporation Japan Ltd. (known as Network Research Corporation Japan Kabushiki Kaisha in Japan)Japan VirnetX Inc.Delaware EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe 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 March 2, 2015, 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 the Company for the yearended December 31, 2014./s/ Farber Hass Hurley LLPChatsworth, CA March 2, 2015 EXHIBIT 31.1CERTIFICATIONS 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, 2014;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: March 2, 2015 EXHIBIT 31.2CERTIFICATIONSI, Richard H. Nance, certify that:1.I have reviewed this Annual Report on Form 10-K of VirnetX Holding Corporation for the fiscal year ended December 31, 2014;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; and5.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/ Richard H. Nance Richard H. Nance Chief Financial Officer (Principal Accounting and Financial Officer) Date: March 2, 2015 EXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of VirnetX Holding Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2014as filed with the Securities and Exchange Commission on March 2, 2015 (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 theCompany. /s/ Kendall Larsen Kendall Larsen President and Chief Executive Officer (Principal Executive Officer) Date: March 2, 2015 EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of VirnetX Holding Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2014as filed with the Securities and Exchange Commission on March 2, 2015 (the "Report"), I, Richard Nance, 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 theCompany. /s/ Richard H. Nance Richard H. Nance Chief Financial Officer (Principal Accounting and Financial Officer) Date: March 2, 2015 

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