VirnetX Holding Corp Annual Report 2018

Plain-text annual report

TABLE OF CONTENTSUNITED 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 1934For the fiscal year ended December 31, 2018or oTRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-33852VirnetX Holding Corporation(Exact name of registrant as specified in its charter)Delaware77-0390628(State or other jurisdiction of incorporation ororganization)(I.R.S. Employer Identification Number)308 Dorla Court, Suite 206Zephyr Cove, Nevada89448(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: N/ASecurities registered pursuant to Section 12(b) of the Act:Title of ClassName of Exchange on Which RegisteredCommon Stock, par value $0.0001 per shareNYSE American LLCSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ☒ No oIndicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required tosubmit such files). Yes ☒ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not containedherein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerginggrowth company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer oAccelerated filer ☒Smaller reporting company oNon-accelerated filer oEmerging growth company oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☒The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2018, was$189,351,416 based upon the closing price of the common shares of the Registrant on June 29, 2018. This calculation does not reflect a determinationthat certain persons are affiliates of the Registrant for any other purpose.68,084,001 shares of Registrant’s Common Stock were outstanding as of March 14, 2019.DOCUMENTS INCORPORATED BY REFERENCEThe information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference fromthe Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018relating to the Registrant’s 2019 Annual Meeting of Stockholders.TABLE OF CONTENTSINDEX Page PART I Item 1.Business3Item 1A.Risk Factors13Item 1B.Unresolved Staff Comments25Item 2.Properties26Item 3.Legal Proceedings26Item 4.Mine Safety Disclosure28 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities29Item 6.Selected Financial Data30Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations30Item 7A.Quantitative and Qualitative Disclosures about Market Risk41Item 8.Financial Statements and Supplementary Data42Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure64Item 9A.Controls and Procedures64Item 9B.Other Information64 PART III Item 10.Directors, Executive Officers and Corporate Governance66Item 11.Executive Compensation66Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters66Item 13.Certain Relationships and Related Transactions, and Director Independence66Item 14.Principal Accountant Fees and Services66 PART IV Item 15.Exhibits and Financial Statement Schedules671TABLE OF CONTENTSSPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTSWe have included or incorporated by reference in this Annual Report on Form 10-K (including in the section entitledManagement’s Discussion and Analysis of Financial Condition and Results of Operations), and from time to time we may makestatements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based uponour current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among otherthings, anticipated future performance (including sales and earnings), expected growth, future business plans and costs andpotential liability for environmental-related matters. Any statement that is not historical in nature is a forward-looking statementand may be identified by the use of words and phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”“predicts,” “projects,” “will be,” “will continue,” “will likely result in,” and similar expressions. These statements include ourbeliefs and statements regarding general industry and market conditions and growth rates, as well as general domestic andinternational economic conditions. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, whichcould cause actual results to differ materially from such statements and from our historical results and experience. These risks,uncertainties and other factors include, but are not limited to those described in Item 1A - Risk Factors of this Annual Report onForm 10-K and elsewhere in the Annual Report and those described from time to time in our future reports filed with the Securitiesand Exchange Commission. Readers are cautioned that it is not possible to predict or identify all the risks, uncertainties and otherfactors that may affect future results and that the risks described herein should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or reviseany forward-looking statement, whether as a result of new information, future events or otherwise.Among others, the forward-looking statements appearing in this annual report that may not occur include statements that:•We have been awarded damages in the amount of $439.7 million in the VirnetX Inc. v. Cisco Systems, Inc. et al. (Case6:10-CV-00417-LED) (“Apple I”) litigation and $595.9 million in the VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”) litigation. Taken together, these statements may imply that we may soon receive over $1 billion incash. Recently United States Court of Appeals for the Federal Circuit (“USCAFC”) issued a Rule 36 order affirming theDistrict Court Judgment in the Apple I case. However, (1) Apple has appealed the awards in both of the Apple I and AppleII litigations and the court’s or jury’s decisions may be reversed or amended upon appeal, or (2) we may be unsuccessfulin our appeal of certain actions by the patent trial and appeals board that have been initiated by Apple or other parties --if any of these occur, they may have the effect of thwarting entirely, or reducing and delaying payments to us. Thecontinuation of these litigations is distracting to our management and expensive, and this distraction and expense maycontinue.•We have undertaken activities to commercialize our products and patent portfolio in and outside the United States. Thesestatements may imply that the worldwide market for our commercialized products is large and will result in significantfuture revenues for us. However, commercialization of products such as ours are subject to significant obstacles and risks,including but not limited to a perception by some potential partners and customers that they should await the outcome ofthe Apple I and Apple II litigations before entering or considering to enter any agreement with us, and that or otherfactors may lead us to be unsuccessful in obtaining further licensing agreements or making arrangements or enteringcontracts which create significant future revenues for us.2TABLE OF CONTENTSPART IItem 1.BusinessThe CompanyWe are an Internet security software and technology company with patented technology for secure communications including 5Gand 4G LTE security. Our software and technology solutions, including our Secure Domain Name Registry and GABRIELConnection Technology™, are designed to facilitate secure communications and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services,streaming video, file transfer, remote desktop and Machine-to-Machine, or M2M communications. Our technology generatessecure 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 intellectualproperty is the foundation of our business model. We currently own approximately 185 total patents and pending applications,including 70 U.S. patents/patent applications and 115 foreign patents/validations/pending applications. Our patent portfolio isprimarily 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 deviceoperating systems and network security for Cloud services, M2M communications in the new initiatives like “Smart City”,“Connected Car” and “Connected Home” that would connect everything from social services and citizen engagement to publicsafety, transportation and economic development to the internet to enable more productivity, features and efficiency in oureveryday lives. The subject matter of all our U.S. and foreign patents and pending applications relates generally to securingcommunication over the internet, and as such covers all our technology and other products. Our issued U.S. and foreign patentsexpire at various times during the period from 2019 to 2024. Some of our issued patents and pending patent applications wereacquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications InternationalCorporation, or SAIC) in 2006 and we are required to make payments to Leidos, based on cash or certain other values generatedfrom those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject tomaximums and other limitations.Our product GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and serviceson the market today, does not require access to user’s confidential data and reduces the threat of hacking and data mining. Itenables individuals and organizations to maintain complete ownership and control over their personal and confidential data,secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. OurGABRIEL 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 GABRIELCollaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, athttp://www.gabrielsecure.com/ . We continue to enhance our products and add new functionality to our products. We will provideupdates to new and existing customers as they are released to the general public. Over 80 small and medium businesses haveinstalled our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporatenetworks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.We are actively recruiting best-of-breed partners in various vertical markets including, healthcare, finance, government, etc, to helpus rapidly expand our enterprise customer base. A number of International Association of Certified ISAO (IACI) including, ISAO'sfor Maritime & Ports, ISAO Credit Union ISAO, City of Chicago, ISAO Human Trafficking ISAO have chosen to deploy oursoftware as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluationsbefore deploying our products within their networks.We have executed a number of patent and technology licenses and intend to seek further licensees for our technology, includingour GABRIEL Connection Technology™ to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unifiedcommunications markets including 5G and 4G/LTE Advanced.We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents andpatent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SystemsArchitecture Evolution, or SAE project. We have agreed to make available a non-exclusive3TABLE OF CONTENTSpatent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPPmembers desiring to implement the technical specifications identified by us. We believe that we are positioned to license ouressential security patents to 3GPP members as they move into deploying 5G and 4G/LTE Advanced devices and solutions.We have an ongoing GABRIEL Licensing Program under which we offer licenses to a portion of our patent portfolio, technologyand software, including our secure domain name registry service, to domain infrastructure providers, communication serviceproviders as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to OEM customers whowant to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domainnames within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK) to assistwith rapid integration of these techniques into existing software implementations with minimal code changes and include objectlibraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer toimplement our technology. Customers who want to develop their own implementation of the VirnetX patented techniques forsupporting secure domain names, or other techniques that are covered by our patent portfolio for establishing securecommunication links, can purchase a patent license. The number of patents licensed, and therefore the cost of the patent license tothe customer, will depend upon which of the patents are used in a particular product or service. These licenses will typicallyinclude an initial license fee, as well as an ongoing royalty.We have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation,NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and SiemensEnterprise Communications Inc. to license certain of our patents, for a one-time payment and/or an ongoing royalty for all futuresales through the expiration of the licensed patents with respect to certain current and future IP-encrypted products. We haveengaged IPVALUE Management Inc. to assist us in commercializing our portfolio of patents on securing real-time communicationsover the Internet. Under the multi-year agreement, IPVALUE is expected to originate and assist us with negotiating transactionsrelated to patent licensing worldwide with respect to certain third parties.We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain namesare now an integral part of securing the next generation 5G and 4G/LTE Advanced wireless networks and M2M communications inareas including Smart City, Connected Car and Connected Home. We also believe that all 5G and 4G/LTE Advanced mobiledevices will require unique secure domain names and become part of a secure domain name registry.We intend to continue to license our patent portfolio, technology and software, including our secure domain name registry service,to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek furtherlicense of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and originalequipment 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 5G and 4G/LTE.Our employees include the core development team behind our patent portfolio, technology and software. This team has workedtogether for over ten years and is the same team that invented and developed this technology while working at Leidos, Inc.(“Leidos”). Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domainknowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment,critical infrastructure and health. The team has continued its research and development work started at Leidos and expanded the setof patents we acquired in 2006 from Leidos, into a larger portfolio of approximately 185 U.S. and Foreign patents, patentvalidations and pending applications. This portfolio now serves as the foundation of our licensing business and planned serviceofferings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue ourresearch and development efforts to further strengthen and expand our patent portfolio.Please see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operations –Research and Development Expenses for a description of our research and development expenses for the past three fiscal years.4TABLE OF CONTENTSWe intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensingbusiness by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intendto expand our design pilot in participation with leading 5G and 4G/LTE companies (domain infrastructure providers, chipsetmanufacturers, service providers and others) and build our secure domain name registry.Industry OverviewWe believe that the rapid growth of mobile devices (smartphones/tablets/ultra-mobile PCs), with always-on network access, andneed to socially interact with friends and family while maintaining a constant online presence has transformed the “Internet of Web2.0” into the “The Internet of the People”. It has become an evolving, rich and complex medium used by individuals andbusinesses to conduct commerce, share information and engage in real-time communications including email, text messaging, IM,and voice and video calls. We believe the user demand for high speed broadband access along with the quality of experiencewherever they are and whatever BYOD (bring your own device) they may be using; Mobility, IP video delivery, and the move tocloud have dramatically changed the way service providers deliver services. While wireline networks remain the primarymechanism for delivering premium and high bandwidth services, its growth has held steady compared to the growth of the mobilecommunications. The cost barrier to obtaining a mobile device with data access has disappeared allowing billions of people tohave online access on fixed and mobile networks, and those users accessing social networking websites, using peer-to-peer, or P2Papplications, and uploading live content over the internet, which in turn is downloaded by billions, has led to significant growth inpacket traffic. Not only is traffic growing and changing in nature, its location of origin and timing has become completelyunpredictable. There is a significant impact on the mobile signaling network, brought on by smartphone penetration and consumeruse of “chatty” applications that conduct frequent network queries.Before all the security issues related to the signaling protocols in 4G/Advanced LTE and other hybrid networks could be resolved,some service providers are forging ahead with early deployments of the emerging 5G standard. The researchers are increasinglyworried that these existing vulnerabilities may get carried over into the 5G networks. Due to 5G’s high-speed bandwidth alongwith billions of connected IoT devices with suspected SIM vulnerabilities, an insecure 5G network sets the stage for increasinglywidespread attacks with exponentially large number of available attack points. It’s not difficult to imagine a business using IoTsensors within a factory setting and getting shut down due to a DDoS attack.We believe that as the users become more comfortable with using their smartphones/tablets and other connected devices, they willincreasingly treat their mobile and fixed/WiFi networks as a single network and demand seamless transition from one network typeto another without any disruption of service. The 4G/LTE standard was developed with the goal of creating a single IP network thatis efficient, flexible, open up new business models and services revenues and eventually lead to true “virtual networks” or software-defined networks (SDN). The service providers were forced to perform complete overhaul of their telecom network infrastructure inorder to move from TDM paradigm to next generation IP networks based on 4G/LTE for dealing with this rapidly growing demand.Before these network overhauls could be completed, some service providers decided to label their hybrid 3.5G/HSPA+/partial LTEimplementations as 4G networks in order to mitigate the risk of losing revenue. We believe this has led to significant confusionand misunderstanding among users.Adding to the demand for mobile and fixed broadband services is the fast adoption of connected machines or devices, or embeddedsystems capable of M2M communication. These M2M communications are made possible by a device (non-phone/tablet/pc suchas a sensor) that is attached to a machine to capture an event that is relayed over a network via 3G/4G routers or fixed broadbandlines, delivering data or events (such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude andspeed) to applications creating an “Internet of Things” or IoT. As the service providers start deploying true 4G (Long TermEvolution-Advanced, or LTE-Advanced) and this pace picks up, we believe that almost every device will get its own uniqueidentity and a high-speed connection to the internet over a high-speed IP (Internet Protocol) based telecommunication networkmaking it an “Internet of Everything”.We believe that growing security concerns and vulnerabilities in a large number of use-case scenarios due to the inherent “open”nature of this architecture can throttle the successful adoption of these technologies. Security can no longer exist as a pointsolution, and enterprises are currently upgrading core IT infrastructure (systems, networks, and management) to integrate securityinto everything. Because of the complexity of today’s networks and the5TABLE OF CONTENTSrequirement to connect users from any location at any time on any device, enterprise buyers looking to improve security posturehave to evaluate everything from software solutions for smartphones to routers and switches with integrated security, massivesecurity appliances for data centers, cloud-based security services, and security solutions for virtualized environments and publicand private clouds.We believe that telecommunication markets are rapidly changing and presenting new challenges to the equipment and serviceproviders, including but not limited to increasing user demand for mobile, always-on connections with multiple devices. We alsobelieve that traffic growth, video acceleration, cloud services and a rapidly growing number of subscribers challenge currentlyavailable network architectures and that, because of this, service providers and carriers will eventually use a single network forfixed and mobile communications, private/premium communications and Internet access, in spite of the difficulties involvedchallenging their business models and forcing the consideration of new network architectures. We believe that LTE technologywill deliver users the benefits of faster data speeds and new services by creating a new radio access technology that’s optimized forIP-based traffic and offers operators a simple upgrade path from 3G networks. Smartphones are multi-functional devices that handlea wide variety of business-critical applications and support increasingly complex functions including enhanced 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 mobileworker. These devices enable mobile workers to have similar functionality inside or outside the office thereby increasing employeeefficiency. However, it is critical that this mobile 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) withembedded mobile broadband modems to enable Internet access via a mobile broadband network. A growing number of thesedevices are now shipping enabled with LTE/4G. Mobile Internet devices (MIDs) include handheld mobile Internet devices; e.g.eReader, gaming console, digital picture frame, digital camera, with embedded mobile broadband modems. Mobile broadbandrouters have mobile broadband modems or antenna as the broadband connection; have multiple Ethernet ports and integratedwireless access points for local area connectivity and bandwidth sharing; can have integrated hub or switch; may have anintegrated stateful firewall or IPSec VPN and are also known as mobile hotspot routers.Machine-to-Machine, or M2M, connected devices, or embedded systems; connected machines are fast becoming the eyes and earsof the enterprise. By adding sensors and networking technologies to the products they sell and the equipment they employ,companies are finding new ways to gather powerful insights 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 and speed, that is relayedover a network delivering data to applications. The potential applications for this technology are numerous and as such includesmart meters in energy and utilities (the “smart grid”), connected vehicles in automotive and logistics, heart monitors in healthcare,RFID tagged inventory in retail and manufacturing, and digital signage in media and communications to name a few. Another fast-growing application is in the wearable technology products namely, fitness and wellness, infotainment (information-based mediacontent), healthcare and medical, and industrial and military. The fitness and wellness segment comprise products like smartclothing and smart sensors, activity monitors, sleep sensors and others, whereas the Infotainment sector consists of products likesmart 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 headsets and others have been mentioned under industrial and military segment. We believe that the largerevenue potential for M2M services that has attracted the attention of carriers globally risks being thwarted by the growing securityconcerns in M2M applications. Porous security is exposing vulnerabilities in a large number of use-case scenarios, includingAutomobiles, energy management systems, telemedicine, and telemetry. While built-in security is a high priority in all otherinformation and communication technologies, it is yet to be considered, even at a basic level, in most M2M applications. Therapid and successful adoption of M2M in automobiles, healthcare, industrial installations, and consumer homes may bejeopardized if communication security is not designed in to all M2M devices and applications. All these new devices will require aunique identity addressable by a secure domain name and all their communications, with application servers and other devices,completely secured automatically and on-demand. IP mobility services require an environment where wired and wireless phoneswork together with Internet Protocol to deliver services (voice, video, data and combinations thereof) uniformly across multipleaccess networks, including, among others, LTE, WiMAX, WiFi cellular and fixed.6TABLE OF CONTENTSVoice over LTE (“VoLTE”) technology is the foundation for communication services on any device over LTE, Wi-Fi and 5G.VoLTE is delivered via the IP Multimedia Subsystem (“IMS”) and enables operators to offer high-quality, simultaneous voice andLTE data services on smartphones and other devices. There are currently more than 1,000 VoLTE-enabled device models,supporting different regions and frequencies. Wi-Fi calling is built on the same core network systems as VoLTE and enablesoperators to extend their voice service to places with limited cellular coverage. Over 50 Wi-Fi calling networks have beenlaunched in more than 30 countries (Source: GSMA March 2017).Based on our estimates, using several market data sources, we believe that growth in 5G network subscriptions will start picking upin 2020 and forecast to reach 2.6 billion in 2025, equivalent to more than one in every five mobile connections. Worldwide LTEbased subscriptions are expected to grow from 3.6 billion in 2018 to 5.9 billion by 2024. VoLTE is now available in more than 125networks spanning across approximately 60 countries. Based on recent measurements in operator networks, the number of VoLTEsubscriptions is now projected to grow from 1.4 million to 6.1 billion by the end of 2024, making up more than 90 percent of allLTE subscriptions globally. Mobile Data Traffic per device, including smartphone and tablets, is expected to increase from 13.5Gigabytes per month in 2018 to over 29 Gigabytes per month in 2023. We believe in order to realize the full functionality of IPmobility, several challenges including security must be overcome. When users are mobile, connections and data need to crossmultiple network boundaries, each of which poses a security threat. Wireless networks may be threatened or compromised by rogueusers who enter through insecure wireless access points. We believe that providing authenticated access to the M2M networks andenterprise applications are important requirements and represent a significant market opportunity for our patented technology andsecure 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 ConnectionTechnology™ are designed to secure real-time communications over the Internet. Our technology uses industry standardencryption methods with our patented Domain Name System, or DNS, lookup mechanisms to create a secure communication linkbetween users intending to communicate in real time over the Internet. Our technology can be built into network infrastructure,operating systems or silicon chips developed for a communication or computing device to secure real-time communications overthe Internet between numerous devices. Our technology automatically encrypts data allowing organizations and individuals toestablish communities of secure, registered users and transmit information between multiple devices, networks and operatingsystems. These secure network communities, which we call secure private domains, or SPDs, are designed to be fully-customizableand support rich content applications such as IM, VoIP, mobile services, streaming video, file transfer and remote desktop in acompletely secure environment. Our approach is a unique and patented solution that we believe provides the robust securityplatform required by these rich content applications and real-time communications over the Internet. We believe the key benefitsand features of 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 securechannel.•Control of data at all times. Users can secure and customize their unified communication and collaboration applicationssuch as file sharing and remote 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 DNSlookup mechanisms to make connections between secure domain names, thereby obviating the need to provideapplication specific security.Our ProductsOur GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and services on themarket today, does not require access to users’ confidential data and reduces the threat of hacking and data mining. It enablesindividuals and organizations to maintain complete ownership and control over their personal7TABLE OF CONTENTSand confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhereat any time. Our GABRIEL Collaboration Suite™ is a set of applications that run on top of our GABRIEL Secure CommunicationPlatform™. It enables seamless and secure cross-platform communications between users’ devices. The following applications areincluded in the current release and can be easily 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 otherGABRIEL user•Secure mail. Allows users to send email and attachments directly from sender to recipient without requiring a centralizedmail server•Secure sync/backup. Allows users to quickly push single files or automatically backup your files to one or multipleGABRIEL destinationsOur GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS Xplatforms, at http://www.gabrielsecure.com/. We continue to enhance our products and add new functionality to our products. Wewill provide updates to new and existing customers as they are released publicly. Over 80 small and medium businesses haveinstalled our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporatenetworks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.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-timecommunications over the Internet and establishing the exclusive secure domain name registry in the United States andother key markets around the world. Our unique solutions combine industry standard encryption methods andcommunication protocols with our patented techniques for automated DNS lookup mechanisms. Our technology andpatented approach enables users to create a secure communication link by generating secure domain names. We currentlyown approximately 185 total patents and pending applications, including 70 U.S. patents/patent applications and 115foreign patents/validations/pending applications. Our portfolio includes patents and pending patent applications in theUnited 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 system integrators 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 nationallyrecognized network security and encryption technology scientists and experts that have worked together as a team forover ten years. During their careers, this team has developed several cutting-edge technologies for U.S. national defense,intelligence and civilian agencies, many of which remain critical to our national security today. Prior to joining VirnetX,our team worked for Leidos, during which time they invented the technology that is the foundation of our technology,and software. Based on the collective knowledge and experience of our development team, we believe that we have oneof the most experienced and sophisticated groups of security experts researching vulnerability and threats to real-timecommunication over the Internet and developing solutions to mitigate these problems.Our StrategyOur strategy is to become the market leader in securing real-time communications over the Internet and to establish our GABRIELCommunications Technology™ as the industry standard security platform. Key elements of our strategy are to:•Actively recruit partners in various vertical markets, including healthcare, finance, government to help us rapidly expandour enterprise customer base.8TABLE OF CONTENTS•Promote our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products in the generalmarket for sale to end-user enterprises, directly and with partners, with targeted promotions and other marketingprograms.•Continue to grow our technology licensing program to commercialize our intellectual property, including our GABRIELConnection Technology™ by adding more licensees in partnership with IPValue.•Establish VirnetX as the exclusive universal registry of secure domain names and to enable our customers to act asregistrars for their users and broker 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 andpatent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project.We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms andconditions, with compensation, or FRAND, to 3GPP members desiring to implement the technical specifications identified by us.We have also submitted a number of updates to our original declaration, identifying additional technical specifications that wouldalso require a license to our U.S. and Foreign 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 forsupporting secure domain names, or who want to use their own techniques that are covered by our patent portfolio forestablishing secure communication links, could purchase a technology license. We anticipate that these licenses wouldtypically include an initial license fee, as well as an ongoing royalty. We expect that these 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 havedeveloped.•GABRIEL Connection Technology™ Software Development Kit or SDK. OEM customers who want to adopt theGABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain nameswithin their products could purchase an SDK license. The software development kit consists of object libraries, samplecode, testing and quality assurance tools and the supporting documentation necessary for a customer to implement ourtechnology. These tools are comprised of software for a secure domain name connection test server, a relay test server anda registration test server. We expect that customers would pay an up-front license fee to purchase an SDK license and aroyalty fee for every product shipped with the embedded VirnetX code module.•Secure domain name registrar service. Customers, including service providers, telecommunication companies, ISPs,system integrators and OEMs could purchase a license to our secure domain name registrar service. We would provide thesoftware suite and technology support to enable such customers to provision devices with secure domain names andfacilitate secure connections between registered devices. This suite includes the following server software modules:•Registrar server software. We anticipate that our registrar server software would enable customers to operate as a securedomain name registrar that provisions devices with secure domain names. The registrar server software is designed toprovide an interface for our customers to register new virtual private domains and sub-domain names. This server modulemust be enrolled with the VirnetX secure domain name master registry to obtain its credentials before functioning as anauthorized registrar.•Connection server software. We anticipate that our connection server software would allow customers to provideconnection services to enrolled devices. The connection services include registration of presence information forauthenticated users and devices, presence information query request services, enforcement of policies and support forcommunication with peers behind firewalls.•Relay server software. We anticipate that our relay server software would allow customers to dynamically maintainconnections and relay data to private IP addresses for network devices that reside behind firewalls.9TABLE OF CONTENTSSecure domain name registrar service customers will enter into a technology licensing and revenue sharing agreementwith VirnetX whereby we will typically receive an up-front licensing fee for the secure domain name registrartechnology, as well as ongoing annual royalties for each secure domain name issued by the customer.•Secure domain name master registry and connection service. As part of enabling the secure domain name registrarservice, we expect that we will maintain and manage the secure domain name master registry. This service is expected toenroll all secure domain name registrar customers and generate the credentials required to function as an authorizedregistrar. It also is expected to provide connection services and universal name resolution, presence information andsecure connections between authorized devices with secure domain names.•Technical support services. We intend to provide high-quality technical support services to licensees and customers forthe rapid customization and deployment of GABRIEL Connection Technology™ in an individual customer’s productsand services.Our research and development team is the team responsible for inventing the claimed subject matter of the patents that form thefoundation of our technology. This team has worked together for over ten years. We intend to leverage this experience andcontinue investing in research and development and, over time, expect to strengthen and expand our patent portfolio, technology,and software. While we are currently focused on securing real-time communications over the Internet and establishing the first andonly secure domain name registry, we believe our existing and future intellectual property portfolio will extend to additional areasincluding, among others, network security and operating systems for fixed and mobile devices.CustomersOur GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS Xplatforms, at http://www.gabrielsecure.com/. We continue to enhance our products and add new functionality to our products. Wewill provide updates to new and existing customers as they are released publicly. Over 80 small and medium businesses haveinstalled our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporatenetworks. We continue to rapidly expand our customer base with targeted promotions and direct sales initiatives.We have signed Patent License Agreements with Aastra USA, Inc. Avaya, Inc., Microsoft Corporation, Mitel Networks Corporation,NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and SiemensEnterprise Communications Inc. to license certain of our patents, for a one-time payment and an ongoing royalty for all future salesthrough the expiration of the licensed patents with respect to certain current and future IP-encrypted products.We are seeking further licensing of our technology, including our GABRIEL Connection Technology™ to developers and originalequipment 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. We have publishedour royalty rates and guidelines on our website. All forward moving licenses have adhered to these guidelines and have met orexceeded these rates and we will use these rates and guidelines in all future license negotiations.Marketing and SalesWe plan to employ a leveraged, partner-oriented, marketing strategy for our technology licenses and software product offerings. In2017, we successfully signed a number of Resellers & Managed Service Provider in various market segments, including,healthcare, finance, government, etc, to assist us in selling our software products to their customers. Some of our key partnersinclude:•ASCARD MSP (Healthcare)•Above PAR Advisors (Financial)•Max Cybersecurity (Government)In 2019, we plan to continue working on a number of sales and marketing promotions, in the U.S. and Japan, to recruit moreresellers and partners along with direct sales programs as we seek to extend out our customer base internationally.10TABLE OF CONTENTSWe plan to directly market our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products, domainname registry services to our service provider and system integrator customers. We market our Gabriel line of products directly tosmall and medium businesses using online marketing programs and tools. A number of International Association of Certified ISAO(IACI) including, ISAO’s for Maritime & Ports, ISAO Credit Union ISAO, City of Chicago ISAO and Human Trafficking ISAO havechosen to deploy our software as private and secure e-technology to protect their communications. Several other ISAOs arecompleting their evaluations before deploying our products within their networks.We expect to leverage our relationship with Leidos, to extend our offering to departments and agencies within the federalgovernment. 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, and health. We intend to leverage our sales team for managing current accounts and pursuing salesopportunities with new customers.In 2017, we began to pursue opportunities to market our GABRIEL™ Collaboration Suite and other products in Japan. In 2017, weentered into an Amended and Restated Revenue Sharing Agreement (the “Revenue Sharing Agreement”) and an Amended andRestated Gabriel License Agreement (the “Gabriel License Agreement,” together with the Revenue Sharing Agreement, the “PITAAgreements”) with Public Intelligence Technology Associates (“PITA”) as well as a related engagement letter with Wirthlin, aDentons Innovation Group Partnership, to facilitate our marketing efforts in Japan. However, since the execution of theseagreements, these arrangements have not produced any meaningful results. The engagement letter terminated automatically onJuly 28, 2017. On March 16, 2018, we delivered a letter to PITA acknowledging the termination of the PITA Agreements but alsonotifying PITA that, though we consider the PITA Agreements effectively terminated, the letter also constituted a notice oftermination pursuant to the relevant termination provisions of each PITA Agreement. More recently, we have begun to explorealternative strategies to pursue opportunities to work with other third parties in Japan, and elsewhere, using an approach that willseek to capitalize on these opportunities in part by placing more emphasis on the use of our own employees.CompetitionWe believe our technology and solutions will compete primarily against various proprietary security solutions. We group thesesolutions into three main categories:•Proprietary or home-grown application specific security solutions have been developed by vendors and integrateddirectly into their products for our target markets including IP-telephony, mobility, fixed-mobile convergence, andunified communications. These proprietary solutions have been developed due to the lack of standardized approaches tosecuring real-time communications. This approach has led to corporate networks that are isolated and, as a result, restrictenterprises to using these next-generation networks within the boundaries of their private network. These solutionsgenerally do not provide security for communications over the Internet or require network administrators to manuallyexchange keys and other security parameters with each destination network outside their corporate network boundary.The cost-savings and other benefits of IP-based real-time communications are significantly limited by this approach tosecuring real-time communications.•A session border controller, or SBC, is a device used in networks to exert control over the signaling and media streamsinvolved in establishing, conducting and terminating VoIP calls. A traditional firewall or network address translation, orNAT, device typically block information like endpoint IP addresses and port numbers required by signaling protocols,such as SIP and XMPP, to reach and communicate with their intended destination. SBCs are used in physical networks toaddress these limitations and enable real-time session traffic to cross the boundaries created by firewalls and other NATdevices 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 designresults in SBCs becoming a single point of congestion on the network, as well as a single point of failure. SBCs are alsolimited to the physical network they secure.•SIP firewalls, or SIP-aware firewalls, and application layer gateways, manage and protect the traffic, flow and quality ofVoIP and other SIP-related communications. They perform real-time network address translation, dynamic firewallfunctions; support multiple signaling protocols, and media functionality, allowing secure interconnection and the flow ofIP media streams across multiple networks. While SIP11TABLE OF CONTENTSfirewalls assist in analyzing SIP traffic transmitted over the corporate network to filter out various threats, they do notnecessarily encrypt the traffic. As a result, this traffic is not entirely secure from end-to-end nor is it protected againstthreats 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 andtechnological innovation.We currently own approximately 185 total patents and pending applications, including 70 U.S. patents/patent applications and115 foreign patents/validations/pending applications. Our portfolio includes a number of patents that describe unique systems andmethods for securing real-time communications over the Internet, as well as related services such as the establishment andmaintenance of a secure domain name registry. Our software and technology solutions also may have additional applicationsrelating to operating systems and network security. A complete list of our U.S. patents is available on our website located atwww.virnetx.com. Each patent is publicly accessible on the Internet website of the U.S. Patent and Trademark Office atwww.uspto.gov. The term of each of our issued U.S. and foreign patents will expire during the period from 2019 to 2024.Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the SecuritiesExchange Act of 1934 that might incorporate future filings, the information set forth on the United States Patent and TrademarkOffice, or the USPTO Website, shall not be deemed to be a part of or incorporated by reference into any such filings. TheCompany does not warrant the accuracy, or completeness or adequacy of the USPTO Website, and expressly disclaims liability forerrors 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 an Assignment Agreement dated December 21, 2006, and a Patent License and Assignment Agreementdated 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 from Leidos, 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 the patents and patent applications, as specifically set forth on Exhibit A to the assignmentdocument recorded with the U.S. Patent Office, including, without limitation, the right to sue for past infringement.•License to Leidos, Outside the Field of Use. Effective March 12, 2008, we granted to Leidos, a non-exclusive, royaltyfree, 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 sell products and services covered by, and to makeimprovements 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 to make payments to Leidos, based on cash or certain other values generated from thosepatents. The amount of such payments depends upon the type of value generated, and certain categories are subject tomaximums 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 acquisitionsof VirnetX and the settlement of certain patent infringement claims of ours.Government RegulationThe laws governing online secure communications remain largely unsettled, even in areas where there has been legislative action.It may take years to determine whether and how existing laws governing intellectual property, privacy, data protection and libelapply to online communications and media. Such legislation may interfere with the growth in use of online secure communicationsand decrease the acceptance of online secure communications as a viable solution, which could adversely affect our business.12TABLE OF CONTENTSDue to the Internet’s popularity and increasing use, new laws regulating secure communications may be adopted. These laws andregulations may cover, among other things, issues relating to privacy, data protection, pricing, taxation, telecommunications overthe Internet, content, copyrights, distribution and quality of products and services. We intend to comply with all new laws andregulations 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, the President of the United States directed the U.S. Secretary of Commerce to privatize the management of thedomain name system in a manner that increases competition 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 agreementwith the Internet Corporation for Assigned Names and Numbers, or ICANN, a California non-profit corporation headquartered inMarina Del Rey, California. ICANN is responsible for managing the accreditation of registry providers and registrars that managethe assignment of top-level domain names associated with the authoritative DNS root directory. Although it is possible to createand manage other DNS root directories privately without accreditation from ICANN, the possibility of conflicting name andnumber assignments makes it less likely that users would widely adopt a top-level domain name associated with an alternativeDNS root directory provided by a non-ICANN-accredited registry service.EmployeesAs of December 31, 2018, we had 21 full and part-time employees.Corporate Overview and HistoryWe are a holding company and conduct our operations through our wholly-owned subsidiary, VirnetX, Inc. VirnetX, Inc., wasincorporated in the State of Delaware in August 2005. In November 2006, VirnetX, Inc. acquired certain patents from SAIC, nowLeidos. In July 2007, we effected a merger by and among VirnetX, Inc., VirnetX Holding Corporation and a wholly-ownedsubsidiary of VirnetX Holding Corporation, whereby VirnetX, Inc. merged with, and became, a wholly-owned subsidiary ofVirnetX Holding Corporation and VirnetX Holding Corporation issued shares of its common stock to the stockholders of VirnetX,Inc. as consideration for the merger. As a result of this merger, the former security holders of VirnetX, Inc. came to own a majority ofour outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetX Holding Corporation.Available InformationWe file or furnish various reports, such as registration statements, periodic and current reports, proxy statements and other materialswith the SEC. Our Internet website address is www.virnetx.com. You may obtain, free of charge on our Internet website, copies ofour annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronicallyfile such material with, or furnish it to, the SEC. The information we post is intended for reference purposes only; none of theinformation 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’sPublic Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy andother information statements, and other information regarding issuers, including us, that file electronically with the SEC. TheInternet address of the SEC’s Internet site is http://www.sec.govItem 1A.Risk FactorsOur operations and financial results are subject to various risks and uncertainties, including those described below, which couldadversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capitalstock. You should carefully consider the risks and uncertainties described below in addition to the other information set forth inthis Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our condensed consolidated financial statements and related notes, before making any investment inour common stock. The risks13TABLE OF CONTENTSand uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us orthat we currently believe to be immaterial may also adversely affect our business. If any of these risk factors occur, you could losesubstantial value or your entire investment in our shares.Risks Related to Our Business and Our Financial Reporting:We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming andcostly, and we cannot anticipate the results.We spend a significant amount of our financial and management resources to pursue our current litigations. We believe that theselitigations and others that we may pursue in the future could continue for years and consume significant financial and managementresources. The counterparties to our litigation include large, well-financed companies with substantially greater resources than us.Patent litigation is risky, and the outcome is uncertain, and we cannot assure you that any of our current or future litigation matterswill result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts, they may beinconsistent with 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. Unfavorable or adverse outcomes may result in losses,exhaustion of financial resources or other adverse effects, which could encumber our ability to develop and commercialize ourproducts.We may need to raise additional capital to support our business growth, and this capital will be dilutive, may cause our stockprice to drop or may not be available on acceptable terms, if at all.We may need to raise additional capital, which may not be available to us when needed or may not be available on termsacceptable to us, to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances,including sales under our ATM or our universal shelf registration statement. Our ability to obtain additional capital, if and whenrequired, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, theterms of our current contractual obligations and other factors. If we raise additional funds through the issuance of equity, equity-linked or debt securities, including those under our ATM or our universal shelf registration statement, those securities may haverights, preferences, or privileges senior to the rights of our common stock, and our existing stockholders may experience dilution.Additionally, we are unable to predict the future success of our ATM offering or any other offering. Sales of a substantial number ofshares of our common stock in the public market, or the perception that these sales or other financings might occur, could depressthe market price of our common stock and could also impair our ability to raise capital through the sale of additional equitysecurities. If we issue debt securities or incur indebtedness, we could experience increased future payment obligations and a needto comply with restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability toacquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability toconduct our business. If we are unable to obtain additional capital or are unable to obtain additional capital on satisfactory terms,our ability to continue to support our business growth or to respond to business opportunities, challenges, or other circumstancescould be adversely affected, and our business may be harmed.We have terminated our revenue sharing and licensing arrangement with PITA and we cannot be sure any of our potentialalternative strategies in Japan, or elsewhere, will be successful.As previously disclosed in our public filings, the PITA Agreements terminated in March 2018. PITA may dispute the effectivenessof that termination and litigation, which may be expensive and distracting to management, may ensue. Although we intend topursue alternative strategies in our expansion efforts in Japan and other countries, including potential partnerships, joint venturesand other arrangements with third parties, we cannot be sure these efforts will be successful or be favorable to us.14TABLE OF CONTENTSWe 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 basethan we could reach through direct sales and marketing efforts; as such, our business strategy and revenues will depend onintellectual property licensing fees and royalties for the majority of our revenues. We currently derive minimal revenue fromlicensing activities and we cannot assure you that we will successfully capitalize on our market opportunities or that our currentbusiness strategy will succeed. Factors that may affect our ability to execute our current business strategy include, but are notlimited to, the following:•Although to date we have entered into a limited number of settlement and license agreements, we may not be successfulin entering into further licensing relationships, or if we are successful in entering into such relationships, the acquisitionof them may be expensive, and they, as well as our existing settlement and our existing and pending license agreementsmay not generate the financial results we expect;•Third parties challenge to the validity of our patents;•The pendency of our various litigations may cause potential licensees not to do business with us;•Intense competition from new and established competitors who may have superior products and services or bettermarketing, financial or other capacities than we do; and•The possibility that one or more of our potential customers or licensees develops or otherwise sources products ortechnologies similar to, competitive with or superior to ours.If we are not able to adequately protect our patent rights, our business would be negatively impacted.We believe our patents are valid, enforceable and valuable. Notwithstanding this belief, third parties may make claims ofinfringement or invalidity claims with respect to our patents and such claims could give rise to material cost for defense orsettlement or both, jeopardize or substantially delay a successful outcome of litigation we are or may become involved in, divertresources away from our other activities, limit or cease our revenues related to such patents, or otherwise materially and adverselyaffect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Additionally, severalof our patents are currently, and other patents may in the future be, subject to United States Patent and Trademark Office(“USPTO”) post-grant inter partes review proceedings (“IPR”) which may result in all or part of these patents being invalidated, orthe claims of our patents being limited. Unfavorable or adverse outcomes in our litigation or IPRs may result in losses, exhaustionof financial resources, reduction in our ability to enforce our intellectual property rights, or other adverse effects, which couldencumber our ability to develop and commercialize our products. Even if we are successful in enforcing our intellectual propertyrights, our patents may not ultimately provide us with any competitive advantages and may be less valuable than we currentlyexpect. These risks may be heightened in countries other than the United States where laws regarding patent protection are lessdeveloped and may be negatively affected by the fact that legal standards in the United States and elsewhere for protection ofintellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significantnumber of United States and foreign patents and patent applications in our areas of interest, and we expect that significantlitigation in these areas will continue and will add uncertainty to the value of certain patents and other intellectual property rightsin our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value from them, our businesswould be negatively affected.We can provide no assurances that the licensing of our essential security patents under FRAND will be successful.At the request of the European Telecommunications Standards Institute (“ETSI”), and the Alliance for TelecommunicationsIndustry Solutions (“ATIS”), we agreed to update our licensing declaration to ETSI and ATIS under their respective IntellectualProperty Rights policies. This was in response to our Statement of Patent Holder identifying a group of our patents and patentapplications that we believe are or may become essential to certain developing specifications in the 3rd Generation PartnershipProject (“3GPP”) Long Term Evolution (“LTE”), Systems Architecture Evolution (“SAE”) project. We will make available a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatory terms and conditions, with compensation) for thepatents identified by us that are or become essential, to applicants desiring to implement the Technical Specifications identified byus, as set forth in the updated licensing declaration under the ATIS and ETSI Intellectual Property Rights policies. Our licensingdeclarations under the ATIS and ETSI Intellectual Property Rights policies may limit our flexibility in15TABLE OF CONTENTSdetermining royalties and license terms for certain of our patents. Consequently, we cannot assure you that the licensing of theessential security patents will be successful or that third parties will be willing to enter into licenses with us on reasonable terms orat all, which could have an adverse effect on our business and harm our competitive position.Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may besubject to various developments in regulation, law and consumer preferences to which we may not be able to adapt successfully.The current regulatory environment for our products and services remains unclear. We can give no assurance that our plannedproduct offerings will be in compliance with laws and regulations of local, state, United States federal or foreign authorities.Further, we can give no assurance that we will not unintentionally violate such laws or regulations or that such laws or regulationswill not be modified, or that new laws or regulations will be enacted in the future which would cause us to be in violation of suchlaws or regulations. For example, Voice-Over-Internet Protocol (“VoIP”) services are not currently subject to all the sameregulations 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 to us which could adversely affect the marketability of our products and plannedproducts related to VoIP. For further example, the use of the Internet and private Internet Protocol (“IP”) networks forcommunication is largely unregulated within the United States, but may become regulated in the future; Additionally, severalforeign governments have enacted measures that could restrict or prohibit voice communications services over the Internet orprivate IP networks.Our business depends on the growth of instant messaging, VoIP, mobile services, streaming video, file transfer and remote desktopand other next-generation Internet-based applications. A decline in the use of these applications due to complexity or cost of theseapplications relative to alternate traditional or newly developed communications channels, or development of alternativetechnologies, could cause a material decline in the number of users in these areas.More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and servicesspecifically may materially and adversely affect our business, financial condition, operating results and future prospects.Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the United StatesPatent and Trademark Office, could adversely affect our licensing and enforcement activities and results of operations.Our licensing and enforcement activities are subject to numerous risks from outside influences, including the following:•New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase ouroperating costs and decrease our revenue. For instance, the United States Supreme Court has recently modified some testsused by the USPTO in granting patents during the past 20 years which may decrease the likelihood that we will be able toobtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, the United Statesrecently enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act,including changes that transition the United States from a “first-to-invent” system to a “first to file” system and alter theprocesses 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; and•As patent enforcement becomes more prevalent, it may become more difficult for us to voluntarily license our patents.New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.Intellectual property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around theworld. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings thatimpact the patent enforcement process, or the rights of patent holders and such16TABLE OF CONTENTSchanges could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patentenforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents,increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert ourpatent or other intellectual property rights.It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whetherany of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult andexpensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial conditionand results of operations.If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.We expect to retain certain confidential and proprietary customer information in our secure data centers and secure domain nameregistry, as well as personal data and other confidential and proprietary information relating to our business. It will be critical to ourbusiness strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our securedomain name registry operations will also depend on our ability to maintain our computer and telecommunications equipment ineffective working order and to reasonably protect our systems against interruption, and potentially depend on protection by otherregistrars in the shared registration system. The secure domain name servers that we will operate will be critical hardware to ourregistry services operations. Therefore, we expect to have to expend significant time and money to maintain or increase the securityof our products, facilities and infrastructure. Security technologies are constantly being tested by computer professionals,academics and “hackers.” Advances in computer capabilities and the techniques for attacking security solutions, new discoveriesin the field of cryptography or other events or developments could result in compromises or breaches of our security measures andcould make some or all our products obsolete or unmarketable. Likewise, if any of our products are found to have significantsecurity vulnerabilities, then we may need to dedicate engineering and other resources to eliminate the vulnerabilities and to repairor replace products already sold or licensed to our customers. Despite the security measures that we and our service providersutilize, our infrastructure and that of our service providers may be vulnerable to physical break-ins, computer viruses, attacks byhackers, phishing attacks, social engineering, or similar disruptive problems. It is possible that we may have to expend substantialfinancial and other resources to address such problems. As a provider of Internet security software and technology, we may be thetarget of dedicated efforts by hackers and other third parties to overcome or defeat our security measures. Any physical orelectronic break-in or other security breach or compromise of the information stored at our secure data centers and domain nameregistration systems, including any compromise due to human error or employee or contractor malfeasance, may jeopardize thesecurity of information stored on our premises or in the computer systems and networks of our customers. In such an event, wecould face significant liability and current or potential customers could be reluctant to use our services. Additionally, any suchdata security incident, or the perception that one has occurred could also result in adverse publicity, harm to our reputation andcompetitive position, and adversely affect the market’s perception of the security of electronic commerce and communicationsover IP networks as well as the security or reliability of our services.A security breach or other security incident could require a substantial level of financial resources to rectify and otherwise respondto and could result in claims, investigations, and inquiries by private parties or governmental entities that may divertmanagement’s attention and require the expenditure of significant time and resources, and which may cause us to incur substantialfines, penalties, or other liability and related legal and other costs. Any actual or perceived security breach or other securityincident may also harm our reputation and make it more difficult or impossible for us to successfully market to others. Any of theforegoing matters could harm our operating results and financial condition.Privacy and data security concerns, and data collection and transfer restrictions and related domestic or foreign regulations maylimit the use and adoption of our solutions and adversely affect our business.Personal privacy, information security, and data protection are significant issues in the United States, Europe and many otherjurisdictions where we have operations or offer our products. The regulatory framework governing the collection, processing,storage and use of confidential and proprietary business information and personal data is rapidly evolving. The United States.federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution,use, security and storage of personally identifiable information and other data relating to individuals, and federal and stateconsumer protection laws are being applied to enforce regulations related to the online collection, use and dissemination of data.17TABLE OF CONTENTSFurther, many foreign countries and governmental bodies, including the European Union (“EU”), where we conduct business, havelaws and regulations concerning the collection and use of personal data obtained from their residents or by businesses operatingwithin their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Laws and regulationsin these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used toidentify or locate an individual, such as names, email addresses and, in some jurisdictions, IP addresses.We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, dataprotection and information security in the United States, the EU, and other jurisdictions. For example, the European Commissionadopted a General Data Protection Regulation (the “GDPR”) that became fully effective on May 25, 2018, superseding prior EUdata protection legislation, imposing more stringent EU data protection requirements, and providing for greater penalties fornoncompliance. We may be required to incur substantial expense in order to make significant changes to our product and businessoperations in connection with compliance with the GDPR, all of which may adversely affect our revenue, results of operations, andfinancial condition. Further, following a referendum in June 2016 in which voters in the United Kingdom approved an exit fromthe EU, the United Kingdom government has initiated a process to leave the EU (“Brexit”). The United Kingdom, enacted a DataProtection Act that substantially implements the GDPR, but Brexit has created uncertainty with regard to the regulation of dataprotection in the United Kingdom. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated.Additionally, California enacted legislation in June 2018, the California Consumer Privacy Act (the “CCPA”) that will, amongother things, require covered companies to provide new disclosures to California consumers, and afford such consumers newabilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020. The CCPA was amended inSeptember 2018, and it is possible that it will be amended again before it goes into effect. It remains unclear what, if any,modifications will be made to the CCPA or how it will be interpreted. The CCPA may require us to modify our data processingpractices and policies and to incur substantial costs and expenses in an effort to comply. We cannot yet fully determine the impactthese or future laws, regulations and standards may have on our business or operations. Privacy, data protection and informationsecurity laws and regulations are often subject to differing interpretations, may be inconsistent among jurisdictions, and may bealleged to be inconsistent with our current or future practices. Additionally, we may be bound by contractual requirementsapplicable to our collection, use, processing, and disclosure of various types of data, including personal data, and may be boundby, or voluntarily comply with, self-regulatory or other industry standards relating to these matters. These and other requirementscould reduce demand for our products, increase our costs, impair our ability to grow our business, or restrict our ability to store andprocess data or, in some cases, impact our ability to offer our service in some locations and may subject us to liability. Any failureor perceived failure to comply with applicable laws, regulations, industry standards, and contractual obligations may adverselyaffect our business and may lead to claims and investigations by private parties and governmental entities, the expenditure of legaland other costs, and of substantial time and resources, as well as significant fines, penalties or liabilities. Further, in view of new ormodified federal, state or foreign laws and regulations, industry standards, contractual obligations and other legal obligations, orany changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities andpractices or to expend significant resources to modify our product and otherwise adapt to these changes. We may be unable tomake such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products andfeatures could be limited.The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of ourservice and reduce overall demand for it. Privacy, information security, and data protection concerns, whether valid or not valid,may inhibit market adoption of our platform, particularly in certain industries and foreign countries.We expect that we will experience long and unpredictable sales cycles, which may impact our operating results.The sales cycle between initial customer contact and execution of a contract or license agreement with a customer or purchaser ofour products can vary widely. We expect that our sales cycles will be long and unpredictable due to several factors, including butnot limited to:•The need to educate potential customers about our patent rights and our product and service capabilities;•Our customers’ willingness to invest potentially substantial resources and modify their network infrastructures to takeadvantage of our products;•Our customers’ budgetary constraints;18TABLE OF CONTENTS•The timing of our customers’ budget cycles;•Delays caused by customers’ internal review processes; and•Long sales cycles that may increase the risk that our financial resources are exhausted before we are able to generatesignificant revenue.In addition, potential customers of our products include local, state, federal and foreign government authorities. Sales togovernment authorities can be extended and unpredictable. Government authorities generally have complex budgeting,purchasing, and regulatory processes that govern their capital spending, and their spending is likely to be adversely impacted byeconomic conditions. In addition, in many instances, sales to government authorities may require field trials and may be delayedby the time it takes for government officials to evaluate multiple competing bids, negotiate terms, and award contracts.For these reasons the sales cycle associated with our products is subject to a number of significant risks that are beyond our control.Consequently, if our forecasted customer orders are not realized or delayed, our revenues and results of operations could bematerially and adversely affected.If we are unable to expand our revenue sources or establish, sustain, grow or replace relationships with a diversified customerbase, our revenues may be limited.We currently generate revenue from a limited number of customers that have entered into Settlement and License Agreements withus. Although our GABRIEL Collaboration Suite™ is currently generating limited revenue, it will take time for us to grow ourinstalled user base and generate new customers. Additionally, there is no guarantee that we will be able to derive revenue from newcustomers, sustain or increase revenue from existing customers or replace customers from whom we currently generate revenue. As aresult, our revenue may be limited or static.We have limited technical resources and are at an early stage in commercialization of our GABRIEL Collaboration Suite™.Part of our business includes the internal development of commercial products we seek to monetize. This aspect of our businessmay require significant capital, time and resources and we cannot guarantee that it will be successful or meet our expectations. Wecurrently have only one commercial product, the GABRIEL Collaboration Suite™. As such, we have a small technical team, whichmay limit our ability to rapidly adapt our product to customer requirements or add new product features to maintain ourcompetitive edge and drive adoption. Based on the scale of our technical resources, our limited historical financial data uponwhich to base our projected revenue or planned operating expenses related to our GABRIEL Collaboration Suite™, we may not beable to effectively:•Generate revenues or profit from product sales;•Drive adoption of our products;•Attract and retain customers for our products;•Provide appropriate levels of customer training and support for our products;•Implement an effective marketing strategy to promote awareness of our products;•Focus our research and development efforts in areas that generate returns on our efforts;•Anticipate and adapt to changes in our market; or•Protect our products from any system failures or other breaches.In addition, a high percentage of our expenses are and will continue to be fixed. Accordingly, if we do not generate revenue as andwhen anticipated, our losses may be greater than expected and our operating results will suffer.Our products are highly technical and may contain undetected errors, which could cause harm to our reputation and adverselyaffect our business.Our products are highly technical and complex and, when deployed, may contain errors or defects. Despite testing, some errors inour products may only be discovered after a product has been installed and used by customers. Any errors or defects discovered inour products after commercial release could result in failure to achieve market acceptance, loss of revenue or delay in revenuerecognition, loss of customers and increased service and warranty19TABLE OF CONTENTScost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claimsfor product liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners.The performance of our products could have unforeseen or unknown adverse effects on the networks over which they are deliveredas well as on third-party applications and services that utilize our services, which could result in legal claims against us, harmingour business. Furthermore, we expect to provide implementation, consulting and other technical services in connection with theimplementation and ongoing maintenance of our products, which typically involves working with sophisticated software,computing and communications systems. We expect that our contracts with customers will contain provisions relating to warrantydisclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divertmanagement’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liabilityinsurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operatingresults and financial condition could be adversely impacted.Malfunctions of third-party communications infrastructure, hardware and software expose us to a variety of risks that we cannotcontrol.Our business will depend upon, among other things, the capacity, reliability, security and unimpeded access of the infrastructureowned by third parties that we will use to deploy our offerings. We have no control over the operation, quality or maintenance of asignificant portion of that infrastructure or whether or not those third parties will upgrade or improve their equipment. We dependon these companies to maintain the operational integrity of our connections. If one or more of these companies is unable orunwilling to supply or expand its levels of service to us in the future, our operations could be severely interrupted. Also, to theextent that the number of users of networks utilizing our current or future products suddenly increases, the technology platform andsecure hosting services which will be required to accommodate a higher volume of traffic may result in slower response times orservice interruptions. System interruptions or increases in response time could result in a loss of potential or existing users and, ifsustained 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 and customers.System failure or interruption or our failure to meet increasing demands on our systems could harm our business.The success of our license and service offerings will depend on the uninterrupted operation of various systems, secure data centersand other computer and communication networks that we establish. To the extent, the number of users of networks utilizing ourfuture products suddenly increases, the technology platform and hosting services which will be required to accommodate a highervolume of traffic may result in slower response times, service interruptions or delays or system failures. Our systems and operationswill also be vulnerable to damage or interruption from, among other things:•Power loss, transmission cable cuts and other telecommunications failures;•Damage or interruption caused by fire, earthquake, and other natural disasters;•Computer viruses or software defects; and•Physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond ourcontrol.System interruptions or failures and increases or delays in response time could result in a loss of potential or existing users and, ifsustained or repeated, could reduce the appeal of the networks to users. These types of occurrences could cause users to perceivethat our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategicpartners and customers.Any significant problem with our systems or operations could result in lost revenue, customer dissatisfaction or lawsuits against us.A failure in the operation of our secure domain name registration system could result in the inability of one or more registrars toregister and maintain secure domain names for a period of time. A failure in the operation or update of the master directory that weplan to maintain could result in deletion or discontinuation of assigned secure domain names for a period of time. The inability ofthe registrar systems we establish, including our back-office billing and collections infrastructure, and telecommunications systemsto meet the demands of an increasing number of secure domain name requests could result in substantial degradation in ourcustomer support service and our ability to process registration requests in a timely manner.20TABLE OF CONTENTSOur ability to sell our solutions will be dependent on the quality of our technical support, and our failure to deliver high-qualitytechnical support services could have a material adverse effect on our sales and results of operations.If we do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues and provide effective ongoing support, or if potential customers perceive that we may not be able achieve to theforegoing, our ability to sell our products would be adversely affected, and our reputation with current and potential customerscould be harmed. In addition, as we expand our operations internationally, our technical support team will face additionalchallenges, including those associated with delivering support, training and documentation in languages other than English. Ourfailure to deliver and maintain high-quality technical support services to our customers could result in customers choosing to useour competitors’ products and support services instead of ours in the future.Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase thecost of online communication, and such increase in cost may impede the growth of online communication and adversely affectour business.Use of the Internet has over-burdened existing telecommunications infrastructures, and many high traffic areas have begun toexperience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforceregulatory tariffs on IP telephony traffic that crosses over their traditional telephone networks. If the relief sought in these petitionsis granted, the costs of communicating via online could increase substantially, potentially adversely affecting the growth in the useof online secure communications. Any of these developments could have an adverse effect on our business.The departure of Kendall Larsen, our Chief Executive Officer and President, and/or other key personnel could compromise ourability to execute our strategic plan and may result in additional severance costs to us.Our success largely depends on the skills, experience and performance of our key personnel. Due to the specialized nature of ourbusiness and limited staff, we are particularly dependent on Kendall Larsen, our Chief Executive Officer and President. We have noemployment agreements with any of our key executives that prevent them from leaving us at any time. In addition, we do notmaintain key person life insurance for any of our officers or key employees. The loss of Mr. Larsen, or our failure to retain other keypersonnel or failure to adequately plan for the succession of key personnel, would jeopardize our ability to execute our strategicplan and materially harm our business.We will need to recruit and retain additional qualified personnel to successfully grow our business.Our future success will depend, in part, on our ability to attract and retain qualified engineering, operations, marketing, sales andexecutive personnel. Inability to attract and retain such personnel could adversely affect our business. Competition forengineering, operations, marketing, sales and executive personnel is intense, particularly in the technology and Internet sectorsand in the regions where we conduct our business. We may need to invest significant amounts of cash and equity to attract andretain employees and expend significant time and resources to identify, recruit, train and integrate such employees, and we maynever realize returns on these investments. Additionally, we can provide no assurance that we will attract or retain such personnel.Our international expansion will subject us to additional costs and risks, and our plans may not be successful.We expect to expand our presence internationally through, for example, international partnerships with third parties and thepossibility of establishing international subsidiaries and offices. Our international expansion may present challenges and risks,including those inherent in international operations, to us and may require significant attention from management. We may not besuccessful in our international partnerships, expansion efforts, and we may incur significant operating expenses.We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and ourmanagement will be required to continue to devote substantial time to various compliance initiatives.The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rulesimplemented by the SEC and the New York Stock Exchange (“NYSE”), impose various requirements on public companies,including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulationsunder consideration may further increase our compliance costs. If compliance with21TABLE OF CONTENTSthese various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have amaterial adverse effect on our business, financial condition and operating results. The Sarbanes-Oxley Act requires, among otherthings, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls andprocedures quarterly. If we are unable to assert in any future reporting periods that our internal control over financial reporting iseffective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of ourinternal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would havean adverse effect on our share price.Although we believe that we currently maintain effective control over our disclosures and procedures and internal control overfinancial reporting, we may in the future identify deficiencies regarding the design and effectiveness of our system of internalcontrol over financial reporting. If we experience any material weaknesses in our internal control over financial reporting the futureor are unable to provide unqualified management or attestation reports about our internal controls, we may be unable to meetfinancial and other reporting deadlines and may incur costs associated with remediation, and any of which could cause our shareprice to decline. Moreover, if we identify deficiencies in our internal control over financial reporting that are deemed to be materialweaknesses in future periods, the market price of our ordinary shares could decline, and we could be subject to potential delistingby the NYSE and review by the NYSE, the SEC, or other regulatory authorities, which would require the expenditure by us ofadditional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting,which would harm our business and the market price of our ordinary shares.There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financialstatements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverseeffect on our business, financial condition and operating results.The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S.GAAP”) involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangibleassets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherentlysubject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities,revenues, expenses and income. Any such changes could have a material adverse effect on our business, financial condition andoperating results.Our results of operations and financial condition could be materially affected by the enactment of legislation implementingchanges in the U.S. or foreign taxation of international business activities or the adoption of other tax reform policies.On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”) was enacted, which containssignificant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a transition to a newterritorial system of taxation. The impact of the Act will likely be subject to ongoing technical guidance and accountinginterpretation, which we will continue to monitor and assess. Provisional accounting impacts may change in future reportingperiods until the accounting analysis is finalized, which will occur no later than one year from the date the Act was enacted. As weexpand the scale of our international business activities, any changes in the U.S. or foreign taxation of such activities may increaseour worldwide effective tax rate and harm our business, results of operations, and financial condition.Risks Related to Our Common Stock:Trading in our common stock is limited and the price of our common shares may be subject to substantial volatility.Our common stock is listed on the NYSE American LLC (formerly the NYSE MKT LLC). Over the past years, the market price ofour common stock has experienced significant fluctuations. Between January 1, 2018, and December 31, 2018, the reported lastadjusted closing price on NYSE American LLC for our common stock ranged between $2.20 and $4.65 per share. The price of ourcommon stock may continue to be volatile as a result of several factors, some of which are beyond our control. These factorsinclude, but not limited to, the following:•Developments or lack thereof in any then-outstanding litigation;•Quarterly variations in our operating results;•Large purchases or sales of common stock or derivative transactions related to our stock;22TABLE OF CONTENTS•Actual or anticipated announcements of new products or services by us or competitors;•General conditions in the markets in which we compete; and•General social, political, economic and financial conditions, including the significant volatility in the global financialmarkets.In addition, we believe there has been and may continue to be substantial trading in derivatives of our stock, including shortselling activity or related similar activities, which are beyond our control and which may be beyond the full control of the SEC andFinancial Institutions Regulatory Authority or “FINRA”. While the SEC and FINRA rules prohibit some forms of short selling andother activities that may result in stock price manipulation, such activity may nonetheless occur without detection or enforcement.We have held conversations with regulators concerning trading activity in our stock; however, there can be no assurance thatshould there be any illegal manipulation in the trading of our stock, it will be detected, prosecuted or successfully eradicated.Significant short selling or other types of market manipulation could cause our stock trading price to decline, to become morevolatile, or both.The market price of our common stock has been and may continue to be volatile, and you could lose all or part of yourinvestment.The trading price of our common stock has been volatile since our initial public offering and is likely to continue to be volatile.Factors that could cause fluctuations in the market price of our common stock include, but are not limited to the following:•Price and volume fluctuations in the overall stock market from time to time;•Volatility in the market prices and trading volumes of companies in our industry or companies that investors considercomparable;•Changes in operating performance and stock market valuations of other companies generally, or those in our industry;•Sales of shares of our common stock by us or our stockholders;•Failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who followus, or our failure to meet these estimates or the expectations of investors;•The financial projections we may provide to the public, any changes in those projections or our failure to meet thoseprojections;•Announcements by us or our competitors of new products or services;•The public’s reaction to our press releases, other public announcements and filings with the SEC;•Rumors and market speculation involving us or other companies in our industry;•Actual or anticipated changes in our results of operations;•Actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;•Litigation involving us, our industry or both, or investigations by regulators into our operations or those of ourcompetitors;•Announced or completed acquisitions of businesses or technologies by us or our competitors;•New laws or regulations or new interpretations of existing laws or regulations applicable to our business;•Changes in accounting standards, policies, guidelines, interpretations or principles;•Any significant change in our management; and•General economic conditions and slow or negative growth of our markets.Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continueto affect the market prices of equity securities of many companies. These fluctuations often have been unrelated ordisproportionate to the operating performance of those companies. In addition, the stock prices of many technology companieshave experienced wide fluctuations that have often been unrelated to the operating23TABLE OF CONTENTSperformance of those companies. These broad market and industry fluctuations, as well as general economic, political and marketconditions such as recessions, government shutdowns, interest rate changes the stability of the EU and the exit of the UnitedKingdom or international currency fluctuations, may cause the market price of our common stock to decline. In the past, followingperiods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigationhas often been instituted against these companies.We do not currently pay dividends on our common stock and thus stockholders must look to appreciation of our common stockto realize a gain on their investments.Our dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including ourbusiness, financial condition, results of operations, capital requirements, and investment opportunities. We therefore cannot makeassurances that our Board of Directors will determine to pay regular or special dividends in the future. Accordingly, unless ourBoard of Directors determines to pay dividends, stockholders will be required to look to appreciation of our common stock torealize a gain on their investment. This appreciation may not occur.The exercise of our outstanding stock options, RSUs and issuance of new shares would result in a dilution of our currentstockholders’ voting power and an increase in the number of shares eligible for future resale in the public market which maynegatively 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 ofDecember 31, 2018, we had outstanding options to purchase an aggregate of 5,998,837 shares of common stock representingapproximately 9% of our total shares outstanding of which 3,855,119 were vested and therefore exercisable. To the extentoutstanding stock options are exercised, additional shares of common stock will be issued, existing stockholders’ percentagevoting interests will decline and the number of shares eligible for resale in the public market will increase. Such increase may havea negative effect on the value or market trading price of our common stock.The market price of our common stock may decline because our operating results may not be consistent and may be difficult topredict.Our reported net income has fluctuated in the past due to several factors. We expect that our future operating results may alsofluctuate due to the same or similar factors. We had a net loss of $28.6 million for the year ended December 31, 2016, a net loss of$17.3 million for the year ended December 31, 2017, and a net loss of $25 million for the year ended December 31, 2018, with anaccumulated deficit of $198 million. The following include some of the factors that may cause our operating results to fluctuate:•The outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in thefuture, and the timing thereof;•The amount and timing of receipt of license fees from potential infringers, licensees or customers;•The rate of adoption of our patented technologies;•The number of new license arrangements we may execute, or that may expire, within a particular period and the scope ofthose licenses, including the number of our patents which are licensed, the extent of prior infringement of our patentrights, royalty rates, timing of payment obligations, expiration date etc.;•The success of a licensee in selling products that use our patented technologies; and•The amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation,related to our intellectual property rights.These fluctuations may make our business particularly difficult to manage, adversely affect our business and operating results,make our operating results difficult for investors to predict and, further, cause our results to fall below investor’s expectations andadversely affect the market price of our common stock.Because ownership of our common stock is concentrated, investors may have limited influence on stockholder decisions.As of September 30, 2018, our executive officers and directors beneficially owned approximately 14.7% of our outstandingcommon stock. In addition, a group of stockholders that, as of December 31, 2007, held 4,766,666 shares, or approximately 7% ofour outstanding common stock, have entered into a voting agreement with us that requires24TABLE OF CONTENTSthem to vote all of their shares of our voting stock in favor of the director nominees approved by our Board of Directors at eachdirector election going forward, and in a manner that is proportional to the votes cast by all other voting shares as to any othermatters submitted to the stockholders for a vote. However, we cannot be certain how many shares of our common stock this groupof stockholders currently owns. Because of their beneficial ownership interest, our officers and directors could significantlyinfluence stockholder actions of which you disapprove or that are contrary to your interests. This ability to exercise significantinfluence could prevent or significantly delay another company from acquiring or merging with us.Our protective provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for a thirdparty to successfully acquire us even if you would like to sell your stock to them.We have a number of protective provisions in our amended and restated certificate of incorporation and bylaws that could delay,discourage or prevent a third party from acquiring control of us without the approval of our Board of Directors. These protectiveprovisions include:•A staggered Board of Directors. This means that only one or two directors (since we have a five-person Board ofDirectors) will be up for election at any given annual meeting. This has the effect of delaying the ability of stockholdersto affect a change in control of us because it would take two annual meetings to effectively replace a majority of theBoard of Directors.•Blank check preferred stock. Our Board of Directors has the authority to establish the rights, preferences and privilegesof our 10,000,000 authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at the discretionof our Board of Directors with preferences over your shares of our common stock in a manner that is materially dilutive toyou. In addition, blank check preferred stock can be used to create a “poison pill” which is designed to deter a hostilebidder from buying a controlling interest in our stock without the approval of our Board of Directors. We have notadopted 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 to submit director nominations or raise matters to a vote of the stockholders must provide notice tous within very specific date windows and in very specific form in order to have the matter voted on at a stockholdermeeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposalsgenerally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting tothe extent such proposal is not raised properly.•No stockholder actions by written consent. No stockholder or group of stockholders may take actions rapidly andwithout prior notice to our Board of Directors and management or to the minority stockholders. Along with the advancenotice requirements described above, this provision also gives our Board of Directors and management more time to reactto proposed stockholder actions.•Super majority requirement for stockholder amendments to the By-laws. Stockholder proposals to alter or amend ourBy-laws or to adopt new By-laws can only be approved by the affirmative vote of at least 66 2/3% of the outstandingshares of our common stock.•No ability of stockholders to call a special meeting of the stockholders. Only the Board of Directors or management cancall special meetings of the stockholders. This could mean that stockholders, even those who represent a significantpercentage of our shares of common stock, may need to wait for the annual meeting before nominating directors or raisingother business proposals to be voted on by the stockholders.In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit largestockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for acertain period of time.These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law coulddiscourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock inthe future and result in the market price being lower than it would be without these provisionsItem 1B.Unresolved Staff Comments.None.25TABLE OF CONTENTSItem 2.PropertiesOur principal executive offices are located at 308 Dorla Court, Suite 206, Zephyr Cove, Nevada, 89448. We lease this property,which comprises approximately 2,090 square feet of office space, from a third party for a term that ends in October 2019. We haveno other properties and believe that our office facility is suitable and appropriately supports our current business needs.Item 3.Legal ProceedingsWe have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District ofTexas, Tyler Division (“USDC”), and United States Court of Appeals for the Federal Circuit (“USCAFC”).VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”),and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos.6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant wereseparated by the judge. Aastra and NEC agreed to sign license agreements with us and we dropped all accusations of infringementagainst them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco onMarch 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.On November 6, 2012, a jury the USDC awarded us over $368,000 for Apple’s infringement of four of our patents, plus dailyinterest up to the final judgment.Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that allfour of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of theasserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty ratesregarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’sclaim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination ofinfringement with respect to FaceTime back to the USDC for further proceedings.On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’sinfringement of four of our patents. On September 29, 2017, the USDC entered its final judgement, denied all of Apple’s post-trialmotions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during thewillfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The totalamount in the final judgement was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs,fees and interest).On October 27, 2017 Apple filed its notice of appeal of this final judgement to the USCAFC. Apple filed its opening brief onMarch 19, 2018. We filed our response on April 4, 2018. On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned to the same merits panel. Events and developments after this order aredescribed below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Appleinfringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages andinjunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and thelatest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I casewas initiated. Post-Trial Motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment andissued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and grantingVirnetX’s motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Macproducts, pre-judgment and post-judgment interest and costs. On September 20, 2018, pursuant to a Court’s order, attorneys fromVirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and PrejudgmentInterest to the $502,600 jury verdict. The total amount in the final judgement in the Apple II case is now26TABLE OF CONTENTS$595,900. Apple has filed a notice of appeal with the USCAFC in the Apple II case. On October 9, 2018, USCAFC accepted thenotice and docketed it as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case aredescribed below under VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”).VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same meritspanel;•VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial andAppeal Board (“PTAB”) in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. PatentNos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC.Oral arguments in this case were argued on January 8, 2019. We are awaiting the Court’s decision in this matter.•VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case) On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the UnitedStates Court of Appeals for the Federal Circuit. Oral arguments in this case were held on January 8, 2019. On January 15,2019 the Court’s issued a Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearingand rehearing en-banc in this matter on February 21, 2019. On March 12, 2019, the court invited us to respond to Apple'spetition on or before March 26, 2019. We are currently preparing our response.•VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591) On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to our U.S. Patent Nos. 7,921,211 and 7,418,504.Oral arguments in this case were argued on January 8, 2019. We are awaiting the Court’s decision in this matter.VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)On January 24, 2019 Apple filed opening brief. We filed our response on March 1, 2019. Apple's next response is due on April 5,2019. The oral arguments have not yet been scheduled.VirnetX Inc. v. Apple Inc. (Case 17-2490)On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018, the USCAFC issued an opinion affirming the PTAB’sinvalidity findings.VirnetX Inc. (Case 17-2593)On September 22, 2017, we filed with the USCAFC, appeals of the invalidity findings by the PTAB in IPR2016-00693 andIPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. The briefing in these appeals has not taken place. Theentity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. OnNovember 27, 2017, the USPTO indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed theseappeals pending the USCAFC’s decision in Case 17-1591.VirnetX Inc. (Case 18-1751)On March 30, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,851 involving our U.S. Patent No. 7,418,504. The briefing in this appeal has been concluded; the oral argument has not yetbeen scheduled.27TABLE OF CONTENTSVirnetX Inc. (Case 18-1872)On April 23, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2016-01585 involving ourU.S. Patent No. 8,904,516. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 18-2211)On July 31, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2017-00337 involving ourU.S. Patent No. 9,038,163. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 19-1043)On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,746 involving our U.S. Patent No. 6,839,759. VirnetX’s opening brief is due in March 2019.One or more potential intellectual property infringement claims may also be available to us against certain other companies whohave the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing alawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we madethem. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our otherresources, including capital resources, from efforts to successfully commercialize our products.Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened orcontemplated against us.Item 4.Mine Safety DisclosureNot applicable.28TABLE OF CONTENTSPART IIItem 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecuritiesMarket InformationOur common stock currently trades under the symbol “VHC” on the NYSE American LLC.Holders of RecordAs of March 14, 2019, we had 41 stockholders of record. Because many of our shares of common stock are held of record bybrokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholdersrepresented by such record holders.DividendsWe do not currently intend to begin paying a regular dividend in the foreseeable future. Any future determination to declare cashdividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results,capital requirements, general business conditions and other factors that our board of directors may deem relevant.Securities Authorized for Issuance under Equity Compensation PlanSee Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for informationregarding securities authorized for issuance.Stock Performance GraphThis performance graph shall not be deemed “soliciting material” or to be “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, or incorporated by reference into any filing of VirnetX under theSecurities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forth by specific reference in such filing. 29TABLE OF CONTENTSThe stock price performance reflected on this graph is not necessarily indicative of future stock price performance. See thedisclosure in Part I, Item 1A, “Risk Factors.” 12/1312/1412/1512/1612/1712/18VirnetX Holding Corp$100.00 $28.28 $13.24 $11.33 $19.06 $12.36 S&P 500$100.00 $113.69 $115.26 $129.05 $157.22 $150.33 RDG Technology Composite$100.00 $117.81 $122.23 $138.28 $189.14 $190.13 Recent Sales of Unregistered SecuritiesDuring the year ended December 31, 2018, we had no sales of unregistered securities and no repurchases of stock.Item 6.Selected Financial Data (in thousands except per share data)The consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the balance sheet data atDecember 31, 2018 and 2017, are derived from our audited financial statements included elsewhere in this Annual Report on Form10-K. The consolidated statement of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data atDecember 31, 2016, 2015 and 2014 are derived from our audited financial statements not included in this annual report on Form10-K.The selected consolidated financial data below is not necessarily indicative of future performance and should be read inconjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and theconsolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K. For the year ended December 31, 20182017201620152014Consolidated Statement of Operations Data: Revenue(a)$63 $1,547 $1,550 $1,555 $1,249 Gain on settlement(b)$— — $— $— $23,000 Total operating expenses$(25,520)$(18,868)$(30,055)$(30,732)$(36,414)Income tax expense$(3)$(3)$(133)$(8)$(15)Net loss$(25,406)$(17,278)$(28,569)$(29,234)$(9,902)Loss per share$(0.40)$(0.30)$(0.51)$(0.56)$(0.19)Consolidated Balance Sheet Data: Cash and cash equivalents$7,611 $3,135 $6,627 $8,726 $18,658 Investments available for sale$1,803 $1,453 $9,249 $9,954 $22,571 Total assets$11,751 $7,175 $18,871 $22,172 $45,090 Stockholders’ equity$9,888 $1,553 $11,147 $15,095 $32,627 (a)Revenue for 2018 has been reduced by $1,500 as a result of the adoption of the new revenue recognition standard as shown in Note 15 – Effectsof Adopting ASU Topic 606.(b)The gain on settlement in 2014 relates to a cash settlement of litigation with Microsoft.Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsCompany OverviewWe are an Internet security software and technology company with patented technology for secure communications including 5Gand 4G LTE security. Our software and technology solutions, including our Secure Domain Name Registry and GABRIELConnection Technology™, are designed to facilitate secure communications and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services,streaming video, file transfer, remote desktop and Machine-to-Machine, or M2M communications. Our technology generatessecure 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 intellectualproperty is the foundation of our business model. We currently own approximately 185 total patents and pending applications,including 70 U.S.30TABLE OF CONTENTSpatents/patent applications and 115 foreign patents/validations/pending applications. Our patent portfolio is primarily focused onsecuring real-time communications over the Internet, as well as related services such as the establishment and maintenance of asecure domain name registry. Our patented methods also have additional applications in the key areas of device operating systemsand network security for Cloud services, M2M communications in the new initiatives like “Smart City”, “Connected Car” and“Connected Home” that would connect everything from social services and citizen engagement to public safety, transportation andeconomic development to the internet to enable more productivity, features and efficiency in our everyday lives. The subjectmatter of all our U.S. and foreign patents and pending applications relates generally to securing communication over the internet,and as such covers all our technology and other products. Our issued U.S. and foreign patents expire at various times during theperiod from 2019 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operatingsubsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006 andwe are required to make payments to Leidos, based on cash or certain other values generated from those patents. The amount ofsuch payments depends upon the type of value generated, and certain categories are subject to maximums and other limitations.Our product GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and serviceson the market today, does not require access to user’s confidential data and reduces the threat of hacking and data mining. Itenables individuals and organizations to maintain complete ownership and control over their personal and confidential data,secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. OurGABRIEL 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 GABRIELCollaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, athttp://www.gabrielsecure.com. We continue to enhance our products and add new functionality to our products. We will provideupdates to new and existing customers as they are released to the general public. Over 80 small and medium businesses haveinstalled our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporatenetworks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.We are actively recruiting best-of-breed partners in various vertical markets including, healthcare, finance, government, etc., tohelp us rapidly expand our enterprise customer base. A number of International Association of Certified ISAO (IACI) including,ISAO’s for Maritime & Ports, ISAO Credit Union ISAO, City of Chicago, ISAO Human Trafficking ISAO have chosen to deploy oursoftware as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluationsbefore deploying our products within their networks.We have executed a number of patent and technology licenses and intend to seek further licensees for our technology, includingour GABRIEL Connection Technology™ to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unifiedcommunications markets including 5G and 4G/LTE Advanced.We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents andpatent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SystemsArchitecture Evolution, or SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonableand non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement thetechnical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPPmembers as they move into deploying 5G and 4G/LTE Advanced devices and solutions.We have an ongoing GABRIEL Licensing Program under which we offer licenses to a portion of our patent portfolio, technologyand software, including our secure domain name registry service, to domain infrastructure providers, communication serviceproviders as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to OEM customers whowant to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domainnames within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK) to assistwith rapid integration of these techniques into existing software implementations with minimal code changes and include objectlibraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer toimplement our technology.31TABLE OF CONTENTSCustomers who want to develop their own implementation of our patented techniques for supporting secure domain names, orother techniques that are covered by our patent portfolio for establishing secure communication links, can purchase a patentlicense. These licenses will typically include an initial license fee, as well as an ongoing royalty.We have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation,NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and SiemensEnterprise Communications Inc. to license certain of our patents, for a one-time payment and/or an ongoing royalty for all futuresales through the expiration of the licensed patents with respect to certain current and future IP-encrypted products. We haveengaged IPVALUE Management Inc. to assist us in commercializing our portfolio of patents on securing real-time communicationsover the Internet. Under the multi-year agreement, IPVALUE is expected to originate and assist us with negotiating transactionsrelated to patent licensing worldwide with respect to certain third parties.We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain namesare now an integral part of securing the next generation 5G and 4G/LTE Advanced wireless networks and M2M communications inareas including Smart City, Connected Car and Connected Home. We also believe that all 5G and 4G/LTE Advanced mobiledevices will require unique secure domain names and become part of a secure domain name registry.We intend to continue to license our patent portfolio, technology and software, including our secure domain name registry service,to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek furtherlicense of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and originalequipment 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 5G and 4G/LTE.Our employees include the core development team behind our patent portfolio, technology and software. This team has workedtogether for over ten years and is the same team that invented and developed this technology while working at Leidos, Inc.(“Leidos”). Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domainknowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment,critical infrastructure and health. The team has continued its research and development work started at Leidos and expanded the setof patents we acquired in 2006 from Leidos, into a larger portfolio of approximately 185 total patents and pending applications,including 70 U.S. patents/patent applications and 115 foreign patents/validations/pending applications This portfolio now servesas the foundation of our licensing business and planned service offerings and is expected to generate the majority of our futurerevenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expandour patent portfolio.We intend to continue using a primarily outsourced and leveraged model to maintain efficiency and manage costs as we grow ourlicensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. Wealso intend to expand our design pilot in participation with leading 5G and 4G/LTE companies (domain infrastructure providers,chipset manufacturers, service providers and others) and build our secure domain name registry.LitigationWe have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District ofTexas, Tyler Division (“USDC”), and United States Court of Appeals for the Federal Circuit (“USCAFC”).VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”),and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos.6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant wereseparated by the judge. Aastra and NEC agreed to sign license agreements with us and we dropped all accusations of infringementagainst them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco onMarch 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.32TABLE OF CONTENTSOn November 6, 2012, a jury the USDC awarded us over $368,000 for Apple’s infringement of four of our patents, plus dailyinterest up to the final judgment.Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that allfour of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of theasserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty ratesregarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’sclaim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination ofinfringement with respect to FaceTime back to the USDC for further proceedings.On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’sinfringement of four of our patents. On September 29, 2017, the USDC entered its final judgement, denied all of Apple’s post-trialmotions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during thewillfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The totalamount in the final judgement was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs,fees and interest).On October 27, 2017 Apple filed its notice of appeal of this final judgement to the USCAFC. Apple filed its opening brief onMarch 19, 2018. We filed our response on April 4, 2018. On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned to the same merits panel. Events and developments after this order aredescribed below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Appleinfringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages andinjunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and thelatest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I casewas initiated. Post-Trial Motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment andissued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and grantingVirnetX’s motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Macproducts, pre-judgment and post-judgment interest and costs. On September 20, 2018, pursuant to a Court’s order, attorneys fromVirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and PrejudgmentInterest to the $502,600 jury verdict. The total amount in the final judgement in the Apple II case is now $595,900. Apple has fileda notice of appeal with the USCAFC in the Apple II case. On October 9, 2018, USCAFC accepted the notice and docketed it asCase No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case are described below underVirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”).VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same meritspanel;•VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial andAppeal Board (“PTAB”) in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. PatentNos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC.Oral arguments in this case were argued on January 8, 2019. We are awaiting the Court’s decision in this matter.33TABLE OF CONTENTS•VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case) On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the UnitedStates Court of Appeals for the Federal Circuit. Oral arguments in this case were held on January 8, 2019. On January 15,2019 the Court’s issued a Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearingand rehearing en-banc in this matter on February 21, 2019. On March 12, 2019, the court invited us to respond to Apple'spetition on or before March 26, 2019. We are currently preparing our response.•VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591) On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to our U.S. Patent Nos. 7,921,211 and 7,418,504.Oral arguments in this case were argued on January 8, 2019. We are awaiting the Court’s decision in this matter.VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)On January 24, 2019 Apple filed opening brief. We filed our response on March 1, 2019. Apple’s next response is due on April 5,2019. The oral arguments have not yet been scheduled.VirnetX Inc. v. Apple Inc. (Case 17-2490)On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018, the USCAFC issued an opinion affirming the PTAB’sinvalidity findings.VirnetX Inc. (Case 17-2593)On September 22, 2017, we filed with the USCAFC, appeals of the invalidity findings by the PTAB in IPR2016-00693 andIPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. The briefing in these appeals has not taken place. Theentity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. OnNovember 27, 2017, the USPTO indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed theseappeals pending the USCAFC’s decision in Case 17-1591.VirnetX Inc. (Case 18-1751)On March 30, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,851 involving our U.S. Patent No. 7,418,504. The briefing in this appeal has been concluded; the oral argument has not yetbeen scheduled.VirnetX Inc. (Case 18-1872)On April 23, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2016-01585 involving ourU.S. Patent No. 8,904,516. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 18-2211)On July 31, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2017-00337 involving ourU.S. Patent No. 9,038,163. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 19-1043)On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,746 involving our U.S. Patent No. 6,839,759. VirnetX’s opening brief is due in March 2019.34TABLE OF CONTENTSOne or more potential intellectual property infringement claims may also be available to us against certain other companies whohave the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing alawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we madethem. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our otherresources, including capital resources, from efforts to successfully commercialize our products.Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened orcontemplated against us.Commitments and Related Party TransactionsWe lease our offices under an operating lease with a third party expiring in October 2019. We recognize rent expense on a straight-line basis over the term of the lease.We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel foremployees of the Company. We incurred approximately $1,590, $1,240, and $772 in rental fees and reimbursements to the LLCduring the years ended December 31, 2018, 2017 and 2016, respectively. We pay for the Company’s business usage of the aircraftand have no right to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLCand control the equity interests of the LLC. We entered into a 12-month non-exclusive agreement with the LLC for use of the planeat 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. The agreement renews on an annual basisunless terminated by either party. Neither party has exercised their termination rights.Critical Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reportedperiod. The critical accounting policies we employ in the preparation of our consolidated financial statements are those whichinvolve impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation.Basis of ConsolidationThe consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries.All intercompany balances and transactions have been eliminated.Use of EstimatesWe prepare our condensed consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to makeestimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as relateddisclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies andestimates. In some cases, changes in our accounting estimates are reasonably likely to occur. Accordingly, actual results coulddiffer materially from our estimates. To the extent that there are material differences between these estimates and actual results, ourfinancial condition or results of operations will be affected. We base our estimates on past experience and other assumptions thatwe believe are reasonable under the circumstances, at the time they are made, and we evaluate these estimates on an ongoing basis.We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.Revenue RecognitionWe derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon avariety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Suchagreements may be complex and include multiple elements. These agreements may include, without limitation, elements related tothe settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patentlicensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual propertyrights associated with contractual technology development arrangements.35TABLE OF CONTENTSWe account for revenue in accordance with Accounting Standards Update (“ASU”) No.2014-09, Revenue from Contracts withCustomers (“Topic 606”), which we adopted on January 1, 2018 using the modified-retrospective method (see Note 15 – Effects ofAdopting ASU Topic 606).Under Topic 606 a performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Acontract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, theperformance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for eachunit of accounting recognized as the product or service is delivered to the customer.With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete and ourpatent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology.Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements’ revenue isrecognized over time, generally over the life of the servicing contract.Prior to January 1, 2018 we recognized revenue in accordance with previous guidance which required consideration to be allocatedto each element of an agreement using the relative fair value method. In other circumstances, such as those agreements involvingconsideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances,the appropriate recording of revenue between periods required the use of judgment. In all cases, revenue was only recognized afterall the following criteria are met: (1) written agreements had been executed; (2) delivery of technology or intellectual propertyrights had occurred or services had been rendered; (3) fees were fixed or determinable; and (4) collectability of fees was reasonablyassured.Under the previous guidance, upon signing a patent license agreement, including licenses entered upon settlement of litigation, weprovided the licensee permission to use our patented technology in specific applications. We accounted for patent licenseagreements with amounts allocated to each element based on their fair values and we elected to utilize the leased-based model forrevenue recognition with revenue being recognized over the expected period of benefit to the licensee.Deferred revenueFrom 2013 to 2016, we received payments totaling $10,000 under a contract (“August 2013 Contract Settlement”). In accordancewith our revenue recognition policy, we deferred and then recognized revenue over the life of the contract, but not ahead ofcollection. We adopted Topic 606 on January 1, 2018 using the modified retrospective approach as discussed above. As a result,revenues totaling $2,500 under the contract were no longer deferred and were written down as an adjustment to the openingbalance of retained earnings (see Note 15 – Effects of Adopting ASU Topic 606).Royalty ExpenseRoyalty expense for the years ended December 31, 2018, 2017 and 2016 was $0, $0 and $884, respectively, and was a result of ourroyalty agreement with Leidos. The agreement provides for revenue sharing and legal reimbursements related to attorney time andexpenses incurred by Leidos during discovery and other aspects of litigation involving the defense of our patents which have beenresolved.Earnings Per ShareBasic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number ofoutstanding common shares during the period. Diluted earnings per share are computed by dividing net income by the weightedaverage number of shares outstanding during the period increased to include the number of additional shares of common stock thatwould have been outstanding if the potentially dilutive securities had been issued. During the years ended 2018, 2017 and 2016we incurred losses. Therefore, the effects of any common stock equivalent were anti-dilutive during those periods.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 thosebalances are insured by the Federal Deposit Insurance Corporation. During the year ended36TABLE OF CONTENTSDecember 31, 2018, and 2017 we had, at times, funds which were uninsured. We do not believe that we are subject to any unusualfinancial risk beyond the normal risk associated with commercial banking relationships with major financial institutions. We havenot experienced any losses on our deposits of cash and cash equivalents.Impairment of Long-Lived AssetsWe identify and record impairment losses on long-lived assets used in operations when events and changes in circumstancesindicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured bycomparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are consideredto be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds theprojected discounted future net cash flows arising from the asset.Income TaxesWe account for income taxes using the asset and liability method. The asset and liability method requires the recognition ofdeferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the taxbasis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimatesand assumptions that could differ from actual results reflected on the income tax returns filed during the following years.Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a changein tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, weconsider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently availableinformation and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized.The determination of the need for a valuation allowance is based on an on-going evaluation of current information including,among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expectedtiming of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferredincome tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxableincome in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and becausethe impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance establishedagainst our net deferred income tax assets, we consider all available evidence, both positive and negative. Consistent with ourpolicy, and because of our history of operating losses, we do not currently recognize the benefit of all our deferred tax assets,including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our ability to generatesufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is morelikely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in ourstatements of operations.We account for our uncertain tax positions in accordance with U.S. GAAP. The U.S. GAAP method of accounting for uncertain taxpositions utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position todetermine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, isaddressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount ofbenefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement withtax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recordeduntil the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, orthe statute of limitations expires. Positions previously recognized are derecognized when we subsequently determine the positionno longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements usingcumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amendedthe Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Forbusinesses, the Act reduced the corporate federal tax rate from a maximum of 35% to a 21% rate effective on January 1, 2018. Thetax rate of 21% was applied to the balances of our federal deferred tax assets and liabilities at December 31, 2018, but because weprovided a full valuation allowance against our net deferred tax assets, no tax impact was recognized due to the federal tax ratechange.37TABLE OF CONTENTSThe Act changes the worldwide territorial tax system. The new Section 951A impose Global Intangible Low-Taxed Income“GILTI” tax on taxpayers who own 10% or more of a controlled foreign corporation. GILTI is broadly the excess income of foreignsubsidiaries over the routine return on tangible business assets. The company has no GILTI tax liability in 2018 because its foreignsubsidiary has negative earnings in 2018.Stock-based CompensationWe account for stock-based compensation using the fair value recognition method. We recognize these compensation costs on astraight-line basis over the requisite service period of the award, which is generally based on the option vesting term of 4 years.Beginning January 1, 2017, we discontinued estimating forfeitures for time-based awards upon adoption of ASU No. 2016-09 –“Compensation – Stock Compensation”.In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the considerationreceived or the fair value of the equity investments issued generally 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 ordisclosed at fair value in the financial statements on a recurring basis. Fair value is estimated by applying the following hierarchy,which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon thelowest level of input that is available and significant to the fair value measurement: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 foridentical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets or liabilities.Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that marketparticipants would use in pricing the asset or liability.Our financial instruments are stated at amounts that equal, or are intended to approximate, fair value. When we approximate fairvalue, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument,including assumptions about risk and inputs to the valuation technique. We use quoted valuation techniques, primarily the incomeand market approach that maximize the use of observable inputs and minimize the use of unobservable inputs for recurring fairvalue measurements.New Accounting PronouncementsIn August 2018 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 - FairValue Measurement (“Topic 820”). The FASB is issuing the amendments in this ASU as part of the disclosure framework project.On March 4, 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’sobjective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clearcommunication of the information required by GAAP that is most important to users of each entity’s financial statements. Theamendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019. We are evaluating the impact this guidance will have on our financial position and statement of operations.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (“Topic 326”). The purpose of this ASU is torequire a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit lossesrelating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective forinterim and annual reporting periods beginning after December 15, 2019. We are evaluating the impact this guidance will have onour financial position and statement of operations.In February 2016, FASB issued ASU No. 2016-02, Leases (“Topic 842”). Topic 842 requires an entity to recognize right-of-useassets and lease liabilities on its balance sheet and disclose key information about leasing arrangements.38TABLE OF CONTENTSFor public companies, Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interimperiods within that reporting period, with early adoption permitted. We have evaluated this ASU and believe this guidance will nothave a material impact on our financial position and statement of operations.In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. As amended, Topic 606 supersedesprior revenue recognition requirements including most industry-specific revenue recognition guidance. In summary, the coreprinciple of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. OnJanuary 1, 2018 we adopted this standard which resulted in a $2,500 decrease in the opening balance of our accumulated deficitand a $2,500 decrease in deferred revenue in our consolidated balance sheet (see Note 15 — Effects of Adopting ASU Topic 606).Results of Operations (all amounts in this section are expressed in thousands)Revenue 201820172016Revenue$63 $1,547 $1,550 Revenue generated for the year ended December 31, 2018 was $63 compared to December 31, 2017 of $1,547, and December 31,2016 revenue of approximately $1,550. Revenue for the year ended December 31, 2018 of $63, was largely attributable to royaltyrevenues as part of license agreements, with the decline when compared to 2017 attributed to the adoption of Topic 606 in 2018 asdescribed in Note 15 – Effects of Adopting ASU Topic 606. Revenues for the year ended December 31, 2017 and 2016 were largelyattributable to the 2013 Contract Settlement. Under the terms of the 2013 Contract Settlement we collected annual payments of$2,500 over the contract period for a total of $10,000. During 2017 and 2016 we recognized $1,500 and $1,500 respectively, ofrevenue for royalties from the 2013 Contract Settlement and $47 and $50 respectively, of revenue for royalties from otherlicensees.In addition to the settlement discussed above, during 2018, 2017 and 2016 we recognized royalty revenue as part of licenseagreements entered into with customers during the patent infringement actions (see Note 13 “Litigation”). These revenues relate topayment for use of our patented technology prior to the signing of a license agreement, and royalty payments after the execution ofthe license agreements. No amounts were allocable to settlement fees, expense reimbursement, damages or any other amounts otherthan historical and future sales as no such amounts were requested or received.Research and Development Expenses 201820172016Research and Development$4,815 4,159 $4,155 Research and development costs include expenses paid to outside development consultants and compensation-related expenses forour engineering staff. Research and development costs are expensed as incurred.Our research and development expenses for the year ended December 31, 2018 were $4,815 compared to December 31, 2017 of$4,159 and $4,155 for the year ended December 31, 2016. The increase in 2018 compared to 2017 was primarily due to theincrease in wages and bonuses.Selling, General and Administrative Expenses 201820172016Selling, General and Administrative$20,705 $14,709 $25,016 Selling, general and administrative expenses include compensation expense for management and administrative personnel, as wellas expenses for outside legal, accounting, and consulting services.Our selling, general and administrative expenses for the year ended December 31, 2018 was $20,705 compared to December 31,2017 of $14,709 and $25,016 for the year ended December 31, 2016. The volatility within selling, general and administrativeexpenses was primarily due to legal fees related to cases involving the defense of our patents. Legal fees were $9,706, $3,657 and$13,002 in 2018, 2017 and 2016, respectively and represent approximately 47% of general and administrative expenses for 2018compared to 25% for 2017 and 52% for 2016.39TABLE OF CONTENTSAlso included in selling, general and administrative expense is royalty expense of $884 for the year ended December 31, 2016,paid to Leidos, in connection with the settlement with Microsoft, Avaya and Mitel et al.Other Income and Expenses 201820172016Interest and Other Income$54 $46 $69 Interest and other income for the year ended December 31, 2018 was $54, compared to December 31, 2017 of $46 and $69 for theyear ended December 31, 2016.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, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016United States federal statutory rate 21.00% 35.00% 35.00%State taxes, net of federal benefit (0.01)% (0.01)% (0.31)%Valuation allowance (24.33)% (35.94)% (35.43)%Accounting method change - ASC 606 2.07% — — R&D Credit 1.53% 1.43% 0.66%Other (0.27)% (0.50)% (0.39)%Effective income tax rate (0.01)% (0.02)% (0.47)%In 2018, 2017 and 2016, we had pre-tax losses of $25 million, $17 million and $28 million, respectively, which are available forcarry forward to offset future taxable income. We made determinations to provide full valuation allowances for our net deferred taxassets at the end of 2018, 2017 and 2016, including NOL carryforwards generated during the years, based on our evaluation ofpositive and negative evidence, including our history of operating losses and the uncertainty of generating future taxable incomethat would enable us to realize our deferred tax.Liquidity and Capital ResourcesFor the year ended December 31, 2018, our cash and cash equivalents totaled $7,611 and our short-term investments totaled$1,803 compared to $3,135 and $1,453, respectively, for the year ended December 31, 2017.We expect that our cash and cash equivalents and short-term investments as of December 31, 2018, and the $2,936 in proceedssubsequent to December 31, 2018, from sales of our common shares under the ATM, as well as the possibility of future sales ofcommon shares under the ATM and the universal shelf registration statement, described below, will be sufficient to fund ourcurrent level of selling, general and administration costs, including legal expenses and provide related working capital for theforeseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royaltiesassociated with our patent portfolio, technology, software and secure domain name registry in the United States and other marketsaround the world.Universal Shelf Registration and ATM OfferingOn August 21, 2015, we filed a universal shelf registration statement with the SEC that enabled us to offer and sell from time totime up to $100,000 of equity, debt or other types of securities. We also entered into an ATM equity offering sales agreement withCowen on August 20, 2015 (“2015 ATM”), under which we could offer and sell shares of our common stock having an aggregatevalue of up to $35,000. On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement with Cowen wherebythe maximum aggregate value of the Company’s common stock we could offer and sell, from time to time, was increased from$35,000 to $50,000. This registration statement expired on September 2, 2018.On July 30, 2018 we filed a $100,000 replacement registration statement on SEC Form S-3, which replaced the S-3 registrationstatement discussed above. We had used approximately 40% of that S-3 registration. The replacement registration statement wasdeclared effective by the SEC on August 16, 2018 enabling us to offer and sell from time to time up to $100,000 of equity, debt orother types of securities. We also entered into an ATM equity offering sales40TABLE OF CONTENTSagreement with Cowen on August 31, 2018 (“2018 ATM”), under which we could offer and sell shares of our common stockhaving an aggregate value of up to $50,000. We use the proceeds of this offering for GABRIEL product development andmarketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses andacquisitions of complementary products, technologies or businesses.During the year ended December 31, 2018, we sold 4,062,100 shares under the 2015 ATM. The average sales price per commonshare was $3.77 and the aggregate proceeds from the sales totaled $15,295 during the period. Sales commissions, fees and othercosts associated with the ATM totaled $459.During the year ended December 31, 2018, we sold 3,448,455 shares under the 2018 ATM. The average sales price per commonshare was $3.64 and the aggregate proceeds from the sales totaled $12,542 during the period. Sales commissions, fees and othercosts associated with the ATM totaled $326.Contractual Commitments Total2019Leases$46 $46 Total$46 $46 Off-Balance Sheet ArrangementsAs of December 31, 2018, 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 corporate, government and federal agencysecurities. By policy, we limit the amount of credit exposure to any one issuer.Investments in fixed rate securities carry a degree of interest rate risk. Fixed rate securities may have their fair market valueadversely impacted due to a rise in interest rates. Due in part to these factors, our income from investments may decrease in thefuture.We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adversechange of 100 basis points could be experienced in the near term but would have an immaterial impact in the fair value of ourmarketable securities as they will be maturing in six months or less.41TABLE OF CONTENTSItem 8.Financial Statements and Supplementary DataFINANCIAL STATEMENTSFinancial Statements Index PageReport of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm 43 Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2018 and December 31, 2017 44 Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2018,December 31, 2017 and December 31, 2016 45 Consolidated Statements of Comprehensive Loss of VirnetX Holding Corporation for the years ended December 31,2018, December 31, 2017 and December 31, 2016 45 Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31,2018, December 31, 2017 and December 31, 2016 46 Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2018,December 31, 2017 and December 31, 2016 47 Notes to Consolidated Financial Statements of VirnetX Holding Corporation 48 42TABLE OF CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors andStockholders of VirnetX Holding CorporationOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December31, 2018 and 2017, and the related consolidated statements of income, comprehensive loss, stockholders’ equity, and cash flowsfor each of the years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as thefinancial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financialposition of the Company as of December 31, 2018 and 2017, and the consolidated results of their operations and cash flows foreach of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally acceptedin the United States of America. We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, basedon criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO), and our report dated March 18, 2019, expressed an unqualified opinion.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered withthe PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws andthe applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to erroror fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whetherdue to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accountingprinciples used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Farber Hass Hurley LLPWe have served as the Company’s auditor since 2008.Chatsworth, CaliforniaMarch 18, 201943TABLE OF CONTENTSVIRNETX HOLDING CORPORATIONCONSOLIDATED BALANCE SHEETS(in thousands, except share amounts) As ofDecember 31, 2018As ofDecember 31, 2017ASSETS Current assets: Cash and cash equivalents$7,611 $3,135 Investments available for sale 1,803 1,453 Accounts receivables 6 — Prepaid expenses and other current assets 718 591 Total current assets 10,138 5,179 Prepaid expenses, non-current 1,604 1,989 Property and equipment, net 9 7 Total assets$11,751 $7,175 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities$1,050 $414 Accrued payroll and related expenses 277 2,175 Other liabilities, current 140 — Income tax liability 396 393 Deferred revenue, current portion — 1,500 Total current liabilities 1,863 4,482 Deferred revenue, non-current portion — 1,000 Other liabilities — 140 Total liabilities 1,863 5,622 Commitments and contingencies (Note 4) — — Stockholders’ equity: Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares atDecember 31, 2018 and December 31, 2017, Issued and outstanding: 0 shares atDecember 31, 2018 and December 31, 2017 — — Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at December 31, 2018 and December 31, 2017,Issued and outstanding: 66,879,847 shares and 59,051,978 shares, at December31, 2018 and December 31, 2017, respectively 7 6 Additional paid-in capital 208,317 177,076 Accumulated deficit (198,422) (175,516)Accumulated other comprehensive loss (14) (13)Total stockholders’ equity 9,888 1,553 Total liabilities and stockholders’ equity$11,751 $7,175 See accompanying notes to consolidated financial statements.44TABLE OF CONTENTSVIRNETX HOLDING CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share amounts) Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Revenue$63 $1,547 $1,550 Operating expense: Royalty expense — — 884 Research and development 4,815 4,159 4,155 Selling, general and administrative expenses 20,705 14,709 25,016 Total operating expense 25,520 18,868 30,055 Loss from operations (25,457) (17,321) (28,505)Interest and other income, net 54 46 69 Loss before taxes (25,403) (17,275) (28,436)Income tax expense (3) (3) (133)Net loss$(25,406)$(17,278)$(28,569)Basic and diluted loss per share$(0.40)$(0.30)$(0.51)Weighted average shares outstanding basic and diluted 62,985,763 58,354,397 55,984,825 VIRNETX HOLDING CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Net loss$(25,406)$(17,278)$(28,569)Other comprehensive (loss), net of tax: Change from foreign currency translation, net of tax — — 3 Change in unrealized gain (loss) on investments, net of tax (1) (1) 4 Total other comprehensive gain (loss), net of tax (1) (1) 7 Comprehensive loss$(25,407)$(17,279)$(28,562)See accompanying notes to consolidated financial statements.45TABLE OF CONTENTSVirnetX Holding CorporationCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share amounts) Common StockAdditionalPaid-inCapitalAccumulatedDeficitAccumulatedOtherComprehensiveLossTotalStockholders’Equity(Deficit) SharesAmountBalance at December 31, 2015 53,198,835 $5$144,778 $(129,669)$(19)$15,095 Stock issued for cash at $3.00-$5.05 pershare, net 4,760,594 1 19,195 19,196 Stock-based compensation 5,398 5,398 Exercise of options 50,357 20 20 Stock issued for vested RSUs 135,102 Comprehensive income: Net Loss (28,569) (28,569)Other comprehensive income,net of tax 7 7 Comprehensive loss (28,562)Balance at December 31, 2016 58,144,888 $6$169,391 $(158,238)$(12)$11,147 Stock issued for cash at $4.00-$5.69 pershare, net 730,444 3,677 3,677 Stock-based compensation 3,986 3,986 Exercise of options 12,500 22 22 Stock issued for vested RSUs 164,146 Comprehensive income: Net Loss (17,278) (17,278)Other comprehensive loss,net of tax (1) (1)Comprehensive loss (17,279)Balance at December 31, 2017 59,051,978 $6$177,076 $(175,516)$(13)$1,553 Cumulative effect of accounting change 2,500 2,500 Stock issued for cash at $3.00 -$4.89 pershare, net 7,510,555 1 27,051 27,052 Stock-based compensation 4,055 4,055 Exercise of options 117,229 135 135 Stock issued for vested RSUs 200,085 Comprehensive income: Net Loss (25,406) (25,406)Other comprehensive loss,net of tax (1) (1)Comprehensive loss (25,407)Balance at December 31, 2018 66,879,847 $7$208,317 $(198,422)$(14)$9,888 See accompanying notes to consolidated financial statements.46TABLE OF CONTENTSVIRNETX HOLDING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Cash flows from operating activities: Net loss$(25,406)$(17,278)$(28,569)Adjustments to reconcile net loss to net cash from operatingactivities: Depreciation 18 26 28 Amortization of warrant issuance costs — — 30 Stock-based compensation 4,055 3,986 5,398 Changes in assets and liabilities: Prepaid expenses and other current assets 258 382 451 Accounts payable 636 (1,392) (477)Other liabilities — 140 — Accrued payroll and related expenses (1,856) 695 232 Accounts receivable (6) — — Related-party payable — — (11)Income tax liability 3 (3) (4)Deferred revenue — (1,500) 1,000 Net cash used in operating activities (22,298) (14,944) (21,922)Cash flows from investing activities: Purchase of property and equipment — — (13)Purchase of investments (3,090) (946) (10,527)Proceeds from sale or maturity of investments 2,720 8,741 11,240 Net cash (used in) provided by investing activities (370) 7,795 700 Cash flows from financing activities: Proceeds from exercise of options 135 22 20 Proceeds from sale of common stock 27,051 3,677 19,196 Payments of taxes on cashless exercise of restricted stockunits (42) (42) (93)Net cash provided by financing activities 27,144 3,657 19,123 Net increase (decrease) in cash and cash equivalents 4,476 (3,492) (2,099)Cash and cash equivalents, beginning of period 3,135 6,627 8,726 Cash and cash equivalents, end of period$7,611 $3,135 $6,627 Cash paid for income taxes$3 $5 $126 Deferred revenue reclassified to retained earnings – ASC 606adoption$2,500 $— $— See accompanying notes to consolidated financial statements.47TABLE OF CONTENTSVirnetX Holding CorporationNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands except share, per share and per device 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 ofcommercializing a portfolio of patents. We seek to license our technology, including GABRIEL Connection Technology™, tovarious original equipment manufacturers, or OEMs, that use our technologies in the development and manufacturing of their ownproducts within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets. Prior to 2012 ourrevenue was limited to an insignificant amount of software royalties pursuant to the terms of a single license agreement. During2013 and 2012 we had revenues from settlements of patent infringement disputes whereby we received consideration for past salesof licensees 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 185 total patentsand pending applications, including 70 U.S. patents/patent applications and 115 foreign patents/validations/pending applications.Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such asthe establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications inthe key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City,Connected Car and Connected Home. The subject matter of all our U.S and foreign patents and pending applications relatesgenerally to securing communications over the internet and such covers all our technology and other products. Our issued U.S. andforeign patents expire at various times during the period from 2019 to 2024. Some of our issued patents and pending patentapplications were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, (f/k/a Science ApplicationsInternational 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 aresubject to maximums and other limitations.Note 2 − Summary of Significant Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requiresus to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.The critical accounting policies we employ in the preparation of our consolidated financial statements are those which involveimpairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation.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, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues,and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have useddifferent accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur fromperiod to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are materialdifferences 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 theseestimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which wediscuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board ofdirectors.Basis of ConsolidationThe consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries.All intercompany balances and transactions have been eliminated.48TABLE OF CONTENTSRevenue RecognitionWe derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon avariety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Suchagreements may be complex and include multiple elements. These agreements may include, without limitation, elements related tothe settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patentlicensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual propertyrights associated with contractual technology development arrangements.We account for revenue in accordance with Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts withCustomers (“Topic 606”), which we adopted on January 1, 2018 using the modified-retrospective method (see Note 15 – Effects ofAdopting ASU Topic 606).Under Topic 606 a performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Acontract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, theperformance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for eachunit of accounting recognized as the product or service is delivered to the customer. With the licensing of our patents, performanceobligations are generally satisfied at a point in time as work is complete and our patent rights are transferred to our customers. Wegenerally have no further obligation to our customers regarding our technology.Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements’ revenue isrecognized over time, generally over the life of the servicing contract.Prior to January 1, 2018 we recognized revenue in accordance with previous guidance which required consideration to be allocatedto each element of an agreement using the relative fair value method. In other circumstances, such as those agreements involvingconsideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances,the appropriate recording of revenue between periods required the use of judgment. In all cases, revenue was only recognized afterall the following criteria are met: (1) written agreements had been executed; (2) delivery of technology or intellectual propertyrights had occurred or services had been rendered; (3) fees were fixed or determinable; and (4) collectability of fees was reasonablyassured.Under the previous guidance, upon signing a patent license agreement, including licenses entered upon settlement of litigation, weprovided the licensee permission to use our patented technology in specific applications. We accounted for patent licenseagreements with amounts allocated to each element based on their fair values and we elected to utilize the leased-based model forrevenue recognition with revenue being recognized over the expected period of benefit to the licensee.Deferred RevenueFrom 2013 to 2016, we received payments totaling $10,000 under a contract. In accordance with our revenue recognition policy,we deferred and then recognized revenue over the life of the contract, but not ahead of collection. We adopted Topic 606 onJanuary 1, 2018 using the modified retrospective approach as discussed above. As a result, revenues totaling $2,500 under thecontract were no longer deferred and were written down, and the opening balance of retained earnings was written up (see Note 15– Effects of Adopting ASU Topic 606).Activity under the August 2013 Contract Settlement was as follows: 201820172016Deferred Revenue, beginning of year$2,500 $4,000 $3,000 ASC 606 Adjustment (2,500) — — Payment received — — 2,500 Less: Amount amortized as revenue — 1,500 1,500 Deferred Revenue, end of year$— $2,500 $4,000 49TABLE OF CONTENTSRoyalty ExpenseRoyalty expense for the years ended December 31, 2018, 2017 and 2016 was $0, $0 and $884, respectively and was a result of ourroyalty agreement with Leidos. The agreement provides for revenue sharing and legal reimbursements related to attorney time andexpenses incurred by Leidos during discovery and other aspects of litigation matters that have been resolved.Cash and Cash EquivalentsWe consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to becash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of theseinvestments.Prepaid Expenses and Other Current AssetsPrepaid Expense and Other Current Assets on the consolidated balance sheet include the current portion of prepaid rent for afacility lease for corporate promotional and marketing purposes. In March 2014, the Company prepaid $4,000 which is beingamortized over the 10-year term of the lease. The unamortized non-current portion of the prepayment is included in PrepaidExpenses-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 asother comprehensive income. Realized gains and losses are recorded in income in the period they are realized using specificidentification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments includingcorporate, government and federal agency securities, with contractual maturities less than two years. By policy, we limit theamount of credit exposure to any one issuer.Property and EquipmentProperty and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation andamortization are computed using the accelerated and straight-line methods over the estimated useful lives of the assets, whichrange from five to seven years. Repair and maintenance costs are charged 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 withthese financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insuredby the Federal Deposit Insurance Corporation, or FDIC. During the year ended December 31, 2018 and 2017, we had, at times,funds that were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associatedwith commercial banking relationships. We have not experienced any losses on our deposits 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 of their generally short maturities.Intangible AssetsWe record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over theirestimated useful lives, which can range 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 circumstancesindicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured bycomparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are consideredto be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds theprojected discounted future net cash flows arising from the asset.50TABLE OF CONTENTSResearch and DevelopmentResearch and development costs include expenses paid to outside development consultants and compensation related expenses forour 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 ofdeferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the taxbasis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimatesand assumptions that could differ from actual results reflected on the income tax returns filed during the following years.Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a changein tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, weconsider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently availableinformation and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized.The determination of the need for a valuation allowance is based on an on-going evaluation of current information including,among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expectedtiming of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferredincome tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxableincome in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and becausethe impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance establishedagainst our net deferred income tax assets, we consider all available evidence, both positive and negative. Consistent with ourpolicy, and because of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets,including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our ability to generatesufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is morelikely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in ourstatements of operations.We account for our uncertain tax positions in accordance with U.S. GAAP. The U.S. GAAP method of accounting for uncertain taxpositions utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position todetermine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, isaddressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount ofbenefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement withtax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recordeduntil the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, orthe statute of limitations expires. Positions previously recognized are derecognized when we subsequently determine the positionno longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements usingcumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amendedthe Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Forbusinesses, the Act reduced the corporate federal tax rate from a maximum of 35% to a 21% rate effective on January 1, 2018. Thetax rate of 21% was applied to the balances of our federal deferred tax assets and liabilities at December 31, 2018, but because weprovided a full valuation allowance against our net deferred tax assets, no tax impact was recognized due to the federal tax ratechange.The Act changes the worldwide territorial tax system. The new Section 951A impose Global Intangible Low-Taxed Income“GILTI” tax on taxpayers who own 10% or more of a controlled foreign corporation. GILTI is broadly the excess income of foreignsubsidiaries over the routine return on tangible business assets. The company has no GILTI tax liability in 2018 because its foreignsubsidiary has negative earnings in 2018.51TABLE OF CONTENTSStock-Based CompensationWe account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognizethese compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting termof 4 years. We do not estimate the forfeiture rate and recognize forfeitures, if any, when they occur. See Note 6 - Stock-BasedCompensation below for additional information concerning our share-based compensation awards.In addition, as required we record stock-based compensation expense for awards granted to non-employees at fair value of theconsideration received or the fair value of the equity instruments 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 ofoutstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weightedaverage number of shares outstanding during the period increased to include the number of additional shares of common stock thatwould have been outstanding if the potentially dilutive securities had been issued. During 2018, 2017 and 2016 we incurredlosses; therefore, the effect of any common stock equivalent would be anti-dilutive during these periods.ReclassificationsCertain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the currentyear’s presentation.New Accounting PronouncementsIn August 2018 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 - FairValue Measurement (Topic 820). The FASB is issuing the amendments in this ASU as part of the disclosure framework project. OnMarch 4, 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’s objective andprimary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clearcommunication of the information required by GAAP that is most important to users of each entity’s financial statements. Theamendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019. We are evaluating the impact this guidance will have on our financial position and statement of operations.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (“Topic 326”). The purpose of this ASU is torequire a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit lossesrelating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective forinterim and annual reporting periods beginning after December 15, 2019. We are evaluating the impact this guidance will have onour financial position and statement of operations.In February 2016, FASB issued ASU No. 2016-02, Leases (“Topic 842”). Topic 842 requires an entity to recognize right-of-useassets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies,Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within thatreporting period, with early adoption permitted. We have evaluated this ASU and believe this guidance will not have a materialimpact on our financial position and statement of operations.In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. As amended, Topic 606 supersedesprior revenue recognition requirements including most industry-specific revenue recognition guidance. In summary, the coreprinciple of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. OnJanuary 1, 2018 we adopted this standard which resulted in a $2,500 decrease in the opening balance of our accumulated deficitand a $2,500 decrease in deferred revenue in our consolidated balance sheet (see Note 15 — Effects of Adopting ASU Topic 606).52TABLE OF CONTENTSNote 3 − Property and EquipmentOur major classes of property and equipment were as follows: December 31 20182017Office furniture$79 $79 Computer equipment 67 172 Total 146 251 Less accumulated depreciation (137) (244)Total property and equipment, net$9 $7 Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $18, $26 and $28, respectively.Note 4 − Commitments, Contingencies and Related Party TransactionsWe lease our offices under an operating lease with a third party expiring in October 2019. We recognize rent expense on a straight-line basis over the term of the lease. Rent expense was $56, for each of the years ended December 31, 2018, 2017 and 2016. Futureminimum rents due under the lease total $46 in 2019, when the lease expires.We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel foremployees of the Company. We incurred approximately $1,590, $1,240, and $772 in rental fees and reimbursements to the LLCduring the years ended December 31, 2018, 2017 and 2016, respectively. We pay for the Company’s usage of the aircraft and haveno rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC andcontrol the equity interests of the LLC. We entered into a 12-month non-exclusive agreement with the LLC for use of the plane at arate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal in suchtransactions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unlessterminated by either party. Neither party has exercised their termination rights.Note 5 − Stock PlanWe have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the“2013 Plan”), which has been approved by our stockholders. To the extent that any award should expire, become un-exercisable oris otherwise forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan. The 2013Plan provides for the granting of stock options and restricted stock units purchase rights (“RSUs”) to our employees andconsultants. Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options. Incentivestock options (“ISOs”) may only be granted to our employees (including officers and directors). Nonqualified stock options(“NSOs”) and stock purchase rights may be granted to our employees and consultants.The 2013 Plan will expire in 2023. Options may be granted under the 2013 Plan with an exercise price determined by our Board ofDirectors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employeeshall be not less than 100% of the fair market value at the date of grant in the case of ISOs or 85% of the fair market value at thedate of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall notbe less than 100% fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholdershall not be less than 110% of the fair market value of the shares on the date of grant. Stock options granted under the 2013 Plantypically 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 thedate of grant because they have no exercise price. RSUs typically vest over four years. At December 31, 2018, there were 1,703,899shares available for grant under the 2013 Plan.53TABLE OF CONTENTSNote 6 − Stock-Based CompensationThe following tables summarize information about stock options and RSUs outstanding at December 31, 2018:Options OutstandingOptions Vested and ExercisableRange ofExercise PricesNumberOutstandingWeightedAverageRemainingContractualLife (Years)WeightedAverageExercisePriceNumberExercisableWeightedAverageRemainingContractualLife (Years)WeightedAverageExercisePrice$ 0.24- 1.58 653,816 0.26 $1.16 653,816 0.26 $1.16 $ 1.74- 6.95 4,091,396 7.86 4.04 1,947,678 6.90 4.24 $ 14.52- 35.25 1,253,625 3.71 23.16 1,253,625 3.71 23.16 5,998,837 6.16 $7.72 3,855,119 4.74 $9.87 The following tables summarize activity under the Plan for the indicated periods: Options Number ofSharesWeightedAverageExercisePriceWeightedAverageRemainingContractualLife (Years)AggregateIntrinsicValueOutstanding at December 31, 2015 4,999,928 $8.76 — $— Options granted 429,000 4.77 — — Options exercised (50,357) 0.40 — — Outstanding at December 31, 2016 5,378,571 $8.52 — $— Options granted 1,613,500 4.06 — — Options exercised (12,500) 1.74 — — Options cancelled (1,841,505) 4.71 — — Outstanding at December 31, 2017 5,138,066 $8.41 — $— Options granted 1,095,000 3.52 — — Options exercised (117,229) 1.15 — — Options cancelled (117,000) 5.34 — — Outstanding at December 31, 2018 5,998,837 $7.72 6.16 $810 Options exercisable at December 31, 2018 3,855,119 $9.87 4.74 $809 RSUs Number ofRSUsWeightedAverageGrant DateFair ValueAggregateIntrinsicValueOutstanding at December 31, 2015 359,956 $13.22 $— RSUs granted 219,331 4.75 — RSUs vested (155,852) 15.27 — Outstanding at December 31, 2016 423,435 $8.08 $— RSUs granted 220,664 3.83 — RSUs vested (174,438) 10.47 — Outstanding at December 31, 2017 469,661 $5.19 $— RSUs granted 246,663 3.26 — RSUs vested (211,330) 6.19 — Outstanding at December 31, 2018 504,994 $3.83 $— Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of2018, which was $2.40, and the exercise price of the options. For options exercised, the intrinsic value54TABLE OF CONTENTSis the difference between market price and the exercise price on the date of exercise. We received cash proceeds of $135, $22 and$20 from stock options exercised in 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised was $241,$25 and $91 during the years ended December 31, 2018, 2017 and 2016, respectively.Stock-based compensation expense is included in general and administrative expense for each period as follows:Stock-Based Compensation by Type of AwardYear EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Stock options$2,926 $2,446 $3,436 RSUs 1,129 1,540 1,962 Total stock-based compensation expense$4,055 $3,986 $5,398 As of December 31, 2018, there was $5,960 of unrecognized stock-based compensation expense related to unvested employeestock options and $1,442 of unrecognized stock-based compensation expense related to unvested RSUs. These costs are expectedto be recognized over a weighted-average period of 2.67 and 2.38 years, respectively.The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using thefollowing weighted average assumptions: Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Expected stock price volatility85.26%84.91%79.6%Risk-free interest rate2.73%1.94%1.85%Expected life term6.02 years6.08 years6.03 yearsExpected dividends0%0%0%Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock options grantedwas $2.58, $2.93 and $3.25 per share during the years ended December 31, 2018, 2017 and 2016, respectively.The expected life was determined using the simplified method outlined in ASC 718, “Compensation - Stock Compensation”.Expected volatility of the stock options was based upon historical data and other relevant factors. We have not provided anestimate for forfeitures because we have had nominal forfeited options and RSUs and believed that all outstanding options andRSUs at December 31, 2018, would vest.Note 7 − Earnings Per ShareBasic earnings per share are based on the weighted average number of shares outstanding for a period. Diluted earnings per shareare based upon the weighted average number of shares and potentially dilutive common shares outstanding. Potential commonshares outstanding principally include stock options, under our stock plan and warrants. During 2018, 2017 and 2016 we incurredlosses; therefore, the effect of any common stock equivalent would be anti-dilutive during those periods.The table below sets forth the basic and diluted loss per share calculations: Year Ended December 31, 201820172016Net loss$(25,406) (17,278)$(28,569)Basic and diluted weighted average number of sharesoutstanding 62,986 58,354 55,985 Basic and diluted loss per share$(0.40) (0.30)$(0.51)Note 8 − Common StockEach share of common stock has the right to one vote. The holders of common stock are entitled to receive dividends wheneverfunds are legally available and when declared by our Board of Directors, subject to the prior rights of holders of all classes of stockoutstanding having priority rights as to dividends. Our restated articles of incorporation authorize us to issue up to 100,000,000shares of $.0001 par value common stock.In August 2015, we filed a universal shelf registration statement with the SEC enabling us to offer and sell from time to time up to$100 million of equity, debt or other types of securities. We also entered into an at-the-market (“ATM”)55TABLE OF CONTENTSequity offering sales agreement with Cowen & Company, LLC in August 2015, under which we may offer and sell shares of ourcommon stock having an aggregate value of up to $35 million. On March 8, 2018, we amended our August 20, 2015 equityoffering sales agreement with Cowen whereby the maximum aggregate value of the Company’s common stock we could offer andsell, from time to time, was increased from $35,000 to $50,000. This registration statement expired on September 2, 2018.On July 30, 2018 we filed a $100,000 replacement universal shelf registration statement on SEC Form S-3. This replacementregistration statement was declared effective by the SEC on August 16, 2018. We also entered a new ATM with Cowen on August31, 2018, under which we could offer and sell shares of our common stock having an aggregate value of up to $50,000.We intend to use the ATM proceeds for GABRIEL product development and marketing, and general corporate purposes, whichmay include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products,technologies or businesses. As of December 31, 2018, common stock with an aggregate value of up to $37,458 remained availablefor offer and sale under the ATM agreement.We sold 7,510,555, 730,444 and 4,760,594 shares of common stock under the ATM program during the years ended December 31,2018, 2017 and 2016 respectively. The average sales price per common share sold during the year ended December 31, 2018 was$3.71 and the aggregate proceeds from the sales totaled $27,837 during the period. Sales commissions, fees and other costsassociated with the ATM transactions totaled $785 for 2018. The average sales price per common share sold during the year endedDecember 31, 2017 was $5.19 and the aggregate proceeds from the sales totaled $3,790 during the period. Sales commissions, feesand other costs associated with the ATM transactions totaled $113 for 2017. The average sales price per common share sold duringthe year ended December 31, 2016 was $4.16 and the aggregate proceeds from the sales totaled $19,791 during the period. Salescommissions, fees and other costs associated with the ATM totaled $594 for 2016 (see Note 16 Subsequent Events).Note 9 − Equity WarrantsIn 2015 we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $7 per share, which expire inApril 2020. Information about warrants outstanding as of December 31, 2018 is as follows:OriginalNumber ofWarrantsIssuedExercisePrice perCommonShareExercisable atDecember 31,2017BecameExercisableExercisedTerminated /Cancelled /ExpiredExercisable atDecember 31,2018ExpirationDate25,000$7.0025,000———25,000April 2020Note 10 − Employee Benefit PlanWe sponsor a defined contribution 401k plan covering substantially all our employees. Our matching contribution to the plan wasapproximately $95, $84 and $90 in 2018, 2017 and 2016, respectively.Note 11 − Income TaxesThe income tax provision is comprised of the following: Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Current: Federal$ — $ — $ — State (3) (3) (133)Foreign — — — (3) (3) (133)Deferred: Federal — — — State — — — Total income tax provision$(3)$(3)$(133)56TABLE OF CONTENTSA reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016United States federal statutory rate 21.00% 35.00% 35.00%State taxes, net of federal benefit (0.01)% (0.01)% (0.31)%Valuation allowance (24.33)% (35.94)% (35.43)%Accounting method change - ASC 606 2.07% — — R&D Credit 1.53% 1.43% 0.66%Other (0.27)% (0.50)% (0.39)%Effective income tax rate (0.01)% (0.02)% (0.47)%In 2018, 2017 and 2016, we had pre-tax losses of $25 million, $17 million and $28 million, respectively, which are available forcarry forward to offset future taxable income. We made determinations to provide full valuation allowances for our net deferred taxassets at the end of 2018, 2017 and 2016, including NOL carryforwards generated during the years, based on our evaluation ofpositive and negative evidence, including our history of operating losses and the uncertainty of generating future taxable incomethat would enable us to realize our deferred tax assets.Deferred tax assets (liabilities) consist of the following: Year EndedDecember 31, 2018Year EndedDecember 31, 2017Deferred tax assets: Reserves and accruals$45 $963 Research and development credits and other credits 1,635 1,300 Net operating loss carry forward 25,733 22,448 Stock based compensation 8,857 9,260 Other 26 54 Total deferred tax assets 36,296 34,025 Valuation allowance (36,296) (34,025)Deferred tax assets after valuation allowance — — Deferred tax liability: Depreciation and amortization — — Total deferred tax liability — — Net deferred tax assets$— $— On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amendedthe Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Forbusinesses, the Act reduced the corporate federal tax rate from a maximum of 35% to a 21% rate effective on January 1, 2018. Thetax rate of 21% was applied to the balances of our federal deferred tax assets and liabilities at December 31, 2018, but because weprovided a full valuation allowance against our net deferred tax assets, no tax impact is recognized due to the federal tax ratechange.The Act changes the worldwide territorial tax system. The new Section 951A impose Global Intangible Low-Taxed Income“GILTI” tax on taxpayers who own 10% or more of a controlled foreign corporation. GILTI is broadly the excess income of foreignsubsidiaries over the routine return on tangible business assets. The company has no GILTI tax liability in 2018 because its foreignsubsidiary has negative earnings in 2018.In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or alldeferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences become deductible.57TABLE OF CONTENTSBased on the available objective evidence, management believes it is more likely than not that the net deferred tax assets atDecember 31, 2018 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its netdeferred tax assets at December 31, 2018. The net change in the total valuation allowance for the 12 months ended December 31,2018 was an increase of $2,271. At December 31, 2018, we had federal and state net operating loss carry-forwards of approximately$112,709 and $107,948, respectively, expiring beginning in 2027 for federal and in 2028, for state. At December 31, 2018, we hadfederal research and development credit carry-forwards of approximately $1,635, expiring beginning in 2031.Internal Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can beoffset by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a losscorporation. California, the state in which our headquarters was once located, has similar rules. Our capitalization described hereinmay have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct net operating loss carryforwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation.Management has done a high level analysis on the utilization of its NOL carryforwards against taxable income in future periodsand determined on a more likely than not basis it will be able to use all of its NOLs before they expire.We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technicalmerits, that the position will be sustained upon examination. As a result, we have provided contingent reserve under ASC 740-10of $316 at December 31, 2018, 2017 and 2016. Our tax returns are subject to review by various tax authorities. The returns subjectto review are those from 2005 forward.Our policy is to recognize interest and penalties, if any, accrued on any unrecognized tax benefits, as a component of income taxexpense. We had no interest or penalties accrued for the year ended December 31, 2018.A reconciliation of beginning and ending amounts of unrecognized tax benefits follows: Year EndedDecember 31, 2018Year EndedDecember 31, 2017Year EndedDecember 31, 2016Balance at the beginning of the year$316 $316 $316 Additions based on tax positions related to the current year — — — Additions for tax positions of prior years — — — Settlements — — — Lapse of applicable statute of limitations — — — Balance at the end of the year$316 $316 $316 Note 12 − Fair Value MeasurementWe apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a recurring basis. Fair value is estimated by applying the following hierarchy,which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon thelowest level of input that is available and significant to the fair value measurement: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 foridentical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets or liabilities.Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that marketparticipants would use in pricing the asset or liability.The carrying amounts for cash and cash equivalents, investments in certificates of deposit, accounts payable and accrued expensesapproximate their fair values due to the short period of time until maturity.Mutual funds: Valued at the quoted net asset value (NAV) of shares held.U.S. agency securities: Fair value measured at the closing price reported on the active market on which the individualsecurities are traded.58TABLE OF CONTENTSThe following table shows our cash and available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized lossesand fair value by significant investment category recorded as cash and cash equivalents of investments available for sale as ofDecember 31, 2018 and 2017 (in thousands): December 31, 2018 AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCashand CashEquivalentsInvestmentsAvailablefor SaleCash$5,048 $— $— $5,048 $5,048 $— Level 1: Mutual funds 1,107 — — 1,107 1,107 — U.S. agency securities 3,259 — — 3,259 1,456 1,803 4,366 — — 4,366 2,563 1,803 Total$9,414 $— $— $9,414 $7,611 $1,803 December 31, 2017 AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCashand CashEquivalentsInvestmentsAvailablefor SaleCash$1,972 $— $— $1,972 $1,972 $— Level 1: Mutual funds 616 $— — 616 616 — U.S. agency securities 2,001 $— (1) 2,000 547 1,453 2,617 $— (1) 2,616 1,163 1,453 Total$4,589 $— $(1)$4,588 $3,135 $1,453 The maturities of our marketable securities generally range from within one to two years. Actual maturities could differ fromcontractual maturities due to call or prepayment provisions.Note 13 – LitigationWe have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District ofTexas, Tyler Division (“USDC”), and United States Court of Appeals for the Federal Circuit (“USCAFC”).VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”),and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos.6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant wereseparated by the judge. Aastra and NEC agreed to sign license agreements with us and we dropped all accusations of infringementagainst them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco onMarch 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.On November 6, 2012, a jury the USDC awarded us over $368,000 for Apple’s infringement of four of our patents, plus dailyinterest up to the final judgment.Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that allfour of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of theasserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty ratesregarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’sclaim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination ofinfringement with respect to FaceTime back to the USDC for further proceedings.On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’sinfringement of four of our patents. On September 29, 2017, the USDC entered its final59TABLE OF CONTENTSjudgement, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willfulinfringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs,certain attorneys’ fees, and prejudgment interest. The total amount in the final judgement was $439,700, including $302,400 (juryverdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).On October 27, 2017 Apple filed its notice of appeal of this final judgement to the USCAFC. Apple filed its opening brief onMarch 19, 2018. We filed our response on April 4, 2018. On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned to the same merits panel. Events and developments after this order aredescribed below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Appleinfringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages andinjunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and thelatest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I casewas initiated. Post-Trial Motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment andissued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and grantingVirnetX’s motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Macproducts, pre-judgment and post-judgment interest and costs. On September 20, 2018, pursuant to a Court’s order, attorneys fromVirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and PrejudgmentInterest to the $502,600 jury verdict. The total amount in the final judgement in the Apple II case is now $595,900. Apple has fileda notice of appeal with the USCAFC in the Apple II case. On October 9, 2018, USCAFC accepted the notice and docketed it asCase No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case are described below underVirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”).VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same meritspanel;•VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368)On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial and Appeal Board(“PTAB”) in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. Oral arguments in this casewere argued on January 8, 2019. We are awaiting the Court’s decision in this matter.•VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United StatesCourt of Appeals for the Federal Circuit. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court’sissued a Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearing and rehearing en-banc inthis matter on February 21, 2019. On March 12, 2019, the court invited us to respond to Apple's petition on or before March 26,2019. We are currently preparing our response.•VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591)On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to our U.S. Patent Nos. 7,921,211 and 7,418,504. Oralarguments in this case were argued on January 8, 2019. We are awaiting the Court’s decision in this matter.VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)On January 24, 2019 Apple filed opening brief. We filed our response on March 1, 2019. Apple’s next response is due on April 5,2019. The oral arguments have not yet been scheduled.60TABLE OF CONTENTSVirnetX Inc. v. Apple Inc. (Case 17-2490)On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018, the USCAFC issued an opinion affirming the PTAB’sinvalidity findings.VirnetX Inc. (Case 17-2593)On September 22, 2017, we filed with the USCAFC, appeals of the invalidity findings by the PTAB in IPR2016-00693 andIPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. The briefing in these appeals has not taken place. Theentity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. OnNovember 27, 2017, the USPTO indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed theseappeals pending the USCAFC’s decision in Case 17-1591.VirnetX Inc. (Case 18-1751)On March 30, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,851 involving our U.S. Patent No. 7,418,504. The briefing in this appeal has been concluded; the oral argument has not yetbeen scheduled.VirnetX Inc. (Case 18-1872)On April 23, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2016-01585 involving ourU.S. Patent No. 8,904,516. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 18-2211)On July 31, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in IPR2017-00337 involving ourU.S. Patent No. 9,038,163. On November 30, 2018, the USCAFC granted an unopposed motion to dismiss this appeal.VirnetX Inc. (Case 19-1043)On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.95/001,746 involving our U.S. Patent No. 6,839,759. VirnetX’s opening brief is due in March 2019.One or more potential intellectual property infringement claims may also be available to us against certain other companies whohave the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing alawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we madethem. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our otherresources, including capital resources, from efforts to successfully commercialize our products.Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened orcontemplated against us.Note 14 − Quarterly Financial Information (unaudited) FirstSecondThirdFourth (in thousands except per share) 2018 Revenue$6 $16 $7 $34 Loss from operations$(7,608)$(6,462)$(4,948)$(6,439)Net loss$(7,605)$(6,450)$(4,934)$(6,417)Basic and diluted (loss) per common share$(0.13)$(0.10)$(0.08)$(0.09)61TABLE OF CONTENTS FirstSecondThirdFourth (in thousands except per share) 2017 Revenue$375 $396 $375 $401 Loss from operations$(3,906)$(3,811)$(3,562)$(6,042)Net loss$(3,894)$(3,798)$(3,552)$(6,034)Basic and diluted (loss) per common share$(0.07)$(0.07)$(0.06)$(0.10)Note 15 – Effects of Adopting ASU Topic 606 – (in thousands except share and per share amounts)As described in Note 2 – Summary of Significant Accounting Policies, we account for revenue in accordance with AccountingStandards Update (“ASU”) No.2014-09, Revenue from Contracts with Customers, which we adopted on January 1, 2018 using themodified-retrospective method. The effect of the changes made to the Company’s January 1, 2018 balance sheet as a result of theadoption of Topic 606 were as follows:BALANCE SHEET HIGHLIGHTSReported As ofDecember 31, 2017Effects of AdoptingTopic 606As ofJanuary 1, 2018Current liabilities: Deferred revenue, current portion$1,500 $(1,500)$— Total current liabilities$4,482 $(1,500)$2,982 Deferred revenue, non-current portion$1,000 $(1,000)$— Total Liabilities$5,622 $(2,500)$3,122 Accumulated deficit$(175,516)$2,500 $(173,016)Total Stockholder’s Equity$1,553 $2,500 $4,053 The impacts of adoption of Topic 606 on the consolidated balance sheet and statement of operations were as follows: Year Ended December 31, 2018BALANCE SHEET HIGHLIGHTSPre-Topic 606Effects of AdoptingTopic 606(as reported)Current liabilities: Deferred revenue, current portion$1,000 $(1,000)$— Total current liabilities$2,863 $(1,000)$1,863 Total liabilities$2,863 $(1,000)$1,863 Accumulated deficit (199,422) 1,000 (198,422)Total stockholders’ equity$8,888 $1,000 $9,888 Year Ended December 31, 2018INCOME STATEMENT HIGHLIGHTSPre-Topic 606Effects of AdoptingTopic 606(as reported)Revenue$1,563 $(1,500)$63 Loss from operations (23,957) (1,500) (25,457)Loss before taxes (23,903) (1,500) (25,403)Net loss$(23,906)$(1,500)$(25,406)Basic and diluted loss per share$(0.38)$(0.02)$(0.40)Weighted average shares outstanding basic and diluted 62,985,763 62,985,763 62,985,763 The adoption of Topic 606 had no impact on net cash used in operating activities.Note 16 – Subsequent EventsBetween January 1, 2019 and February 20, 2019, we sold 560,338 shares of common stock under the 2018 ATM offering. Theaverage sales price per common shares sold was $5.24 and the aggregate proceeds from the sales totaled $2,936. Salescommissions, fees and other costs associated with these ATM transactions totaled $88.62TABLE OF CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors andStockholders of VirnetX Holding CorporationOpinion on Internal Control over Financial ReportingWe have audited VirnetX Holding Corporation’s (the Company’s) internal control over financial reporting as of December 31,2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—IntegratedFramework (2013) issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated balance sheets and the related consolidated statements of income, comprehensive loss, stockholders’equity, and cash flows of the Company, and our report dated March 18, 2019, expressed an unqualified opinion.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Reporton Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit of internal control over financial reporting included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofthe assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Farber Hass Hurley LLPChatsworth, CaliforniaMarch 18, 201963TABLE OF CONTENTSItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our Chief Executive Officer and Chief FinancialOfficer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, December 31, 2018.The purpose of this evaluation was to determine whether as of December 31, 2018 our disclosure controls and procedures wereeffective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC, (i) isrecorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulatedand communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2018,our disclosure controls and procedures were effective.Changes in Internal Control Over Financial ReportingThere were no changes in our internal controls over financial reporting (as such term is defined in rules 13a-15(f) under theSecurities Exchange Act of 1934, as amended) during the fiscal year ended December 31, 2018 that have materially affected, or arereasonably likely to materially affect, our internal controls over 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 theCompany. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of ourfinancial reporting for external purposes in accordance with accounting principles generally accepted in the United States ofAmerica. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairlyreflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financialstatements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance withmanagement authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Companyassets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of itsinherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement ofour financial statements would be prevented or detected.Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the frameworkin Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting waseffective as of December 31, 2018. There were no changes in our internal control over financial reporting during the period endedDecember 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting. Farber Hass Hurley LLP has audited our internal control over financial reporting as of December 31, 2018; their report isincluded elsewhere herein.Item 9B.Other InformationTermination of PITA AgreementsOn March 16, 2018, we sent a letter to PITA acknowledging the termination of the Amended and Restated Revenue SharingAgreement and the Amended and Restated Gabriel License Agreement with PITA. Although we consider the PITA Agreementsterminated as of March 16, 2018, our letter also constituted our (i) notice of termination of the Amended and Restated RevenueSharing Agreement pursuant to Section 5.2(b) thereof and (ii) notice of termination of the Amended and Restated Gabriel LicenseAgreement pursuant to Section 5.2(b) thereof to PITA.64TABLE OF CONTENTSNew Form of Indemnification AgreementOn March 14, 2019, our Board of Directors approved and adopted a new form of indemnification agreement (the “IndemnificationAgreement”) which we expect to enter into with each of our current directors and officers (collectively, the “Indemnitees”). TheIndemnification Agreement replaces the existing form of indemnification agreement in place with the Company’s directors andofficers, which was adopted by the Board in 2007 (the “Prior Indemnification Agreement”).The Indemnification Agreement continues to provide for, among other things, the indemnification by the Company of theIndemnitees to the maximum extent permitted by Delaware law and the advancement of reasonable expenses incurred byIndemnitees in connection with certain legal proceedings, and shall be in addition to any other rights the Indemnitees may haveunder applicable law, the Company’s charter documents or bylaws, or otherwise. The Indemnification Agreement also continues toset forth procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims forwhich indemnification is sought, the procedures for enforcement of indemnification rights, and the limitations on and exclusionsfrom indemnification.The foregoing description of the Indemnification Agreement does not purport to be complete and is subject to and qualified in itsentirety by reference to the complete form of Indemnification Agreement, a copy of which is filed as Exhibit 10.1 to this AnnualReport on Form 10-K and incorporated herein by reference.65TABLE OF CONTENTSPART IIIItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connectionwith our 2018 Annual Meeting of Stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days afterthe end of our fiscal year ended December 31, 2018 and is incorporated in this report by reference.Item 11.Executive CompensationThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.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 approved by our stockholders. The Plan provides for the granting of up to 16,624,469 shares of our common stock,including stock options and stock purchase rights, and will expire in 2023. As of December 31, 2018, there were 1,703,899 sharesavailable to be granted under the Plan. We had 5,998,837 and 5,138,066 options outstanding at December 31, 2018, and December31, 2017, respectively, with an average exercise price of $7.72 and $8.41, respectively. We had 504,993 and 469,661 restrictedstock units outstanding at December 31, 2018 and December 31, 2017, respectively, with a weighted average grant price of $3.83and $5.19 respectively.Plan CategoryNumber ofSecurities to beIssued UponExercise ofOutstandingOptions,Warrants andRightsWeighted-AverageExercise Price ofOutstandingOptions, Warrantsand RightsNumber ofSecuritiesRemainingAvailable forFuture IssuanceUnder EquityCompensationPlansEquity compensation plans approved by security holders 6,528,830 $7.42 1,703,899 Equity compensation plans not approved by security holders — — Total 6,528,830 $7.42 1,703,899 On February 16, 2018, February 26, 2018, May 31, 2018 and September 26, 2018, the Compensation Committee granted 640,000,30,000, 302,500 and 85,000 options respectively to the employees of VirnetX Inc. On February 26, 2018 and May 31, 2018 theCompensation Committee granted 20,000 and 201,664 RSUs respectively to the employees of VirnetX, Inc. On May 24, 2018, theCompensation Committee granted 37,500 options and 24,999 RSUs to members of the Board of Directors of VirnetX, Inc.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.Item 14.Principal Accountant Fees and ServicesThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.TABLE OF CONTENTSPART 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 onForm 10-K.(2)Financial Statement Schedule: Financial statement schedules are omitted because they are not applicable, or therequired information is shown in the financial statements or notes thereto. All other schedules are omitted because ofthe absence of conditions under which they are required or because the required information is given in the financialstatements or the notes thereto.(3)Exhibits: The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated byreference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered inaccordance with Item 601 of Regulation S-K).EXHIBIT INDEXExhibitNumber Incorporated by reference hereinDescriptionFormExhibit 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 andbetween the Company and Corporate StockTransfer, Inc. as Warrant Agent.S-1/A4.101/16/2009333-1536454.2Form of Series I Warrant.8-K4.109/03/2009001-338524.3Specimen Common Stock Certificate.S-34.107/30/2018333-2264134.4Form of Senior IndentureS-34.207/30/2018333-2264134.5Form of Subordinated IndentureS-34.407/30/2018333-22641310.1Form of Indemnification Agreement by andbetween the Company and each of Kendall Larsen,Robert D. Short III, Gary Feiner, Michael F.Angelo, Thomas M. O’Brien and Richard Nance. 10.2*2007 Stock Plan, as amended on April 13, 2012.10-Q10.205/10/2012001-3385210.3*Amended Form of Stock Option Agreement – 2007Stock 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 EquityIncentive Plan.10-K10.603/02/2015001-3385210.7*Form of Restricted Stock Unit Agreement – 2013Equity Incentive Plan.10-K10.703/02/2015001-3385210.8Voting Agreement among the Company andcertain of its stockholders, dated as of December12, 2007.10-K10.1103/31/2008001-3385210.9Securities Purchase Agreement, dated as ofSeptember 2, 2009, by and between the Companyand the Purchasers (as defined therein).8-K10.109/03/2009001-3385210.10Form of Registration Rights Agreement by andbetween the Company and the Purchasers (asdefined therein).8-K10.209/03/2009001-33852TABLE OF CONTENTSExhibitNumber Incorporated by reference hereinDescriptionFormExhibit No.Filing DateFile No.10.11Form of Underwriting Agreement between VirnetXHolding Corporation and Gilford SecuritiesIncorporated.S-1/A1.101/16/2009333-15364510.12Patent License and Assignment Agreement by andbetween the Company and Leidos, Inc. (formerlyScience Applications International Corporation)dated as of August 12, 2005.8-K10.407/12/2007000-2689510.13Amendment No. 1 to Patent License andAssignment Agreement by and between theCompany and Leidos, Inc. dated as of November 2,2006.8-K10.607/12/2007000-2689510.14Amendment No. 2 to Patent License andAssignment Agreement by and between VirnetX,Inc. and Leidos, Inc. dated as of March 12, 2008.8-K10.103/18/2008001-3385210.15Security Agreement by and between the Companyand Leidos, Inc. dated as of August 12, 2005.8-K10.507/12/2007000-2689510.16Assignment Agreement between the Company andLeidos, Inc. dated as of December 21, 2006.8-K10.707/12/2007000-2689510.17Professional Services Agreement by and betweenthe Company and Leidos, Inc. dated as of August12, 2005.8-K10.807/12/2007000-2689510.18**Engagement Letter dated June 8, 2009, by andbetween McKool Smith, a professionalcorporation, and VirnetX, Inc.10-Q10.108/10/2009001-3385210.19**Engagement Letter dated April 15, 2010, by andbetween McKool Smith, a professionalcorporation, and VirnetX, Inc.10-Q10.105/07/2010001-3385210.20**Settlement and License Agreement, by andbetween Microsoft Corporation and VirnetX, Inc.,dated May 14, 2010.10-Q/A10.101/31/2011001-3385210.21***Amended Settlement and License Agreement, byand between Microsoft Corporation and VirnetX,Inc., dated December 17, 2014.10-K10.2303/02/2015001-3385210.22*Employment Offer Letter from VirnetX, Inc. toRichard H. Nance.10-Q10.405/10/2012001-3385210.23Patent Licensing Representative Agreement, byand between IPValue Management, Inc. andVirnetX, Inc., dated May 8, 2015.10-Q10.105/11/2015001-3385210.24**Amended and Restated Revenue SharingAgreement by and between VirnetX HoldingCorporation and Public Intelligence TechnologyAssociates, dated October 18, 2017.10-Q10.111/09/2017001-33852TABLE OF CONTENTSExhibitNumber Incorporated by reference hereinDescriptionFormExhibit No.Filing DateFile No.10.25**Amended and Restated Gabriel License Agreementby and between VirnetX Holding Corporation andPublic Intelligence Technology Associates, datedOctober 18, 2017.10-Q10.211/09/2017001-3385210.26Sales Agreement, dated August 31, 2018, by andbetween VirnetX Holding Corporation and Cowenand Company, LLC.8-K10.108/31/2018001-3385221.1Subsidiaries of VirnetX Holding Corporation. 23.1Consent of Farber Hass Hurley LLP, IndependentRegistered Public Accounting Firm. 24.1Power of Attorney (contained on signature pagehereto) 31.1Chief Executive Officer Certification pursuant toRule 13a-14(a) of the Securities Exchange Act. 31.2Chief Financial Officer Certification pursuant toRule 13a-14(a) of the Securities Exchange Act. 32.1†Chief Executive Officer Certification pursuant to18 U.S.C. Section 1350 as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 32.2†Chief Financial Officer Certification pursuant to18 U.S.C. Section 1350 as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. 101.INSXBRL Instance Document 101.SCHXBRL Taxonomy Extension Schema Document 101.CALXBRL Taxonomy Extension Calculation LinkbaseDocument 101.DEFXBRL Taxonomy Extension Definition LinkbaseDocument 101.LABXBRL Taxonomy Extension Label LinkbaseDocument 101.PREXBRL Taxonomy Extension PresentationLinkbase Document *Indicates management contract or compensatory plan.**Confidential treatment has been granted by the 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 portionsshould be granted 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 of1933, as amended, or the Securities Exchange Act of 1934, as amended, whether before or after the date of this Annual Report on Form 10-K,irrespective of any general incorporation language contained in such filing.TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisAnnual Report on Form 10-K to 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 18, 2019TABLE OF CONTENTSPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints KendallLarsen his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any amendmentsto this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with theSecurities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute orsubstitutes 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 bythe following persons on behalf of the registrant and in the capacities indicated.NameCapacityDate /s/ Kendall LarsenDirector, Chief Executive Officer and PresidentMarch 18, 2019Kendall Larsen(Principal Executive Officer) /s/ Richard H. NanceChief Financial OfficerMarch 18, 2019Richard H. Nance(Principal Financial Officer andPrincipal Accounting Officer) /s/ Robert D. Short IIIDirectorMarch 18, 2019Robert D. Short III /s/ Gary FeinerDirectorMarch 18, 2019Gary Feiner /s/ Michael F. AngeloDirectorMarch 18, 2019Michael F. Angelo /s/ Thomas M. O’BrienDirectorMarch 18, 2019Thomas M. O’Brien Exhibit 10.1VIRNETX HOLDING CORPORATIONINDEMNIFICATION AGREEMENTThis Indemnification Agreement (this “Agreement”) is dated as of [insert date], and is between VirnetX Holding Corporation, a Delawarecorporation (the “Company”), and [insert name of indemnitee] (“Indemnitee”).RECITALSA. Indemnitee’s service to the Company substantially benefits the Company.B. Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequateprotection through insurance or indemnification against the risks of claims and actions against them arising out of such service.C. Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance asadequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer without additional protection.D. In order to induce Indemnitee to continue to provide services to the Company, it is reasonable, prudent and necessary for the Company tocontractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law.E. This Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s certificate of incorporation andbylaws, and any resolutions adopted pursuant thereto, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed tolimit, diminish or abrogate any rights of Indemnitee thereunder.The parties therefore agree as follows:1. Definitions.(a) A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the followingevents:(i) Acquisition of Stock by Third Party. Any Person (as defined below) becomes the Beneficial Owner (as defined below),directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company’s thenoutstanding securities;(ii) Change in Board Composition. During any period of two consecutive years (not including any period prior to theexecution of this Agreement), individuals who at the beginning of such period constitute the Company’s board of directors, and any new directors (other thana director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 1(a)(i), 1(a)(iii) or 1(a)(iv)) whose election by the board of directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of thedirectors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved,cease for any reason to constitute at least a majority of the members of the Company’s board of directors;(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, otherthan a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidationcontinuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of thecombined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power toelect at least a majority of the board of directors or other governing body of such surviving entity;(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or anagreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and(v) Other Events. Any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, asamended, whether or not the Company is then subject to such reporting requirement.For purposes of this Section 1(a), the following terms shall have the following meanings:(1) “Person” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,as amended; provided, however, that “Person” shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefitplan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions astheir ownership of stock of the Company.(2) “Beneficial Owner” shall have the meaning given to such term in Rule 13d-3 under the Securities Exchange Actof 1934, as amended; provided, however, that “Beneficial Owner” shall exclude any Person otherwise becoming a Beneficial Owner by reason of (i) thestockholders of the Company approving a merger of the Company with another entity or (ii) the Company’s board of directors approving a sale of securitiesby the Company to such Person.(b) “Corporate Status” describes the status of a person who is or was a director, trustee, general partner, managing member, officer,employee, agent or fiduciary of the Company or any other Enterprise.(c) “DGCL” means the General Corporation Law of the State of Delaware.(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of whichindemnification is sought by Indemnitee.(e) “Enterprise” means the Company and any other corporation, partnership, limited liability company, joint venture, trust, employeebenefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member,officer, employee, agent or fiduciary.-2-(f) “Expenses” include all reasonable and actually incurred attorneys’ fees, retainers, court costs, transcript costs, fees and costs ofexperts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all otherdisbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating,being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appealresulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond or otherappeal bond or their equivalent, and (ii) for purposes of Section 12(c), Expenses incurred by Indemnitee in connection with the interpretation, enforcement ordefense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses,however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.(g) “Independent Counsel” means a law firm, or a partner or member of a law firm, that is experienced in matters of corporation law andneither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (otherthan as Independent Counsel with respect to matters concerning Indemnitee under this Agreement, or other indemnitees under similar indemnificationagreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term“Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict ofinterest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.(h) “Proceeding” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolutionmechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil,criminal, administrative or investigative nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the dateof this Agreement, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact thatIndemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as adirector or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner,managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, in each case whether or not serving in such capacity at thetime any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement.(i) Reference to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessedon a person with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service as a director, officer,employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employeebenefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests ofthe participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company”as referred to in this Agreement.2. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 ifIndemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procurea judgment in its favor. Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses,judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceedingor any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the bestinterests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.-3-3. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisionsof this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure ajudgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expensesactually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, ifIndemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. Noindemnification for Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged bya court of competent jurisdiction to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery or any court in which theProceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case,Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court of Chancery or such other court shall deem proper.4. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the extent that Indemnitee is a party to or a participant inand is successful (on the merits or otherwise) in defense of any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemniteeagainst all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. For purposes of this section, thetermination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to suchclaim, issue or matter.5. Indemnification for Expenses of a Witness. To the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in anyProceeding to which Indemnitee is not a party, Indemnitee shall be indemnified to the extent permitted by applicable law against all Expenses actually andreasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.6. Additional Indemnification.(a) Notwithstanding any limitation in Sections 2, 3 or 4, the Company shall indemnify Indemnitee to the fullest extent permitted byapplicable law if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding (including a Proceeding by or in the right of theCompany to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred byIndemnitee or on his or her behalf in connection with the Proceeding or any claim, issue or matter therein.(b) For purposes of Section 6(a), the meaning of the phrase “to the fullest extent permitted by applicable law” shall include, but not belimited to:(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnificationby agreement, or the corresponding provision of any amendment to or replacement of the DGCL; and(ii) the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the dateof this Agreement that increase the extent to which a corporation may indemnify its officers and directors.-4-7. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make anyindemnity in connection with any Proceeding (or any part of any Proceeding):(a) for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision,vote or otherwise, except with respect to any excess beyond the amount paid;(b) for an accounting or disgorgement of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, orsimilar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlementarrangements);(c) for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or ofany profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Securities Exchange Act of 1934, asamended (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Actof 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation ofSection 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);(d) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company orits directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part ofthe Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Companyunder applicable law, (iii) otherwise authorized in Section 12(c) or (iv) otherwise required by applicable law; or(e) if prohibited by applicable law.8. Advances of Expenses. The Company shall advance the Expenses incurred by Indemnitee in connection with any Proceeding prior to itsfinal disposition, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 90 days, after the receipt by theCompany of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee inconnection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure madethat would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured andinterest free and made without regard to Indemnitee’s ability to repay such advances. Indemnitee hereby undertakes to repay any advance to the extent that itis ultimately determined that Indemnitee is not entitled to be indemnified by the Company, and no other form of undertaking shall be required other than theexecution of this Agreement. This Section 8 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding (or anypart of any Proceeding) for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding (or any part of any Proceeding)referenced in Section 7(b) or 7(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company.9. Procedures for Notification and Defense of Claim.(a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification oradvancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of notice thereof. The written notification to the Companyshall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notifythe Company will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and anydelay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights, except to the extent that such failure or delay materiallyprejudices the Company.-5-(b) If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has directors’ and officers’liability insurance in effect that may be applicable to the Proceedings,, the Company shall give prompt notice of the commencement of the Proceeding to theinsurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all commercially-reasonable action to causesuch insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.(c) In the event the Company may be obligated to make any indemnity in connection with a Proceeding, the Company shall beentitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, conditioned ordelayed, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee andthe retention of such counsel by the Company, the Company will not be liable to Indemnitee for any fees or expenses of counsel subsequently incurred byIndemnitee with respect to the same Proceeding. Notwithstanding the Company’s assumption of the defense of any such Proceeding, the Company shall beobligated to pay the fees and expenses of Indemnitee’s separate counsel to the extent (i) the employment of separate counsel by Indemnitee is authorized bythe Company, (ii) counsel for the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company andIndemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the fees and expenses are non-duplicative andreasonably incurred in connection with Indemnitee’s role in the Proceeding despite the Company’s assumption of the defense, (iv) the Company is notfinancially or legally able to perform its defense obligations or (v) the Company shall not have retained, or shall not continue to retain, such counsel todefend such Proceeding. The Company shall have the right to conduct such defense as it sees fit in its sole discretion. Regardless of any provision in thisAgreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled,without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.(d) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonablyappropriate.(e) The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) without theCompany’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.(f) The Company shall have the right to settle any Proceeding (or any part thereof) without the consent of Indemnitee.10. Procedures upon Application for Indemnification.(a) To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith suchdocumentation and information as is reasonably available to Indemnitee and as is reasonably necessary to determine whether and to what extent Indemniteeis entitled to indemnification following the final disposition of the Proceeding. The Company shall, as soon as reasonably practicable after receipt of such arequest for indemnification, advise the board of directors that Indemnitee has requested indemnification. Any delay in providing the request will not relievethe Company from its obligations under this Agreement, except to the extent such failure is prejudicial.-6-(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a), a determination, if required by applicable law,with respect to Indemnitee’s entitlement thereto shall be made in the specific case (i) if a Change in Control shall have occurred, by Independent Counsel in awritten opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (ii) if a Change in Control shall not have occurred, ifrequired by applicable law, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (B) bya committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s boardof directors, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to theCompany’s board of directors, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Company’s board of directors, by the stockholdersof the Company. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after suchdetermination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement toindemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is notprivileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costsor expenses (including attorneys’ fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating with the person, persons orentity making such determination shall be borne by the Company, to the extent permitted by applicable law.(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 10(b),the Independent Counsel shall be selected as provided in this Section 10(c). If a Change in Control shall not have occurred, the Independent Counsel shall beselected by the Company’s board of directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of theIndependent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemniteeshall request that such selection be made by the Company’s board of directors, in which event the preceding sentence shall apply), and Indemnitee shall givewritten notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the casemay be, may, within ten days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, awritten objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selecteddoes not meet the requirements of “Independent Counsel” as defined in Section 1 of this Agreement, and the objection shall set forth with particularity thefactual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is somade and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a courthas determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnificationpursuant to Section 10(a) hereof and (ii) the final disposition of the Proceeding, the parties have not agreed upon an Independent Counsel, either theCompany or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company orIndemnitee to the other’s selection of Independent Counsel and for the appointment as Independent Counsel of a person selected by the court or by suchother person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act asIndependent Counsel under Section 10(b) hereof. Upon the due commencement of any judicial proceeding pursuant to Section 12(a) of this Agreement, theIndependent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professionalconduct then prevailing).-7-(d) The Company agrees to pay the reasonable fees and expenses of any Independent Counsel and to fully indemnify such counselagainst any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto11. Presumptions and Effect of Certain Proceedings.(a) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making suchdetermination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemniteehas submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall, to the fullest extent not prohibitedby law, have the burden of proof to overcome that presumption.(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon aplea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right ofIndemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be inor not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his orher conduct was unlawful.(c) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith to the extent Indemniteerelied in good faith on (i) the records or books of account of the Enterprise, including financial statements, (ii) information supplied to Indemnitee by theofficers of the Enterprise in the course of their duties, (iii) the advice of legal counsel for the Enterprise or its board of directors or counsel selected by anycommittee of the board of directors or (iv) information or records given or reports made to the Enterprise by an independent certified public accountant, anappraiser, investment banker or other expert selected with reasonable care by the Enterprise or its board of directors or any committee of the board ofdirectors. The provisions of this Section 11(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may bedeemed to have met the applicable standard of conduct set forth in this Agreement.(d) Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputedto Indemnitee for purposes of determining the right to indemnification under this Agreement.12. Remedies of Indemnitee.(a) Subject to Section 12(d), in the event that (i) a determination is made pursuant to Section 10 of this Agreement that Indemnitee isnot entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 or 12(c) of this Agreement,(iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10 of this Agreement within 90 days after the later of thereceipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to thisAgreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect toindemnification pursuant to Sections 4, 5 and 12(c) of this Agreement, within 30 days after receipt by the Company of a written request therefor, or (v) theCompany or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation orother action or proceeding to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemniteeshall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses.Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right tocommence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought byIndemnitee to enforce his or her rights under Section 4 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication inaccordance with this Agreement.-8-(b) Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, IndependentCounsel or stockholders to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met theapplicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors,Independent Counsel or stockholders that Indemnitee has not met the applicable standard of conduct, shall create a presumption that Indemnitee has or hasnot met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 of this Agreement that Indemniteeis not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, on themerits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding commenced pursuant to this Section 12,the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement ofExpenses, as the case may be.(c) To the extent not prohibited by law, the Company shall indemnify Indemnitee against all Expenses that are incurred by Indemniteein connection with any action for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action, and, if requested by Indemnitee, shall (as soonas reasonably practicable, but in any event no later than 60 days, after receipt by the Company of a written request therefor) advance such Expenses toIndemnitee, subject to the provisions of Section 8.(d) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall berequired to be made prior to the final disposition of the Proceeding.13. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable toIndemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amounts incurred by Indemnitee, whether for Expenses, judgments,fines or amounts paid or to be paid in settlement, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion asis deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company andIndemnitee as a result of the events and transactions giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its otherdirectors, officers, employees and agents) in connection with such events and transactions.14. Non-exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemedexclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s certificate of incorporation or bylaws,any agreement, a vote of stockholders or a resolution of directors, or otherwise. To the extent that a change in Delaware law, whether by statute or judicialdecision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company’s certificate of incorporation andbylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change,subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred is intended to beexclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunderor now or hereafter existing at law or in equity or otherwise. Except as expressly set forth herein, the assertion or employment of any right or remedyhereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.-9-15. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwiseindemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment forsuch amounts under any insurance policy, contract, agreement or otherwise.16. Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, trustees,general partners, managing members, officers, employees, agents or fiduciaries of the Company or any other Enterprise, Indemnitee shall be covered by suchpolicy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position.17. Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all ofthe rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of suchdocuments as are necessary to enable the Company to bring suit to enforce such rights.18. Services to the Company. Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director,trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointedor until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position(subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under thisAgreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of itssubsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries orany Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may beotherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or anyEnterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of theCompany, the Company’s certificate of incorporation or bylaws or the DGCL. No such document shall be subject to any oral modification thereof.19. Duration. This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceasedto serve as a director or officer of the Company or as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of any otherEnterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee isgranted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 12 of thisAgreement relating thereto.20. Successors. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successorby purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, and shall inure to the benefit ofIndemnitee and Indemnitee’s heirs, executors and administrators. The Company shall require and cause any successor (whether direct or indirect by purchase,merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree toperform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.-10-21. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act inviolation of applicable law. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shallnot constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reasonwhatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of anysection of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shallnot in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (ii) such provision or provisions shall bedeemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (iii) to thefullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any suchprovision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intentmanifested thereby.22. Enforcement. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed onit hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon thisAgreement in serving as a director or officer of the Company.23. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof andsupersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided,however, that this Agreement is a supplement to and in furtherance of the Company’s certificate of incorporation and bylaws and applicable law.24. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing bythe parties hereto. No amendment, alteration or repeal of this Agreement shall adversely affect any right of Indemnitee under this Agreement in respect of anyaction taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. No waiver of any of the provisions ofthis Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver.25. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered orcertified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:(a) if to Indemnitee, to Indemnitee’s address, facsimile number or electronic mail address as shown on the signature page of thisAgreement or in the Company’s records, as may be updated in accordance with the provisions hereof; or(b) if to the Company, to the attention of the Chief Executive Officer or Chief Financial Officer of the Company at 308 Dorla Ct.,Zephyr Cove, NV 89448, or at such other current address as the Company shall have furnished to Indemnitee, with a copy (which shall not constitute notice)to Bradley Finkelstein, Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304.Each such notice or other communicationshall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (orif sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with thecourier), (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit ofthe United States mail, addressed and mailed as aforesaid, (iii) if sent via facsimile, upon confirmation of facsimile transfer or (v) if sent via electronic mail,upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent duringnormal business hours of the recipient, then on the recipient’s next business day.-11-26. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, andconstrued and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and Indemniteehereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only inthe Delaware Court of Chancery, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent tosubmit to the exclusive jurisdiction of the Delaware Court of Chancery for purposes of any action or proceeding arising out of or in connection with thisAgreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, The Corporation Trust Company,Wilmington, Delaware, as its agent in the State of Delaware as such party’s agent for acceptance of legal process in connection with any such action orproceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive anyobjection to the laying of venue of any such action or proceeding in the Delaware Court of Chancery, and (v) waive, and agree not to plead or to make, anyclaim that any such action or proceeding brought in the Delaware Court of Chancery has been brought in an improper or inconvenient forum.27. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be anoriginal but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signatureand in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.28. Captions. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part ofthis Agreement or to affect the construction thereof.(signature page follows)-12-The parties are signing this Indemnification Agreement as of the date stated in the introductory sentence. VIRNETX HOLDING CORPORATION (Signature) (Print name) (Title) [INSERT INDEMNITEE NAME] (Signature) (Print name) (Street address) (City, State and ZIP)EXHIBIT 21.1Subsidiaries of RegistrantName of EntityJurisdiction ofIncorporation orOrganizationNetwork Research Corporation Japan Ltd. (known as Network Research Corporation Japan KabushikiKaisha in Japan)JapanVirnetX Inc.DelawareEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-226413) and Form S-8(Nos. 333-149883, 333-196064, and 333-218467) of our reports dated March 18, 2019, relating to the consolidated financialstatements of VirnetX Holding Corporation (the “Company”), and the effectiveness of the Company's internal control overfinancial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2018./s/ Farber Hass Hurley LLPChatsworth, CaliforniaMarch 18, 2019EXHIBIT 31.1CERTIFICATIONSI, 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 31,2018;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith 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 allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, theregistrant’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 overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. /s/ Kendall Larsen Kendall Larsen President and Chief Executive Officer (Principal Executive Officer)Date: March 18, 2019 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 31,2018;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith 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 allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, theregistrant’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 overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. /s/ Richard H. Nance Richard H. Nance Chief Financial Officer (Principal Accounting and Financial Officer)Date: March 18, 2019 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 endedDecember 31, 2018 as filed with the Securities and Exchange Commission on March 18, 2019 (the “Report”), I, Kendall Larsen,President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 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 ofoperations of the Company. /s/ Kendall Larsen Kendall Larsen President and Chief Executive Officer (Principal Executive Officer)Date: March 18, 2019 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 endedDecember 31, 2018 as filed with the Securities and Exchange Commission on March 18, 2019 (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 theSarbanes-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 ofoperations of the Company. /s/ Richard H. Nance Richard H. Nance Chief Financial Officer (Principal Accounting and Financial Officer)Date: March 18, 2019

Continue reading text version or see original annual report in PDF format above