Company Overview

We are an Internet security software and technology company with patented technology for various types of secure network communications, including 5G and 4G LTE network security. Our patented Secure Domain Name Registry and GABRIEL Connection Technology™, are the foundation for our GABRIEL Secure Communication Platform™ that protects communications using Zero Trust Network Access (ZTNA). Our technology generates secure connections on a "zero-click" or "single-click" basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 201 total patents and pending applications, including 70 U.S. patents/patent applications and 131 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, and related services, and is used in all our technology and products, some of which were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006.

Our product portfolio includes sophisticated technologies, products and services that are available for sale worldwide. Our GABRIEL Secure Communication Platform™ includes a set of software libraries with application interfaces available for securing third-party applications seamlessly across multiple operating systems. It enables individuals and organizations to maintain complete ownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time.

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

Our GABRIEL Collaboration Suite™ is a set of communication applications and tools that use our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between devices that are enrolled in our "GABRIEL SECURED" network and have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux, and Mac OS X platforms, at https://virnetx.com.

We continue to enhance our products and add new functionality. We will provide updates to new and existing customers as they are released to the public. Many small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.

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

Our employees include the core development team behind our patent portfolio, technology, and software. Some members of this team have worked together for over twenty years and were on same team that invented and developed this technology while working at Leidos. The team has continued its research and development work and expanded the set of patents we acquired in 2006 from Leidos, into a larger patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing business. It is expected to generate most of our future revenue in license fees and royalties. We intend to continue our efforts to develop new products and technologies and further strengthen and expand our patent portfolio. We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents.

New Accounting Pronouncements

In December 2019 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 with no material impact on our financial position, results of operations or cash flows.



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Results of Operation


                 Three and Nine Months Ended September 30, 2021

Compared with the Three and Nine Months Ended September 30, 2020


                    (in thousands, except per share amounts)

Revenue

For the three and nine months ended September 30, 2021, we recognized revenue of $4 and $24, respectively, and revenues of $26 and $302,620, for the three and nine months ended September 30, 2020, respectively. During the nine months ended September 30, 2020, we collected a lump sum payment of $454,034 from Apple, Inc. as a result of a favorable court decision relating to a patent infringement case. The payment includes past royalties, damages for willful infringement, interest, court costs and attorneys' fees. The elements of the payment were recognized in our condensed consolidated statement of operations as follows:



                   Classification in the Condensed Consolidated

Statement of Operations for the Nine Months Ended September 30, 2020 Revenue (royalties)

$ 302,428

Operating expenses: selling, general and administrative (reimbursed litigation costs)

                                                            2,114
Other income: gain (willful infringement)                                   41,271
Other income: interest income (pre and post judgment interest)             108,221
Total cash received                                                      $ 454,034



Licensing Costs

Licensing costs for the nine months ended September 30, 2020, include $90,101 accrued in conjunction with the proceeds received from Apple, Inc., pursuant to the favorable court decision relating to a patent infringement case. Accrued licensing costs of $9,438 were reversed during the nine months ended September 30, 2021, as a result of the McKool award (See Note 7 - Litigation).

Research and Development Expenses

Our research and development expenses increased by $60 to $1,151 for the three months ended September 30, 2021, and decreased by $3,347 to $3,452 for the nine months ended September 30, 2021. Our research and development expenses were $1,091 and $6,799 for the three and nine months ended September 30, 2020, respectively. The decrease in 2021 was primarily due to lower engineering employee benefits.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses decreased by $1,181 to $3,089 and increased by $9,693 to $48,040 for the three and nine months ended September 30, 2021, from $4,270 and $38,347 for the three and nine months ended September 30, 2020, respectively. The increase is primarily due to $38,284 disputed legal fees accrued to McKool (See Note - 7 Litigation), offset by a $24,104 decrease in other attorney fees.

Gain on Settlement

For the nine months ended September 30, 2020, we recorded a gain of $41,271 pursuant to the favorable court ruling in the case regarding Apple, Inc. discussed above.

Interest and other income, net

For the nine months ended September 30, 2020, we recognized interest income of $108,272 largely related to the favorable ruling against Apple, Inc. discussed above.

Liquidity and Capital Resources

As of September 30, 2021, our cash and cash equivalents totaled approximately $148,042 and our short-term investments totaled approximately $24,450, compared to cash and cash equivalents of approximately $192,908 and short-term investments of approximately $28,348 at December 31, 2020, respectively. Working capital was $175,164 at September 30, 2021, and $214,076 at December 31, 2020. The decrease in cash and investments during the nine months ended September 30, 2021 was primarily attributed to operating expenses.

We expect that our cash and cash equivalents and short-term investments as of September 30, 2021, will be sufficient to fund our current level of operating expense, including legal expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the world.



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Universal Shelf Registration Statement and ATM Offering

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

We use the ATM proceeds for GABRIEL product development, marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses, and acquisitions of complementary products, technologies, or businesses. This registration statement expired on August 13, 2021.

We sold no shares under the ATM during 2021. During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average sales price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627 during the period. Sales commissions, fees and other costs associated with the ATM totaled $139. This registration expired on August 13, 2021.

Income Taxes

For the three months ended September 30, 2021, we recognized income tax benefit of $895 on loss before income taxes of $4,226, which is an effective tax rate of 21.18%. For the nine months ended September 30, 2021, we recognized income tax benefit of $8,697 on loss before income taxes of $41,994 which is an effective tax rate of 20.71%.

For the three and nine months ended September 30, 2020, we had an income tax benefit of $1,293 and an income tax expense of $29,036, respectively. The effective tax rate for the three-month period ended September 30, 2021, was favorably impacted by the net operating loss generated in the quarter.

As of December 31, 2020, we had deferred tax assets of $9,049. As of September 30, 2021, we had net deferred tax assets of $17,749.

Contractual Obligations

There have been no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Off-Balance Sheet Arrangements

None.



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