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0000320193
20200129
10-Q
132
The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date.
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The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change.
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Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge.
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The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
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The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty.
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To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds.
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10-Q
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The Company presents its derivative assets and derivative liabilities at their gross fair values in its Condensed Consolidated Balance Sheets.
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10-Q
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As of December 28, 2019 and September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion and $1.6 billion, respectively, which were included in other current liabilities in the Condensed Consolidated Balance Sheets.
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Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other.
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10-Q
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As of December 28, 2019 and September 28, 2019, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.4 billion and $2.7 billion, respectively, resulting in...
0000320193-20-000010/full-submission.txt
0000320193
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10-Q
142
Accounts Receivable Trade Receivables The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers.
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The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk.
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In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure.
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These credit-financing arrangements are directly between the third-party financing company and the end customer.
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As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
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As of both December 28, 2019 and September 28, 2019, the Company had no customers that individually represented 10% or more of total trade receivables.
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The Company’s cellular network carriers accounted for 43% and 51% of total trade receivables as of December 28, 2019 and September 28, 2019, respectively.
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Vendor Non-Trade Receivables The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company.
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The Company purchases these components directly from suppliers.
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As of December 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 56% and 17%.
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As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59% and 14%.
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Apple Inc. | Q1 2020 Form 10-Q | 14 Note 4 - Condensed Consolidated Financial Statement Details The following tables show the Company’s condensed consolidated financial statement details as of December 28, 2019 and September 28, 2019 (in millions): Property, Plant and Equipment, Net Other Non-Current Liabilities Other ...
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The Company had accrued $1.5 billion of gross interest and penalties related to income tax matters as of December 28, 2019.
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The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions.
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The U.S. Internal Revenue Service concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed.
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Tax years after 2014 remain open in certain major foreign jurisdictions and are subject to examination by the taxing authorities.
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The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.
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However, the outcome of tax audits cannot be predicted with certainty.
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If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
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Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $2.3 billion.
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Apple Inc. | Q1 2020 Form 10-Q | 15 European Commission State Aid Decision On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the...
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The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014.
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The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion.
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On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries.
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As of December 28, 2019, the adjusted recovery amount was €12.9 billion.
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Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward.
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The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union.
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Ireland has also appealed the State Aid Decision.
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The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the U.S. Tax Cuts and Jobs Act.
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The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals.
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Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
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Note 6 - Debt Commercial Paper The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program.
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The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases.
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As of December 28, 2019 and September 28, 2019, the Company had $5.0 billion and $6.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months.
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The weighted-average interest rate of the Company’s Commercial Paper was 1.88% and 2.24% as of December 28, 2019 and September 28, 2019, respectively.
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The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for the three months ended December 28, 2019 and December 29, 2018 (in millions): Apple Inc. | Q1 2020 Form 10-Q | 16 Term Debt As of December 28, 2019, the Company had outstanding floating- and fixed-ra...
0000320193-20-000010/full-submission.txt
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The Notes are senior unsecured obligations and interest is payable in arrears.
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The following table provides a summary of the Company’s term debt as of December 28, 2019 and September 28, 2019: To manage interest rate risk on certain of its U.S. dollar-denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floa...
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10-Q
180
Additionally, to manage foreign currency risk on certain of its foreign currency-denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar-denominated notes.
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A portion of the Company’s Japanese yen-denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation.
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As of December 28, 2019 and September 28, 2019, the carrying value of the debt designated as a net investment hedge was $1.2 billion and $1.0 billion, respectively.
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10-Q
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For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 3, “Financial Instruments.” The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments re...
0000320193-20-000010/full-submission.txt
0000320193
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10-Q
184
The Company recognized $757 million and $809 million of interest cost on its term debt for the three months ended December 28, 2019 and December 29, 2018, respectively.
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As of December 28, 2019 and September 28, 2019, the fair value of the Company’s Notes, based on Level 2 inputs, was $109.1 billion and $107.5 billion, respectively.
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10-Q
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Note 7 - Shareholders’ Equity On April 30, 2019, the Company announced the Board of Directors increased the current share repurchase program authorization from $100 billion to $175 billion of the Company’s common stock, of which $116.1 billion had been utilized as of December 28, 2019.
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10-Q
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During the three months ended December 28, 2019, the Company repurchased 70.4 million shares of its common stock for $20.0 billion, including 30.4 million shares initially delivered under a $10.0 billion accelerated share repurchase arrangement (“ASR”) dated November 2019.
0000320193-20-000010/full-submission.txt
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The Company’s share repurchase program does not obligate it to acquire any specific number of shares.
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Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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Under the Company’s ASR, financial institutions deliver shares of the Company’s common stock during the purchase period in exchange for an up-front payment.
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The total number of shares ultimately delivered under the ASR, and therefore the average repurchase price paid per share, is determined based on the volume-weighted average price of the Company’s common stock during the purchase period, which will end in or before May 2020.
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The shares received are retired in the periods they are delivered, and the up-front payment is accounted for as a reduction to retained earnings in the Company’s Condensed Consolidated Statement of Shareholders’ Equity in the period the payment is made.
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Apple Inc. | Q1 2020 Form 10-Q | 17 Note 8 - Comprehensive Income The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as hedges and unrealized ...
0000320193-20-000010/full-submission.txt
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The following table shows the pre-tax amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations, and the associated financial statement line items, for the three months ended December 28, 2019 and December 29, 2018 (in millions): The following table shows the changes in AOCI by component f...
0000320193-20-000010/full-submission.txt
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Note 9 - Benefit Plans Stock Plans The Company had 194.4 million shares reserved for future issuance under its stock plans as of December 28, 2019.
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Restricted stock units (“RSUs”) granted under the Company’s stock plans generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis.
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RSUs granted under the Company’s stock plans reduce the number of shares available for grant under the plans by a factor of two times the number of RSUs granted.
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RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the plans utilizing a factor of two times the number of RSUs canceled or shares withheld.
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199
Rule 10b5-1 Trading Plans During the three months ended December 28, 2019, Section 16 officers Timothy D. Cook, Chris Kondo, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act.
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An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.
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Apple Inc. | Q1 2020 Form 10-Q | 18 Restricted Stock Units A summary of the Company’s RSU activity and related information for the three months ended December 28, 2019 is as follows: The fair value as of the respective vesting dates of RSUs was $4.2 billion and $4.1 billion for the three months ended December 28, 2019 ...
0000320193-20-000010/full-submission.txt
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202
Share-Based Compensation The following table shows share-based compensation expense and the related income tax benefit included in the Condensed Consolidated Statements of Operations for the three months ended December 28, 2019 and December 29, 2018 (in millions): As of December 28, 2019, the total unrecognized compens...
0000320193-20-000010/full-submission.txt
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Note 10 - Commitments and Contingencies Accrued Warranty and Guarantees The following table shows changes in the Company’s accrued warranties and related costs for the three months ended December 28, 2019 and December 29, 2018 (in millions): The Company offers an iPhone Upgrade Program, which is available to customers ...
0000320193-20-000010/full-submission.txt
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The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met.
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The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.
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Concentrations in the Available Sources of Supply of Materials and Product Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources.
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The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices.
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Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
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Apple Inc. | Q1 2020 Form 10-Q | 19 The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source.
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When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased.
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The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
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The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
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Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
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Unconditional Purchase Obligations The Company has entered into certain off-balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”).
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The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, Internet and telecommunication services, intellectual property licenses and content creation.
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As of December 28, 2019, the Company’s total future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year were $10.5 billion.
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Contingencies The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved.
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The outcome of litigation is inherently uncertain.
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If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
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In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters: VirnetX VirnetX, Inc. (“VirnetX”) filed tw...
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On September 30, 2016, a jury returned a verdict in VirnetX I against the Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings.
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The Company appealed the VirnetX I verdict to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”).
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On April 11, 2018, a jury returned a verdict in VirnetX II against the Company and awarded damages of $503 million.
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The Company appealed the VirnetX II verdict to the Federal Circuit, and on November 22, 2019, the Federal Circuit affirmed-in-part, reversed-in-part, and remanded VirnetX II back to the Eastern Texas District Court.
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The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and Trademark Office (the “PTO”).
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In response, the PTO has declared the VirnetX Patents invalid.
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VirnetX appealed the invalidity decision of the PTO to the Federal Circuit.
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The Federal Circuit consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings.
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On January 15, 2019, the Federal Circuit affirmed the VirnetX I verdict, which the Company has further appealed.
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On July 8, 2019, the Federal Circuit remanded one of VirnetX’s two appeals of the PTO’s invalidity decisions back to the PTO for further proceedings.
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On August 1, 2019, the Federal Circuit affirmed-in-part, vacated-in-part, and remanded back to the PTO portions of VirnetX’s second appeal.
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