VirnetX Holding Corp 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Company Overview We are an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network communications. VirnetX’s software and technology solutions, including its Secure Domain Name Registry and Technology, VirnetX One™, War Room™, and VirnetX Matrix™ are designed to be device and location-independent, and enable a secure real-time communication environment for all types of enterprise applications, services, and critical infrastructures. Our technology generates secure connections on a “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 product portfolio includes sophisticated technologies, products and services that are available for sale worldwide. Our next-generation, VirnetX One™ platform builds upon our patented Secure Domain Name Registry and Technology to further enhance the security and efficiency of our patented secure communication links. VirnetX One™ is a security-as-a-service platform that protects enterprise applications, services, and infrastructure from cyber-attacks. Our platform allows government organizations, businesses, and other enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and bolster security against ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers. Our War Room™ software product provides safe and secure video conferencing meeting environment where sensitive communications and data is invisible to those not authorized to view it. War Room™ validates permissions of all the users, and devices requesting access to any secure meeting room prior to granting access. We believe our War Room™ will be an attractive solution for government and law enforcement agencies as well as all professional sectors such as legal, financial, and medical where limiting access to confidential data is a critical requirement. Our VirnetX Matrix™ product provides superior security for internet-enabled enterprise applications and their connected devices, and for control systems currently deployed by those enterprises (e.g., file servers, data back-up systems, VPN/firewalls). VirnetX Matrix™ provides a true “zero-trust” access protection, “single-click” ease of use, and is a highly-effective added layer of protection that is deployed simply, without the need for changes to an enterprise’s existing, in-place infrastructure. We believe VirnetX Matrix™ is an attractive solution for all businesses, cloud and on-premise application service providers, and original equipment manufacturers (“OEMs”), looking to improve visibility and management of their networks to mitigate morphing attacks on their networks and for real time access and control of their users. We continue to augment our product strategy to provide secure AI to the marketplace. In addition to our investments with L2 Holdings, LLC (“OmniTeq”), an artificial intelligence and machine learning (AI/ML) solutions provider and OP Media, Inc, a dynamic software platform provider, we participated in a Cooperative Research and Development Agreement (CRADA) with the Air Force (AF) Research Laboratory Intelligence Systems Directorate (AFRL/RI) to facilitate collaboration on cybersecurity and Zero Trust technologies to support integrated surveillance and reconnaissance operations as well as AF and joint targeting processes. This CRADA continues through 2030 and allows VirnetX to apply for security clearances for its employees. We are also beginning to integrate AI/ML capabilities into VirnetX Matrix™ to enhance its zero-trust security, threat detection, and network resilience by enabling autonomous threat response, adaptive access control, and self-healing network architectures. We have undertaken activities to commercialize our products and intellectual property in and outside the United States including VirnetX One™, War Room™, VirnetX Matrix™ and our Secured Domain Name Registry and Technology. We believe our product portfolio to secure devices and systems are suitable in areas such as national defense, local, state, Federal and foreign governments, critical infrastructure, law enforcement, healthcare, finance, legal, oil and gas, medical, and related support industries. We continue to actively pursue new sales opportunities in and outside of the United States. 14 Index Our employees include the core development team behind our inventions, technology, and software. Some members of this team have worked together for over twenty years and were on the same team that invented and developed this technology while working at Leidos, Inc., or Leidos. The team has continued its research and development work to refine our unique network security technology and make it more secure and easy to deploy. Our portfolio of intellectual property is the foundation of our business model. We currently own U.S. and foreign patents and 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 in 2006. 15 Index Results of Operation Three Months Ended March 31, 2025 Compared with the Three Months Ended March 31, 2024 (in thousands, except per share amounts) Revenue We recognized revenue of $0 and $2 in the three months ended March 31, 2025 and 2024 respectively. Research and Development Expenses For the three months ended March 31, 2025, our research and development expenses remained steady at $1,259 compared to $1,268 for the three months ended March 31, 2024. Selling, General and Administrative Expenses Our selling, general and administrative expenses decreased by $872 to $2,788 for the three months ended March 31, 2025, from $3,660 for the three months ended March 31, 2024. The decrease is primarily due to lower legal fees and compensation costs from reduced head count in 2025. Liquidity and Capital Resources As of March 31, 2025, our cash and cash equivalents totaled approximately $23,222 and our short-term investments totaled approximately $10,954, compared to cash and cash equivalents of approximately $23,296 and short-term investments of approximately $14,786 at December 31, 2024, respectively. Working capital was $32,624 at March 31, 2025, and $31,009 at December 31, 2024. We expect that our cash and cash equivalents and short-term investments as of March 31, 2025, 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 our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry, as well as collaborating with others to integrate our family of cybersecurity products and services into their solutions and to resell them to their current and future customers. Income Taxes Our effective tax rate is 0% for income tax for the three months ended March 31, 2025 and 2024, respectively and we expect our effective tax rate for the full year will be 0 %. O ur effective tax rate is less than the 21% statutory tax rate primarily due to our valuation allowance. Based on the weight of available evidence, including net cumulative losses and expected future losses, we have determined it is more likely than not that our U.S. federal and state deferred tax asset s will not be realized and therefore we have provided a full valuation allowance on the U.S. federal and state net deferred tax assets. Contractual Obligations We have leases in Nevada, Utah and California, the last of which expires in 2035. See Note 8 – Leases in the accompanying consolidated financial statements for details. 16 Index Off-Balance Sheet Arrangements None.