VirnetX Holding Corp 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Company Overview We develop patented cybersecurity solutions that ensure resilient, secure communications across any network or device. Built on Zero Trust Network Access (ZTNA) principles, our flagship platform, VirnetX One™, virtualizes on-demand private networks using patented Secure Domain Names and automatically establishes secure links regardless of location or endpoint. Our products, including War Room™ and VirnetX Matrix™, are designed to support the U.S. Department of War (DoW) with real-time, encrypted collaboration. War Room TM offers advanced visualization for situational awareness, while VirnetX Matrix TM secures communications through robust encryption, even in contested environments. 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. Our Digital Engineering (DE) services are designed to strengthen our current and evolving Model-Based Systems Engineering (MBSE) processes while also providing comprehensive Cyber Threat Assessment services seamlessly integrating into the DoW Digital Engineering strategy. Additionally, our DE professional services include integration of our subject matter expertise in kinetic and non-kinetic secure, automated, command and control, battle management, and all-domain collection sensor orchestration. With embedded secure communication from R&D to operational deployment, our Dynamic Trust Evaluation (DTE) methods continuously enforce real-time trust policies, ensuring resilient and adaptive network security. Our Cyber Threat Intelligence (CTI) and assessment services deliver context-aware insights, empowering defense leaders to anticipate and mitigate emerging cyber threats. We have undertaken activities to align our products and services with DoW’s Digital Engineering Strategy, and as such, plan to make available the following services to Federal, state, and local government agencies. • DE services for embedding cybersecurity in system design, command and control processes, battle management, and all-domain sensor orchestration and lifecycle management to enhance system resilience by identifying vulnerabilities early via threat modeling and design. • Advanced hybrid Cyber MBSE services for building artificial intelligence and machine learning (AI/ML) hybrid models to represent communication flows and threat boundaries using specialized VirnetX engineering to customize architectures in multi domain digital engineering projects. • Cyber Threat Assessment services for providing systematic evaluation of cyber risks, vulnerabilities, and potential impacts on critical systems with threat modeling, risk prioritization, and AI/ML based defensive and offensive threat mitigation strategies. 14 Index We are building our Center for Advanced Software/Hardware Integration, at our Farmington, Utah office, utilizing AI/ML and digital twin technology integrated with VirnetX’s SDNS technology. We intend to further augment our product strategy to provide secure, dynamic cyber-driven, AI to the marketplace. In addition to our investments with L2 Holdings, LLC (OmniTeq), 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 us to apply for security clearances for our 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 intend to sell directly to U.S. defense, intelligence and government agencies. We obtained a Multiple Award Schedule (MAS) contract, so we can sell our products, services, and solutions at pre-negotiated prices to Federal, state, and local government buyers. To strengthen our ability to support these markets, we have obtained DD Form 2345 certifications for our facilities in Zephyr Cove, Nevada, and Farmington, Utah. This certification, formally known as the Militarily Critical Technical Data Agreement and administered by the DoW’s Joint Certification Program, enables us to access and share unclassified technical data with military or space applications subject to export controls under the Export Administration Regulations or the International Traffic in Arms Regulations. This certification is an essential step in ensuring that we can securely handle sensitive technical information while advancing opportunities with U.S. defense and government agencies. We intend to continue our activities to commercialize our products, services 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. 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 and Nine Months Ended September 30, 2025 Compared with the Three and nine Months Ended September 30, 2024 (in thousands, except per share amounts) Revenue We recognized revenue of $106 and $5 in the nine months ended September 30, 2025 and 2024. Research and Development Expenses Our research and development expenses remained steady between 2025 and 2024 totaling $1,143 and $3,617 for the three and nine months ended September 30, 2025 compared to $1,176 and $3,667 for the three and nine months ended September 30, 2024. Selling, General and Administrative Expenses Our selling, general and administrative expenses decreased from $3,213 in 2024 to $3,059 for the three months ended September 30, 2025, and decreased from $10,066 in 2024 to $8,624 for the nine months ended September 30, 2025. The decrease was related to legal fees incurred in 2024 to protect our patents; no similar costs were incurred in 2025. Loss on impairment of investment Effective September 30, 2025, we identified an impairment in our investment in OP Media Inc., and a result, we recognized an impairment loss totaling $500. Liquidity and Capital Resources As of September 30, 2025, our cash and cash equivalents totaled $17,129 and our short-term investments totaled $11,064, compared to cash and cash equivalents of $23,296 and short-term investments of $14,786 at December 31, 2024, respectively. Working capital was $26,363 at September 30, 2025, and $31,009 at December 31, 2024. We expect that our cash and cash equivalents and short-term investments as of September 30, 2025, will be sufficient to fund our current level of operating expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive our future revenue from 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 as well as from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry. Income Taxes Our effective tax rate is 0% for income tax for the three and nine months ended September 30, 2025, and 2024, and we expect our effective tax rate for the full year will be 0%. Our 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 assets 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. Off-Balance Sheet Arrangements None. 16 Index