Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts in this section are in thousands)
The Company
VirnetX Holding Corporation (“Company”, “we”, “us”, or “our”) is an Internet security software and technology company with patented cybersecurity solutions that are designed to
ensure resilient, secure communications across any network or device.
Our flagship platform, VirnetX One™, is built on Zero Trust Network Access (ZTNA) principles and extends our patented Secure Domain Name System (SDNS) technology to establish end-to-end encrypted communications on
demand, regardless of user location or endpoint. VirnetX One™ operates as a security-as-a-service platform and may be deployed in cloud, on-premise, or hybrid enterprise environments. The platform is designed to protect applications, services, and
infrastructure by providing an additional security layer that integrates with existing systems to reduce exposure to evolving cyber threats affecting data, operating systems, infrastructure components, and gateway security controllers.
VirnetX Matrix™ leverages the VirnetX One™ platform to secure communications using encrypted, identity-based access controls, including in contested or high-risk environments. It is designed to
protect internet-enabled enterprise applications, connected devices, and control systems, such as file servers, data backup systems, and VPN or firewall environments. VirnetX Matrix™ is intended to be deployed without requiring material changes to an
enterprise’s existing infrastructure and provides centralized visibility and policy enforcement to address unauthorized access and evolving attack techniques.
VirnetX War Room™, also built on the VirnetX One™ P LATFORM , provides secure collaboration and visualization capabilities
designed to support sensitive, unclassified but secure communications. The platform enables controlled access to virtual meeting environments by validating user and device permissions prior to granting access. VirnetX War Room™ is intended for use
cases where confidentiality and access control are critical, including government, law enforcement, legal, financial, and healthcare environments.
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Our products, including VirnetX One™, VirnetX Matrix™, and VirnetX War Room™, are designed to support U.S. Department of Defense (DoD), federal government, and commercial customers requiring real-time encrypted
communications and network security. We believe our solutions are applicable across a range of public and private sector markets, including critical infrastructure, law enforcement, healthcare, financial services, legal services, energy, and related
industries. We pursue sales opportunities nationwide and engage with universities and academic institutions to support research collaboration, workforce development, and technology transition initiatives.
We also support international sales of our commercial products in compliance with applicable U.S. export control laws and regulations, including the International Traffic in Arms Regulations (ITAR)
and the Export Administration Regulations (EAR). Our compliance processes are designed to ensure that international transactions adhere to export control requirements while supporting authorized global customers.
Our technology roadmap addresses the continued growth of Internet of Things (IoT) and edge computing environments. We are extending secure networking capabilities to resource-constrained devices
through obfuscated and lightweight security mechanisms designed to protect communications without exposing underlying security processes. These efforts support secure identity, trust enforcement, and encrypted communications for distributed and
edge-based systems.
We are developing a federated, hybrid mesh network architecture designed with security as a foundational element. This approach incorporates dynamic trust evaluation, autonomous recovery, and
distributed decision-making to enhance network resilience and adaptability. We believe this architecture aligns with broader industry trends toward decentralized and resilient network models.
To support system design and evaluation, we employ Model-Based Systems Engineering (MBSE) and agent-based modeling methodologies. These approaches enable simulation and analysis of complex systems,
including cyber-physical environments and adaptive networks, and support assessment of system behavior under evolving threat conditions.
We have undertaken efforts to align certain services with the Department of Defense Digital Engineering (DE) strategy. These services are intended to support cybersecurity integration across system
design, command and control, battle management, and sensor orchestration, and to enhance our MBSE and cyber threat assessment capabilities. Our Dynamic Trust Evaluation (DTE) methods are designed to enforce trust policies throughout system
lifecycles, and our cyber threat intelligence and assessment services provide structured analysis of cyber risks and vulnerabilities.
We intend to make available digital engineering, cyber MBSE, and cyber threat intelligence services to federal, state, and local government agencies, subject to applicable contracting requirements.
These services include cybersecurity-focused system design support, advanced modeling of communication flows and threat boundaries, and structured cyber risk assessment methodologies.
We are developing a Center for Advanced Software and Hardware Integration at our Farmington, Utah facility, that incorporates artificial
intelligence (AI) and digital twin technologies alongside our Software-Defined Networks (SDN) capabilities. This facility is intended to support development and integration of secure, adaptive software solutions. We have entered into strategic
relationships, including an investment in L2 Holdings, LLC (OmniTeq), an AI/Machine Learning (ML) solutions provider and cooperative agreements, including a Cooperative Research and Development Agreement
(CRADA) with the Air Force Research Laboratory, Intelligence Systems Directorate (AFRL/RI). The CRADA focuses on cybersecurity and Zero Trust Network Access (ZTNA)-related technologies, extends through 2030, and supports collaboration in areas
relevant to defense and intelligence operations.
We hold a Multiple Award Schedule (MAS), enabling streamlined procurement of our products and services by federal, state, and local government customers. We have also obtained Department of Defense
Joint Certification Program (DD Form 2345) certifications for our facilities in Zephyr Cove, Nevada, and Farmington, Utah, which permit access to certain unclassified technical data subject to export controls. These certifications support our ability
to engage with government and defense customers while maintaining compliance with applicable handling and security requirements.
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Durning 2025, we provided subject matter and technical expertise as a subcontractor under a U.S. Department of Defense contract in support of activities directed by the Air Force Research Laboratory (“AFRL”). While
there can be no assurance, we believe this engagement may represent a meaningful foothold in the national security sector and may provide pathways to follow-on activities and/or expansion into broader strategic programs.
Our intellectual property portfolio is a core component of our business. We own U.S. and foreign patents, as well as pending patent applications, that are primarily directed to securing real-time communications over the
Internet and related services. These patents underpin our technology and products. Certain portions of this portfolio were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, Inc. in 2006.
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. 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.
Litigation
We are subject to various legal proceedings, the outcomes of which are inherently uncertain. We record any potential gains related to legal proceedings only after cash is collected. We record a
liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could
have a material impact on our financial condition and operating results. See Note 12 in the notes to our consolidated financial statements for more information.
Commitments and Related Party Transactions
We lease our offices in Nevada under an operating lease with a third party expiring in October 2027. We recognize rent expense on a straight-line basis over the term of the lease.
We have a facility lease in Utah to be used for technical integration and as a training facility. This lease requires monthly payments and expires in April 2029.
We have a non-exclusive service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for our employees. Our Chief Executive Officer and Chief Administrative
Officer are the managing partners of the LLC and control the equity interests of the LLC. We pay for the Company’s business usage of the aircraft at a rate of $9.8 per flight hour.
We have a facility lease in California, used for corporate, promotional, and marketing purposes. The lease expires in 2035.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and 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 involve income taxes, fair value of financial instruments and stock-based compensation.
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Use of Estimates
We prepare our consolidated financial statements in accordance with 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 used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably
likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of
operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, 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. We have reviewed our critical accounting policies and estimates with the Audit Committee of our Board of Directors.
Investments
Investments classified as available-for-sale are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in
income in the period they are realized using specific identification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual
maturities less than two years.
We have elected the investment measurement alternative for other investments without readily determinable fair values. During 2023, we invested $2,000 OmniTeq and $500 in OP Media Inc. These
investments are carried at our initial cost less any impairment because we do not have the ability to exercise significant influence over operating and financial matters. For these investments, we adjust the carrying value for any purchases or sales
of our ownership interests. Periodically, we evaluate these investments for impairment. If we identify an impairment, we reduce the carrying value for the impairment loss with a charge to operating expenses. Effective September 30, 2025 we identified
an impairment in our investment in OP Media Inc., and as a result, we recognized an impairment loss totaling $500.
Income Taxes
We account for income taxes using the asset and liability method. The asset and liability method require the recognition of deferred tax assets and liabilities for expected future tax consequences
of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and 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 change in tax rates is recognized in income in the
period that the tax rate change is enacted. In assessing our deferred tax assets, we consider 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 available information 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 expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting
estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation
allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate
sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance if any, as an
income tax benefit in our statements of operations.
We account for our uncertain tax positions in accordance with U.S. GAAP. The U.S. GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step
one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to
be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not
meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of
limitations expires. Positions previously recognized are derecognized when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using
cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.
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Fair Value
Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either
directly or indirectly observable inputs in markets other than quoted prices in active markets.
Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, 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 valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use
of unobservable inputs for recurring fair value measurements.
Stock-based Compensation
We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite
service period of the award, which is generally a vesting term of 4 years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the
consideration received or the fair value of the equity instruments issued, as they vest, over the performance period. See Note 6 in the notes to our consolidated financial statements for more information.
Results of Operations
Revenue
2025
2024
Revenue
$
162
$
5
Revenue generated in 2025 was $162, compared to $5 in 2024. During 2025, we provided subject matter and technical expertise as a subcontractor under a U.S. Department of Defense contract is support
of activities directed by AFRL.
Research and Development Expenses
2025
2024
Research and Development
$
5,654
$
6,038
Research and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff. Research and development costs are expensed as
incurred. Our research and development expenses in 2025 were $5,654 compared to $6,038 in 2024. The decrease in 2025 was primarily due to a reduction in engineering compensation costs.
Selling, General and Administrative Expenses
2025
2024
Selling, General and Administrative
$
13,448
$
14,364
Selling, general and administrative expenses include compensation costs for management and administrative personnel, as well as expenses for outside legal, accounting, and consulting services. Our
selling, general and administrative expenses in 2025 were $13,448 compared to $14,364 in 2024. The decrease in 2025 was primarily due to a reduction in legal and outside services as well as reduced compensation costs.
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Interest and Other Income, net
2025
2024
Interest and Other Income
$
1,213
$
2,225
Interest and other income in 2025 was $1,213 compared to $2,225 in 2024, due to a decrease in investments.
Effective Income Tax Rate
A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows:
2025
2024
United States federal statutory rate
21.00
%
21.00
%
State taxes, net of federal benefit
(0.01
)%
(0.01
)%
Valuation allowance
(21.87
)%
(20.50
)%
Stock based compensation
(0.33
)%
(0.62
)%
Research and development credit
1.99
%
1.55
%
Other
(1.46
)%
(1.41
)%
Effective income tax rate
0.01
%
0.01
%
The Company’s effective tax rate for 2025 and 2024 was substantially lower than the statutory Federal income tax rate primarily due to our valuation allowance.
Liquidity and Capital Resources
As of December 31, 2025, our cash and cash equivalents totaled $15,548 and our short-term investments totaled $5,979 compared to $23,296 and $14,786, respectively, as of December 31, 2024.
We expect that our cash and cash equivalents and short-term investments as of December 31, 2025, will be sufficient to fund our current level of selling, general and administration costs 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.
Item 7A.
Q uantitative and Qualitative Disclosures about Market Risk
Consistent with the rules applicable to “smaller reporting companies,” we have omitted the information required by Item 7A.
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