VIRNETX HOLDING CORP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS. (Form 10-Q)

Company presentation

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 names and GABRIEL Connection Technology™ are the foundation of our new VirnetX One™ platform that protects communications using Zero Trust Network Access (“ZTNA”). Our technology generates secure connections on a “zero-click” or “one-click” basis, greatly simplifying the deployment of secure real-time communication solutions by eliminating the need for end users to enter encryption information. Our intellectual property portfolio is the foundation of our business model. We currently have approximately 205 patents and pending applications, including 72 US patents/applications and 133 foreign patents/validations/applications pending. Our patent portfolio is primarily focused on securing real-time communications over the Internet and related services, and is used in all of our technologies 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 available for sale worldwide. On March 1, 2022we launched the War Room™ software, and on April 7, 2022, we launched VirnetX Matrix™ software on our next-generation VirnetX One™ platform. This new platform leverages our patented secure domain names and GABRIEL Connection Technology™ to further enhance the security and efficiency of our patented secure communication links. Our VirnetX One™ platform is a security-as-a-service platform that protects enterprise applications, services and infrastructure from cyberattacks.

Our new War Room™ software product provides an industry-leading, safe and secure video conferencing meeting environment where sensitive communications and data are invisible to those not authorized to see it. War Room™ validates the permissions of all users and devices requesting access to any secure meeting room before granting access. We believe our War Room™ will be an attractive solution for government agencies as well as all professional sectors such as legal, finance and medical where limiting access to confidential data is a critical requirement.

Our VirnetX Matrix™ product provides industry-leading protections for applications and the contemporary remote workforce against sophisticated hackers and mitigates threats by allowing enterprise applications to be invisible to unauthorized users. We believe our VirnetX Matrix™ software will be an attractive solution for all enterprises, cloud and on-premises application service providers and OEMs looking to improve the visibility and management of their networks to mitigate morphing attacks on their networks and for real-time access and control of their users.

Our GABRIEL Collaboration Suite™ is a set of applications and communication tools that use our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between devices that are enrolled in our “VIRNETX SECURED” network and on which our software is 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 have an ongoing licensing program where we license a portion of our patent portfolio, technology and software, including our secure domain name registration service, to service providers. domain infrastructure, communication service providers and system integrators. Our GABRIEL Connection Technology™ license is offered to original equipment manufacturer (“OEM”) customers who wish to adopt GABRIEL Connection Technology™ as a solution for establishing secure connections using secure domain names in their products. . We have developed the GABRIEL Connection Technology™ Software Development Kit (“SDK”) to facilitate rapid integration of these techniques into existing software implementations. Customers who wish to develop their own implementation of the
VirnetX patented techniques for supporting secure domain names, or other techniques covered by our patent portfolio for establishing secure communication links, may purchase a patent license. The number of patents licensed, and therefore the cost of the patent license to the customer, will depend on the patents used in a particular product or service. These licenses will generally include an initial license fee, as well as an ongoing royalty.

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We plan to continue to release new and improved security platforms, software products and services based on our GABRIEL Connection Technology™. We plan to provide updates to new and existing customers as they are made public. Many small and medium enterprises have installed our software products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct selling initiatives.

Our employees are part of 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 part of the same team that invented and developed this technology while working at Leidos. The team 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 for our products, services and licensing business. It should generate most of our future revenue in the form of 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 to use an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business, for example by offering incentives for early licensing goals or by making assert our rights to use our patents.

New accounting statements

In December 2019the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments to this ASU simplify accounting for income taxes by removing certain exceptions to the general principles of Topic 740. The amendments also improve consistent application and simplify United States GAAP for other areas of Topic 740 by clarifying and modifying existing guidelines. Amendments to this ASU apply to fiscal years and interim periods within those fiscal years beginning after December 15, 2020. We adopted this ASU on January 1, 2021
without a material impact on our financial condition, results of operations or cash flows.

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Operating results

                       Three Months Ended March 31, 2022
              Compared with the Three Months Ended March 31, 2021
                    (in thousands, except per share amounts)

Revenue

We recognized revenue from $5 within two months March 31, 2022 and
March, 31st. 2021.

License costs

Accumulated license fees of $9,438 have been knocked down in the three months ended
March 31, 2021, following the McKool Prize; these licensing costs have been reduced by an additional amount $4during March 31, 2022. (See Note 7 – Disputes).

Research and development costs

Our research and development costs increased by $75 for $1,227 for the three months ended March 31, 2022. Our research and development expenses were $1,152
for the three months ended March 31, 2021, respectively. The increase in 2022 is mainly due to the addition of personnel and the increase in benefits for engineers.

Selling, general and administrative expenses

Our selling, general and administrative expenses decreased by $38,758 for $3,185
for the three months ended March 31, 2022from $41,943 for the three months ended March 31, 2021, respectively. The decrease is mainly due to $38,284
disputed attorney fees due to McKool in 2021 (See Note – 7 Disputes),

Cash and capital resources

From March 31, 2022our cash and cash equivalents totaled approximately
$136,408 and our short-term investments totaled approximately $28,728against cash and cash equivalents of approximately $142,018 and short-term investments of approximately $27,254 to December 31, 2021, respectively. Working capital was $164,771 to March 31, 2022and $168,471 to December 31, 2021.

We expect that our cash and cash equivalents and our short-term investments from
March 31, 2022, will be sufficient to fund our current level of operating expenses, including legal fees, and provide related working capital for the foreseeable future. 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 United States and other markets around the world.

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Income taxes

For the three months ended March 31, 2022we recognized a tax benefit of
$1,059 on the pre-tax loss of $4,379, representing an effective tax rate of 24.45%. The effective tax rate was higher than the federal statutory tax rate primarily due to the effect of research and development tax credits. For the three months ended March 31, 2021the tax benefit was $7,193 on the pre-tax loss of $33,636 and an effective tax rate of 21.38%. The effective tax rate was higher than the federal statutory tax rate primarily due to the effect of research and development tax credits.

Contractual obligations

There have been no material changes in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Off-balance sheet arrangements

Nothing.

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