VirnetX Holding Corporation — 2019 Form 10-K
Business context and period. VirnetX develops and licenses patented internet-security technology, including its GABRIEL platform and secure domain-name technology. This filing covers the fiscal year ended December 31, 2019; Q4 figures are also summarized below. Amounts are in U.S. dollars; financial statement amounts are generally in thousands. The company reported approximately 194 patents and pending applications and had 20 full-time employees.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $85,000 | $63,000 |
| Operating expenses | $19.750 million | $25.520 million |
| Operating loss | $19.665 million | $25.457 million |
| Net loss | $19.180 million | $25.406 million |
| Loss per share, basic and diluted | $0.28 | $0.40 |
| Cash used in operating activities | $15.080 million | $22.298 million |
- FY 2019 R&D expense was $3.845 million, down from $4.815 million; SG&A was $15.905 million, down from $20.705 million. Legal fees were $5.898 million versus $9.706 million.
- Q4 2019 revenue was $35,000 and net loss was $4.485 million, compared with $34,000 revenue and a $6.417 million net loss in Q4 2018.
- At year-end, cash and cash equivalents were $3.135 million and available-for-sale investments were $2.394 million. Current assets were $5.771 million, current liabilities $1.826 million, total assets $7.498 million, and total liabilities $1.870 million. The filing reports no debt.
- Cash and investments totaled $5.529 million at year-end. The company issued 1.86 million shares under its ATM offering during 2019, generating $10.866 million gross proceeds; commissions and other costs were $327,000. It reported no off-balance-sheet arrangements.
- Revenue remained minimal relative to expenses. The company says revenue came from patent-license royalties, including payments for past use and royalties after license execution; it reported no settlement fees or damages as 2019 revenue.
Material changes, outlook and risks
- Losses narrowed year over year, alongside lower operating expenses, while revenue increased by only $22,000. Management attributes much of the SG&A variation to patent-litigation legal costs.
- After year-end, the company received $454.034 million from Apple on March 13, 2020, including interest, in the Apple I litigation. This was a subsequent event, not 2019 operating revenue or year-end cash. Apple is seeking to vacate the judgment and has indicated it may seek repayment if it obtains relief; the court had not ruled as of the filing.
- In Apple II, the Federal Circuit affirmed infringement findings for two patents but reversed infringement findings for two others and remanded for a damages determination. The district court’s decision on recalculated damages or a new trial was pending. VirnetX’s reported $595.9 million Apple II judgment is therefore subject to further proceedings.
- Management said year-end cash and investments, subsequent ATM proceeds, and potential future financing were expected to fund current costs and working capital for the foreseeable future. No specific revenue, earnings, or cash-flow guidance was provided. Management expects future revenue to depend mainly on patent licenses and royalties, but acknowledges commercialization and licensing may not succeed.
- Key risks include prolonged and costly patent litigation; patent challenges and potential invalidation; dependence on a small number of licensees and limited product revenue; uncertain adoption and long sales cycles; potential dilution from ATM or other financing; and regulatory, privacy, cybersecurity, and execution risks. The company also disclosed that its patents expire at various times from 2019 through 2024.
- A related-party aircraft-use arrangement generated approximately $1.790 million in rental fees and reimbursements in 2019, versus $1.590 million in 2018. The CEO and Chief Administrative Officer manage and control the related entity.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Apple’s motion to vacate the Apple I judgment succeeds and whether any of the $454.034 million payment must be returned.
- The district court’s eventual Apple II damages ruling and the impact of ongoing patent validity challenges on potential awards and licensing leverage.
- Whether licensing, royalties, or GABRIEL product adoption can grow materially from the very small 2019 revenue base.
- Actual cash use and financing needs after year-end. The filing’s MD&A cites $4.489 million of subsequent ATM proceeds, while its subsequent-events note reports $4.627 million gross proceeds for shares sold through February 21, 2020; reconcile the amounts and timing.
- The effects of patent expirations, ongoing litigation costs, potential equity dilution, and the related-party aircraft expenditures on future liquidity and shareholder value.