VirnetX Holding Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statement amounts below are in thousands of dollars, except per-share data. VirnetX commercializes and licenses patents and secure-communications technology, including its GABRIEL products. Most revenue historically has come from patent settlements and licenses; management says it expects future revenue primarily from licenses and royalties.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $38 | $16 | $46 | $22 |
| Research and development | $986 | $1,186 | $1,921 | $2,191 |
| Selling, general and administrative | $3,604 | $5,292 | $8,310 | $11,901 |
| Operating loss | $(4,552) | $(6,462) | $(10,185) | $(14,070) |
| Net loss | $(4,130) | $(6,450) | $(9,738) | $(14,055) |
| Loss per share, basic and diluted | $(0.06) | $(0.10) | $(0.14) | $(0.23) |
Revenue remained very small relative to operating expenses, and the filing does not present a gross-profit line or a meaningful gross-margin measure. The lower operating and net losses mainly reflected reduced patent-litigation legal fees; SG&A fell $1.7 million in Q2 and $3.6 million for the six-month period. R&D also decreased, primarily due to lower staff expense. Q2 and six-month 2019 results included income-tax benefits of $395 and $393, respectively, from releasing a state tax reserve after the limitation period expired.
At June 30, cash and cash equivalents were $4.155 million and available-for-sale investments were $2.772 million, totaling $6.927 million in cash and investments. Working capital was $6.540 million, down from $8.275 million at December 31, 2018. Six-month operating cash use was $8.954 million; cash declined $3.456 million after financing inflows. The balance sheet reports no debt. Total current liabilities were $849,000 and total assets were $9.226 million.
Material changes and financing
- Compared with the first half of 2018, revenue increased by $24,000 while operating expenses decreased by $3.861 million. Net loss improved by $4.317 million.
- VirnetX raised $5.873 million gross through ATM sales in the first half of 2019, selling 1,028,266 shares at an average $5.71 per share; fees and costs were $176,000. Up to $31.584 million remained available under the ATM at June 30.
- After quarter-end, it sold another 191,342 shares under the ATM for $1.188 million gross, less $36,000 in fees and costs. Shares outstanding were 68,754,547 at June 30 and 68,945,889 on August 7.
- Management stated that cash, investments, and access to the ATM and shelf registration were expected to fund current SG&A, including legal costs, and working capital for the foreseeable future. This depends in part on continued access to equity financing. Management expected operating losses to continue and anticipated similar or lower legal-fee levels over the next two quarters.
Litigation, outlook and other risks
- District-court judgments against Apple total $439.7 million in the Apple I matter and $595.9 million in Apple II. These are disputed judgments, not reported revenue or cash receipts. Apple II remained on appeal with oral argument not yet scheduled; the filing cautions that appeals and other proceedings could reverse, reduce, or delay any recovery. On August 1, 2019, after quarter-end, the Federal Circuit denied Apple’s rehearing petition in Apple I; the filing notes Apple could still seek Supreme Court review.
- Other patent proceedings produced mixed results. The Federal Circuit vacated and remanded two PTAB decisions in July 2019, while other rulings affirmed some invalidity findings and vacated or remanded findings as to specified claims. Several appeals and PTAB proceedings remained pending. Litigation is costly and management-intensive, and outcomes are uncertain.
- The company owns approximately 185 patents and pending applications; issued patents expire at various times from 2019 through 2024. Certain patent-related proceeds may require payments to Leidos under the acquisition arrangements.
- Commercialization remains uncertain: management reported more than 80 small and medium businesses had installed GABRIEL products, but revenue remained minimal. The company warned that potential customers or partners may defer decisions pending litigation outcomes, and there is no assurance that licensing or product commercialization will generate significant revenue.
- Key risks include patent validity and enforceability, litigation expense and outcomes, dependence on licensing, potential equity dilution and capital availability, product adoption and long sales cycles, cybersecurity and privacy compliance, and stock-price volatility. The company also disclosed aircraft-service payments to an LLC controlled by its CEO and Chief Administrative Officer: approximately $326,000 in Q2 and $885,000 for the first half of 2019.
- Management maintained a full valuation allowance against deferred tax assets, citing uncertainty about future taxable income. Federal and state NOL carryforwards were approximately $124 million and $108 million, respectively. The company reported effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Current procedural status, appeal prospects, and potential timing or collectability of the Apple judgments; do not treat judgment amounts as cash or recognized operating revenue.
- Cash burn, working-capital trend, legal spending, and whether equity issuance remains available on acceptable terms; assess resulting dilution.
- Evidence that GABRIEL deployments and licensing efforts are converting into material recurring revenue, rather than relying on litigation recoveries.
- Patent validity, remaining patent lives, pending PTAB matters, and any obligations to Leidos tied to future proceeds.
- Terms, oversight, and ongoing cost of the related-party aircraft arrangement.