VirnetX Holding Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in thousands of dollars, except per-share data and where noted. VirnetX commercializes patent rights and develops secure-communications products, including its Gabriel platform. Revenue remained limited and largely reflected recognition of previously collected settlement payments.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $375 | $375 | $1,146 | $1,148 |
| Operating expenses | $3,937 | $7,662 | $12,426 | $22,407 |
| Operating loss | $(3,562) | $(7,287) | $(11,280) | $(21,259) |
| Net loss | $(3,552) | $(7,387) | $(11,244) | $(21,335) |
| Basic and diluted loss per share | $(0.06) | $(0.13) | $(0.19) | $(0.38) |
- Revenue for the nine-month period included $1,125 recognized from a four-year settlement contract whose final payment was collected in 2016. Q3 revenue was $375 in both years.
- SG&A fell by $2,862 in Q3 and $9,179 for the nine-month period, primarily because of lower patent-litigation legal fees. R&D increased by $21 in Q3 and $82 year to date.
- Cash and cash equivalents were $1,647 and available-for-sale investments were $2,665 at September 30, 2017, down from $6,627 and $9,249, respectively, at December 31, 2016. Working capital was $1,958, versus $11,240 at year-end.
- Operating cash use was $11,520 for the first nine months, compared with $15,465 in the prior-year period. Investing activities provided $6,582; financing activities used $42. Cash declined by $4,980 during the period.
- Total liabilities were $4,421, including deferred revenue and operating liabilities; the balance sheet reports no borrowings or debt line item. Stockholders’ equity was $2,681, down from $11,147 at year-end.
Material changes, outlook and risks
- Management expected legal fees to remain at the same or a higher level over the next two quarters and expected operating losses as a result. It stated that September-end cash and investments, $2,806 of subsequent ATM proceeds, and potential additional securities sales should fund current costs and working capital for the foreseeable future.
- After quarter-end, VirnetX sold 527,039 shares through its ATM at an average $5.49 per share, receiving $2,806 before $87 in commissions and other costs. Further equity sales could dilute shareholders.
- The planned sale of 5,494,505 shares to Public Intelligence Technology Associates (PITA), which was expected to provide a $20 million investment, did not close and was terminated October 18, 2017. A restated revenue-sharing arrangement remains; VirnetX cautioned that it may produce little revenue and could require payments to PITA exceeding receipts from it.
- Management reported a September 29, 2017 Apple I judgment totaling approximately $439.7 million, including damages, interest, costs and fees. Apple appealed on October 27. The judgment is contingent on appellate proceedings and is not recurring operating revenue. A separate Apple II jury trial date remained pending. VirnetX also disclosed multiple patent-validity appeals and other ongoing litigation.
- Principal risks include costly and uncertain patent litigation and patent challenges, dependence on licensing and a limited revenue base, cash burn and possible need for additional capital, potential equity dilution, and uncertainty in commercializing Gabriel products. The company’s tax assets remain subject to a full valuation allowance; management cited its history of losses and uncertainty of future taxable income.
- VirnetX had approximately 49 U.S. and 69 foreign patents and about 50 pending applications; issued patents expire at varying times from 2019 to 2024. The company reported over 80 small and medium businesses had installed Gabriel products, but those products were not yet generating significant disclosed revenue.
Investor verification points
- Track the Apple I appeal and any changes to the reported judgment; do not treat the award as settled or cash collected.
- Check the timing and cost of Apple II and other patent litigation, including patent validity proceedings and their effect on legal spending.
- Monitor cash burn, working capital, ATM or shelf-security sales, and resulting dilution, particularly after the PITA investment failed to close.
- Assess whether licensing, Gabriel adoption, and the PITA revenue-sharing arrangement generate material, repeatable cash revenue beyond deferred settlement recognition.
- Verify future-period legal expense and operating-loss trends against management’s stated outlook.