VirnetX Holding Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context
VirnetX seeks to commercialize and license its patent portfolio and secure-communications technology, including GABRIEL. The company reported approximately 185 patents and pending applications. Its business remains heavily dependent on patent licensing and litigation; product and technology revenue was minimal in the quarter.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $8 | $6 |
| Research and development | $936 | $1,005 |
| Selling, general and administrative | $4,706 | $6,609 |
| Operating loss | $(5,634) | $(7,608) |
| Net loss | $(5,608) | $(7,605) |
| Basic and diluted loss per share | $(0.08) | $(0.13) |
| Net cash used in operating activities | $(4,819) | $(5,289) |
Revenue came from GABRIEL Connection Technology sales. Management attributed the $1.9 million reduction in SG&A primarily to lower legal fees related to patent litigation; R&D fell mainly because of lower employee benefits. Interest income increased to $28 from $8. Operating and net losses narrowed year over year, but revenue remained immaterial relative to expenses. The filing does not provide a meaningful gross-margin measure.
At March 31, cash and cash equivalents were $5.227 million and short-term investments were $3.033 million, together $8.260 million, versus $9.414 million at December 31, 2018. Working capital was $6.799 million, down from $8.275 million. Total assets were $10.798 million and total liabilities were $2.068 million; the balance sheet reports no debt. Operating cash use was partly offset by $3.664 million in financing cash flow, including $2.848 million of net reported common-stock proceeds and $816,000 from option exercises. Cash declined by $2.384 million during the quarter.
VirnetX sold 560,338 shares through its at-the-market offering during the quarter, reporting $2.936 million of gross proceeds and $88,000 of fees and costs. Shares outstanding increased from 66.880 million at December 31 to 68.104 million at March 31. Up to $34.521 million remained available under the ATM at quarter-end.
Outlook, litigation, and risks
- Management said cash, short-term investments, and the ability to raise funds under its ATM and shelf registration were expected to fund its current level of SG&A, including legal expenses, and working capital for the foreseeable future. No numerical revenue or earnings guidance was provided.
- Management expects future revenue to come primarily from patent-portfolio, technology, software, and secure-domain-name licensing and royalties. It cautioned that commercialization faces obstacles, including potential customers waiting for the Apple litigation to conclude.
- District Court judgments total $439.7 million in Apple I and $595.9 million in Apple II. These are litigation awards, not reported cash receipts; Apple appealed both matters. The Federal Circuit affirmed the Apple I judgment by Rule 36 order, but Apple sought rehearing and a decision on that request was pending. Apple II appeal proceedings were ongoing. Other appeals concerning patent validity were also pending, and the Federal Circuit had affirmed certain PTAB invalidity findings.
- The company warned that litigation is costly, lengthy, and uncertain; adverse outcomes or patent challenges could reduce or delay recoveries and impair commercialization. It also cited risks including limited licensing revenue, dilution from further equity issuance, capital needs, product adoption and execution, cybersecurity and privacy regulation, and volatile trading in its stock.
- A related-party aircraft service agreement generated approximately $559,000 in rental fees and reimbursements in Q1 2019, compared with $608,000 in Q1 2018. The filing states that the CEO and Chief Administrative Officer are managing partners of the aircraft provider.
Important facts for investors to verify
- Subsequent court decisions and appeal outcomes in Apple I, Apple II, and the related patent-validity proceedings; do not treat judgment amounts as collected cash.
- Cash burn, working-capital changes, and the timing and availability of additional ATM or shelf financing, including potential share dilution.
- Whether licensing, GABRIEL product deployments, and customer adoption produce material recurring revenue beyond the quarter’s $8,000.
- Patent enforceability and remaining patent lives; the filing says issued patents expire at various times from 2019 through 2024.
- The costs and governance implications of the related-party aircraft arrangement.