VirnetX Holding Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results are compared with the three months ended March 31, 2022. VirnetX develops and seeks to commercialize secure communications software and technology, while its business model also relies on licensing and enforcing its patent portfolio. Unless otherwise noted, dollar amounts below are in thousands.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $2 | $5 |
| Operating expenses | $5,916 | $4,408 |
| Operating loss | $(5,914) | $(4,403) |
| Interest and other income, net | $1,369 | $24 |
| Income tax benefit | $78 | $1,059 |
| Net loss | $(4,467) | $(3,320) |
| Basic and diluted loss per share | $(0.06) | $(0.05) |
| Cash used in operating activities | $(2,711) | $(3,962) |
Revenue was negligible, so conventional revenue margins are not meaningful. R&D expense rose $141 to $1,368, primarily due to engineering employee benefits. Selling, general and administrative expense rose $1,363 to $4,548, primarily due to increased legal fees and outside services. Interest and other income increased by $1,345; the filing does not provide a clearer breakdown in the supplied text. The smaller tax benefit reflected, in part, a change in the valuation allowance; management recorded a full valuation allowance against net deferred tax assets.
At March 31, cash and cash equivalents were $97,050 and available-for-sale investments were $52,367, totaling $149,417. Working capital was $76,512. Total liabilities were $73,523, including $71,429 of accrued dividends; the filing reports no debt balance. Operating cash outflow was partly offset by $13,200 of net cash provided by investing activities, primarily from investment maturities and sales. Cash increased by $10,489 during the quarter. Management stated that cash and short-term investments were expected to fund current operating expenses, legal expenses, the declared dividend, and working capital for the foreseeable future.
Changes, significant events, and outlook
- Net loss widened by $1,147 year over year, while operating expenses increased by $1,508. Operating cash use improved by $1,251.
- On March 30, the company declared a one-time $1-per-share dividend, totaling $71,429, accrued at quarter-end and paid in April 2023. The company also paid a $7,245 special employee bonus in April. Future dividends are not assured.
- On March 31, 2023, the Federal Circuit vacated the district court judgment in Apple II and remanded with instructions to dismiss the case as moot. The district court judgment had followed a $502,800 jury verdict. VirnetX said it was evaluating options; the outcome and any further recovery are uncertain. The company does not recognize contingent gains before realization, generally upon cash collection.
- On March 30, the Federal Circuit affirmed PTAB findings that certain claims of VirnetX’s ’135 and ’151 patents were unpatentable. Other patent and litigation appeals remain pending. The company cautions that litigation is costly, time-consuming, and uncertain, and patent challenges could reduce or eliminate potential recoveries.
- Management described discussions with potential third parties about VirnetX One, but provided no sales or revenue guidance and cautioned that commercialization may face significant obstacles. The company expects future revenue to depend largely on patent licenses and royalties, but currently generates minimal revenue from licensing and software products.
- On May 12, 2023, after quarter-end, the company disclosed an NYSE notice for noncompliance with the $1 minimum-price standard. It had six months to regain compliance, through November 12, 2023, or risk suspension and delisting; a reverse stock split was identified as a possible option, subject to approvals. The company had not regained compliance as of the filing date.
Risks and other disclosures
- Key risks include patent litigation and invalidation challenges, dependence on uncertain licensing and product adoption, limited revenue sources, long sales cycles, and the costs of commercialization.
- Additional risks include possible NYSE delisting, stock-price volatility, potential need for additional capital, privacy and cybersecurity requirements, and dependence on key personnel.
- The filing reports uninsured cash balances at times during the quarter, though the company said it had not experienced deposit losses. It also identifies interest-rate risk, with a 100-basis-point adverse move expected to have an immaterial effect on investment fair value.
- The company reported effective disclosure controls as of March 31, 2023, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Developments and final outcomes in Apple II and the patent-validity appeals, including any petitions for rehearing or further review.
- Cash, investment balances, legal spending, and liquidity after the April dividend and employee bonus payments.
- Progress converting product discussions and commercialization efforts into customer contracts, licensing revenue, or royalties.
- Whether VirnetX meets the NYSE minimum-price standard by the applicable deadline and whether any proposed compliance actions receive required approvals.
- Future dividend decisions and the effect of ongoing legal and product-development costs on capital needs.