VirnetX Holding Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in thousands of dollars except per-share data.
Business context
VirnetX commercializes a portfolio of communications-security patents and related products, including its GABRIEL platform, primarily through licenses and royalties. The company reported approximately 201 patents and pending applications. Management describes product commercialization as early-stage; revenue remains heavily dependent on licensing and intellectual-property enforcement.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4 | $26 | $24 | $302,620 |
| Operating income (loss) | ($4,236) | ($5,335) | ($42,030) | $167,373 |
| Net income (loss) | ($3,331) | ($4,025) | ($33,297) | $287,880 |
| Basic and diluted EPS | ($0.05) | ($0.06) | ($0.47) | $4.07 basic; $4.02 diluted |
- Nine-month 2021 operating expenses were $42,054, including $48,040 of SG&A, partly offset by a $9,438 reversal of licensing costs. SG&A increased $9,693 year over year, primarily reflecting a $38,284 McKool legal-fee accrual, partly offset by lower other attorney fees.
- Nine-month research and development expense declined to $3,452 from $6,799, primarily due to lower engineering employee benefits.
- Operating cash flow was negative $48,553 for the first nine months, versus positive $308,120 in 2020. Investing activities provided $3,883; financing activities used $196. Cash and cash equivalents ended at $148,042.
- Cash plus available-for-sale investments totaled $172,492 at September 30, 2021, down from $221,256 at December 31, 2020. Working capital was $175,164, versus $214,076 at year-end 2020.
- Total assets were $194,539 and total liabilities $570; the balance sheet reports no debt. Management said available cash and investments should fund current operating expenses, including legal expenses, and working capital for the foreseeable future.
- Deferred tax assets were $17,749, up from $9,049 at December 31, 2020. The nine-month tax benefit was $8,697.
Material changes and unusual items
- The sharp year-over-year revenue and earnings decline reflects the absence of the large Apple-related payment recorded in 2020. Of the $454,034 received in 2020, $302,428 was recognized as royalty revenue, $41,271 as gain, and $108,221 as interest income; $2,114 reimbursed litigation costs reduced SG&A.
- The 2021 nine-month results include the $9,438 reversal of accrued licensing costs associated with the McKool arbitration matter. The company paid McKool $38,284 in April 2021 pursuant to the arbitrator’s award; that matter is closed.
- The company used no shares under its ATM offering in 2021. The related registration statement expired August 13, 2021. Shares outstanding were 71,232,856 as of November 5, 2021.
Outlook, litigation and key risks
- Apple litigation: A jury awarded VirnetX $502,800 in October 2020 in Apple II. The district court denied Apple’s post-trial motion; Apple appealed, briefing was complete, and oral argument was awaiting scheduling as of the filing. The potential award is not recorded as a gain before realization, and patent challenges or appellate proceedings could reduce, eliminate, or delay any recovery.
- Other patent-validity appeals and USPTO rehearing proceedings remain active. The company cautions that litigation is costly, time-consuming, uncertain, and may distract management or limit commercialization.
- Management expects future revenue primarily from patent licenses and royalties, but gave no numerical revenue or earnings guidance. It warns that licensing opportunities may not convert to material revenue and that potential customers may wait for litigation outcomes.
- Other disclosed risks include patent invalidation or expiration, limited customer diversification, long sales cycles, product adoption and security risks, privacy regulation, COVID-19-related disruption, and stock-price volatility. Some patents expire at various times from 2021 through 2034.
- A related-party aircraft-use agreement generated fees and reimbursements of $454 for the first nine months of 2021, compared with $157 in 2020. The CEO and Chief Administrative Officer are managing partners of the provider.
Important facts for investors to verify
- Latest status and possible timing or outcome of the Apple II appeal and related patent-validity challenges; do not treat the verdict as collected cash.
- Cash burn, legal spending, and whether liquidity remains sufficient if licensing revenue stays minimal or litigation continues.
- Underlying recurring licensing and product revenue, given the exceptional 2020 Apple payment and only $24 of revenue in the first nine months of 2021.
- Basis and recoverability of the $17,749 deferred tax asset, including the assumptions supporting future taxable income.
- Related-party aircraft costs and other potential obligations, including any future legal-fee or patent-licensing liabilities.