VirnetX Holding Corporation (NYSE: VHC) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless noted. VirnetX commercializes a portfolio of communications-security patents and related GABRIEL products. The company reported approximately 194 patents and pending applications.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $0.015 | $0.018 | $0.020 | $302.594 |
| Operating expenses | $4.157 | $10.504 | $37.814 | $129.886 |
| Operating income (loss) | $(4.142) | $(10.486) | $(37.794) | $172.708 |
| Net income (loss) | $(3.523) | $(8.040) | $(29.966) | $291.905 |
| Basic/diluted EPS | $(0.05) | $(0.11) | $(0.42) | $4.13 / $4.05 |
Q2 revenue remained minimal. Gross margin is not separately presented, and margins are not informative given negligible current-period revenue and the prior-year litigation-related revenue. The first half of 2020 included a $454.034 million Apple payment, with $302.428 million classified as royalties; it also included litigation-cost reimbursement, damages gain, and interest income.
- Cash flow: First-half 2021 operating cash use was $45.519 million, versus $332.937 million provided in the prior-year period. Investing activities provided $6.439 million; financing activities used $0.196 million. Cash declined $39.276 million during the first half.
- Liquidity: At June 30, cash and cash equivalents were $153.632 million and available-for-sale investments were $21.908 million, totaling $175.540 million. Working capital was $178.139 million. Current liabilities were $0.769 million. The balance sheet reports no debt.
- Equity and taxes: Stockholders’ equity was $196.127 million, down from $224.437 million at year-end 2020. Net deferred tax assets were $16.854 million after a partial valuation allowance. The company recorded a $7.802 million first-half income tax benefit.
Changes versus the comparable period
First-half revenue and earnings fell sharply from 2020 because the prior-year period included the Apple payment; 2021 revenue was only $20,000. First-half 2021 operating expenses included a $9.438 million reversal of accrued licensing costs associated with the McKool arbitration award. SG&A rose to $44.951 million for the first half from $34.077 million, primarily reflecting a $38.284 million McKool-related legal-fee accrual, partly offset by lower other attorney fees. The award was paid in April 2021. Q2 R&D expense decreased to $1.149 million from $3.803 million, primarily due to lower employee benefits; Q2 SG&A decreased to $3.008 million from $6.701 million.
Outlook, litigation, and risks
- Management said cash, cash equivalents, and short-term investments at June 30, 2021 should fund the current level of operating expenses, including legal expenses, and working capital for the foreseeable future. It expects longer-term revenue primarily from patent, technology, software, and secure-domain-name licensing and royalties. No quantified revenue or earnings guidance was provided.
- In the Apple II case, a jury awarded VirnetX $502.8 million in October 2020. The district court denied Apple’s post-trial motion in January 2021; Apple appealed, and briefing was ongoing at the filing date. The company cautioned that patent challenges or the appeal could reduce, eliminate, or delay any recovery. Under its accounting policy, contingent gains are not recognized until realized, generally upon cash collection.
- VirnetX appealed PTAB patent-invalidity findings; proceedings were stayed pending further consideration of the Supreme Court’s Arthrex decision. Patent litigation is costly and outcomes uncertain. Management also warned that litigation may deter potential licensees, while commercialization and licensing have so far generated minimal recurring revenue.
- Other stated risks include patent challenges and expirations, long and unpredictable sales cycles, competition, regulatory and privacy requirements, cybersecurity and product risks, COVID-19-related disruption, stock-price volatility, and possible dilution. Some patents expire between 2021 and 2034.
- Related-party aircraft services from an LLC controlled by the CEO and Chief Administrative Officer cost approximately $95,000 in Q2 2021 and $174,000 in the first half. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Current status and potential timing or amount of any recovery in Apple II, including the appeal and patent-validity proceedings; no appeal proceeds were recorded as an asset or gain.
- Whether VirnetX can develop recurring licensing or product revenue beyond the very low first-half 2021 reported revenue.
- Cash burn, legal and other operating costs, and management’s liquidity assessment against the company’s stated “foreseeable future” funding horizon.
- Basis and recoverability of the $16.854 million deferred tax asset and the remaining valuation allowance.
- Related-party aircraft-service terms and usage, and the potential dilution from outstanding equity awards and the remaining ATM capacity.