VirnetX Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Financial-statement amounts below are in thousands of dollars, except per-share data. VirnetX commercializes patents and security technology through licensing, while developing its GABRIEL secure communications products.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $398 | $400 | $773 | $775 |
| Operating expenses | $5,751 | $9,967 | $14,745 | $16,102 |
| Operating loss | $(5,353) | $(9,567) | $(13,972) | $(15,327) |
| Net loss | $(5,337) | $(9,546) | $(13,948) | $(15,401) |
| Loss per share, basic and diluted | $(0.10) | $(0.18) | $(0.25) | $(0.30) |
- Revenue was nearly flat year over year and primarily reflected recognition of the August 2013 license settlement: $375 in Q2 and $750 for the six-month period. The filing says no amount of the remaining $2,500 due under that contract would be recognized until collected; payment was due in August 2016.
- No gross-margin measure is presented. Royalty expense was zero in 2016 versus $4,236 in the first half of 2015, when it primarily reflected revenue-sharing and legal reimbursements to Leidos. R&D expense rose to $931 from $809; six-month SG&A rose to $13,814 from $11,057, primarily due to a $3,015 increase in patent-litigation legal fees.
- Operating cash use was $14,244 in the first half, compared with $13,579 in 2015. Investing activities provided $1,670; financing activities provided $13,763, including $13,743 net proceeds reported from ATM share sales. Cash and cash equivalents ended the period at $9,915.
- At June 30, cash and cash equivalents were $9,915 and available-for-sale investments were $8,297. Working capital was $15,629, versus $13,788 at year-end 2015. Total current liabilities were $3,416. The balance sheet reports no borrowings or other debt.
- Stockholders’ equity was $17,484, versus $15,095 at year-end. Shares outstanding increased from 53,198,835 to 56,435,095 during the period; 56,660,039 shares were outstanding on August 4, 2016.
Changes, outlook and material matters
- Net loss improved year over year, mainly because the prior-year period included $4,236 of royalty expense; lower six-month interest income and higher SG&A partly offset that benefit. Revenue changed little.
- Management said available cash, investments, and ATM proceeds were expected to fund current operating costs, including legal expenses, and working capital for the foreseeable future. It provided no revenue or earnings guidance and cautioned that results are not necessarily indicative of full-year results.
- Management expected legal fees to remain at or rise above recent levels over the next two quarters and expected operating losses as a result. It expects future revenue primarily from patent license fees and royalties; commercial adoption of GABRIEL and licensing success remain uncertain.
- Apple litigation is a major contingency. A February 2016 jury verdict awarded VirnetX $625.6 million, including damages and royalties, and found infringement willful. The award was not reported as revenue or an asset in the financial statements. On July 29, 2016, after quarter-end, the court vacated consolidation of the cases and ordered separate retrials; jury selection in Apple I was scheduled for September 26, 2016, with Apple II to follow. Outcomes and timing remain uncertain.
- Subsequent to quarter-end, VirnetX sold 224,944 additional ATM shares for $883 gross proceeds, before $27 of commissions, fees and other costs.
- Key risks include prolonged and costly patent litigation; challenges to patent validity or enforceability, including inter partes review; dependence on a limited number of license arrangements; uncertain product adoption and long sales cycles; and possible dilution from equity sales and outstanding options. The filing also identifies risks from security breaches, regulation, and market volatility.
- Management concluded disclosure controls were effective as of June 30, 2016; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent court orders, retrial schedules, appeals, and the ultimate collectability and accounting treatment of the Apple verdict.
- Collection of the $2,500 contract installment due in August 2016 and the associated deferred-revenue recognition schedule.
- Cash burn, legal spending, and remaining capacity under the $35 million ATM program; sales dilute existing shareholders.
- Progress in converting patent assets and GABRIEL into recurring licensing or product revenue, given minimal reported revenue and continuing losses.
- Patent challenges and Leidos payment obligations tied to value generated from certain patents; the filing does not quantify future Leidos payments.