VirnetX Holding Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 11, 2023. Amounts below are in millions unless stated otherwise. VirnetX is an internet-security software and technology company whose business relies on licensing and enforcing a portfolio of approximately 205 patents and pending applications, alongside products including VirnetX One, War Room and VirnetX Matrix.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $0.002 | $0.034 | $0.004 | $0.039 |
| Operating expenses | $12.121 | $4.301 | $18.036 | $8.709 |
| Operating loss | $(12.119) | $(4.267) | $(18.032) | $(8.670) |
| Net loss | $(11.379) | $(4.437) | $(15.846) | $(7.757) |
| Loss per share, basic and diluted | $(0.16) | $(0.06) | $(0.22) | $(0.11) |
- Q2 research and development expense was $4.755 million, up $3.500 million year over year; the company cited higher engineering costs and a second-quarter bonus. Selling, general and administrative expense was $7.366 million, up $4.320 million, primarily due to legal fees, outside services and compensation, including a bonus.
- Interest and other income, net, was $0.740 million in Q2 and $2.108 million for the first half, compared with $0.203 million and $0.229 million, respectively, in 2022. The filing attributes the increase to neither a specific source nor a detailed breakdown.
- Gross margin is not presented; revenue was negligible relative to operating costs.
- Six-month operating cash outflow was $14.466 million, versus $7.296 million in 2022. Investing activities provided $25.309 million, mainly reflecting investment sales and maturities net of purchases. Financing used $71.434 million, primarily for the one-time dividend.
- At June 30, cash and cash equivalents were $25.970 million and available-for-sale investments were $40.259 million. Working capital was $65.900 million. Total liabilities were $0.813 million, with no debt reported.
- Total assets were $67.247 million, versus $152.975 million at December 31, 2022; stockholders’ equity was $66.434 million, versus $152.244 million. The $1.00-per-share special dividend declared in March and paid in April totaled $71.429 million.
Changes, outlook and material developments
- Revenue fell year over year, while operating expenses more than doubled in both the quarter and first half, widening losses. Management identifies legal costs, outside services, engineering costs and bonuses as significant expense drivers.
- Management stated that June 30 cash and investments should fund the current level of operating expenses, including legal expenses, and provide working capital for the foreseeable future. Longer term, it expects most revenue to come from patent, technology, software and secure-domain-name licensing and royalties. No quantified revenue or earnings guidance was provided.
- The company reported discussions and announcements involving potential commercial partners and new VirnetX Matrix deployments, but cautioned that there is no assurance these efforts will generate material sales. It ended support for the GABRIEL Collaboration Suite effective May 31, 2023.
- NYSE notified the company in May that its share price did not meet the $1.00 minimum average-price listing standard. The company said it intended to regain compliance, including by considering a reverse stock split. The cure period ran through November 12, 2023; delisting could reduce liquidity and access to capital.
- Apple II litigation: On March 31, 2023, the Federal Circuit vacated the district court judgment and directed dismissal as moot. Rehearing was denied in June; after quarter-end, the district court vacated its prior judgment and dismissed the case on July 14, 2023. The filing identifies September 25, 2023 as the deadline for a possible certiorari petition. No contingent litigation gain is recognized before realization.
- The Federal Circuit affirmed PTAB findings that certain claims of the company’s ’135 and ’151 patents were unpatentable; rehearing was denied in June 2023. Other patent validity appeals remained pending. Outcomes may affect the value of the portfolio and licensing strategy.
- The company reported that cash was at times uninsured above FDIC limits. It also disclosed related-party aircraft-use payments of approximately $0.112 million for Q2 and $0.399 million for the first half, to an LLC managed by its CEO and Chief Administrative Officer.
- After quarter-end, on July 5, 2023, the company issued 578,830 shares of restricted stock. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Key investor verification points
- Reconcile the investment balance: the balance sheet and investment note report $40.259 million at June 30, while MD&A states $40.529 million.
- Track the Apple II appeal options and related patent validity proceedings; litigation recoveries are uncertain and are not recorded as assets before collection.
- Assess whether partner announcements and product deployments produce measurable revenue; first-half revenue was only $4,000.
- Monitor cash use, legal and product-development spending, and the effect of the paid $71.429 million special dividend on liquidity.
- Verify whether the company regained NYSE minimum-price compliance by the stated deadline and whether any reverse stock split or other action was implemented.