VirnetX Holding Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. VirnetX commercializes patents and secure communications technology, and is developing software products and licensing programs. Financial statement amounts below are in thousands of dollars, except per-share data.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $5 | $5 |
| Operating expenses | $4,408 | $33,657 |
| Operating loss | $4,403 | $33,652 |
| Net loss | $3,320 | $26,443 |
| Loss per share, basic and diluted | $0.05 | $0.37 |
| Net cash used in operating activities | $3,962 | $4,225 |
Revenue was negligible relative to expenses, so operating margins are not meaningful. The lower year-over-year loss primarily reflects unusually high prior-year legal-related expenses, not revenue growth. Q1 2021 SG&A included a $38,284 McKool legal-fee accrual; 2021 licensing costs included a $9,438 reversal. Q1 2022 licensing costs were reduced by a further $4.
At March 31, cash and cash equivalents were $136,408 and available-for-sale investments were $28,728, for combined cash and investments of $165,136. Working capital was $164,771, total liabilities were $1,068, and the filing reports no debt balance. Total assets were $183,801. Cash and cash equivalents declined $5,610 from year-end. Management expects cash and short-term investments to fund current operating expenses, including legal expenses, and working capital for the foreseeable future.
Cash flow from investing activities was an outflow of $1,648, reflecting investment purchases and maturities or sales. The company recognized a $1,059 income tax benefit. Stock-based compensation was $778. Shares outstanding were 71,232,856 at March 31; potentially dilutive securities were excluded from diluted EPS because their effect was antidilutive.
Business developments, outlook, and risks
- VirnetX launched War Room software on March 1, 2022, and launched VirnetX Matrix on its VirnetX One platform on April 7, 2022. It gave no quantified revenue or earnings guidance and cautioned that new products may not generate significant sales.
- Management expects future revenue primarily from patent-portfolio licensing and royalties, but current licensing and software revenue is minimal. Customer adoption, long sales cycles, and the ongoing Apple litigation may impede commercialization.
- In Apple II, a jury returned a $502,800 damages verdict in October 2020, and the district court denied Apple’s post-trial motion in January 2021. Apple appealed; briefing was complete and oral-argument scheduling was pending. The award is contingent and is not recognized before cash is collected. Patent challenges could reduce, eliminate, or delay any recovery.
- Other patent-validity appeals and proceedings remain ongoing. The filing identifies patent litigation costs, adverse court or patent-office decisions, and potential invalidation or expiration of patents as significant risks.
- VirnetX launched products amid risks including limited technical and commercial resources, uncertain product-market acceptance, competition, privacy and cybersecurity requirements, and international expansion costs. The company also cited COVID-19-related operational and sales risks.
- A material weakness in internal control over financial reporting related to deferred-tax accounting had resulted in a restatement of the December 31, 2021 financial statements. Management reported beginning remediation during Q1, targeting completion by year-end 2022 subject to testing. Management nevertheless concluded disclosure controls were effective as of March 31.
- Related-party aircraft service fees and reimbursements were approximately $265 in Q1 2022 versus $79 in Q1 2021; the CEO and Chief Administrative Officer are managing partners of the service provider.
Most important facts for investors to verify
- Current status and ultimate outcome of the Apple II appeal and related patent-validity proceedings; do not treat the verdict as cash or assured recovery.
- Whether War Room, VirnetX Matrix, and the VirnetX One platform obtain paying customers and generate material revenue.
- Cash burn, legal spending, and investment balances relative to management’s stated liquidity outlook.
- Progress in remediating the deferred-tax control weakness and any implications of the prior-year restatement.
- Reconciliation of patent-portfolio counts: the filing describes approximately 201 patents and pending applications in one section and approximately 205 in another.