VirnetX Holding Corporation — Q2 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2022. VirnetX’s business centers on licensing its patent portfolio and commercializing secure-communications software. It launched War Room in March and VirnetX Matrix in April on its VirnetX One platform. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $0.034 | $0.015 | $0.039 | $0.020 |
| Operating expenses | $4.301 | $4.157 | $8.709 | $37.814 |
| Operating loss | $(4.267) | $(4.142) | $(8.670) | $(37.794) |
| Net loss | $(4.437) | $(6.851) | $(7.757) | $(33.294) |
| Loss per share, basic and diluted | $(0.06) | $(0.10) | $(0.11) | $(0.47) |
- Margins: Revenue was very small relative to operating costs, so operating and net margins were deeply negative and are not particularly informative as percentages.
- Cash flow: H1 operating cash use was $7.296 million, versus $45.519 million in H1 2021. Investing activities used $7.515 million, and financing activities used $0.029 million. Cash and cash equivalents declined $14.840 million during H1.
- Liquidity and debt: At June 30, cash and cash equivalents were $127.178 million and available-for-sale investments were $34.482 million, totaling $161.660 million. Working capital was $161.455 million. Total liabilities were $0.756 million; the filing reports no borrowings or other material debt.
- Other balance-sheet items: Total assets were $179.722 million; stockholders’ equity was $178.966 million. The deferred tax asset was $16.635 million. Accumulated deficit was $58.692 million.
Changes versus the prior comparable period
- Revenue increased by $0.019 million in Q2 and $0.019 million in H1, but remained immaterial in scale.
- H1 net loss narrowed by $25.537 million. The comparison is heavily affected by 2021 items: 2021 SG&A included a $38.284 million McKool legal-fee accrual, while licensing costs included a $9.438 million reversal. These make the year-over-year expense comparison atypical.
- Q2 2022 R&D expense rose to $1.255 million from $1.149 million; the filing attributes the increase to added staff and higher engineering benefits. Q2 SG&A was $3.046 million versus $3.008 million.
- Cash and equivalents fell from $142.018 million at December 31, 2021, while investments rose from $27.254 million. Combined cash and investments decreased by $7.612 million.
Outlook, commentary, risks and unusual items
- Management stated that cash and investments at June 30 should fund the current level of operating expenses, including legal costs, and working capital for the foreseeable future. No quantified revenue, earnings or cash-flow guidance was provided.
- Management expects future revenue principally from patent licenses and royalties, while seeking to grow software sales. The company said it expected to launch its new products in Asia Pacific and Europe during 2022; commercialization, customer adoption and revenue generation remain uncertain.
- Apple litigation: A 2020 jury verdict awarded VirnetX $502.8 million in the Apple II case. Apple appealed; oral arguments were scheduled for September 8, 2022. The award was not recorded as an asset or revenue because the company’s policy does not recognize contingent gains before realization. Patent validity challenges and appeal outcomes could reduce, eliminate or delay any recovery.
- Other patent-related appeals and proceedings were ongoing. The company cautioned that litigation is costly, time-consuming and uncertain, and that potential licensees may defer agreements pending litigation outcomes.
- Restatement and controls: VirnetX restated previously issued 2021 financial statements for an error that overstated deferred tax assets, including revisions to the 2021 interim tax figures. The restatement process identified a material weakness in internal control over financial reporting. Management described enhanced tax-review procedures and training, and said the remediation controls were operating effectively; it also concluded disclosure controls were effective at June 30, 2022.
- Related-party cost: Fees and reimbursements for aircraft use from an LLC whose managing partners include the CEO and Chief Administrative Officer were $0.249 million in Q2 and $0.514 million in H1, compared with $0.095 million and $0.174 million in the 2021 periods.
- Other key risks include patent invalidation or expiration, limited customer concentration and minimal current licensing revenue, slow product adoption, cybersecurity and privacy requirements, and volatile results and share price. The company reported no material changes to contractual obligations and no off-balance-sheet arrangements.
Important facts for investors to verify
- Track the Apple II appeal and patent-validity proceedings; do not treat the $502.8 million jury verdict as cash or recognized revenue.
- Assess whether the new software products gain customers and generate material revenue, given current revenue of only $0.039 million for H1.
- Review the 2021 restatement disclosures and subsequent evidence that the deferred-tax controls remediation remains effective.
- Reconcile the H1 2021 comparison, which includes the unusual McKool accrual and licensing-cost reversal, when evaluating expense trends.
- Check two apparent disclosure inconsistencies: the notes describe approximately 201 patents and pending applications, while MD&A says approximately 205; and MD&A’s R&D discussion appears to give inconsistent six-month figures compared with the financial statements, which report $2.482 million for H1 2022 and $2.301 million for H1 2021.