VirnetX Holding Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Share and per-share information reflects the 1-for-20 reverse split effective October 25, 2023.
Business context
VirnetX develops and seeks to commercialize patented cybersecurity and secure-communications technology, including VirnetX One, War Room and VirnetX Matrix. Its business model relies on product sales and patent licensing and royalties. The company reported approximately 205 patents and pending applications. It ended support for its GABRIEL Collaboration Suite in May 2023.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $0.003 | $0.004 | $0.007 | $0.043 |
| Operating expenses | $5.638 | $5.359 | $23.674 | $14.068 |
| Operating loss | $(5.635) | $(5.355) | $(23.667) | $(14.025) |
| Net loss | $(4.918) | $(4.280) | $(20.764) | $(12.037) |
| Loss per share | $(1.36) | $(1.20) | $(5.79) | $(3.38) |
Revenue was negligible, so conventional revenue margins are not meaningful. Interest and other income was $0.716 million in Q3 and $2.824 million for the nine months, up from $0.589 million and $0.817 million, respectively, in 2022. The nine-month 2023 income tax benefit was $0.079 million; the company recorded a full valuation allowance against net deferred tax assets.
- Cash and liquidity: At September 30, cash and cash equivalents were $27.845 million and available-for-sale investments were $33.183 million, totaling $61.028 million in these categories. Working capital was $59.868 million, down from $151.530 million at year-end 2022. The balance sheet also reported $2.0 million of other investments at cost.
- Cash flow: Nine-month operating cash use was $17.757 million; investing activities provided $30.481 million net; financing activities used $71.440 million, including a $71.429 million dividend payment. Cash declined by $58.716 million from year-end.
- Debt and liabilities: Total liabilities were $1.601 million, consisting primarily of current liabilities. The filing reports no off-balance-sheet arrangements.
- Equity: Stockholders’ equity was $62.312 million versus $152.244 million at December 31, 2022. The reduction largely reflects the $71.429 million dividend and accumulated losses.
Changes versus prior comparable periods
- Nine-month revenue fell to $7,000 from $43,000, while net loss widened to $20.764 million from $12.037 million.
- Nine-month R&D expense increased $3.643 million to $7.341 million, principally due to engineering personnel costs and a second-quarter bonus. SG&A increased $5.959 million to $16.333 million, mainly due to legal fees, outside services and compensation, including a bonus.
- Cash and cash equivalents plus available-for-sale investments fell from $152.023 million at year-end 2022 to $61.028 million at September 30, 2023. The one-time dividend was the largest financing cash outflow.
Outlook, risks and unusual items
- Management said cash, cash equivalents and short-term investments should fund current operating expenses, including legal costs, and working capital for the foreseeable future. No quantified revenue or earnings guidance was provided. Management expects future revenue to depend primarily on patent licenses and royalties.
- Commercialization remains uncertain: product revenue was minimal, and the company cautions that product launches and partnerships may not generate significant sales. It announced AI-sector investments and partnerships; a subsequent October investment of $0.5 million in OP Media included an agreement for exclusive cybersecurity-provider status and integration/resale of VirnetX One.
- Litigation: The Federal Circuit vacated the Apple II judgment and remanded for dismissal as moot after affirming patent-invalidity decisions. The district court dismissed the case in July 2023. VirnetX petitioned the Supreme Court for review in September; the Court requested responses, with a then-current deadline of December 27, 2023. Other patent appeals and challenges remain pending, and several claims have been found unpatentable. The company warns litigation is costly, distracting and uncertain.
- NYSE listing: The company received notice in May 2023 that it failed the $1.00 minimum-price standard. After the October reverse split, management expected to regain price compliance but gave no assurance; it also flagged possible failure to meet the $15 million market-capitalization standard and potential delisting.
- Capital allocation and commitments: The company declared and paid a one-time $20-per-share dividend in April 2023; future dividends are not assured. Subsequent events include a two-year office lease renewal and a 66-month Utah office lease associated with its AI-sector move.
- Related party: Aircraft services from an entity controlled by the CEO and Chief Administrative Officer cost approximately $0.314 million in Q3 and $0.713 million year to date.
- Other risks: Patent validity and enforcement, ability to commercialize products, customer concentration, cybersecurity and privacy regulation, volatile stock price, and potential financing needs are prominent risks. Management concluded disclosure controls were effective at September 30, 2023.
Important facts for investors to verify
- Track Supreme Court and Federal Circuit developments, including patent validity outcomes and their potential effects on any recoveries or licensing prospects.
- Verify NYSE compliance after the reverse split, including both the minimum share-price and market-capitalization requirements.
- Assess the pace of cash use and whether the reported liquidity remains sufficient as legal, operating and new AI-related commitments evolve.
- Look for evidence that product deployments, reseller agreements and AI partnerships produce material, recurring revenue; reported revenue to date is very limited.
- Reconcile the MD&A tax discussion: it states Q3 loss before taxes of $4.419 million, while the statement of operations reports $4.919 million. The filing text does not explain this discrepancy.
- Confirm the nature and terms of the $2.0 million other investment reported at September 30, and distinguish it from investments announced after quarter-end.