VirnetX Holding Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statement amounts below are in thousands of dollars, except per-share data.
Business context
VirnetX develops and seeks to commercialize patented secure-communications technology, including its GABRIEL products, and primarily expects revenue from patent licenses and royalties. It reported approximately 191 patents and pending applications. Commercial revenue remained minimal.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4 | $7 | $50 | $28 |
| Operating expenses | $4,980 | $4,955 | $15,212 | $19,046 |
| Operating loss | $(4,976) | $(4,948) | $(15,162) | $(19,018) |
| Net loss | $(4,956) | $(4,934) | $(14,694) | $(18,989) |
| Loss per share, basic and diluted | $(0.07) | $(0.08) | $(0.22) | $(0.31) |
- Cash flow: Operating activities used $11,908 during the first nine months of 2019, versus $17,759 in 2018. Investing activities used $816; financing activities provided $7,685, primarily from common-stock sales and option exercises.
- Liquidity: At September 30, 2019, cash and cash equivalents were $2,572 and available-for-sale investments were $2,621, totaling $5,193. Working capital was $3,914. At December 31, 2018, cash and investments totaled $9,414 and working capital was $8,275.
- Debt: No debt is reported on the balance sheet. Total liabilities were $1,600, primarily current liabilities.
- Equity financing: The company sold 1,232,020 shares through its at-the-market program in the first nine months, generating $7,131 gross proceeds. An additional 551,795 shares were sold from October 1 through November 6, generating $3,360 gross proceeds. These issuances dilute existing shareholders.
Changes versus prior comparable periods
Nine-month net loss narrowed by $4,295, principally because selling, general and administrative expense declined by $3,597, including a $3,955 reduction in legal fees related to patent litigation. Research and development expense also fell by $237. Q3 net loss was slightly higher than a year earlier as operating expenses increased modestly while revenue declined. Nine-month revenue increased by $22 but remained immaterial relative to expenses.
Outlook, litigation and risks
- Management said cash, short-term investments and access to equity sales were expected to fund current selling, general and administrative costs, including legal expenses, and working capital for the foreseeable future. The filing provides no formal revenue or earnings guidance and says operating losses are expected.
- Management’s longer-term plan depends on licensing and royalties, but the company cautions that commercialization and licensing may not produce significant revenue. It reported more than 80 small and medium businesses had installed GABRIEL products.
- Apple I has a $439.7 million district-court judgment; the Federal Circuit affirmed it and denied rehearing, but Apple’s deadline to seek Supreme Court review was extended to December 29, 2019. Apple II has a $595.9 million judgment under appeal; appellate oral argument occurred October 4, 2019, with no decision reported in the filing. These awards are disputed and contingent; the filing does not report receipt of the awarded amounts. Appeals and patent challenges could reduce, delay or prevent recovery.
- Other patent proceedings have produced mixed outcomes: certain Patent Trial and Appeal Board decisions were vacated or remanded, while some invalidity findings were affirmed. Outcomes remain uncertain.
- Key risks include dependence on litigation and a small number of licensees, patent validity and enforcement challenges, limited product adoption, ongoing losses, possible further equity dilution, and volatility in the stock price. The company maintains a full valuation allowance against deferred tax assets.
- A related-party aircraft-use agreement with an entity controlled by the CEO and Chief Administrative Officer generated $442 of fees and reimbursements in Q3 2019 and $1,327 in the first nine months.
Important facts for investors to verify
- Subsequent outcomes of Apple I Supreme Court proceedings, the Apple II appeal and other patent validity proceedings; whether any judgment becomes collectible and when.
- Cash burn, working capital and the pace and pricing of future ATM share sales, including resulting dilution.
- Evidence that licensing, GABRIEL adoption or other commercialization can generate material recurring revenue.
- Patent portfolio status and expiration timing; the filing says issued patents expire at various times from 2019 through 2024.
- Related-party aircraft expenses and the terms and continuation of the agreement.