VirnetX Holding Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request refers to 2018 Q4, this is an annual filing; quarterly figures are included where disclosed. Unless noted, financial amounts below are in U.S. dollars.
Business context
VirnetX develops and licenses patented Internet-security technology, including secure domain-name and GABRIEL communication products. Its strategy relies primarily on patent licensing and royalties, with product sales and services also being developed. The company reported approximately 185 patents and pending applications and more than 80 small and medium businesses with GABRIEL installations. It had 21 full- and part-time employees at year-end.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $0.063 million | $1.547 million |
| Operating expenses | $25.520 million | $18.868 million |
| Operating loss | $25.457 million | $17.321 million |
| Net loss | $25.406 million | $17.278 million |
| Loss per share, basic and diluted | $0.40 | $0.30 |
| Cash used in operating activities | $22.298 million | $14.944 million |
FY2018 revenue was largely royalty revenue. Adoption of ASC 606 reduced reported 2018 revenue by $1.5 million; on the filing’s pre-adoption comparison, revenue would have been $1.563 million. The filing does not report a conventional gross margin measure. Selling, general and administrative expense rose to $20.705 million from $14.709 million; legal fees were $9.706 million versus $3.657 million. Research and development expense was $4.815 million versus $4.159 million.
At December 31, 2018, cash and cash equivalents were $7.611 million and available-for-sale investments were $1.803 million, up from $3.135 million and $1.453 million, respectively, a year earlier. Current assets were $10.138 million and current liabilities $1.863 million. Total liabilities were $1.863 million; the balance sheet lists no borrowings or debt. Stockholders’ equity was $9.888 million, compared with $1.553 million at year-end 2017.
Financing cash flow was $27.144 million, principally reflecting $27.837 million of gross proceeds from ATM share sales, before $0.785 million of associated costs. The company sold 7.51 million shares during 2018; shares outstanding increased from 59.05 million to 66.88 million. Subsequent to year-end through February 20, 2019, it raised a further $2.936 million gross under the ATM. Management said cash, investments, and expected ATM proceeds should fund current spending levels for the foreseeable future. The filing reports no off-balance-sheet arrangements.
Fourth-quarter results and changes
Fourth-quarter 2018 revenue was $34,000, operating loss was $6.439 million, and net loss was $6.417 million, or $0.09 per share. Fourth-quarter 2017 revenue was $401,000 and net loss was $6.034 million, or $0.10 per share.
For the full year, revenue fell sharply, while net loss widened by $8.128 million. Higher operating costs—particularly legal fees and, to a lesser extent, R&D and compensation—contributed to the larger loss. Operating cash use also increased by $7.354 million. The higher year-end cash balance primarily reflected equity issuance, not positive operating cash flow.
Outlook, litigation, and other material matters
Management provided no quantified revenue or earnings guidance. It plans to pursue licensing, expand GABRIEL sales and partnerships, and develop secure-domain-name services for 5G, LTE and connected devices. It cautioned that commercialization may be difficult and that prospective licensees may wait for litigation outcomes. The terminated PITA Japan licensing and revenue-sharing arrangements had not produced meaningful results; VirnetX said it was exploring other approaches.
Two Apple judgments were outstanding but not collected as of the filing: $439.7 million in Apple I and $595.9 million in Apple II. Apple appealed both. The Federal Circuit affirmed the Apple I judgment in January 2019, but Apple sought rehearing; the Apple II appeal remained pending. These awards are contingent litigation outcomes, not reported operating revenue or available cash. Separately, the Federal Circuit affirmed PTAB invalidity findings for one patent in December 2018, while other patent validity appeals remained pending. The company warned that litigation is costly, outcomes are uncertain, and adverse rulings could reduce or delay recoveries and impair its licensing strategy.
Other notable risks include dependence on a limited number of licensees and litigation-related income, patent challenges and expirations (patents expire at various times from 2019 to 2024), long sales cycles, competition, security and privacy regulation, and potential dilution from future equity sales. The company reported a full valuation allowance against deferred tax assets. It also reported $1.590 million in 2018 aircraft rental fees and reimbursements to an entity managed and controlled by its CEO and Chief Administrative Officer. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor found internal control over financial reporting effective at year-end.
Important facts for investors to verify
- Track the final outcomes and collectability of the Apple I and Apple II judgments, including appeals and any further patent-validity decisions.
- Assess whether recurring licensing, royalty, or product revenue can replace litigation-related and contract-based receipts; reported FY2018 revenue was only $63,000.
- Monitor operating cash burn, legal spending, remaining liquidity, and dependence on ATM or other equity financing.
- Review the effect of ASC 606 on comparability and the company’s explanation of the $1.5 million FY2018 revenue adjustment.
- Evaluate patent enforceability and remaining patent life, as well as progress converting GABRIEL installations and partnerships into material revenue.
- Consider dilution from the 2018 share issuance and any subsequent or planned ATM sales.