VirnetX(VHC) - 2021 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents VirnetX Holding Corporation's unaudited condensed consolidated financial statements as of September 30, 2021, showing a shift from net income to net loss primarily due to a prior-year patent infringement settlement Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2021, reflects a decrease in total assets to $194.5 million and total stockholders' equity to $194.0 million, primarily due to reduced cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $148,042 | $192,908 | | Total current assets | $175,734 | $224,432 | | Total assets | $194,539 | $234,793 | | Total current liabilities | $570 | $10,356 | | Total liabilities | $570 | $10,356 | | Total stockholders' equity | $193,969 | $224,437 | Condensed Consolidated Statements of Operations For the nine months ended September 30, 2021, the company reported a net loss of $33.3 million, a significant decline from $287.9 million net income in 2020, primarily due to the absence of prior-year patent settlement revenue Statement of Operations Summary (in thousands, except per share amounts) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Revenue | $24 | $302,620 | | Total operating expense | $42,054 | $135,247 | | Income (loss) from operations | ($42,030) | $167,373 | | Net income (loss) | ($33,297) | $287,880 | | Diluted income (loss) per share | ($0.47) | $4.02 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $48.6 million for the nine months ended September 30, 2021, a significant change from $308.1 million provided in the prior year due to a patent settlement collection Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($48,553) | $308,120 | | Net cash provided by (used in) investing activities | $3,883 | ($19,681) | | Net cash used in financing activities | ($196) | ($65,663) | | Net change in cash and cash equivalents | ($44,866) | $222,776 | | Cash and cash equivalents, end of period | $148,042 | $225,911 | Notes to Condensed Consolidated Financial Statements These notes detail the company's business model, accounting policies, revenue recognition from settlements, significant litigation status, stock-based compensation, and related party transactions - The company's business is centered on commercializing its portfolio of approximately 201 patents and pending applications, primarily focused on securing real-time communications over the Internet[27][28] - The company is involved in several ongoing intellectual property infringement lawsuits, most notably the 'Apple II' case, where a jury awarded VirnetX over $502 million in October 2020, with Apple's appeal awaiting oral argument[83][85][86] - In a separate legal matter, the law firm McKool Smith, P.C. was awarded $36.3 million plus interest in an arbitration case related to contingency fees from the Apple I case payment, which VirnetX accrued and paid in April 2021[91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's internet security technology business, highlighting the significant year-over-year decrease in revenue and profitability due to the absence of a $454 million Apple Inc. payment received in 2020, while affirming sufficient cash to fund future operations - The company's business model is founded on its portfolio of approximately 201 patents and pending applications related to secure network communications, commercialized through its GABRIEL Secure Communication Platform™ and a licensing program[99][104] Breakdown of Apple Inc. Payment in Q1 2020 (in thousands) | Classification | Amount | | :--- | :--- | | Revenue (royalties) | $302,428 | | Operating expenses (reimbursed litigation costs) | $2,114 | | Other income: gain (willful infringement) | $41,271 | | Other income: interest income | $108,221 | | Total cash received | $454,034 | - Selling, general and administrative expenses for the nine months ended Sep 30, 2021, increased to $48.0 million from $38.3 million in 2020, primarily due to accruing $38.3 million in disputed legal fees to McKool, partially offset by a decrease in other attorney fees[113] - As of September 30, 2021, the company had cash and cash equivalents of $148.0 million and short-term investments of $24.5 million, which management believes are sufficient to cover operating expenses for the foreseeable future[116][117] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its highly liquid, short-term investments, with a 100 basis point interest rate change deemed to have an immaterial impact on marketable securities' fair value - The company's primary market risk is interest rate risk on its cash and investments, which are held in highly liquid, short-term instruments[128] - Management determined that a potential adverse change of 100 basis points in interest rates would have an immaterial impact on the fair value of its marketable securities[130] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[134] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[135] PART II — OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 7 of the financial statements for detailed information on the company's ongoing patent infringement litigation, particularly cases involving Apple Inc - For details on legal proceedings, the report refers to Note 7 — Litigation in the financial statements[139] Item 1A. Risk Factors This section details numerous risks, including heavy reliance on costly patent litigation, potential patent invalidation, challenges in licensing and commercializing products, and high stock price volatility - The company's business is heavily dependent on litigation to defend and monetize its patent portfolio, which is time-consuming, costly, and has an uncertain outcome[140] - There is a risk that the company's patents could be invalidated through challenges in court or in post-grant review proceedings at the U.S. Patent and Trademark Office (USPTO)[144] - The company faces risks related to security breaches of its systems, which could expose it to liability and damage its reputation, particularly as a provider of security technology[155] - The market price of the company's common stock is highly volatile and subject to significant fluctuations due to factors like litigation developments, operating results, and market speculation[185][187] Item 5. Exhibits This section lists exhibits filed with the Form 10-Q, including a management contract and CEO/CFO certifications required by the Sarbanes-Oxley Act - Exhibits filed include the CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and a new hire letter for the CFO[211]