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As filed with the Securities
and Exchange Commission on January 26, 2009
Registration
No. 333-153645
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 8
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
VirnetX Holding
Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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5615 Scotts Valley Drive, Suite 110
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77-0390628
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(State or Other Jurisdiction of
Incorporation or Organization)
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Scotts Valley, California 95066
(831) 438-8200
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(I.R.S. Employer
Identification Number)
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(Address, Including Zip Code,
and Telephone Number,
Including Area Code, of
Registrants Principal Executive Offices)
Kendall Larsen
Chief Executive
Officer
VirnetX Holding
Corporation
5615 Scotts Valley Drive,
Suite 110
Scotts Valley, California
95066
(831) 438-8200
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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Lowell D. Ness
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
(650) 614-7400
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Christopher C. Paci
Peter M. Astiz
DLA Piper LLP (US)
2000 University Avenue
East Palo Alto, California 94303
(650) 833-2000
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Approximate date of commencement of proposed sale to the
public: From time to time after the effective
date of this Registration Statement.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box: o
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following
box: þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box: o
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed to
register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box: o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering
Price(2)
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Fee(1)
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Common Stock, par value
$0.0001(3)
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$4,312,500.00(3)
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$
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169.48
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Warrants(3)
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Warrants to purchase shares of common stock at an exercise price
of $2.00
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Warrants to purchase shares of common stock at an exercise price
of $3.00
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Warrants to purchase shares of common stock at an exercise price
of $4.00
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Shares of Common Stock Underlying the
Warrants(3)
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$12,937,500.00
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$
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508.44
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Underwriters Warrant
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Shares of Common Stock Underlying the Underwriters Warrant
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$450,000.00
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$
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17.69
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Total
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$17,700,000.00
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$
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695.61
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*
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(1)
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Calculated pursuant to
Rule 457(o) on the basis of the maximum aggregate offering
price of all of the securities to be registered. Pursuant to
Rule 457(g), no separate registration fee is required for the
Warrants because we are registering those Securities in the same
registration statement as the underlying common stock.
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(2)
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Estimated solely for the purpose of
calculating the registration fee. In accordance with Rule 416
under the Securities Act of 1933 in order to prevent dilution, a
presently indeterminable number of shares of common stock are
registered hereunder which may be issued in the event of a stock
split, stock dividend or similar transaction. No additional
registration fee has been paid for these shares of common stock.
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(3)
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Includes approximately
$563,000 in aggregate offering price of shares of common
stock and approximately $1,688,000 in aggregate offering
price of warrants to purchase shares of common stock which may
be issued on exercise of a
45-day
option granted to the underwriters to cover over-allotments, if
any.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
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PROSPECTUS
(Subject to Completion) |
Dated January 26, 2009 |
2,500,000 Shares of Common
Stock
Warrants to Purchase
3,750,000 Shares of Common Stock
VIRNETX HOLDING
CORPORATION
We are offering 2,500,000 shares of our common stock,
warrants to purchase 1,250,000 shares of our common stock
at an exercise price of $2.00 per share, warrants to
purchase 1,250,000 shares of our common stock at an
exercise price of $3.00 per share, and warrants to purchase
1,250,000 shares of our common stock at an exercise price
of $4.00 per share. This prospectus also covers the offer
and sale of 3,750,000 shares of common stock issuable upon
exercise of the warrants offered hereby.
Our common stock is currently listed on the American Stock
Exchange under the symbol VHC. We do not intend to
apply for listing of the warrants on any securities exchange. On
January 23, 2009, the last reported sales price of our
common stock as reported on the American Stock Exchange was
$1.44 per share.
Our business and an investment in our common stock and
warrants involve significant risks. These risks are described
under the caption Risk Factors beginning on
page 8 of this prospectus.
Gilford Securities Incorporated has agreed to act as the
underwriter in connection with this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the offered
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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of Common Stock and
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Associated Warrants
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Total(1)
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Public Offering Price
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$
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$
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Underwriting
Discount*
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$
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$
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Offering Proceeds before expenses**
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$
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$
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* |
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See section entitled Underwriting on page 69 of this
prospectus. |
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** |
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Our underwriter is offering these shares on a firm commitment
basis and expects that delivery of shares will be made on or
about ,
2009. We have granted the underwriter a
45-day
option to purchase up to 375,000 additional shares and warrants
to purchase up to an additional 187,500 shares at an exercise
price of $2.00 per share, an additional 187,500 shares at an
exercise price of $3.00 per share and an additional 187,500
shares at an exercise price of $4.00 per share from us at the
public offering price, less the underwriting discount, to cover
over-allotments. In addition, we will issue the underwriter a
warrant to purchase 250,000 shares of our common stock. The
underwriters over-allotment option and the
underwriters warrant are subject to adjustment for stock
splits, stock dividends or similar transactions. |
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(1) |
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Table excludes shares of common stock issuable upon exercise of
warrants offered hereby. |
Gilford Securities
Incorporated
,
2009
TABLE OF
CONTENTS
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Page
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F-1
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EX-23.1 |
EX-23.2 |
This prospectus does not contain all of the information set
forth in the registration statement of which this prospectus is
a part, as permitted by the rules and regulations of the
Securities and Exchange Commission. For additional information
regarding us and the offered securities, please refer to the
registration statement of which this prospectus is a part.
Before purchasing any of the offered securities, you should
carefully read this prospectus, together with the additional
information described under the section of this prospectus
titled Where You Can Find More Information on
page 68. In particular, you should carefully consider the
risks and uncertainties described under the section titled
Risk Factors in this prospectus starting on
page 7 before you decide whether to purchase any of the
offered securities. These risks and uncertainties, together with
those not known to us or those that we may deem immaterial,
could impair our business and ultimately affect the price of our
common stock.
You should rely only on the information contained in this
prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. No offers are being made hereby in any jurisdiction where
the offer or sale is not permitted. You should assume that the
information in this prospectus is accurate only as of the date
on the cover. Our business, financial condition, results of
operations and prospects may have changed since that date.
i
PROSPECTUS
SUMMARY
The following summary provides an overview of certain
information about our company and the offering and may not
contain all the information that may be important to you. This
summary is qualified in its entirety by and should be read
together with the information contained in other parts of this
prospectus. You should carefully read this entire prospectus
before making a decision about whether to invest in the offered
securities.
The
Company
We are developing and commercializing software and technology
solutions for securing real-time communications over the
Internet. Our patented GABRIEL Connection
Technologytm
combines industry standard encryption protocols with our
patented techniques for automated domain name system, or DNS,
lookup mechanisms, enabling users to create a secure
communication link using secure domain names. We also intend to
establish the exclusive secure domain name registry in the
United States and other key markets around the world. Our
software and technology solutions provide the security platform
required by next-generation Internet-based applications such as
instant messaging, or IM, voice over Internet protocol, or VoIP,
mobile services, streaming video, file transfer and remote
desktop. Our technology generates secure connections on a
zero-click or single-click basis,
significantly simplifying the deployment of secure real-time
communication solutions by eliminating the need for end users to
enter any encryption information.
We intend to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. The leaders in these markets include Alcatel-Lucent,
Avaya Inc., Cisco Systems, Inc., Juniper Networks, Inc., LM
Ericsson Telephone Company, Motorola, Inc., NEC Corporation,
Nokia Corporation, Nortel Networks Corporation, Samsung
Electronics Co. Ltd. and Sony Ericsson Mobile Communications AB,
among others. We also intend to license our patent portfolio,
technology, and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators. We believe that the market opportunity
for our software and technology solutions is large and
expanding. As part of our licensing strategy, in March 2008, we
hired ipCapital Group, a leading advisor on licensing technology
and intellectual property, to initiate discussions with several
major potential licensees. Since its founding in 1998, ipCapital
Group has supported the licensing efforts of clients across a
variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. We are
currently in discussions with prospective customers in our
target markets.
Our portfolio of intellectual property is the foundation of our
business model. We currently have 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our patent
portfolio is primarily focused on securing real-time
communications over the Internet, as well as related services
such as the establishment and maintenance of a secure domain
name registry. Our software and technology solutions also have
additional applications in operating systems and network
security. The core development team behind our patent portfolio,
technology, and software has worked together for over ten years
and is the same team that invented and developed this technology
while working at Science Application International Corporation,
or SAIC. SAIC is a FORTUNE
500®
scientific, engineering, and technology applications company
that uses its deep domain knowledge to solve problems of vital
importance to the nation and the world, in national security,
energy and the environment, critical infrastructure, and health.
In 2006, we acquired this patent portfolio, which now serves as
the foundation of our planned licensing and service offerings.
We expect to derive the majority of our revenue from license
fees and royalties associated with these patents. We also intend
to continue our research and development efforts to further
strengthen and expand our patent portfolio, and over time, we
plan to leverage this portfolio to develop a product suite that
can be sold to enterprise customers and developers.
Industry
Overview
The Internet is increasingly evolving into a rich medium used by
individuals and businesses to conduct commerce, share
information and engage in real-time communications including
email, text messaging, IM,
1
and voice and video calls. This communications experience is
richer and more complex than ever before. Session initiation
protocol, or SIP, was developed to enable the convergence of
voice and data networks and today is the predominant industry
standard for establishing multimedia communications over the
Internet such as voice, video, instant messaging, presence
information and file transfer. SIP as well as other real-time
collaboration-protocols such as XMPP, use DNS lookup as their
primary means of connecting Internet devices but is an open
architecture that remains inherently unsecure. As the workforce
becomes increasingly dispersed, mobile features enabled by
Internet protocol-based communications such as presence, unified
messaging, find me/follow me, white-boarding and document
sharing have become more commonplace. However, the development
of the security infrastructure for these applications has lagged
behind the adoption of next-generation networks, leaving them
vulnerable to a multitude of threats including
man-in-middle,
eavesdropping, domain hijacking, distributed denial of service,
or DDoS, spam over Internet telephony, or SPIT, and spam over
instant messaging, or SPIM. These threats continue to highlight
the need for securing these next-generation networks.
We believe that accessing a diversity of services from a single
device, anytime and anywhere, and the ability to access these
same services from a range of devices, are emerging as key
market requirements. The portions of the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology
solutions are forecasted to grow from approximately
$59 billion in total revenues in 2006 to approximately
$162 billion in total revenues by 2011, representing a
compound annual growth rate, or CAGR, of approximately 23%. This
growing trend represents a significant opportunity for VirnetX
to license its patent portfolio, technology and software, and
establish its secure domain name registry.
Our
Solutions
Our software and technology solutions, including GABRIEL
Connection
Technologytm,
our secure domain name registry, and our patents are designed to
secure all types of real-time communications over the Internet.
Our patented GABRIEL Connection
Technologytm
combines industry standard encryption protocols with our
patented techniques for automated DNS lookup mechanisms,
enabling users to create a secure communication link using
secure domain names. Our technology can be built into network
infrastructure, operating systems or silicon chips developed for
a communication or computing device to secure real-time
communications over the Internet between any number of devices.
Our technology automatically encrypts data allowing
organizations and individuals to establish communities of
secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or
SPDs, are designed to be fully-customizable and support rich
content applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a secure
environment. Our approach is a unique and patented solution that
provides the robust security platform required by these rich
content applications and real-time communications over the
Internet. The key benefits and features of our technology
include the following:
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Automatic and seamless to the user. After a
one-time registration, users connect securely on a
zero-click or single-click basis.
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Secure data communications. Users create
secure networks with people they trust and communicate over a
secure channel.
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Control of data at all times. Users can secure
and customize their unified communication and collaboration
applications such as file sharing and remote desktop with
policy-based access and secure presence information.
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Authenticated users. Users know they are
communicating with authenticated users with secure domain names.
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Application-agnostic technology. Our solution
provides security at the IP layer of the network by using
patented techniques for automated DNS lookup mechanisms to make
connections between secure domain names, thereby obviating the
need to provide application specific security.
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Competitive
Strengths
We believe the following competitive strengths will enable our
success in the marketplace:
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Unique patented technology. We are focused on
developing innovative technology for securing real-time
communications over the Internet, and establishing the exclusive
secure domain name registry in the United States and other key
markets around the world. Our unique solutions combine industry
standard encryption methods and communication protocols with our
patented techniques for automated DNS lookup mechanisms. Our
technology and patented approach enables users to create a
secure communication link by generating secure domain names. We
have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our portfolio
includes patents and pending patent applications in the United
States and other key markets that support our secure domain name
registry service for the Internet.
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Scalable licensing business model. Our
intellectual property portfolio is the foundation of our
business model. We are actively engaged in commercializing our
intellectual property portfolio by pursuing licensing agreements
with OEMs, service providers and system integrators within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
end-markets. We have engaged ipCapital Group to accelerate our
patent and technology licensing program with customers and to
expand the depth of our intellectual property portfolio, and we
are actively pursuing our first licensing agreements. We believe
that our licensing business model is highly scalable and has the
potential to generate strong margins once we achieve significant
revenue growth.
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Highly experienced research and development
team. Our research and development team is
comprised of nationally recognized network security and
encryption technology scientists and experts that have worked
together as a team for over ten years and, collectively, have
over 120 years of experience in the field. During their
careers, this team has developed several cutting-edge
technologies for U.S. national defense, intelligence and
civilian agencies, many of which remain critical to our national
security today. Prior to joining VirnetX, our team worked for
SAIC during which time they invented the technology that is the
foundation of our patent portfolio, technology, and software.
Based on the collective knowledge and experience of our
development team, we believe that we have one of the most
experienced and sophisticated groups of security experts
researching vulnerability and threats to real-time communication
over the Internet and developing solutions to mitigate these
problems.
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Our
Strategy
Our strategy is to become the market leader in securing
real-time communications over the Internet and to establish our
GABRIEL Communications
Technologytm
as the industry standard security platform. Key elements of our
strategy are to:
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Implement a patent and technology licensing program to
commercialize our intellectual property, including our GABRIEL
Connection
Technologytm.
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Establish VirnetX as the exclusive universal registry of secure
domain names and to enable our customers to act as registrars
for their users and broker secure communication between users on
different registries.
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Leverage our patent portfolio, technology and software to
develop a suite of products that can be sold directly to
end-user enterprises.
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In furtherance of our strategy, in March 2008, we engaged
ipCapital Group to help us support and grow our licensing
business. The ipCapital Group is a leading advisor on licensing
technology and intellectual
3
property. Through our alliance with ipCapital Group, we are
actively engaged in discussions with several potential customers
in our target markets. ipCapital Group is led by John Cronin.
Prior to founding ipCapital Group, Mr. Cronin was a
distinguished inventor at IBM for 17 years where he
patented 100 inventions, published over 150 technical papers,
received IBMs Most Distinguished Inventor
Award, and was recognized as IBMs Top
Inventor. As a member of the senior technical staff and
the prestigious IBM Academy, Mr. Cronin led an intellectual
asset team that spearheaded efforts to produce and manage the
development of intellectual property at IBM. Eventually known as
The IBM Patent Factory, this select group supported
the division that increased IBMs annual licensing revenue
from $30 million in 1992 to more than $1 billion in
1997 when Mr. Cronin left IBM. Since its founding in 1998,
ipCapital Group has supported the licensing efforts of clients
across a variety of technologies and markets, resulting in
transactions representing several hundred million dollars of
value.
Microsoft
Litigation
We filed a patent infringement lawsuit against Microsoft
Corporation on February 15, 2007. The lawsuit involves
three patents and 18 claims. The patent infringement claims
extend to eight Microsoft products including Windows Vista,
Windows XP, Server 2003, Server 2008 and Officer Communicator,
among others. On March 31, 2008, Microsoft filed a Motion
to Dismiss our patent infringement case against it. On
June 3, 2008, the court held that VirnetX has
constitutional standing to file its complaint and on that basis
denied Microsofts motion to dismiss. Also pursuant to the
June 2008 court decision, SAIC joined us in our lawsuit as a
plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. A Markman hearing is scheduled for
February 17, 2009. After the hearing, the Court will make
certain determinations regarding the scope of our patent claims.
The trial is scheduled to begin on October 12, 2009.
Corporate
Information
Our principal executive offices are located at 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066,
and our phone number is
(831) 438-8200.
We maintain a website at www.virnetx.com. Information contained
on our website does not comprise a part of this prospectus.
In November 2006, we acquired certain patents from SAIC. In July
2007, we effected a reverse merger between PASW, Inc., a
publicly traded company with limited operations, and VirnetX,
which became our principal operating subsidiary. As a result of
this merger, the former security holders of VirnetX came to own
a majority of our outstanding common stock. On October 29,
2007, we changed our name from PASW, Inc. to VirnetX Holding
Corporation.
VirnetXtm
and GABRIEL Connection
Technologytm
are our trademarks in the United States. This prospectus
includes product names, trade names and trademarks of other
companies. All other product names, trade names and trademarks
appearing in this prospectus are the property of their
respective holders.
4
The
Offering
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Securities offered:
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2,500,000 shares of our common stock and warrants to
purchase 3,750,000 shares of our common stock (as described
in more detail below). |
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Offering price:
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We anticipate that the offering price of each share of our
common stock and associated warrants will be
$ . |
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Description of the warrants:
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We are offering three types of warrants for each share of our
common stock offered hereby. The warrants will be issued in
registered form under a warrant agency agreement between
Corporate Stock Transfer, Inc., as warrant agent, and us. The
three types of warrants have similar terms but are exercisable
at different prices. For each share purchased at the closing of
the offering, an investor will receive a warrant to purchase
0.5 shares of our common stock at $2.00 per share,
0.5 shares of our common stock at $3.00 per share and
0.5 shares of our common stock at $4.00 per share
(fractional shares will be rounded up). All warrants will be
exercisable on or after the applicable closing date of this
offering through and including the
18-month
anniversary of the first closing date. All warrants will also
include a call feature that gives us the right to require the
holder of the warrant to exercise the warrant when our average
closing stock price over five consecutive trading days is equal
to or exceeds two times the applicable warrants purchase
price, failing which the warrant will terminate. |
|
Common stock outstanding before the offering:
|
|
34,899,985 shares of our common stock. |
|
|
|
Common stock outstanding after the offering:
|
|
37,399,985 shares of our common stock. |
|
|
|
Use of proceeds:
|
|
To fund product development, pursue our litigation strategy and
for general working capital needs. We anticipate that our
existing cash and cash equivalents, together with net proceeds
from this offering, at an assumed public offering price of $1.50
per share and associated warrants and assuming no warrants are
exercised, may only be sufficient to fund our operations for the
next three months. See the Liquidity and Capital
Resources section in this prospectus for additional
information. |
|
|
|
Amex symbol:
|
|
VHC |
|
Risk factors:
|
|
See Risk Factors beginning on page 7 of this
prospectus and the other information in this prospectus for a
discussion of factors you should consider before you decide to
invest in our securities. |
5
Unless otherwise noted in this prospectus, all information in
this prospectus related to the number of shares of our common
stock to be outstanding or beneficially owned after this
offering:
|
|
|
|
|
is based on 34,899,985 shares of common stock outstanding
as of December 31, 2008;
|
|
|
|
assumes no exercise of the underwriters over-allotment
option;
|
|
|
|
|
|
assumes no exercise of the warrants to purchase
3,750,000 shares of our common stock offered hereby;
|
|
|
|
|
|
assumes no exercise of the 250,000 shares of our common
stock issuable upon exercise of the warrant to be issued to the
underwriter at the closing of this offering;
|
|
|
|
|
|
excludes 300,000 shares of our common stock issuable upon
exercise of the warrant issued to the underwriter in connection
with our previous public offering which closed on
December 31, 2007; and
|
|
|
|
excludes 4,318,596 shares of our common stock issuable upon
exercise of stock options outstanding as of December 31,
2008.
|
6
Summary
Financial Data
The summary financial data set forth below is derived from
our financial statements and notes thereto, and should be read
in conjunction with, and is qualified in its entirety by
reference to, our consolidated financial statements and notes
thereto and the information contained under the caption
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case
appearing elsewhere in this prospectus.
For accounting purposes, VirnetX Holding Corporation was a
publicly-held shell company prior to the merger with VirnetX.
In light of the fact that VirnetX was deemed to be the acquiror
in the Merger, the historical financial information of VirnetX
has been presented as the historical financial information of
the Company throughout this prospectus.
Statement
of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
$
|
107,955
|
|
|
$
|
46,664
|
|
|
$
|
74,866
|
|
|
$
|
|
|
|
$
|
|
|
Total operating expenses:
|
|
|
9,253,611
|
|
|
|
4,571,749
|
|
|
|
8,725,210
|
|
|
|
1,407,675
|
|
|
|
882,478
|
|
Total other income (expenses), net:
|
|
|
142,454
|
|
|
|
(23,111
|
)
|
|
|
(41,820
|
)
|
|
|
6,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(8,692,164
|
)
|
|
$
|
(1,401,339
|
)
|
|
$
|
(882,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash and cash equivalents:
|
|
$
|
2,260,170
|
|
|
$
|
8,589,447
|
|
|
$
|
139,997
|
|
|
$
|
86,552
|
|
Total assets:
|
|
|
3,079,152
|
|
|
|
9,279,166
|
|
|
|
195,123
|
|
|
|
147,722
|
|
Accounts payable and accrued expenses:
|
|
|
1,467,412
|
|
|
|
531,790
|
|
|
|
87,386
|
|
|
|
|
|
Total stockholders equity (deficit):
|
|
$
|
1,407,740
|
|
|
$
|
8,495,376
|
|
|
$
|
107,737
|
|
|
$
|
(82,278
|
)
|
7
RISK
FACTORS
You should carefully consider the following material risks in
addition to the other information set forth in this prospectus
before making any investment in the offered securities. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also
adversely affect our business. If any of these risk factors
occurs, you could lose substantial value or your entire
investment in the offered securities.
Risks
Related To Existing and Future Litigation
We
have commenced legal proceedings against Microsoft, and we
expect such litigation to be time-consuming and costly, which
may adversely affect our financial condition and our ability to
operate our business.
On February 15, 2007, we initiated a lawsuit by filing a
complaint against Microsoft in the United States District Court
for the Eastern District of Texas, Tyler Division, pursuant to
which we allege that Microsoft infringes two of our patents
regarding the creation of virtual private networks, or VPNs. We
seek damages and injunctive relief. On April 5, 2007, we
filed an amended complaint, pursuant to which we allege that
Microsoft infringes a third patent. We anticipate that these
legal proceedings may continue for several years and may require
significant expenditures for legal fees and other expenses. The
time and effort required of our management to effectively pursue
the Microsoft lawsuit may adversely affect our ability to
operate our business, since time spent on matters related to the
lawsuit will take away from the time spent on managing and
operating our business. Microsoft has counterclaimed for
declarations that the three patents are not infringed, are
invalid and are unenforceable. If Microsofts counterclaims
are successful, they may preclude our ability to commercialize
our initial products. Additionally, we anticipate that our legal
fees will be material and will negatively impact our financial
condition and results of operations and may result in our
inability to continue our business.
While
we believe Microsoft infringes our patents, we can provide no
assurance that we will be successful in our
lawsuit.
We believe that Microsoft infringes on three of our patents, but
obtaining and collecting a judgment against Microsoft may be
difficult or impossible. Patent litigation is inherently risky
and the outcome is uncertain. Microsoft is a large,
well-financed company with substantially greater resources than
us. We believe that Microsoft will devote a substantial amount
of resources in an attempt to prove that either their products
do not infringe our patents or that our patents are not valid
and are unenforceable. At this time, we cannot predict the
outcome of this litigation.
We are
devoting a substantial amount of our financial and management
resources to the Microsoft litigation, and if we are
unsuccessful in this lawsuit, our financial condition may be so
adversely affected, we may not survive.
Currently, we are devoting substantial time, effort and
financial resources to our lawsuit against Microsoft. We are a
development stage company with no finished product, and,
although our business strategy is focused primarily on bringing
patented products to market, our business strategy also depends
greatly on obtaining a judgment in our favor from the courts and
collecting such judgment before our financial resources are
depleted. In the event we are not awarded and do not
subsequently obtain monetary and injunctive relief, we may not
have enough financial resources to continue our operations.
The
burdens of being a public company may adversely affect our
ability to pursue the Microsoft litigation.
As a public company, our management must devote substantial
time, attention and financial resources to comply with
U.S. securities laws. This may have a material adverse
affect on managements ability to effectively pursue the
Microsoft litigation as well as our other business initiatives.
In addition, our disclosure obligations under
U.S. securities laws require us to disclose information
publicly that will be available to
8
Microsoft as well as any other future litigation opponents. We
may, from time to time, be required to disclose information that
will have a material adverse affect on our litigation
strategies. This information may enable our litigation opponents
to develop effective litigation strategies that are contrary to
our interests.
We may
commence additional legal proceedings against third parties who
we believe are infringing on our intellectual property rights,
and if we are forced to litigate to defend our intellectual
property rights, or to defend claims by third parties against us
relating to intellectual property rights, legal fees and court
injunctions could adversely affect our financial condition or
end our business.
Disputes regarding the ownership of technologies and
intellectual property rights are common and we may have
intellectual property infringement claims against other parties
in addition to our claims against Microsoft. If we decide to
commence actions against any additional parties, doing so may be
expensive and time-consuming, which may adversely affect our
financial condition and results of operations. Moreover, there
can be no assurance that we would be successful in these
additional legal proceedings and the existence and outcome of
any such litigation could harm our business. In addition,
commencing lawsuits may lead to potential counterclaims which
may preclude our ability to develop and commercialize our
initial products.
Risks
Related to Our Business and Our Industry
We are
a development stage company with virtually no
revenues.
We are a development stage company with a very small amount of
revenue and do not expect to generate additional revenues unless
and until after our patent portfolio, or part of it, is
commercialized. We do not anticipate launching any new products
into the market until the first quarter of 2009, at the
earliest. We will need to raise additional capital to fund our
operations and our litigation against Microsoft and there can be
no assurance that we will be successful in doing so on
acceptable terms or at all. We anticipate that our existing cash
and cash equivalents, together with net proceeds from this
offering, at an assumed public offering price of $1.50 per share
and associated warrants and assuming no warrants are exercised,
may only be sufficient to fund our operations for the next three
months. See the Liquidity and Capital Resources
section in this prospectus for additional information.
We
anticipate incurring operating losses and negative cash flows
for the foreseeable future resulting in uncertainty of future
profitability and limitations on our operations.
We anticipate that we will incur operating losses and negative
cash flows in the foreseeable future, and we will accumulate
increasing deficits as we increase our expenditures for:
|
|
|
|
|
our lawsuit against Microsoft;
|
|
|
|
infrastructure;
|
|
|
|
sales and marketing;
|
|
|
|
research and development;
|
|
|
|
personnel; and
|
|
|
|
general business enhancements.
|
We need to significantly increase our revenue if we are to
attain profitability and there is no assurance that we will be
able to do so. In the event that we are unable to achieve
profitability or raise sufficient funding to cover our losses,
we may not be able to meet our obligations as they come due,
raising substantial doubts as to our ability to continue as a
going concern.
9
Our
business plan for commercializing our patents and technology is
new and unproven, and therefore we can provide no assurance that
we will be successful in pursuing it.
We intend to develop products to provide a security platform for
real-time communications; however, this is not a defined market.
We expect to depend on our intellectual property licensing fees
for the majority of our revenues. Our ability to generate
licensing fees is highly dependent on mainstream market adoption
of real-time communications based on SIP or using DNS lookup
protocols as well as customer adoption of our GABRIEL
Communication
Technologytm
and our secure domain name registry. We cannot assure you that
customers will adopt our products and services, or that we will
succeed in building a profitable business based on our business
plan.
We may
or may not be able to capitalize on potential market
opportunities related to our licensing strategy or our patent
portfolio.
Our business strategy calls for us to enter into licensing
relationships with the leading companies in our target market in
order to reach a larger end-user base than we could reach
through direct sales and marketing efforts. We have engaged
ipCapital Group to help develop our licensing strategy and to
introduce the Company to five potential strategic licensees of
the Companys technology. In connection with this
engagement, we agreed to pay ipCapital Group 10% of the
royalties of each resulting licensing arrangement, up to an
aggregate maximum of $2 million per licensee, or
$10 million in the aggregate. There can be no assurance
that we will be able to capitalize on the potential market
opportunity. Our inability to generate licensing revenues
associated with the potential market opportunity could result
from a number of factors, including, but not limited to:
|
|
|
|
|
our capital resources may be insufficient;
|
|
|
|
our management team may not have sufficient bandwidth to
successfully capitalize on all of the opportunities identified
by ipCapital Group;
|
|
|
|
we may not be successful in entering into licensing
relationships with our targeted customers on commercially
acceptable terms; and
|
|
|
|
the validity of our patents underlying the licensing opportunity
is currently being challenged in our litigation against
Microsoft.
|
We
will need additional capital to pursue our litigation strategy,
conduct our operations and develop our products, and our ability
to obtain the necessary funding is uncertain.
We expect to utilize a substantial portion of the proceeds of
this offering to finance our litigation with Microsoft. We will
require significant additional capital from sources including
equity
and/or debt
financings, license arrangements, grants, collaborative research
arrangements
and/or other
sources in order to develop and commercialize our products and
continue operations. If we are not able to raise additional
capital when needed, our business will fail. We anticipate that
our existing cash and cash equivalents, together with net
proceeds from this offering, at an assumed public offering price
of $1.50 per share and associated warrants and assuming no
warrants are exercised, may only be sufficient to fund our
operations for the next three months. There can be no assurance
that we will be able to close this offering on acceptable terms
or at all, especially in the current capital markets environment.
Our
business greatly depends on the growth of IM, VoIP, mobile
services, streaming video, file transfer and remote desktop and
other next-generation Internet-based applications.
We cannot assure you that next-generation Internet-based
applications such as instant messaging, or IM, voice over
Internet protocol, or VoIP, mobile services, streaming video,
file transfer and remote desktop will continue to gain
widespread market acceptance. The Internet may ultimately prove
not to be a viable commercial marketplace for such applications
for a number of reasons, including:
|
|
|
|
|
unwillingness of consumers to shift to VoIP and use other such
next-generation Internet-based applications;
|
|
|
|
refusal to purchase security products to secure information
transmitted through such applications;
|
10
|
|
|
|
|
perception by the licensees of unsecure communication and data
transfer;
|
|
|
|
lack of concern for privacy by licensees and users;
|
|
|
|
limitations on access and ease of use;
|
|
|
|
congestion leading to delayed or extended response times;
|
|
|
|
inadequate development of Internet infrastructure to keep pace
with increased levels of use; and
|
|
|
|
increased government regulations.
|
If the
market for IM, VoIP, mobile services, streaming video, file
transfer and remote desktop does not grow as anticipated, our
business would be adversely affected.
The success of our products that secure IM, VoIP, mobile
services, streaming video, file transfer and remote desktop,
among other real-time communications applications, depends on
the growth in the number of users, which in turn depends on the
Internet gaining more widespread acceptance as the basis for
these real-time communications applications. These real-time
communications applications are still in early stages of market
acceptance and we cannot assure you that they will continue to
develop a broader audience. For example, potential new users may
view VoIP as unattractive relative to traditional telephone
services for a number of reasons, including the need to purchase
computer headsets or the perception that the price advantage for
VoIP is insufficient to justify the perceived inconvenience.
While
the use of IM and other next-generation Internet-based
applications has grown rapidly in personal and professional use,
there can be no assurance that users will pay to secure their
use of such applications.
Many services such as Microsoft, Yahoo! and America Online offer
IM free of charge. However, security solutions for these
services are not free, and OEMs may not want to adopt such
security solutions if users of IM do not see the value and do
not want to pay for such security solutions. If personal and
professional users of IM and other next-generation
Internet-based solutions do not want to pay for the security
solutions, we will have difficulty marketing and selling our
products and technologies.
We
expect that we will experience long and unpredictable sales
cycles, which may impact our quarterly operating
results.
We expect that our sales cycles will be long and unpredictable
due to a number of uncertainties such as:
|
|
|
|
|
the need to educate potential customers about our patent rights
and our product and service capabilities;
|
|
|
|
customers willingness to invest potentially substantial
resources and modify their network infrastructures to take
advantage of our products;
|
|
|
|
customers budgetary constraints;
|
|
|
|
the timing of customers budget cycles; and
|
|
|
|
delays caused by customers internal review processes.
|
We
expect that we will be substantially dependent on a concentrated
number of customers. If we are unable to establish, maintain or
replace our relationships with customers and develop a
diversified customer base, our revenues may fluctuate and our
growth may be limited.
We expect that for the foreseeable future, a significant portion
of our revenues will be generated from a limited number of
customers. There can be no guarantee that we will be able to
obtain such customers, or if we do so, to sustain our revenue
levels from these customers. If we cannot establish, maintain or
replace the limited group of customers that we anticipate will
generate a substantial majority revenues, or if they do not
generate revenues at the levels or at the times that we
anticipate, our ability to maintain or grow our revenues will be
adversely affected.
11
If we
do not successfully develop our planned products and services in
a cost-effective manner to customer demand in the rapidly
evolving market for Internet and
IP-based
communications services, our business may fail.
The market for communications services is characterized by
rapidly changing technology, evolving industry standards,
changes in customer needs and frequent new service and product
introductions. We are currently focused on developing products
to provide security solutions for real-time communications. Our
future success will depend, in part, on our ability to use new
technologies effectively, to continue to develop our technical
expertise, to enhance our existing services and to develop new
services that meet changing customer needs on a timely and
cost-effective basis. We may not be able to adapt quickly enough
to changing technology, customer requirements and industry
standards. If we fail to use new technologies effectively, to
develop our technical expertise and new services, or to enhance
existing services on a timely basis, either internally or
through arrangements with third parties, our product and service
offerings may fail to meet customer needs, which would adversely
affect our revenues and prospects for growth.
In addition, if we are unable, for technological, legal,
financial or other reasons, to adapt in a timely manner to
changing market conditions or customer requirements, we could
lose customers, strategic alliances and market share. Sudden
changes in user and customer requirements and preferences, the
frequent introduction of new products and services embodying new
technologies and the emergence of new industry standards and
practices could render our existing products, services and
systems obsolete. The emerging nature of products and services
in the technology and communications industry and their rapid
evolution will require that we continually improve the
performance, features and reliability of our products and
services. Our success will depend, in part, on our ability to:
|
|
|
|
|
design, develop, launch
and/or
license our planned products, services and technologies that
address the increasingly sophisticated and varied needs of our
prospective customers; and
|
|
|
|
respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
|
The development of our planned products and services and other
patented technology involves significant technological and
business risks and requires substantial expenditures and lead
time. We may be unable to use new technologies effectively.
Updating our technology internally and licensing new technology
from third-parties may also require us to incur significant
additional expenditures.
If our
products do not gain market acceptance, we may not be able to
fund future operations.
A number of factors may affect the market acceptance of our
planned products or any other products we develop or acquire,
including, among others:
|
|
|
|
|
the price of our products relative to other products that seek
to secure real-time communication;
|
|
|
|
the perception by users of the effectiveness of our products;
|
|
|
|
our ability to fund our sales and marketing efforts; and
|
|
|
|
the effectiveness of our sales and marketing efforts.
|
If our products do not gain market acceptance, we may not be
able to fund future operations, including the development of new
products
and/or our
sales and marketing efforts for our current products, which
inability would have a material adverse effect on our business,
financial condition and operating results.
Our
products are highly technical and may contain undetected errors,
which could cause harm to our reputation and adversely affect
our business.
Our products are highly technical and complex and, when
deployed, may contain errors or defects. In addition, we rely on
third parties for software development and technology services,
and there may be errors in the development processes used by our
third party counterparts that may adversely affect our end
products.
12
Despite testing, some errors in our products may only be
discovered after a product has been installed and used by
customers. Any errors or defects discovered in our products
after commercial release could result in failure to achieve
market acceptance, loss of revenue or delay in revenue
recognition, loss of customers and increased service and
warranty cost, any of which could adversely affect our business,
operating results and financial condition. In addition, we could
face claims for product liability, tort or breach of warranty,
including claims relating to changes to our products made by our
channel partners. The performance of our products could have
unforeseen or unknown adverse effects on the networks over which
they are delivered as well as on third-party applications and
services that utilize our services, which could result in legal
claims against us, harming our business. Furthermore, we expect
to provide implementation, consulting and other technical
services in connection with the implementation and ongoing
maintenance of our products, which typically involves working
with sophisticated software, computing and communications
systems. We expect that our contracts with customers will
contain provisions relating to warranty disclaimers and
liability limitations, which may not be upheld. Defending a
lawsuit, regardless of its merit, is costly and may divert
managements attention and adversely affect the
markets perception of us and our products. In addition, if
our business liability insurance coverage proves inadequate or
future coverage is unavailable on acceptable terms or at all,
our business, operating results and financial condition could be
adversely impacted.
Malfunctions
of third-party communications infrastructure, hardware and
software exposes us to a variety of risks we cannot
control.
In addition, our business will also depend upon the capacity,
reliability and security of the infrastructure owned by third
parties that we will use to deploy our offerings. We have no
control over the operation, quality or maintenance of a
significant portion of that infrastructure or whether or not
those third parties will upgrade or improve their equipment. We
depend on these companies to maintain the operational integrity
of our connections. If one or more of these companies is unable
or unwilling to supply or expand its levels of service to us in
the future, our operations could be severely interrupted. Also,
to the extent the number of users of networks utilizing our
future products suddenly increases, the technology platform and
secure hosting services which will be required to accommodate a
higher volume of traffic may result in slower response times or
service interruptions. System interruptions or increases in
response time could result in a loss of potential or existing
users and, if sustained or repeated, could reduce the appeal of
the networks to users. In addition, users depend on real-time
communications; outages caused by increased traffic could result
in delays and system failures. These types of occurrences could
cause users to perceive that our solution does not function
properly and could therefore adversely affect our ability to
attract and retain licensees, strategic partners and customers.
System
failure or interruption or our failure to meet increasing
demands on our systems could harm our business.
The success of our license and service offerings will depend on
the uninterrupted operation of various systems, secure data
centers and other computer and communication networks that we
establish. To the extent the number of users of networks
utilizing our future products suddenly increases, the technology
platform and hosting services which will be required to
accommodate a higher volume of traffic may result in slower
response times, service interruptions or delays or system
failures. Our systems and operations will also be vulnerable to
damage or interruption from:
|
|
|
|
|
power loss, transmission cable cuts and other telecommunications
failures;
|
|
|
|
damage or interruption caused by fire, earthquake, and other
natural disasters;
|
|
|
|
computer viruses or software defects; and
|
|
|
|
physical or electronic break-ins, sabotage, intentional acts of
vandalism, terrorist attacks and other events beyond our control.
|
System interruptions or failures and increases or delays in
response time could result in a loss of potential or existing
users and, if sustained or repeated, could reduce the appeal of
the networks to users. These types of
13
occurrences could cause users to perceive that our solution does
not function properly and could therefore adversely affect our
ability to attract and retain licensees, strategic partners and
customers.
Any significant problem with our systems or operations could
result in lost revenue, customer dissatisfaction or lawsuits
against us. A failure in the operation of our secure domain name
registration system could result in the inability of one or more
registrars to register and maintain secure domain names for a
period of time. A failure in the operation or update of the
master directory that we plan to maintain could result in
deletion or discontinuation of assigned secure domain names for
a period of time. The inability of the registrar systems we
establish, including our back office billing and collections
infrastructure, and telecommunications systems to meet the
demands of an increasing number of secure domain name requests
could result in substantial degradation in our customer support
service and our ability to process registration requests in a
timely manner.
If we
experience security breaches, we could be exposed to liability
and our reputation and business could suffer.
We will retain certain confidential customer information in our
secure data centers and secure domain name registry. It will be
critical to our business strategy that our facilities and
infrastructure remain secure and are perceived by the
marketplace to be secure. Our secure domain name registry
operations will also depend on our ability to maintain our
computer and telecommunications equipment in effective working
order and to reasonably protect our systems against
interruption, and potentially depend on protection by other
registrars in the shared registration system. The secure domain
name servers that we will operate will be critical hardware to
our registry services operations. Therefore, we expect to have
to expend significant time and money to maintain or increase the
security of our facilities and infrastructure.
Security technologies are constantly being tested by computer
professionals, academics and hackers. Advances in
the techniques for attacking security solutions could make some
or all of our products obsolete or unmarketable. Likewise, if
any of our products are found to have significant security
vulnerabilities, then we may need to dedicate engineering and
other resources to eliminate the vulnerabilities and to repair
or replace products already sold or licensed to our customers.
Despite our security measures, our infrastructure may be
vulnerable to physical break-ins, computer viruses, attacks by
hackers or similar disruptive problems. It is possible that we
may have to expend additional financial and other resources to
address such problems. Any physical or electronic break-in or
other security breach or compromise of the information stored at
our secure data centers and domain name registration systems may
jeopardize the security of information stored on our premises or
in the computer systems and networks of our customers. In such
an event, we could face significant liability and customers
could be reluctant to use our services. Such an occurrence could
also result in adverse publicity and therefore adversely affect
the markets perception of the security of electronic
commerce and communications over IP networks as well as of the
security or reliability of our services.
We may
incur significant expenses and damages because of liability
claims.
An actual or perceived breach of our security solutions could
result in a product liability claim against us. A substantial
product liability claim against us could harm our operating
results and financial condition. In addition, any actual or
perceived breach of our security solution, whether or not caused
by the failure of one of our products, could hurt our reputation
and cause potential customers to turn to our competitors
products.
Our
ability to sell our solutions will be dependent on the quality
of our technical support, and our failure to deliver
high-quality technical support services could have a material
adverse effect on our sales and results of
operations.
If we do not effectively assist our customers in deploying our
products, succeed in helping our customers quickly resolve
post-deployment issues and provide effective ongoing support, or
if potential customers perceive that we may not be able achieve
to the foregoing, our ability to sell our products would be
adversely affected, and our reputation with potential customers
could be harmed. In addition, as we expand our
14
operations internationally, our technical support team will face
additional challenges, including those associated with
delivering support, training and documentation in languages
other than English. As a result, our failure to deliver and
maintain high-quality technical support services to our
customers could result in customers choosing to use our
competitors products instead of ours in the future.
There
has been increased competition for security solutions in the
real-time communications industry, as more companies seek to
provide products and services similar to our proposed products
and services, and because larger and better-financed competitors
may affect our ability to operate our business and achieve
profitability, our business may fail.
We expect competition for our products and services to be
intense. We expect to compete directly against other companies
offering similar security products and services that will
compete directly with our proposed products and services. We
also expect that we will compete against established vendors
within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. These companies may incorporate other competitive
technologies into their product offerings, whether developed
internally or by third parties. For the foreseeable future,
substantially all of our competitors are likely to be larger,
better-financed companies that may develop products superior to
our proposed products, which could create significant
competitive advantages for those companies. Our future success
depends on our ability to compete effectively with our
competitors. As a result, we may have difficulty competing with
larger, established competitor companies. Generally, these
competitors have:
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substantially greater financial, technical and marketing
resources;
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a larger customer base;
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better name recognition; and
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more expansive product offerings.
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These competitors are likely to command a larger market share
than us, which may enable them to establish a stronger
competitive position, in part, through greater marketing
opportunities. Further, our competitors may be able to respond
more quickly to new or emerging technologies and changes in user
preferences and to devote greater resources to developing and
operating networks of affinity websites. These competitors may
develop products or services that are comparable or superior. If
we fail to address competitive developments quickly and
effectively, we may not be able to remain a viable entity.
If we
are not able to adequately protect our patented rights, our
operations would be negatively impacted.
Our ability to compete largely depends on the superiority,
uniqueness and value of our technology and intellectual
property. To protect our intellectual property rights, we rely
on a combination of patent, trademark, copyright and trade
secret laws, confidentiality agreements with our employees and
third parties, and protective contractual provisions. Further,
we can give no assurances that infringement or invalidity claims
(or claims for indemnification resulting from infringement
claims) will not be asserted or prosecuted against us or that
any such assertions or prosecutions will not materially
adversely affect our business. Regardless of whether any such
claims are valid or can be successfully asserted, defending
against such claims could cause us to incur significant costs
and could divert resources away from our other activities. In
addition, assertion of infringement claims could result in
injunctions that prevent us from distributing our products.
Despite these efforts, any of the following may reduce the value
of our intellectual property:
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our applications for patents, trademarks and copyrights relating
to our business may not be granted and, if granted, may be
challenged or invalidated;
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issued trademarks, copyrights, or patents may not provide us
with any competitive advantages;
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our efforts to protect our intellectual property rights may not
be effective in preventing misappropriation of our
technology; or
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our efforts may not prevent the development and design by others
of products or technologies similar to or competitive with, or
superior to those we develop.
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In addition, we may not be able to effectively protect our
intellectual property rights in certain foreign countries where
we may do business in the future or from which competitors may
operate. While we have numerous pending international patents,
obtaining such patents will not necessarily protect our
technology or prevent our international competitors from
developing similar products or technologies. Our inability to
adequately protect our patented rights would have a negative
impact on our operations and revenues.
In addition, legal standards relating to the validity,
enforceability, and scope of protection of intellectual property
rights in Internet-related businesses are uncertain and still
evolving. Because of the growth of the Internet and Internet
related businesses, patent applications are continuously and
simultaneously being filed in connection with Internet-related
technology. There are a significant number of U.S. and
foreign patents and patent applications in our areas of
interest, and we believe that there has been, and is likely to
continue to be, significant litigation in the industry regarding
patent and other intellectual property rights.
If we
fail to meet our obligations to SAIC, we may lose our rights to
key technologies on which our business depends.
Our business depends on our rights to and under the patents we
obtained from SAIC. Our agreements with SAIC impose various
obligations on us, including payment obligations and minimum
royalties that we must pay to SAIC. If SAIC believes that we
have failed to meet these obligations, SAIC could seek to limit
or reacquire the assigned patent rights, which could lead to
costly and time-consuming litigation and, potentially, a loss of
our rights in these patents. During the period of any such
litigation, our ability to carry out the development and
commercialization of potential products could be significantly
and negatively affected. The loss or restriction of our rights
in our patents would result in our inability to continue our
business.
When
we attempt to implement our secure domain name registry services
business, we may be subject to government and industry
regulation and oversight which may impede our ability to achieve
our business strategy.
The U.S. government has historically controlled the
authoritative domain name system, or DNS, root server since the
inception of the Internet. On July 1, 1997, the President
of the United States directed the U.S. Secretary of
Commerce to privatize the management of the domain name system
in a manner that increases competition and facilitates
international participation in its management.
On September 29, 2006, the U.S. Department of Commerce
extended its delegation of authority by entering into a new
agreement with the Internet Corporation for Assigned Names and
Numbers, or ICANN, a California non-profit corporation
headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers
and registrars that manage the assignment of top level domain
names associated with the authoritative DNS root directory.
Although other DNS root directories are possible to create and
manage privately without accreditation from ICANN, the
possibility of conflicting name and number assignments makes it
less likely that users would widely adopt a top level domain
name associated with an alternative DNS root directory provided
by a non-ICANN-accredited registry service.
On June 26, 2008, ICANN announced that it will be relaxing
its prior position and will begin to issue generic top level
domain names, or gTLDs, more broadly than it had previously.
ICANN expects to begin to take applications for gTLDs in April
or May of 2009 with an application fee of $100,000 or more per
application. ICANN expects the first of these customized gTLDs
to be issued in the fourth quarter of 2009.
We are currently evaluating whether we will apply to become an
ICANN-accredited registry provider with respect to one or more
customized gTLDs, or create our own alternative DNS root
directory to manage the assignment of non-standard secure domain
names. We have not yet begun discussions with ICANN and we
cannot assure you that we will be successful in obtaining ICANN
accreditation for our registry service on terms acceptable to us
or at all. Whether or not we obtain accreditation from ICANN, we
will be subject to
16
the ongoing risks arising out of the delegation of the
U.S. governments responsibilities for the domain name
system to the U.S. Department of Commerce and ICANN and the
evolving government regulatory environment with respect to
domain name registry services.
The
laws governing online secure communications are largely
unsettled, and if we become subject to various government
regulations, costs associated with those regulations may
materially adversely affect our business.
The current regulatory environment for our services remains
unclear. We can give no assurance that our planned product
offerings will be in compliance with local, state
and/or
U.S. federal laws or other laws. Further, we can give no
assurance that we will not unintentionally violate such laws or
that such laws will not be modified, or that new laws will be
enacted in the future which would cause us to be in violation of
such laws.
VoIP services are not currently subject to all of the same
regulations that apply to traditional telephony. The
U.S. Federal Communications Commission has imposed some
traditional telephony requirements on VoIP such as disability
access requirements and other obligations. It is possible that
federal and state legislatures may seek to impose increased fees
and administrative burdens on VoIP, data and video providers.
Such regulations could result in substantial costs depending on
the technical changes required to accommodate the requirements,
and any increased costs could erode the pricing advantage over
competing forms of communication and adversely affect consumer
adoption of VoIP products generally.
The use of the Internet and private IP networks to provide
voice, video and other forms of real-time, two-way
communications services is a relatively recent development.
Although the provisioning of such services is currently
permitted by U.S. law and is largely unregulated within the
United States, several foreign governments have adopted laws
and/or
regulations that could restrict or prohibit the provisioning of
voice communications services over the Internet or private IP
networks. More aggressive domestic or international regulation
of the Internet in general, and Internet telephony providers and
services specifically, may materially and adversely affect our
business, financial condition, operating results and future
prospects, particularly if increased numbers of governments
impose regulations restricting the use and sale of IP telephony
services.
In addition to regulations addressing Internet telephony and
broadband services, other regulatory issues relating to the
Internet in general could affect our ability to provide our
planned security solutions. Congress has adopted legislation
that regulates certain aspects of the Internet, including online
content, user privacy, taxation, liability for third-party
activities and jurisdiction. In addition, a number of
initiatives pending in Congress and state legislatures would
prohibit or restrict advertising or sale of certain products and
services on the Internet, which may have the effect of raising
the cost of doing business on the Internet generally.
Telephone
carriers have petitioned governmental agencies to enforce
regulatory tariffs, which, if granted, would increase the cost
of online communication, and such increase in cost may impede
the growth of online communication and adversely affect our
business.
The growing popularity and use of the Internet has burdened the
existing telecommunications infrastructures, and many high
traffic areas have begun to experience interruptions in service.
As a result, certain local telephone carriers have petitioned
governmental agencies to enforce regulatory tariffs on IP
telephony traffic that crosses over the traditional telephone
networks. If any of these petitions or the relief that they seek
is granted, the costs of communicating via online could increase
substantially, potentially adversely affecting the growth in the
use of online secure communications. Any of these developments
could have an adverse effect on our business.
The
departure of Kendall Larsen, our Chief Executive Officer and
President, and/or other key personnel could compromise our
ability to execute our strategic plan and may result in
additional severance costs to us.
Our success largely depends on the skills, experience and
efforts of our key personnel, including Kendall Larsen, our
Chief Executive Officer and President. We have no employment
agreements with any of our key
17
executives that prevent them from leaving us at any time. In
addition, we do not maintain key person life insurance for any
of our officers or key employees. The loss of Mr. Larsen,
or our failure to retain other key personnel, would jeopardize
our ability to execute our strategic plan and materially harm
our business.
We
will need to recruit and retain additional qualified personnel
to successfully grow our business.
Our future success will depend in part on our ability to attract
and retain qualified operations, marketing and sales personnel
as well as engineers. Inability to attract and retain such
personnel could adversely affect our business. Competition for
engineering, sales, marketing and executive personnel is
intense, particularly in the technology and Internet sectors and
in the regions where our facilities are located. We can provide
no assurance that we will attract or retain such personnel.
Growth
of internal operations and business may strain our financial
resources.
We intend to significantly expand the scope of our operating and
financial systems in order to build our business. Our growth
rate may place a significant strain on our financial resources
for a number of reasons, including, but not limited to, the
following:
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the need for continued development of the financial and
information management systems;
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the need to manage relationships with future licensees,
resellers, distributors and strategic partners;
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the need to hire and retain skilled management, technical and
other personnel necessary to support and manage our
business; and
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the need to train and manage our employee base.
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The addition of new infrastructure services, networks, vertical
categories and affinity websites and the attention they demand,
on top of the attention demanded by our pending litigation with
Microsoft, may also strain our management resources. We cannot
give you any assurance that we will adequately address these
risks and, if we do not, our ability to successfully expand our
business could be adversely affected.
If we
expand into international markets, our inexperience outside the
United States would increase the risk that our international
expansion efforts will not be successful, which would in turn
limit our prospects for growth.
We may explore expanding our business to outside the United
States. Expansion into international markets requires
significant management attention and financial resources. In
addition, we may face the following risks associated with any
expansion outside the United States:
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challenges caused by distance, language and cultural differences;
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legal, legislative and regulatory restrictions;
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currency exchange rate fluctuations;
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economic instability;
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longer payment cycles in some countries;
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credit risk and higher levels of payment fraud;
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potentially adverse tax consequences; and
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other higher costs associated with doing business
internationally.
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These risks could harm our international expansion efforts,
which would in turn harm our business prospects.
We
will continue to incur significant costs as a result of being a
public company.
As a public company, we will continue to incur significant
legal, accounting and other expenses that VirnetX did not incur
as a private company. We expect the laws, rules and regulations
governing public
18
companies to increase our legal and financial compliance costs
and to make some activities more time-consuming and costly, and
these costs could be material to us.
In
connection with audits of our financial statements, our
independent auditors identified material weaknesses in our
internal controls over financial reporting.
During the course of their audit of our 2007 financial
statements, our independent auditors concluded that our internal
controls over financial reporting suffered from certain
material weaknesses as defined in standards
established by the Public Company Accounting Oversight Board and
the American Institute of Certified Public Accountants.
Farber Hass Hurley LLP noted the following matters involving our
internal control over financial reporting that are considered to
be material weaknesses in connection with their audit of our
2007 financial statements:
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Farber Hass Hurley LLP proposed, and we recorded, adjustments to
our accounting for equity transactions during 2007;
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Farber Hass Hurley LLP noted that our controls over financial
disclosures need to be improved; and
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Farber Hass Hurley LLP noted that certain expenses within 2007
were not timely accrued prior to receipt of billing statements.
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Prior to becoming our subsidiary, VirnetX was a development
stage, privately held company that historically did not
formalize or document internal controls over financial
reporting, utilized the cash basis of accounting and was not
required to have its financial statements audited or reviewed.
Prior to becoming our subsidiary, VirnetX engaged independent
auditors to audit its financial statements for certain prior
periods. During the course of that audit, VirnetXs
independent auditors concluded that VirnetXs internal
controls over financial reporting suffered from certain
material weaknesses and significant
deficiencies over its internal controls over financial
reporting as defined in standards established by the Public
Company Accounting Oversight Board and the American Institute of
Certified Public Accountants. Because VirnetX is now our
wholly-owned subsidiary, the material weaknesses in
VirnetXs internal controls over financial reporting have
resulted in our having material weaknesses and significant
deficiencies in our internal controls over financial reporting.
We have commenced a process of developing, adopting and
implementing policies and procedures to address such material
weaknesses, and management believes it has addressed the
material weaknesses identified by Farber Hass Hurley LLP in the
course of the audit of our 2007 financial statements. However,
that process has been and may continue to be time consuming and
costly and there can be no assurance that our audit firm will
not continue to identify these and other material weaknesses and
significant deficiencies in the course of the audit of our 2008
financial statements.
Our
inability to become compliant with the internal controls
requirements of Section 404 of the Sarbanes Oxley Act could
negatively affect our stock price and limit our ability to raise
additional financing.
Burr, Pilger & Mayer LLP, the independent audit firm
retained to audit the 2005 and 2006 financial statements for our
principal operating subsidiary resigned on October 26,
2007. The reason for the resignation was concern that we would
not become compliant with the internal controls requirements of
Section 404 of the Sarbanes Oxley Act by December 31,
2007 due to an insufficient quantity of experienced resources
involved with the financial reporting and period closing
process. Our management has concluded that, as of
December 31, 2007, we were not compliant with these
internal control requirements and, although we are pursuing
compliance, there can be no assurance we will be successful in
becoming compliant in future periods. Our lack of compliance
with internal controls requirements of Section 404 of the
Sarbanes Oxley Act could negatively affect our stock price, make
us less attractive to our stockholders, jeopardize our listing
status and limit our ability to raise additional financing.
19
Our
ability to sell our solutions will be dependent on the quality
of our technical support, and our failure to deliver
high-quality technical support services could have a material
adverse effect on our sales and results of
operations.
If we do not effectively assist our customers in deploying our
products, succeed in helping our customers quickly resolve
post-deployment issues and provide effective ongoing support, or
if potential customers perceive that we may not be able achieve
the foregoing, our ability to sell our products would be
adversely affected, and our reputation with potential customers
could be harmed. In addition, as we expand our operations
internationally, our technical support team will face additional
challenges, including those associated with delivering support,
training and documentation in languages other than English. As a
result, our failure to deliver and maintain high-quality
technical support services to our customers could result in
customers choosing to use our competitors products instead
of ours in the future.
Risks
Related to Our Stock
Trading
in our common stock is limited and the price of our common stock
may be subject to substantial volatility.
Our common stock is listed on the American Stock Exchange, or
AMEX, but its daily trading volume has been limited and
sporadic. Also, there can be no assurance that we will remain
listed on the AMEX. In the past several months, the market price
of our common stock has experienced significant fluctuation.
Between January 1, 2008 and December 31, 2008, the
reported last sale price for our common stock has ranged from
$7.06 to $0.89 per share. We expect the price of our common
stock to continue to be volatile as a result of a number of
factors, including, but not limited to, the following:
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developments in our pending litigation against Microsoft;
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quarterly variations in our operating results;
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large purchases or sales of common stock;
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actual or anticipated announcements of new products or services
by us or competitors;
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general conditions in the markets in which we compete; and
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economic and financial conditions.
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Purchasers
in this offering will immediately experience substantial
dilution in net tangible book value and may experience further
dilution.
The public offering price of our common stock is substantially
higher than $0.03, the net tangible book value per share of our
common stock as of September 30, 2008. Therefore, if you
purchase our common stock in this offering, and assuming no
warrants are exercised, you will incur an immediate dilution of
$1.40 in net tangible book value per share from the price you
paid, based on an assumed public offering price of $1.50 per
share.
The exercise of outstanding options to purchase shares of our
common stock at a weighted average exercise price of $3.54 per
share will result in further dilution.
Because
ownership of our common shares is concentrated, you and other
investors will have minimal influence on stockholder
decisions.
As of December 31, 2008, our officers and directors
beneficially owned an aggregate of 9,385,618 shares, or
26.16% of our outstanding common stock. In addition, a group of
stockholders that, as of December 31, 2007, held
4,766,666 shares, or 13.7% of our outstanding common stock,
have entered into a voting agreement with us that requires them
to vote all of their shares of our voting stock in favor of the
director nominees approved by our Board of Directors at each
director election going forward, and in a manner that is
proportional to the votes cast by all other voting shares as to
any other matters submitted to the stockholders
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for a vote. As a result, our existing officers and directors
could significantly influence shareholder actions of which you
disapprove or that are contrary to your interests. This ability
to exercise significant influence could prevent or significantly
delay another company from acquiring or merging with us.
Large
portions of our outstanding common shares were released from
contractual restrictions on July 5, 2008 and
December 31, 2008, and sales of those shares may drive down
the price of our stock.
Stockholders who received our common shares as a result of the
merger between PASW, Inc. and VirnetX entered into a
lock-up
agreement restricting sales of their shares until July 5,
2008. Subsequently, certain of our stockholders signed a
lock-up
agreement with the underwriter in connection with our public
offering in December 2007, which restricted sales of their
shares until December 31, 2008. Sales of the shares
released from
lock-up on
July 5, 2008 may have driven down the price of our
stock. Certain of these additional shares were released after
the first quarter of 2008, and certain of the shares were
released on December 31, 2008. Sales of such additional
shares may drive down the price of our stock. The
8,489,545 shares that became eligible for trading on
December 31, 2008 represented 24.3% of our outstanding
common stock as of December 31, 2009.
Our
protective provisions could make it more difficult for a third
party to successfully acquire us even if you would like to sell
your shares to them.
We have a number of protective provisions that could delay,
discourage or prevent a third party from acquiring control of us
without the approval of our Board of Directors. Our protective
provisions include:
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A staggered Board of Directors: This means
that only one or two directors (since we have a five-person
Board of Directors) will be up for election at any given annual
meeting. This has the effect of delaying the ability of
stockholders to effect a change in control of us since it would
take two annual meetings to effectively replace at least three
directors which represents a majority of the Board of Directors.
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Blank check preferred stock: Our Board of
Directors has the authority to establish the rights, preferences
and privileges of our 10,000,000 authorized, but unissued,
shares of preferred stock. Therefore, this stock may be issued
at the discretion of our Board of Directors with preferences
over your shares of our common stock in a manner that is
materially dilutive to existing stockholders. In addition, blank
check preferred stock can be used to create a poison
pill which is designed to deter a hostile bidder from
buying a controlling interest in our stock without the approval
of our Board of Directors. We have not adopted such a
poison pill; but our Board of Directors has the
ability to do so in the future, very rapidly and without
stockholder approval.
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Advance notice requirements for director nominations and for
new business to be brought up at stockholder
meetings: Stockholders wishing to submit director
nominations or raise matters to a vote of the stockholders must
provide notice to us within very specific date windows and in
very specific form in order to have the matter voted on at a
stockholder meeting. This has the effect of giving our Board of
Directors and management more time to react to stockholder
proposals generally and could also have the effect of
disregarding a stockholder proposal or deferring it to a
subsequent meeting to the extent such proposal is not raised
properly.
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No stockholder actions by written consent: No
stockholder or group of stockholders may take actions rapidly
and without prior notice to our Board of Directors and
management or to the minority stockholders. Along with the
advance notice requirements described above, this provision also
gives our Board of Directors and management more time to react
to proposed stockholder actions.
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Super majority requirement for stockholder amendments to the
By-laws: Stockholder proposals to alter or amend
our By-laws or to adopt new By-laws can only be approved by the
affirmative vote of at least
662/3%
of the outstanding shares.
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Elimination of the ability of stockholders to call a special
meeting of the stockholders: Only the Board of
Directors or management can call special meetings of the
stockholders. This could mean that stockholders, even those who
represent a significant block of our shares, may need to wait
for the annual meeting before nominating directors or raising
other business proposals to be voted on by the stockholders.
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Securities
analysts may not cover our common stock and this may have a
negative impact on our common stocks market
price.
The trading market for our common stock may depend on the
research and reports that securities analysts publish about us
or our business. We do not have any control over these analysts.
There is no guarantee that securities analysts will cover our
common stock. If securities analysts do not cover our common
stock, the lack of research coverage may adversely affect our
common stocks market price. If we are covered by
securities analysts, and our stock is downgraded, our stock
price would likely decline. If one or more of these analysts
ceases to cover us or fails to publish regularly reports on us,
we could lose or fail to gain visibility in the financial
markets, which could cause our stock price or trading volume to
decline.
We may
seek to raise additional funds, finance acquisitions or develop
strategic relationships by issuing capital stock that would
dilute your ownership.
We have financed our operations, and we expect to continue to
finance our operations, acquisitions and develop strategic
relationships, by issuing equity or convertible debt securities,
which could significantly reduce the percentage ownership of our
existing stockholders. Furthermore, any newly issued securities
could have rights, preferences and privileges senior to those of
our existing stock. Moreover, any issuances by us of equity
securities may be at or below the prevailing market price of our
stock and in any event may have a dilutive impact on your
ownership interest, which could cause the market price of stock
to decline. We may also raise additional funds through the
incurrence of debt or the issuance or sale of other securities
or instruments senior to our common shares. The holders of any
debt securities or instruments we may issue would have rights
superior to the rights of our common stockholders.
We
have no current intention of declaring or paying any cash
dividends on our common stock.
We do not plan to declare or pay any cash dividends on our
common stock. Our current policy is to use all funds and any
earnings in the operation and expansion of our business.
22
FORWARD-LOOKING
STATEMENTS
This prospectus includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All
statements other than statements of historical facts contained
in this prospectus, including statements regarding our future
financial position, business strategy and plans and objectives
of management for future operations, are forward-looking
statements. The words believe, may,
will, estimate, continue,
anticipate, intend, expect
and similar expressions, as they relate to us, are intended to
identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. These
forward-looking statements are subject to a number of risks,
uncertainties and assumptions described in Risk
Factors and elsewhere in this prospectus. These risks are
not exhaustive. Other sections of this prospectus include
additional factors which could adversely impact our business and
financial performance. Moreover, we operate in a very
competitive and rapidly changing environment. New risk factors
emerge from time to time and it is not possible for our
management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. You should not rely upon forward-looking statements
as predictions of future events. We cannot assure you that the
events and circumstances reflected in the forward-looking
statements will be achieved or occur and actual results could
differ materially from those projected in the forward-looking
statements.
ABOUT
THIS PROSPECTUS
As used in this prospectus:
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VirnetX refers to VirnetX, Inc., a Delaware
corporation;
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VirnetX Holding Corporation refers to VirnetX
Holding Corporation, a Delaware corporation, formerly PASW,
Inc., on and after our reincorporation which became effective on
March 30, 2007 and name change which became effective on
October 29, 2007, and refers to PASW, Inc., a California
corporation, prior to that date;
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the merger refers to the merger which became
effective on July 5, 2007, by and among VirnetX, VirnetX
Holding Corporation and a wholly-owned subsidiary of VirnetX
Holding Corporation, whereby VirnetX merged with, and became, a
wholly-owned subsidiary of VirnetX Holding Corporation and
VirnetX Holding Corporation issued shares of its common stock to
the stockholders of VirnetX as consideration for the
merger; and
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we, our, us and the
company refer to VirnetX Holding Corporation and its
wholly-owned subsidiaries, including VirnetX, collectively, on a
consolidated basis after giving effect to the merger.
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USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
offered securities, assuming gross proceeds of $3.8 million
(which is the amount of gross proceeds received by us, based
upon an assumed public offering price of $1.50 per share
and associated warrants and assuming no warrants are exercised),
will be approximately $2.7 million, after deducting the
underwriters fees and expense reimbursement and other
estimated expenses of this offering.
We expect to use all of the proceeds received from the sale of
our shares of common stock and the associated warrants in this
offering. We will have significant discretion in the use of any
net proceeds raised in this offering less than all of the
proceeds currently anticipated. Investors will be relying on the
judgment of our management regarding the application of the
proceeds of any sale of the securities. We may invest the net
proceeds received from this offering temporarily until we use
them for their stated purpose. We anticipate that the net
proceeds obtained from this offering will be used to fund
development activities, pursue our litigation strategy and for
general working capital needs. We anticipate that our existing
cash and cash equivalents, together with net proceeds from this
offering, at an assumed public offering price of $1.50 per share
and associated warrants and assuming no warrants are exercised,
may only be sufficient to fund our operations for the next three
months. See the Liquidity and Capital Resources
section in this prospectus for additional information.
DIVIDEND
POLICY
We have not in the past paid, and do not expect for the
foreseeable future to pay, dividends on our common stock.
Instead, we anticipate that all of our earnings, if any, in the
foreseeable future will be used for working capital and other
general corporate purposes. Any future determination to pay
dividends on our common stock will be at the discretion of our
board of directors and will depend upon, among other factors,
our results of operations, financial condition, capital
requirements and contractual restrictions.
24
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report, including this Managements Discussion and
Analysis of Financial Condition and Results of Operations
contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
which provides a safe harbor for statements about
future events, products and future financial performance that
are based on the beliefs of, estimates made by and information
currently available to our management. Except for the historical
information contained herein, the outcome of the events
described in these forward-looking statements is subject to
risks and uncertainties. See Risk Factors for a
discussion of these risks and uncertainties. The following
discussion should be read in conjunction with and is qualified
in its entirety by reference to our consolidated financial
statements included elsewhere in this prospectus. Actual results
and the outcome or timing of certain events may differ
significantly from those stated or implied by these
forward-looking statements due to the factors listed under
Risk Factors, and from time to time in our other
filings with the Securities and Exchange Commission, or SEC. For
this purpose, using the terms believe,
expect, expectation,
anticipate, can, should,
would, could, estimate,
appear, based on, may,
intended, potential,
indicate, are emerging and
possible or similar statements are forward-looking
statements that involve risks and uncertainties that could cause
our actual results and the outcome and timing of certain events
to differ materially from those stated or implied by these
forward-looking statements. By making forward-looking
statements, we have not assumed any obligation to, and you
should not expect us to, update or revise those statements
because of new information, future events or otherwise.
As used herein, we, us,
our, or the Company means VirnetX
Holding Corporation and its wholly-owned subsidiaries, including
VirnetX, collectively, on a consolidated basis after giving
effect to the merger.
Company
Overview
We are a development stage company focused on commercializing a
patent portfolio for securing real-time communications over the
Internet. These patents were acquired by our principal operating
subsidiary, VirnetX, from Science Applications International
Corporation, or SAIC. SAIC is a FORTUNE
500®
scientific, engineering, and technology applications company
that uses its deep domain knowledge to solve problems of vital
importance to the nation and the world, in national security,
energy and the environment, critical infrastructure, and health.
In December 2007, we closed an underwritten public offering of
3.45 million shares of our common stock, raising gross
proceeds of $13.8 million before underwriting discounts and
commissions and offering expenses. In connection with the 2007
offering, our common shares began trading on the American Stock
Exchange under the ticker symbol VHC. Our principal
business activities to date are our efforts to commercialize our
patent portfolio. We also conduct the remaining activities of
PASW, Inc., which are generally limited to the collection of
royalties on certain Internet-based communications by a
wholly-owned Japanese subsidiary of ours pursuant to the terms
of a single license agreement. The revenue generated by this
agreement is not significant.
Although we believe we may derive revenues in the future from
our principal patent portfolio and are currently endeavoring to
develop certain of those patents into marketable products, we
have not done so to date. Because we have limited capital
resources, our revenues are insignificant and our expenses,
including but not limited to those we expect to incur in our
patent infringement case against Microsoft, are substantial, we
may be unable to successfully complete our business plans, our
business may fail and your investment in our securities may
become worthless. See Risk Factors for additional
information.
We are in the development stage and consequently we are subject
to the risks associated with development stage companies
including: the need for additional financings; the uncertainty
that our patent and technology licensing program development
efforts will produce revenue bearing licenses for us; the
uncertainty that our development initiatives will produce
successful commercial products as well as the marketing and
25
customer acceptance of such products; competition from larger
organizations; dependence on key personnel; uncertain patent
protection; and dependence on corporate partners and
collaborators. To achieve successful operations, we will require
additional capital to continue research and development and
marketing efforts. No assurance can be given as to the timing or
ultimate success of obtaining future funding.
Recent
Developments
We announced our GABRIEL Connection
Technologytm
on April 1, 2008. Our GABRIEL Connection
Technologytm
is designed to secure all types of real-time communications over
the Internet. This technology uses industry standard encryption
methods with our patented DNS lookup mechanisms to create a
secure communication link between users intending to communicate
in real time over the Internet. This technology automatically
encrypts data allowing organizations and individuals to
establish communities of secure, registered users to transmit
information between multiple devices and operating systems.
These secure network communities, which we call secure private
domains, or SPDs, are designed to be fully-customizable and
support applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a
completely secure environment.
On May 14, 2008, we announced jointly with ipCapital Group
the completion and results of ipCapital Groups evaluation
of our business model, product, patent portfolio, technology and
software. The goal of the evaluation was to determine the
potential commercialization value range to potential licensing
partners in IP telephony, mobility, fixed-mobile convergence and
unified communications markets. Based on ipCapital Groups
proprietary ipValue Model, the estimated potential
commercialization value range of our business model, product,
patent portfolio, technology and software indicates a
significant market opportunity. We are currently in discussions
with prospective customers in our target markets.
On March 31, 2008, Microsoft filed a motion to dismiss our
patent infringement case against it. On June 3, 2008, the
court denied Microsofts motion to dismiss. The court ruled
that VirnetX has constitutional standing to sue for
patent infringement. Also pursuant to the court decision, on
June 10, 2008, SAIC joined us in our lawsuit as a plaintiff.
On August 26, 2008, we were awarded another
U.S. patent, number 7,418,504, by the U.S. Patent and
Trademark Office. The new patent, titled Agile network
protocol for secure communications using secure domain
names describes a system for establishing a secure
communication link using secure domain names. In conjunction
with the issuance of this patent, we will seek to commercialize
these exclusive rights in the United States by establishing the
secure domain name registry service for the Internet. Additional
information about the patent can be found on www.uspto.gov.
On October 23, 2008, our Board of Directors authorized the
establishment of an advisory board and we concurrently entered
into advisory board agreements with John Cronin, Paul Henderson,
and John F. Slitz. The members of our advisory board
collaborate with and provide advice and assistance to us, with a
focus on facilitating the development and commercialization of
our licensing program. We will strategically select members of
our advisory board, including those appointed on
October 23, 2008, who are
well-informed
and
well-connected
in fields relevant to our software and technology solutions,
market direction, and future plans. Additional biographical
information regarding the advisors appointed on October 23,
2008 is included under the section of this prospectus entitled
Management.
On November 19, 2008, the court granted our motion to amend
our infringement contentions, permitting us to provide increased
specificity and citations to Microsofts proprietary
documents and source code to support our infringement case
against Microsofts accused products, including, among
other things, Windows XP, Vista, Server 2003, Server 2008, Live
Communication Server, Office Communication Server and Office
Communicator. Microsoft was ordered to provide further
information regarding its non-infringement contentions and
invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
26
Critical
Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. The critical accounting policies we
employ in the preparation of our consolidated financial
statements are those which involve impairment of long-lived
assets, income taxes, fair value of financial instruments and
stock-based compensation.
Impairment
of Long-Lived Assets
We identify and record impairment losses on long-lived assets
used in operations when events and changes in circumstances
indicate that the carrying amount of an asset might not be
recoverable, but not less than annually. Recoverability is
measured by comparison of the anticipated future net
undiscounted cash flows to the related assets carrying
value. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the projected
discounted future net cash flows arising from the asset.
Income
Taxes
We account for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be realized.
Fair
Value of Financial Instruments
Carrying amounts of our financial instruments, including cash
and cash equivalents, accounts payable, and accrued liabilities,
approximate their fair values due to their short maturities.
Stock-Based
Compensation
We account for share-based compensation in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 123 (revised 2004), Share-Based
Payment, or SFAS 123(R), which requires the
measurement and recognition of compensation expense in the
statement of operations for all share-based payment awards made
to employees and directors including employee stock options
based on estimated fair values. Using the modified retrospective
transition method of adopting SFAS 123(R), the financial
statements presented herein reflect compensation expense for
stock-based awards as if the provisions of SFAS 123(R) had
been applied from the date of our inception.
In addition, as required by Emerging Issues Task Force Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or
Services, we record stock and options granted to non-employees
at fair value of the consideration received or the fair value of
the equity investments issued as they vest over the performance
period.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141 (revised 2007),
Business Combinations and
SFAS No. 160, Accounting and Reporting of
Noncontrolling Interests in Consolidated Financial Statements
an amendment to ARB No. 51. These
standards will significantly change the accounting and reporting
for business combination transactions and noncontrolling
(minority) interests in consolidated financial statements,
including capitalizing at the acquisition date the fair value of
acquired in-process research and development, and, remeasuring
and writing down these assets, if necessary, in subsequent
periods during their development. These new standards will be
applied prospectively for business
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combinations that occur on or after January 1, 2009, except
that presentation and disclosure requirements of SFAS 160
regarding noncontrolling interests shall be applied
retroactively. The implementation of these standards is not
expected to have a material impact on the consolidated
statements of operations or financial position.
In December 2007, the FASB ratified EITF
No. 07-1,
Accounting for Collaborative Agreements. This
standard provides guidance regarding financial statement
presentation and disclosure of collaborative agreements, as
defined, which includes arrangements regarding the developing
and commercialization of products and product candidates.
EITF 07-01
is effective as of January 1, 2009. Implementation of this
standard is not expected to have a material impact on the
consolidated statements of operations or financial position.
In June 2007, the FASB ratified
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to be used in Future Research and Development
Activities. This standard requires that nonrefundable
advance payments for goods and services that will be used or
rendered in future research and development activities pursuant
to executory contractual arrangements be deferred and recognized
as an expense in the period the related goods are delivered or
services are performed. EITF
No. 07-3
became effective as of January 1, 2008 and it did not have
a material impact on the consolidated statements of operations
or financial position upon adoption.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, or SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to
investors request for expanded information about the
extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the
effect of fair valued measurements on earnings.
SFAS No. 157 applies whenever standards require (or
permit) assets or liabilities to be measured at fair value, and
does not expand the use of fair value in any new circumstances.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years, with early
adoption permitted, except for the impact of FASB Staff
Position, or FSP,
157-2.
FSP 157-2
deferred the adoption of SFAS 157 for non financial assets
and liabilities until years ended after November 15, 2008.
The Company must adopt these requirements no later than the
first quarter of 2008.
On March 19, 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement
No. 133, or SFAS No. 161. SFAS No. 161
requires enhanced disclosures about an entitys derivative
and hedging activities. These enhanced disclosures will discuss
(a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We have
not determined the impact, if any SFAS No. 161 will
have on our consolidated financial statements.
Nine
Months Ended September 30, 2008
Compared with Nine Months Ended September 30,
2007
Results
of Operations
Revenue
Royalties
Revenue generated increased to $107,955 for the nine months
ended September 30, 2008 from $46,664 for the nine months
ended September 30, 2007. Our revenue in 2008 was solely
limited to the royalties earned under our single license
agreement through our Japan subsidiary. We expect the revenue
from this license to decrease substantially in the future. We do
not intend to seek additional licenses or other revenue through
our Japan subsidiary.
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Research
and Development Expenses
Research and development costs include expenses paid to outside
development consultants and compensation related expenses for
our engineering staff. Research and development costs are
expensed as incurred.
Our research and development expenses increased by $165,095 to
$633,335 for the nine months ended September 30, 2008, from
$468,240 for the nine months ended September 30, 2007. This
increase is primarily due to increased engineering activities
for product development and the addition of one engineer,
bringing the total number of engineers we employ to four. We
expect research and development expenses to increase as
employees are hired to provide in-house research and
development. While we expect to use outside contractors for
additional product development on a limited basis, we expect
those costs to remain level or decline.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses include management
and administrative personnel, as well as outside legal,
accounting, and consulting services.
Our selling, general and administrative expenses increased by
$4,516,767 to $8,620,276 for the nine months ended
September 30, 2008 from $4,103,509 for the nine month
period ended September 30, 2007.
Within selling, general and administrative expenses, legal fees
increased by $2,166,735 to $4,618,256 for the nine months ended
September 30, 2008 from $2,451,521 for the nine months
ended September 30, 2007. The increase in fees incurred was
due primarily to our patent infringement litigation against
Microsoft and the filing of a
Form S-1
registration statement on September 24, 2008.
In addition, during the nine months ended September 30,
2008, we made our first minimum annual royalty payment of
$50,000 to SAIC pursuant to the patent license and assignment
agreement, as amended, by and between VirnetX and SAIC. As of
September 30, 2008, we had not received any royalty revenue
on the patents nor begun to amortize the related intangible
asset.
Also within selling, general and administrative expenses,
expenses increased by $2,350,032 to $4,002,020 for the nine
months ended September 30, 2008, from $1,651,988 for the
nine month period ended September 30, 2007. The increase
was due principally to stock options granted to our employees
and directors. In addition, we increased the number of employees
and resources in order to comply with the requirements
associated with being an SEC reporting company.
Once we begin to generate royalty revenues, we expect that our
selling expenses will increase significantly as we must make
payments to ipCapital Group and SAIC with respect to such
revenues and as we begin to expand our sales force.
Fiscal
Year Ended December 31, 2007 Compared to the Fiscal Year
Ended
December 31, 2006 and Inception Through December 31,
2005
Results
of Operations
Revenue
Royalties
We generated only nominal revenue of $74,866 during the period
from July 5, 2007 (the closing date of the merger between
us and VirnetX) to December 31, 2007. We generated no
revenue prior to July 5, 2007. Our revenue in 2007 was
solely limited to the royalties earned under our single license
agreement through our Japan subsidiary. We expect the revenue
from this license to decrease substantially in the future. We do
not intend to seek additional licenses or other revenue through
our Japan subsidiary.
Research
and Development Expenses
Research and development costs include expenses paid to outside
development consultants and compensation-related expenses for
our engineering staff. Research and development costs are
expensed as incurred.
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Our research and development expenses increased from $56,000 for
the period from August 2, 2005 (date of inception) to
December 31, 2005 to $554,187 for 2006 and to $684,316 for
2007, primarily as a result of increased engineering activities
for product development. We expect research and development
expenses to increase as employees are hired to provide in-house
research and development. While we expect to use outside
contractors for additional product development on a limited
basis, we expect those costs to remain level or decline.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses include management
and administrative personnel, as well as outside legal,
accounting, and consulting services.
Our selling, general and administrative expenses increased from
$826,478 for the period from August 2, 2005 (date of
inception) to December 31, 2005, to $853,488 for 2006 and
to $8,040,894 for 2007.
Within selling, general and administrative expenses,
professional fees, primarily legal fees, increased from $12,481
in the period from August 2, 2005 (date of inception) to
December 31, 2005 to $133,199 in 2006 and to $5,286,525 in
2007. The fees were incurred to pursue the litigation with
Microsoft, assist in the merger between VirnetX and VirnetX
Holding Corporation, audit the financial statements, assist in
obtaining financing and to assist in contract negotiations and
in general corporate matters. Legal fees may continue to
increase as our patent infringement litigation moves forward and
we incur the costs associated with being an SEC reporting
company.
Also within selling, general and administrative expenses,
compensation expenses changed from $799,920 in the period from
August 2, 2005 (date of inception) to December 31,
2005 to $613,757 in 2006 and to $2,152,000 in 2007. The
compensation expense was higher in 2005 than 2006 due to the
higher proportion of stock based compensation expense in 2005.
The increase from 2006 to 2007 is due principally to stock-based
compensation expense related to stock options granted to our
employees and directors and an increase in the number of our
employees as we added resources to comply with reporting
requirements.
Other selling, general and administrative expenses increased
from $14,077 in the period from August 2, 2005 (date of
inception) to December 31, 2005 to $106,532 in 2006 and to
$602,639 in 2007 as we incurred costs related to building our
infrastructure, litigation support and completing the merger.
Once we begin to generate royalty revenues, we expect that our
selling expenses will increase significantly as we must make
payments to ipCapital Group and SAIC with respect to such
revenues and as we begin to expand our sales force.
Liquidity
and Capital Resources
We are in the development stage and have raised capital since
our inception through the issuance of our equity securities. As
of September 30, 2008, we had approximately $2,260,170 in
cash. We expect to finance future cash needs primarily through
proceeds from equity or debt financings, loans,
and/or
collaborative agreements with corporate partners. We have used
the net proceeds from the sale of common and preferred stock for
general corporate purposes, which have included funding research
and development, litigation efforts and working capital needs.
We anticipate that our existing cash and cash equivalents,
together with net proceeds from this offering, at an assumed
public offering price of $1.50 per share and associated warrants
and assuming no warrants are exercised, may only be sufficient
to fund our operations for the next three months.
In order to obtain additional capital, we expect to evaluate
alternative financing sources, including, but not limited to,
the issuance of equity or debt securities, corporate alliances,
joint ventures and licensing agreements; however, there can be
no assurance that funding will be available on favorable terms,
if at all. We cannot assure you that we will successfully
commercialize our products and services or that our products and
services will gain sufficient market acceptance to enable us to
earn a profit. If we are unable to obtain additional capital or
generate sufficient revenue from such efforts, we may be
required to cease operations or
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to reduce cash used in our business, including the termination
of commercialization efforts that may appear to be promising,
the sale of our patent portfolio or other assets, the
abandonment of our litigation with Microsoft or others and the
reduction in overall operating activities.
We believe that our 2009 average cash requirement to fund
operations will average approximately $950,000 per month. We
anticipate our monthly cash requirements will increase
significantly as we increase our expenditures for:
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our lawsuit against Microsoft;
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infrastructure;
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sales and marketing;
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research and development;
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personnel; and
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general business enhancements.
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We may exceed those projected amounts if we increase these
expenditures in response to business conditions we do not
currently expect or for other reasons. The process of developing
new security solutions is inherently complex, time-consuming,
expensive and uncertain. We must make long-term investments and
commit significant resources before knowing whether our patented
technology offerings will achieve market acceptance. We are
unable to predict when we will begin to generate material net
cash inflows from our patent and technology licensing program
and our secure domain name registry service.
Off-Balance
Sheet Arrangements
As of December 31, 2008, we did not have any off balance
sheet arrangements except for operating lease commitments and
the contingent portion of our royalty obligation under our
royalty agreement with SAIC as discussed in the notes to the
financial statements.
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BUSINESS
The
Company
We are developing and commercializing software and technology
solutions for securing real-time communications over the
Internet. Our patented GABRIEL Connection
Technologytm
combines industry standard encryption protocols with our
patented techniques for automated domain name system, or DNS,
lookup mechanisms, enabling users to create a secure
communication link using secure domain names. We also intend to
establish the exclusive secure domain name registry in the
United States and other key markets around the world. Our
software and technology solutions provide the security platform
required by next-generation Internet-based applications such as
instant messaging, or IM, voice over Internet protocol, or VoIP,
mobile services, streaming video, file transfer and remote
desktop. Our technology generates secure connections on a
zero-click or single-click basis,
significantly simplifying the deployment of secure real-time
communication solutions by eliminating the need for end users to
enter any encryption information.
We intend to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. The leaders in these markets include Alcatel-Lucent,
Avaya Inc., Cisco Systems, Inc., Juniper Networks, Inc., LM
Ericsson Telephone Company, Motorola, Inc., NEC Corporation,
Nokia Corporation, Nortel Networks Corporation, Samsung
Electronics Co. Ltd. and Sony Ericsson Mobile Communications AB,
among others. We also intend to license our patent portfolio,
technology and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators. We believe that the market opportunity
for our software and technology solutions is large and
expanding. As part of our licensing strategy, in March 2008, we
hired ipCapital Group, a leading advisor on licensing technology
and intellectual property, to initiate discussions with several
major potential licensees. Since its founding in 1998, ipCapital
Group has supported the licensing efforts of clients across a
variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. We are
currently in discussions with prospective customers in our
target markets.
Our portfolio of intellectual property is the foundation of our
business model. We currently have 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our patent
portfolio is primarily focused on securing real-time
communications over the Internet, as well as related services
such as the establishment and maintenance of a secure domain
name registry. Our software and technology solutions also have
additional applications in operating systems and network
security. The core development team behind our patent portfolio,
technology, and software has worked together for over ten years
and is the same team that invented and developed this technology
while working at Science Application International Corporation,
or SAIC. SAIC is a FORTUNE
500®
scientific, engineering, and technology applications company
that uses its deep domain knowledge to solve problems of vital
importance to the nation and the world, in national security,
energy and the environment, critical infrastructure, and health.
In 2006, we acquired this patent portfolio, which now serves as
the foundation of our planned licensing and service offerings.
We expect to derive the majority of our revenue from license
fees and royalties associated with these patents. We also intend
to continue our research and development efforts to further
strengthen and expand our patent portfolio, and over time, we
plan to leverage this portfolio to develop a product suite that
can be sold to enterprise customers and developers.
Industry
Overview
The Internet is increasingly evolving into a rich medium used by
individuals and businesses to conduct commerce, share
information and engage in real-time communications including
email, text messaging, IM, and voice and video calls. This
communications experience is richer and more complex than ever
before. Session initiation protocol, or SIP, was developed to
enable the convergence of voice and data networks and today is
the predominant industry standard for establishing multimedia
communications over the Internet such as voice, video, instant
messaging, presence information and file transfer. SIP, as well
as other real-time
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collaboration protocols such as XMPP, use DNS lookup as its
primary means of connecting Internet devices but is an open
architecture that remains inherently unsecure.
We believe that accessing a diversity of services from a single
device, anytime and anywhere, and the ability to access these
same services from a range of devices, are emerging as key
market requirements. The portions of the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology
solutions are forecasted to grow from approximately
$59 billion in total revenues in 2006 to approximately
$162 billion in total revenues by 2011, representing a
compound annual growth rate, or CAGR, of approximately 23%. This
growing trend represents a significant opportunity for VirnetX
to license its patent portfolio, technology and software, and
establish its secure domain name registry.
IP
Telephony
IP telephony includes technologies that use Internet
Protocols packet-switched connections to exchange voice,
fax, and other forms of information traditionally carried over
the dedicated circuit-switched connections of the public
switched telephone network, or PSTN. The adoption of IP
telephony has helped businesses significantly lower network
operating costs by using a common network for voice and data. As
the workforce becomes increasingly dispersed, mobile features
enabled by Internet protocol-based communications such as
presence, unified messaging, peer-to-peer applications, find
me/follow me, white-boarding and document sharing have become
more commonplace. However, the development of the related
security infrastructure has lagged behind, leaving
next-generation networks vulnerable to a multitude of threats
including
man-in-middle,
eavesdropping, domain hijacking, distributed denial of service,
or DDoS, spam over Internet telephony, or SPIT, and spam over
instant messaging, or SPIM. These threats continue to highlight
the need for securing next-generation networks. As the use of IP
telephony systems extends beyond the boundaries of an
organizations private network, security is likely to
become an even bigger concern. Worldwide revenue from IP
telephony products like
IP-PBX
including IP phones, service provider VoIP and IMS equipment,
VoIP gateways and hosted VoIP services for businesses is
forecasted to grow from approximately $15 billion in 2006
to approximately $43 billion in 2011, representing a CAGR
of approximately 24%. We believe our unique and patented
solution provides the robust security platform required for
providing on-demand secure communication links between
enterprises intending to communicate securely without manually
configuring the connections. We believe a standard security
solution such as ours will further accelerate the adoption of IP
telephony products in the market and allow enterprises to take
full advantage of these rich content applications and real-time
communications over the Internet, thereby significantly
increasing their return on investment.
Fixed-Mobile
Convergence
Fixed-mobile convergence is an environment where wireline and
wireless phones work together with Internet Protocol to deliver
services (voice, video, data and combinations thereof) uniformly
across multiple access networks, including, among others, WiMAX,
WiFi, cellular and fixed. We believe that the fixed-mobile
convergence infrastructure equipment revenue will grow from
approximately $9 million in 2006 to over $406 million
in revenue in 2011, representing a CAGR of approximately 116%.
Additionally, according to a thought leadership paper entitled
Road to Full Convergence published by Fixed-Mobile
Convergence Alliance, or FMCA, an alliance of leading operators
representing a customer base of over 850 million customers,
consumers increasingly feel the need to be connected and have
real-time access to media streams, blogs and breaking news.
During the past ten years, users have become increasingly
technologically sophisticated and are now demanding greater
functionality from the Internet. Today, the Internet is used for
commerce, social networking, online dating and a number of other
forms of media-rich, real-time communication and collaboration.
Mobile devices like dual mode (cellular/WiFi) phones lie at the
center of this transition and have become the device with the
closest proximity and relationship to the user. We believe that
accessing a diversity of services from a single device, anytime
and anywhere, and the ability to access the same services from a
range of devices, is emerging as a key market requirement.
Worldwide total dual mode cellular/WiFi phone revenue was
approximately $17 billion in 2006 and is expected to grow
to over $76 billion
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in 2011, representing a CAGR of approximately 35%. The strong
projected growth for converged cellular/WiFi phones and related
services in enterprise and consumer market segments represents a
significant opportunity for VirnetXs patent portfolio,
technology, and software to become the industry standard for
securing real-time communication.
IP
Mobility
Smartphones are multi-functional devices that handle a wide
variety of business-critical applications and support
increasingly complex functions including, enhanced data
processing, Internet access,
e-mail
access, calendars and scheduling, contact management and the
ability to view electronic documents. Users have continual
access to these applications while on the move making them an
increasingly essential business tool for the mobile worker.
These devices enable mobile workers to have similar
functionality inside or outside the office thereby increasing
employee efficiency. However, it is critical that this mobile
environment have the same level of security as an
enterprises internal network. Worldwide revenue from IP
mobility products like smartphones and mobile data cards is
expected to grow from approximately $26 billion in 2006 to
approximately $41 billion by 2011, representing a CAGR of
approximately 9%. We believe in order to realize the full
functionality of IP mobility, several challenges including
security must be overcome. When users are mobile, connections
and data need to cross multiple network boundaries, each of
which poses a security threat. Wireless networks present unique
threats because rogue users can enter the enterprise network
through wireless access points that may not be sufficiently
protected as part of an organizations IT security
protocols. Providing authenticated access to the wireless
networks and enterprise applications through the wireless domain
are important requirements and represent a significant market
opportunity for VirnetXs patented technology and secure
domain names to provide users fully authenticated secure access
on a zero-click or single-click basis.
Unified
Communications
The need to enhance productivity is putting increasing demand on
instant access to, and the management of, rapidly expanding
real-time information. Mobile collaboration, and the ability to
conduct business whether inside or outside of the office, are
high priorities. Business and consumer users are nomadic and
expect instant access everywhere. The ability to establish
multiple secure simultaneous network connections and provide IP
sessions with strong security and encryption will be critical to
widespread deployment of next-generation networks. A shortcoming
of this new communications environment is that the various modes
of communication operate independently from one another and do
not integrate easily, if at all. As the number of devices grows,
individual points of contact multiply and communication becomes
more sophisticated and increasingly vulnerable.
The idea behind unified communications is to organize the array
of communication methodologies, integrating the various
fragmented ways individuals communicate today into a single
communications experience, ultimately increasing utility and
productivity. The basic components comprising unified
communications include: a directory for storing addresses,
various modes of communication with each user/contact (desk
phone, mobile phone, IM, etc.), message storage for all messages
regardless of communication method and secure presence of a
users status for each mode of communication (available,
away, busy, etc.). Worldwide unified communications market
generated approximately $377 million in revenue in 2006 and
is forecasted to grow rapidly over the next few years generating
approximately $813 million in revenue in 2011, representing
a CAGR of approximately 17%. We believe the growth in unified
communication products may not reach its full potential due to
the lack of transparent and seamless security as users hesitate
to place their presence information online for all to see and as
organizations block access due to the lack of credentials
verified by a neutral third party. Our solutions help address
these concerns and should enable significant growth in the
unified communications market.
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Our
Solutions
Our software and technology solutions, including our secure
domain name registry, our patents and our GABRIEL Connection
Technologytm
are designed to secure all types of real-time communications
over the Internet. Our technology uses industry standard
encryption methods with our patented DNS lookup mechanisms to
create a secure communication link between users intending to
communicate in real time over the Internet. Our technology can
be built into network infrastructure, operating systems or
silicon chips developed for a communication or computing device
to secure real-time communications over the Internet between any
number of devices. Our technology automatically encrypts data
allowing organizations and individuals to establish communities
of secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or
SPDs, are designed to be fully-customizable and support rich
content applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a
completely secure environment. Our approach is a unique and
patented solution that provides the robust security platform
required by these rich content applications and real-time
communications over the Internet. The key benefits and features
of our technology include the following:
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Automatic and seamless to the user. After a
one-time registration, users connect securely on a
zero-click or single-click basis.
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Secure data communications. Users create
secure networks with people they trust and communicate over a
secure channel.
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Control of data at all times. Users can secure
and customize their unified communication and collaboration
applications such as file sharing and remote desktop with
policy-based access and secure presence information.
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Authenticated users. Users know they are
communicating with authenticated users with secure domain names.
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Application-agnostic technology. Our solution
provides security at the IP layer of the network by using
patented DNS lookup mechanisms to make connections between
secure domain names, thereby obviating the need to provide
application specific security.
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Competitive
Strengths
We believe the following competitive strengths will enable our
success in the marketplace:
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Unique patented technology. We are focused on
developing innovative technology for securing real-time
communications over the Internet, and establishing the exclusive
secure domain name registry in the United States and other key
markets around the world. Our unique solutions combine industry
standard encryption methods and communication protocols with our
patented techniques for automated DNS lookup mechanisms. Our
technology and patented approach enables users to create a
secure communication link by generating secure domain names. We
have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our portfolio
includes patents and pending patent applications in the United
States and other key markets that support our secure domain name
registry service for the Internet.
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Scalable licensing business model. Our
intellectual property portfolio is the foundation of our
business model. We are actively engaged in commercializing our
intellectual property portfolio by pursuing licensing agreements
with OEMs, service providers and system integrators within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
end-markets. We have engaged ipCapital Group to accelerate our
patent and technology licensing program with customers and to
expand the depth of our intellectual property portfolio, and we
are actively pursuing our first licensing agreements. We believe
that our licensing business model is highly scalable and has the
potential to generate strong margins once we achieve significant
revenue growth.
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Highly experienced research and development
team. Our research and development team is
comprised of nationally recognized network security and
encryption technology scientists and experts that have worked
together as a team for over ten years and, collectively, have
over 120 years of experience in the field. During their
careers, this team has developed several cutting-edge
technologies for U.S. national defense, intelligence and
civilian agencies, many of which remain critical to our national
security today. Prior to joining VirnetX, our team worked for
SAIC during which time they invented the technology that is the
foundation of our patent portfolio, technology, and software.
Based on the collective knowledge and experience of our
development team, we believe that we have one of the most
experienced and sophisticated groups of security experts
researching vulnerability and threats to real-time communication
over the Internet and developing solutions to mitigate these
problems.
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Our
Strategy
Our strategy is to become the market leader in securing
real-time communications over the Internet and to establish our
GABRIEL Communications
Technologytm
as the industry standard security platform. Key elements of our
strategy are to:
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Implement a patent and technology licensing program to
commercialize our intellectual property, including our GABRIEL
Connection
Technologytm.
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Establish VirnetX as the exclusive universal registry of secure
domain names and to enable our customers to act as registrars
for their users and broker secure communication between users on
different registries.
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Leverage our existing patent portfolio and technology to develop
a suite of products that can be sold directly to end-user
enterprises.
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In furtherance of our strategy, in March 2008, we engaged
ipCapital Group to help us support and grow our licensing
business. The ipCapital Group is a leading advisor on licensing
technology and intellectual property. Through our alliance with
ipCapital Group, we are actively engaged in discussions with
several potential customers in our target markets. ipCapital
Group is led by John Cronin. Prior to founding ipCapital Group,
Mr. Cronin was a distinguished inventor at IBM for
17 years where he patented 100 inventions, published over
150 technical papers, received IBMs Most
Distinguished Inventor Award, and was recognized as
IBMs Top Inventor. As a member of the senior
technical staff and the prestigious IBM Academy, Mr. Cronin
led an intellectual asset team that spearheaded efforts to
produce and manage the development of intellectual property at
IBM. Eventually known as The IBM Patent Factory,
this select group supported the division that increased
IBMs annual licensing revenue from $30 million in
1992 to more than $1 billion in 1997 when Mr. Cronin
left IBM. Since its founding in 1998, ipCapital Group has
supported the licensing efforts of clients across a variety of
technologies and markets, resulting in transactions representing
several hundred million dollars of value.
License
and Service Offerings
We plan to offer a diversified portfolio of license and service
offerings focused on securing real-time communications over the
Internet, including:
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VirnetX patent licensing: Customers who want
to develop their own implementation of the VirnetX code module
for supporting secure domain names, or who want to use their own
techniques that are covered by our patent portfolio for
establishing secure communication links, will purchase a patent
license. The number of patents licensed, and therefore the cost
of the patent license to the customer, will depend upon which of
the patents are used in a particular product or service. These
licenses will typically include an initial license fee, as well
as an ongoing royalty.
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GABRIEL Connection
Technologytm
Software Development Kit, or SDK: OEM customers
who want to adopt the GABRIEL Connection
Technologytm
as their solution for establishing secure connections using
secure domain names within their products will purchase an SDK
license. The
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software development kit consists of object libraries, sample
code, testing and quality assurance tools and the supporting
documentation necessary for a customer to implement our
technology. These tools are comprised of software for a secure
domain name connection test server, a relay test server and a
registration test server. Customers will pay an up-front license
fee to purchase an SDK license and a royalty fee for every
product shipped with the embedded VirnetX code module.
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Secure domain name registrar
service: Customers, including service providers,
telecommunication companies, ISPs, system integrators and OEMs
can purchase a license to our secure domain name registrar
service. We provide the software suite and technology support to
enable such customers to provision devices with secure domain
names and facilitate secure connections between registered
devices. This suite includes the following server software
modules:
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Registrar server software: Enables customers
to operate as a secure domain name registrar that provisions
devices with secure domain names. The registrar server software
provides an interface for our customers to register new virtual
private domains and sub-domain names. This server module must be
enrolled with the VirnetX secure domain name master registry to
obtain its credentials before functioning as an authorized
registrar.
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Connection server software: Allows customers
to provide connection services to enrolled devices. The
connection services include registration of presence information
for authenticated users and devices, presence information query
request services, enforcement of policies and support for
communication with peers behind firewalls.
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Relay server software: Allows customers to
dynamically maintain connections and relay data to private IP
addresses for network devices that reside behind firewalls.
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Secure domain name registrar service customers will enter into a
technology licensing and revenue sharing agreement with VirnetX
whereby we will typically receive an up-front licensing fee for
the secure domain name registrar technology, as well as ongoing
annual royalties for each secure domain name issued by the
customer.
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Secure domain name master registry and connection
service: As part of enabling the secure domain
name registrar service, we will maintain and manage the secure
domain name master registry. This service will enroll all secure
domain name registrar customers and generate the credentials
required to function as an authorized registrar. It also
provides connection services and universal name resolution,
presence information and secure connections between authorized
devices with secure domain names.
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Technical support services: We intend to
provide high-quality technical support services to licensees and
customers for the rapid customization and deployment of GABRIEL
Connection
Technologytm
in an individual customers products and services.
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Our research and development team was the team responsible for
inventing the patents that form the foundation of the technology
we intend to license to OEMs and service providers globally.
This team has worked together for over ten years and,
collectively, has over 120 years of experience in
engineering and technology. We intend to leverage this
experience and continue investing in research and development
and, over time, expect to strengthen and expand our patent
portfolio, technology, and software. While we are currently
focused on securing
real-time
communications over the Internet and establishing the first and
only secure domain name registry, we believe our existing and
future intellectual property portfolio will extend to additional
areas including, among others, network security and operating
systems for fixed and mobile devices.
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Customers
We are currently focused on commercializing our technology and
are actively pursuing our first licensing agreements. We intend
to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. We also intend to license our patent portfolio,
technology and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators.
Marketing
and Sales
We plan to employ a leveraged, partner-oriented, marketing
strategy for our patent and technology licensing program. The
marketing strategy for our patent and technology licensing
program will primarily be focused on OEMs. We have engaged
ipCapital Group to accelerate our patent and technology
licensing program with these customers and are actively pursuing
our first licensing agreements.
We plan to directly market our domain name registry services to
our service provider and system integrator customers. ipCapital
Group is also focused on building our marketing efforts with
these potential customers. Additionally, we hope to leverage our
relationship with SAIC to extend our offering to departments and
agencies within the federal government. SAIC is a FORTUNE
500®
scientific, engineering, and technology applications company
that uses its deep domain knowledge to solve problems of vital
importance to the nation and the world, in national security,
energy and the environment, critical infrastructure, and health.
Once we begin generating revenue, we intend to build a sales
force that will be responsible for managing existing accounts
and pursuing licensing and sales opportunities with new
customers.
Competition
We believe our technology and solutions will compete primarily
against various proprietary security solutions. We group these
solutions into three main categories:
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Proprietary or home-grown application specific security
solutions have been developed by vendors and integrated directly
into their products for our target markets including
IP-telephony,
mobility, fixed-mobile convergence, and unified communications.
These proprietary solutions have been developed due to the lack
of standardized approaches to securing real-time communications.
This approach has led to corporate networks that are isolated
and, as a result, restrict enterprises to using these
next-generation networks within the boundaries of their private
network. These solutions generally do not provide security for
communications over the Internet or require network
administrators to manually exchange keys and other security
parameters with each destination network outside their corporate
network boundary. The cost-savings and other benefits of
IP-based
real-time communications are significantly limited by this
approach to securing real-time communications.
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A session border controller, or SBC, is a device used in
networks to exert control over the signaling and media streams
involved in establishing, conducting and terminating VoIP calls.
Signaling protocols such as SIP and XMPP, transfer information
including endpoint IP addresses and port numbers in a manner
that prevents this information from being seen by a traditional
firewall or network address translation, or NAT, device, and
reaching the intended destination. SBCs are used in physical
networks to address these limitations and enable real-time
session traffic to cross the boundaries created by firewalls and
other NAT devices and enable VoIP calls to be established
successfully. However, SBCs must decrypt and analyze every
single data packet for the information to be transmitted
successfully, thereby preventing end-to-end encryption. This
network designs results in SBCs becoming a single point of
congestion on the network, as well a single point of failure.
SBCs are also limited to the physical network they secure.
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SIP firewalls, or SIP-aware firewalls, and application layer
gateways, manage and protect the traffic, flow and quality of
VoIP and other SIP-related communications. They perform
real-time network address translation and dynamic firewall
functions and support multiple signaling protocols, and media
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functionality, allowing secure interconnection and the flow of
IP media streams across multiple networks. While SIP firewalls
assist in analyzing SIP traffic transmitted over the corporate
network to filter out various threats, they do not necessarily
encrypt the traffic. As a result, this traffic is not entirely
secure from end-to-end nor is it protected against threats like
man-in-middle
and eavesdropping.
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Intellectual
Property and Patent Rights
Our intellectual property is primarily comprised of trade
secrets, patented know-how, issued and pending patents and
technological innovation.
We have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our patent
portfolio is primarily focused on securing real-time
communications over the Internet, as well as related services
such as the establishment and maintenance of a secure domain
name registry. Our software and technology solutions also have
additional applications in operating systems and network
security.
We have included a list of our U.S. patents below. Each patent
below is publicly accessible on the Internet website of the U.S.
Patent and Trademark Office at
www.uspto.gov.
The various terms of our issued U.S. and foreign patents
will expire during the period from 2019 to 2024.
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U.S. Patent
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Number
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Title of Patent
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6,502,135
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Agile network protocol for secure communications with assured
system availability
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6,618,761
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Agile network protocol for secure communications with assured
system availability
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6,826,616
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Method for establishing secure communication link between
computers of virtual private network
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6,834,310
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Preventing packet flooding of a computer on a computer network
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6,839,759
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Method for establishing secure communication link between
computers of virtual private network without user entering any
cryptographic information
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6,907,473
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Agile network protocol for secure communications with assured
system availability
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7,010,604
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Agile network protocol for secure communications with assured
system availability
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7,133,930
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Agile network protocol for secure communications with assured
system availability
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7,188,180
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Method for establishing secure communication link between
computers of virtual private network
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7,209,479
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Third party VPN certification
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7,418,504
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Agile network protocol for secure communications using secure
domain names
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Notwithstanding anything to the contrary set forth in any of
the Companys filings under the Securities Act of 1933 or
the Securities Exchange Act of 1934 that might incorporate
future filings, including this registration statement, of which
this prospectus forms a part, in whole or in part, the
information set forth on the United States Patent and Trademark
Office, or the USPTO Website, shall not be deemed to be a part
of or incorporated by reference into any such filings. The
Company does not warrant the accuracy or completeness of the
USPTO Website, or the adequacy of the USPTO Website, and
expressly disclaims liability for errors or omissions on such
website.
Assignment
of Patents
Most of our issued patents were originally acquired from SAIC
pursuant to an assignment agreement by and between VirnetX and
SAIC dated December 21, 2006, and a patent license and
assignment agreement by and between VirnetX and SAIC dated
August 12, 2005, as amended on November 2, 2006,
including documents prepared pursuant to the November amendment,
and as further amended on March 12, 2008. VirnetX recorded
the assignment from SAIC with the U.S. Patent and Trademark
Office on December 21, 2006.
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Key terms of these agreements are as follows:
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Patent assignment. SAIC unconditionally and
irrevocably conveyed, transferred, assigned and quitclaimed all
its right, title and interest in and to the patents and patent
applications, as specifically set forth on Exhibit A to the
assignment document recorded with the U.S. Patent and
Trademark Office, including, without limitation, the right to
sue for past infringement.
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License to SAIC outside the field of use. On
November 2, 2006, we granted to SAIC an exclusive, royalty
free, fully paid, perpetual, worldwide, irrevocable,
sublicensable and transferable right and license permitting SAIC
and its assignees to make, have made, import, use, offer for
sale, and sell products and services covered by, and to make
improvements to, the patents and patent applications we acquired
from SAIC, solely outside our field of use. We have, and retain,
all right, title and interest to all our patents within our
field of use. Our field of use is defined as the field of secure
communications in the following areas: virtual private networks,
or VPNs; secure VoIP; electronic mail, or
e-mail;
video conferencing; communications logging; dynamic uniform
resource locators, or URLs; denial of service; prevention of
functional intrusions; IP hopping; voice messaging and unified
messaging; live voice and IP PBXs; voice web video conferencing
and collaboration; IM; minimized impact of viruses; and secure
session initiation protocol or SIP. Our field of use is not
limited by any predefined transport mode or medium of
communication (for example, wire, fiber, wireless, or mixed
medium). On March 12, 2008, SAIC relinquished the
November 2, 2006, exclusive grant back license outside our
field of use, as well as any right to obtain such exclusive
license in the future. Effective March 12, 2008, we granted
to SAIC a non-exclusive, royalty free, fully paid, perpetual,
worldwide, irrevocable, sublicensable and transferable right and
license permitting SAIC and its assignees to make, have made,
import, use, offer for sale, and sell products and services
covered by, and to make improvements to, the patents and patent
applications we acquired from SAIC, solely outside our field of
use.
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Compensation obligations. As consideration for
the assignment of the patents and for the rights we obtained
from SAIC as a result of the March 12, 2008 amendment, we
are required to make payments to SAIC based on the revenue
generated from our ownership or use of the patents assigned to
us by SAIC.
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Our compensation obligation includes payment of royalties, in an
amount equal to (a) 15% of all gross revenues generated by
us in our field of use less (1) trade, quantity and cash
discounts allowed, (2) commercially reasonable commissions,
discounts, refunds, rebates, chargebacks, retroactive price
adjustments and other allowances which effectively reduce the
net selling price, and which are based on arms length terms and
are customary and standard in VirnetXs industry, and
(3) actual product returns and allowances; (b) 15% of
all non-license gross revenues generated by us outside our field
of use less (1) trade, quantity and cash discounts allowed,
(2) commercially reasonable commissions, discounts,
refunds, rebates, chargebacks, retroactive price adjustments and
other allowances which effectively reduce the net selling price,
and which are based on arms length terms and are customary and
standard in VirnetXs industry, and (3) actual product
returns and allowances; and (c) 50% of all license revenues
generated by us outside our field of use less (1) trade,
quantity and cash discounts allowed, (2) commercially
reasonable commissions, discounts, refunds, rebates,
chargebacks, retroactive price adjustments and other allowances
which effectively reduce the net selling price, and which are
based on arms length terms and are customary and standard in
VirnetXs industry, and (3) actual product returns and
allowances.
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Royalty payments are calculated based on each quarter and
payment is due within 30 days following the end of each
quarter.
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Beginning 18 months after January 1, 2007, we must
make a minimum guaranteed annual royalty payment of $50,000.
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The maximum cumulative royalty paid in respect to our
revenue-generating activities in our field of use shall be no
more than $35 million.
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In addition to the royalties, in the circumstances and subject
to the limitations specified in the November amendment, SAIC
shall be entitled to receive 10% of any proceeds, revenues,
monies or any other form of consideration paid for the
acquisition of VirnetX by Microsoft or any other party alleged
to be infringing the patents or patent applications we acquired
from SAIC, up to a maximum amount of $35 million. Any such
payments to SAIC shall be credited against the $35 million
maximum cumulative royalty payable with respect to our
revenue-generating activities in our field of use.
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In the event that VirnetX receives any proceeds, recovery or
other form of compensation (other than acquisition proceeds) as
a result of any action or proceeding brought by VirnetX against
Microsoft or certain other alleged infringing companies to
resolve a claim of infringement or enforcement relating to the
patents and patent applications we acquired from SAIC, or as a
result of negotiations with such entities, as further
consideration for the assignment of the patents, in lieu of any
amounts otherwise owing to SAIC we must pay to SAIC 35% of the
excess of such proceeds over all costs incurred in connection
with any such litigation, without a cap. Any payment to SAIC of
amounts with respect to such proceeds shall be credited against
the $35 million maximum cumulative royalty payable with
respect to our revenue-generating activities in our field of use.
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In the event that VirnetX receives any proceeds, recovery or
other form of compensation as a result of any action or
proceeding brought by VirnetX against parties other than
Microsoft and certain other alleged infringing companies, with
respect to which VirnetX is required to notify SAIC of
infringement under the terms of the November amendment to
resolve a claim of infringement or enforcement relating to the
patents and patent applications we acquired from SAIC, or as a
result of negotiations with such entities (other than
acquisition proceeds) as further consideration for the
assignment of the patents, in lieu of any amounts otherwise
owing to SAIC we must pay to SAIC 25% of the excess of such
proceeds over all costs incurred in connection with any such
litigation, without a cap. Any payment to SAIC of amounts with
respect to such proceeds shall be credited against the
$35 million maximum cumulative royalty payable with respect
to our revenue-generating activities in our field of use.
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Reversion to SAIC upon breach or default. We
must convey, transfer, assign and quitclaim to SAIC all of our
right, title and interest in and to the patents or patent
applications we acquired from SAIC, upon the first occurrence of
the following reversion events:
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our failure to pay SAIC an aggregate cumulative amount of at
least $7.5 million within seven years after January 1,
2007;
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our failure to pay the $50,000 minimum annual royalty that has
not been cured within 90 days after our receipt of written
notice of such failure; or
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for the period prior to the date of our full payment of the
$35 million maximum cumulative royalty, any termination of
the August 2005 agreement with SAIC, as amended.
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If a reversion event occurs due to our failure to pay SAIC an
aggregate cumulative amount of at least $7.5 million within
seven years after January 1, 2007, then we will receive
from SAIC a non-exclusive license to the reverting patents in
our field of use.
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Rights to bring and control actions for infringement and
enforcement. In addition to the exclusive right
to bring and control any action or proceeding with respect to
infringement or enforcement of our patents, and to collect
damages and fees for past, present and future infringement, both
in and outside of our field of use, we also have the first right
to negotiate with or bring a lawsuit against any and all third
parties for purposes of enforcing our patents, regardless of the
field of use.
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Security agreement. We granted SAIC a security
interest in some of our intellectual property, including the
patents and patent applications we obtained from SAIC, to secure
our payment obligations to SAIC described above.
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41
Government
Regulation
The laws governing online secure communications remain largely
unsettled, even in areas where there has been legislative
action. It may take years to determine whether and how existing
laws governing intellectual property, privacy and libel apply to
online media. Such legislation may interfere with the growth in
use of online secure communications and decrease the acceptance
of online secure communications as a viable solution, which
could adversely affect our business.
Due to the Internets popularity and increasing use, new
laws regulating secure communications may be adopted. These laws
and regulations may cover, among other things, issues relating
to privacy, pricing, taxation, telecommunications over the
Internet, content, copyrights, distribution and quality of
products and services. We intend to comply with all new laws and
regulations as they are adopted.
The U.S. government has historically controlled the
authoritative domain name system, or DNS, root server since the
inception of the Internet. On July 1, 1997, the President
of the United States directed the U.S. Secretary of
Commerce to privatize the management of the domain name system
in a manner that increases competition and facilitates
international participation in its management.
On September 29, 2006, the U.S. Department of Commerce
extended its delegation of authority by entering into a new
agreement with the Internet Corporation for Assigned Names and
Numbers, or ICANN, a California non-profit corporation
headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers
and registrars that manage the assignment of top level domain
names associated with the authoritative DNS root directory.
Although other DNS root directories are possible to create and
manage privately without accreditation from ICANN, the
possibility of conflicting name and number assignments makes it
less likely that users would widely adopt a top level domain
name associated with an alternative DNS root directory provided
by a non-ICANN-accredited registry service.
On June 26, 2008, ICANN announced that it will be relaxing
its prior position and will begin to issue generic top level
domain names, or gTLDs, more broadly than it had previously.
ICANN expects to begin to take applications for gTLDs in April
or May of 2009 with an application fee of $100,000 or more per
application. ICANN expects the first of these customized gTLDs
to be issued in the fourth quarter of 2009.
We are currently evaluating whether we will apply to become an
ICANN-accredited registry provider with respect to one or more
customized gTLDs, or create our own alternative DNS root
directory to manage the assignment of non-standard secure domain
names. We have not yet begun discussions with ICANN and we
cannot assure you that we will be successful in obtaining ICANN
accreditation for our registry service on terms acceptable to us
or at all. Whether or not we obtain accreditation from ICANN, we
will be subject to the ongoing risks arising out of the
delegation of the U.S. governments responsibilities
for the domain name system to the U.S. Department of
Commerce and ICANN and the evolving government regulatory
environment with respect to domain name registry services.
Employees
As of December 31, 2008, we had 12 full-time employees.
Facilities
Our principal executive offices are located at 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066.
Between July 1, 2008 and August 31, 2009, we will
lease this property for approximately $3,150 per month. We have
no other properties.
42
Corporate
Overview and History
PASW, Inc. was incorporated in the State of California in
November 1992. PASW, Inc. reincorporated in the State of
Delaware in March 2007. From inception until January 2003, PASW,
Inc. was engaged in the business of developing and licensing
software that enabled Internet and web based communications. In
January 2003, PASW, Inc. sold all of its operating assets and
became a publicly traded company with limited operations.
VirnetX, Inc., which we refer to throughout this prospectus as
VirnetX, was incorporated in the State of Delaware in August
2005. In November 2006, VirnetX acquired certain patents from
SAIC. In July 2007, we effected a reverse merger between PASW,
Inc., and VirnetX, which became our principal operating
subsidiary. As a result of this merger, the former security
holders of VirnetX came to own a majority of our outstanding
common stock. On October 29, 2007, we changed our name from
PASW, Inc. to VirnetX Holding Corporation.
43
MANAGEMENT
The following table sets forth the respective names, ages and
positions of each of our directors, and executive officers as of
December 31, 2008. There are no family relationships
between any of the persons named below. All of our directors
were elected to the Board of Directors on July 5, 2007.
Executive
Officers and Directors
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Name
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Age
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Position
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Kendall Larsen
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President, Chief Executive Officer and Director
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William E. Sliney
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70
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Chief Financial Officer (Interim)
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Edmund C. Munger
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64
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Director
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Scott C. Taylor
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Director
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Michael F. Angelo
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49
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Director
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Thomas M. OBrien
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Director
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Kendall Larsen. Mr. Larsen has been our
President since July 5, 2007 and has been our Chief
Executive Officer and a Director since June 10, 2007.
Mr. Larsen has held the same positions with VirnetX since
its inception in August 2005. From April 2003 to July 2005,
Mr. Larsen focused on pre-incorporation activities related
to VirnetX. From April 2002 to April 2003, Mr. Larsen was a
Limited Partner at Osprey Ventures, L.P., a venture fund that
makes investments primarily in business and consumer technology
companies. From October 2000 to April 2002, he was Senior Vice
President and General Manager of the Security Products Division
of Phoenix Technologies Ltd., a software and firmware developer.
Prior to March 2003, and for a period of over 20 years,
Mr. Larsen has held senior executive positions at various
leading technology companies, including RSA Security, Inc.,
Xerox Corporation, Rolm/International Business Machines
Corporation, Novell, Inc., General Magic, Inc., and Ramp
Networks. Mr. Larsen holds a B.S. in Economics from the
University of Utah.
William E. Sliney. Mr. Sliney has been
our Chief Financial Officer on an interim and part-time basis
since July 5, 2007. Mr. Sliney previously served as
our President, Chief Financial Officer and Secretary. He also
served as our Chairman of the Board from October 2000 to August
2001 and was a member of our Board of Directors from October
2000 to July 5, 2007. From March 2004 to March 2006, he was
also a director of Enterra Energy Trust (NYSE: ENT), an oil and
gas trust based in Calgary, Alberta that acquires, operates, and
exploits petroleum and natural gas assets in Canada and in the
United States. Before joining us, Mr. Sliney was the Chief
Financial Officer of Legacy Software Inc. from 1995 to 1998.
From 1993 to 1994, Mr. Sliney was Chief Executive Officer
of Gumps, a high end department store retailer based in
San Francisco. Mr. Sliney received an M.B.A. from the
Anderson School at UCLA.
Edmund C. Munger. Mr. Munger has been a
Director since July 5, 2007. He has been the Chief
Technology Officer of VirnetX since July 2006 and a director of
VirnetX since July 2006. From July 1987 to June 2006,
Mr. Munger held various positions including Associate
Division Manager, Division Manager, Chief System
Architect and Assistant Vice President at Science Applications
International Corporation, or SAIC. Prior to SAIC,
Mr. Munger was the chief system architect for the
FBIs Counterterrorism Data Warehouse Prototype, and has
worked on several advanced defense systems. Mr. Munger is
named as a co-inventor on substantially all of the patents in
the VirnetX patent portfolio. Mr. Munger received a M.S. in
Naval Architecture and Marine Engineering from MIT and a B.S. in
Naval Science from the United States Naval Academy.
Scott C. Taylor. Mr. Taylor has been a
Director since July 5, 2007. Mr. Taylor has recently
been promoted to Executive Vice President and General Counsel
and had previously served as the Vice President of Corporate
Legal Services for Symantec Corporation since February 2007.
From January 2002 to February 2007, Mr. Taylor worked for
Phoenix Technologies Ltd. Prior to 2002, Mr. Taylor has
worked at Narus Inc, Symantec Corporation, Pillsbury
Madison & Sutro LLP (now Pillsbury Winthrop Shaw
Pittman LLP), ICF Incorporated (now ICF Consulting) and the
U.S. Securities and Exchange Commission in various roles.
44
Mr. Taylor was admitted to practice law in the State of
California in 1993 and is an advisory Board Member at Langtech
(IT infrastructure consulting and outsourced management). He is
the Co-chair of General Counsel Committee (and former board
member) of the Silicon Valley Campaign for Legal Services and
maintains a Top Secret security clearance with the
U.S. government. Mr. Taylor has a B.A. in
International Relations from Stanford University and a J.D. from
George Washington University.
Michael F. Angelo. Mr. Angelo has been a
Director since July 2007. He has been a Senior Architect at
NetIQ Corporation since August 2005. From October 2003 to August
2005, Mr. Angelo was a Security Architect and Manager,
Government Engagements SBU with Microsoft Corporation. From July
1989 to October 2003, Mr. Angelo was a Staff Fellow at both
Hewlett Packard Company and Compaq Computer Corp.
Mr. Angelo also served as Senior Systems Programmer at the
John von Neumann National Supercomputer Center from September
1985 to July 1989. He was a Sub-Chairman of the National
Institute of Standards and Technology Board of Assessment for
Programs/National Research Council responsible for the CISD
review, for fiscal years
2000-2001
and
2001-2002,
and a technology contributor and participant on the
U.S. Commerce Departments Information Systems
Technical Advisory Council, or ISTAC, from 1999 to the present.
Mr. Angelo was named a distinguished lecturer for 2004 and
2005 by Sigma XI, the Scientific Research Society. He currently
holds 49 patents, most in the area of security and
authentication, and was also named the 2003 Inventor of the Year
for the City of Houston by the Houston Intellectual Property
Lawyers Association.
Thomas M. OBrien. Mr. OBrien
has been a Director since July 2007. He has been Senior Vice
President of Reit Management & Research LLC, an
institutional manager of real estate, public real estate
investment trusts, or REITs, and other public companies, since
April 2006 and served as a Vice President from May 1996 to April
2006. During the last five years, Mr. OBrien has held
various positions with public entities managed by Reit
Management or its affiliates, including serving as:
(1) Chief Executive Officer and President of TravelCenters
of America LLC (AMEX: TA), since February 2007 and a Managing
Director since October 2006; (2) Chief Executive Officer
and President of RMR Funds, a group of publicly traded
closed-end investment management companies which invest in
equity and fixed income securities in the United States and
international real estate, hospitality and finance sectors, from
2003 to May 2007; and (3) Executive Vice President of
Hospitality Properties Trust (NYSE: HPT), a REIT that invests in
hotels and travel centers, from 2002 to 2003 and Chief Financial
Officer from 1996 to 2002. From 1988 to 1996,
Mr. OBrien was a senior manager with Arthur Andersen
LLP where he served a number of public company clients.
Mr. OBrien graduated cum laude from the University of
Pennsylvania, Wharton School of Business, with a B.S. in
Economics.
Significant
Employees
Robert Dunham Short III. Mr. Short has
been the Chief Scientist for VirnetX since May 2006. From
February 2000 to April 2007, Mr. Short was Assistant Vice
President and Division Manager at Science Applications
International Corporation, or SAIC. From 1994 to February 2000,
he also held various other positions at SAIC. Prior to SAIC, he
worked at ARCO Power Technologies, Inc. (Atlantic Richfield
Petroleum), Sperry Corporate Technology Center and Sperry
Research Center. Mr. Short is named as a co-inventor on
substantially all of the patents in the VirnetX patent
portfolio. He holds a TS/SCI security clearance. He has a Ph.D
in Electrical Engineering from Purdue University along with a
M.S. in Mathematics and a B.S. in Electrical Engineering from
Virginia Tech.
Kathleen Sheehan. Ms. Sheehan is our
Chief Administrative Officer. Prior to this position, she served
as our Vice President, Administration and Human Resources since
February 2005. From September 2004 until February 2005,
Ms. Sheehan focused on equity raise and pre-incorporation
activities related to VirnetX. Ms. Sheehan also served as
the Treasurer and Chief Financial Officer of VirnetX from March
2006 until July 2007. From September 2002 to September 2004,
Ms. Sheehan was a Commercial Property Manager for JBD
Properties, a real estate developer. Ms. Sheehans
experience includes Executive Recruiter at Armen and Associates,
Senior Director of Human Resources at CHW Advertising and Human
Resource and Office Manager at Realtime Consulting, Inc./MODIS.
45
Sameer Mathur. Mr. Mathur has been the
Vice President of Corporate Development and Marketing for
VirnetX since July 2007. Prior to that date, Mr. Mathur was
the Vice President of Business Development of VirnetX since
April 2006. From March 2004 to April 2006, Mr. Mathur was
Product Line Manager for SonicWALL Inc. From April 2003 to March
2004, Mr. Mathur was Senior Product Manager for Zone Labs
Inc, a leading provider of Internet security software. From June
1996 to April 2003, he was Senior Product Marketing Manager of
Phoenix Technologies Ltd. Prior to June 1996, Mr. Mathur
worked in various engineering and marketing roles for OEC Japan,
IBM Japan, and Pertech Computers Ltd. Mr. Mathur has a B.S.
in Engineering from Gujarat University, India.
Dr. Victor Larson. Dr. Larson is
the Director of Research and Development and a co-inventor of
the VirnetX technologies. Prior to joining VirnetX,
Dr. Larson worked for over 20 years doing system
engineering, software design and technical program management
under contract to many branches of the Department of Defense and
the intelligence community. Dr. Larson worked on numerous
advanced prototypes to implement new solutions to secure
communications, remote sensing data extraction and processing,
intelligence information extraction and data visualization.
Dr. Larson holds a Ph.D. in Information Technology from
George Mason University, an M.S. in Mechanical Engineering from
Rensselaer Polytechnic Institute, and a B.S. in Mechanical
Engineering from Virginia Tech.
Greg Wood. Mr. Wood has been with
VirnetX since October 2007 and has been our Senior Director of
Corporate Communications since May 2008. His executive brand
experience includes McDonalds, Safeway, Nissan, Burger King,
Taco Bell, Nutri-System, Supercuts and Pacific Gas &
Electric with advertising agencies that include J. Walter
Thompson, Chiat/Day, Tracy-Locke/BBDO, Hoefer
Dietrich & Brown and Crossover Creative.
Mr. Woods areas of marketing expertise include
strategic branding, new business development, direct, licensing,
product merchandising, consumer education, multicultural,
investor relations and public relations. Mr. Wood holds a
B.A. degree from the University of California, Davis.
Advisory
Board Members
The VirnetX advisory board collaborates with and provides advice
and assistance to the Company, with a focus on facilitating the
development and commercialization of the Companys
licensing program.
John Cronin. Mr. Cronin has been a
member of our advisory board since October 2008. He is Managing
Director and Chairman of ipCapital Group. John spent over
17 years at IBM Corporation and became its top inventor
with over 100 patents and 150 patent publications. He created
and ran The IBM Patent Factory which was essential
to helping IBM become number one in US patents and the team
contributed to the start of and success of IBMs successful
licensing program. Mr. Cronin holds a BSEE, an MSEE, and a
B.A. degree in Psychology from the University of Vermont.
Paul Henderson. Mr. Henderson has been a
member of our advisory board since October 2008. He is Managing
Director of Clarify LLC, a business advisory firm specializing
in intellectual property strategy for both early stage and
established companies. Prior to this, Mr. Henderson was
Director of IP acquisition at Hewlett Packard, or HP.
Mr. Henderson also managed HPs Product Generation
Consulting Group, providing internal advisory and consulting
services to senior leaders of HP businesses. Mr. Henderson
holds MBAs from UC Berkeley Haas School of Business and Columbia
Graduate School of Business and a degree in Chemical Engineering
from the University of Washington.
John F. Slitz. Mr. Slitz has been a
member of our advisory board since October 2008. He is the
founder of World Series of Golf, Inc. and has been its Chairman
of the Board of Directors since 2003. Mr. Slitz was also
Vice President of IBM from 2005 to 2007. From 2002 to 2005,
Mr. Slitz served as Chief Executive Officer and President
of Systems Research and Development (acquired by IBM in 2005).
From 2000 to 2002, he was a venture partner at Osprey Ventures,
focusing on investments in middleware software companies.
Mr. Slitz was also a principal at Slitz &
Company, a consulting firm to software and Internet companies.
From 1997 to 1999, he was Senior Vice President of Marketing
with Novell, Inc. Mr. Slitz holds a B.A. in Economics from
SUNY at Cortland, MALS in Psychology/Sociology from the Graduate
Faculty New School for Social Research, and an MBA in Management
from Farleigh-Dickinson University.
46
EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Objectives
and Philosophy of Executive Compensation
We maintain a peer-based executive compensation program
comprised of multiple elements. We conducted our benchmarking
analysis by evaluating:
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early and late stage private companies using a semi-annual
survey of private, venture-backed companies that have received
at least one (1) round of financing from a professional
U.S.-based
venture capital firm. This semi-annual survey was prepared by
CompensationPro (a Dow Jones company). Of the companies in this
survey, over one-half are in the information technology business
and the remainder are divided between healthcare, products and
services and other companies;
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a key comparable company, Medivation, Inc., which also completed
a reverse merger followed by an underwritten direct primary
public offering. This company had similar market capitalization
compared to us and was similarly early stage and pre-revenue at
the time of their reverse merger, although this company is a
medical device company; and
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public company peers using data we gathered from the SEC filings
of ten public companies with the same industry code as us and
otherwise in a comparable industry, having a market
capitalization of between $25 million and
$500 million, and in a similar geographic region.
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The primary objectives of our peer-based executive compensation
program are:
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attracting and retaining the most talented and dedicated
executives possible;
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correlating annual and long-term cash and stock incentives to
achievement of measurable performance objectives; and
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aligning executives incentives with stockholder value
creation.
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To achieve these objectives, we implement and maintain
compensation plans that tie a substantial portion of each
executives overall compensation to key strategic financial
and operational goals such as the establishment and maintenance
of key strategic relationships, the development of our product
candidates, the identification and advancement of additional
product candidates, and the performance of our common stock
price. Our compensation committees approach emphasizes the
setting of compensation at levels the committee believes are
competitive with executives in other companies of similar size
and stage of development operating in the information technology
industry while taking into account our relative performance and
our own strategic goals.
Tax
Deductibility of Executive Compensation
Our compensation committee and our Board have considered the
potential future effects of Section 162(m) of the Internal
Revenue Code on the compensation paid to our executive officers.
Section 162(m) disallows a tax deduction for any publicly
held corporation for individual compensation exceeding
$1.0 million in any taxable year for any of our executive
officers, unless compensation is performance based. In approving
the amount and form of compensation for our executive officers,
our compensation committee will continue to consider all
elements of the cost to us of providing such compensation,
including the potential impact of Section 162(m).
Role of
Executive Officers
Our compensation committee exclusively makes all compensation
decisions with regard to our chief executive officer and it
approves recommendations regarding compensation for our other
employees. Our president and chief executive officer generally
attends compensation committee meetings and sometimes makes
recommendations to our compensation committee regarding the
amount and form of the compensation
47
of the other executive officers and key employees. He is not
present for any of the executive sessions or for any discussion
of his own compensation.
Elements
of Executive Compensation
Executive compensation consists of the following elements:
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Base salary. Base salaries for our executives
are established based on the scope of their responsibilities,
taking into account competitive market compensation paid by
other companies for similar positions. Generally, the program is
designed to deliver executive base salaries within the range of
salaries for executives with the requisite skills in similar
positions with similar responsibilities at comparable companies,
in line with our compensation philosophy. Executives with more
experience, critical skills,
and/or
considered key performers may be compensated above the range as
part of our strategy for attracting, motivating and retaining
highly experienced and high performing employees. Base salaries
are reviewed annually and adjusted from time to time to realign
salaries with market levels after taking into account individual
responsibilities, performance, and experience. This review
occurs each year in the fourth quarter and adjustments are made
from time to time to ensure market competitiveness.
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Discretionary annual incentive bonus. Each
year, our compensation committee establishes a target
discretionary annual incentive bonus pool based on a percentage
of an executives base salary and the achievement of
corporate and individual objectives. Our compensation committee
has the sole authority to award discretionary annual incentive
bonuses to our chief executive officer and has authority along
with our Board to award discretionary annual incentive bonuses
to other employees. Our compensation committee utilizes annual
incentive bonuses to compensate officers for achieving financial
and operational goals and for achieving individual annual
performance objectives. These objectives vary depending on the
individual executive, but relate generally to strategic factors
such as establishment and maintenance of key strategic
relationships, development and implementation of our licensing
strategy, development of our product, identification and
advancement of additional products, and to financial factors
such as raising capital, improving our results of operations,
and increasing the price per share of our common stock.
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Long-term incentive program. We believe that
long-term performance is achieved through an ownership culture
that encourages high performance by our executive officers
through the use of stock and stock-based awards. Our 2007 Stock
Plan was established to provide our employees, including our
executive officers, with incentives to help align those
employees interests with the interests of stockholders.
Our compensation committee believes that the use of stock and
stock-based awards offers the best approach to achieving our
compensation goals. We have historically elected to use stock
options as the primary long-term equity incentive vehicle.
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Stock option grants. Stock option grants are
made at the commencement of employment, may be made annually
based upon performance and, occasionally, following a
significant change in job responsibilities or to meet other
special retention objectives. Our compensation committee reviews
and approves stock option awards to executive officers based
upon a review of competitive compensation data, its assessment
of individual performance, a review of each executives
existing long-term incentives, and retention considerations. In
determining the number of stock options to be granted to
executives, we take into account the individuals position,
scope of responsibility, ability to affect profits and
stockholder value, the individuals historic and recent
performance, and the value of stock options in relation to other
elements of the individual executives total compensation.
We expect to continue to use stock options as a long-term
incentive vehicle because:
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stock options align the interests of executives with those of
the stockholders, support a pay-for-performance culture, foster
employee stock ownership, and focus the management team on
increasing value for the stockholders;
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stock options are performance based and all the value received
by the recipient of a stock option is based on the growth of the
stock price;
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stock options help to provide a balance to the overall executive
compensation program as base salary and our discretionary annual
bonus program focus on short-term compensation, while the
vesting of stock options increases stockholder value over the
longer term; and
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the vesting period of stock options encourages executive
retention and the preservation of stockholder value.
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Stock
Ownership Guidelines
We have not adopted stock ownership guidelines and our 2007
Stock Plan has provided the principal method for our executive
officers to acquire equity in the Company. We currently do not
require our directors or executive officers to own a particular
amount of our common stock. Our compensation committee is
satisfied that stock and option holdings among our directors and
executive officers are sufficient at this time to provide
motivation and to align this groups interests with those
of our stockholders.
Perquisites
Our executive officers participate in the same group insurance
and employee benefit plans as our other salaried employees. At
this time we do not provide special benefits or other
perquisites to our executive officers.
Change of
Control Arrangements
Our 2007 Stock Plan allows our Board to determine the terms and
condition of awards issued thereunder. Our Board has made the
determination that all options issued under our 2007 Stock Plan
will include the provision that in the event of a Change
of Control (as defined in our 2007 Stock Plan), all
unvested shares underlying the option will vest and become
exercisable immediately prior to the consummation of such Change
of Control transaction.
Named
Executive Officers Compensation
Base
Salary
Mr. Larsen is our president and chief executive officer, as
well as a director. At a compensation committee meeting held on
December 31, 2007, Mr. Larsens base salary was
increased for the fiscal year 2008 from $245,000 in 2007 to
$275,000 in 2008. In approving such an increase to
Mr. Larsens base salary for the fiscal year 2008, the
compensation committee conducted the benchmarking analysis
discussed above and acknowledged the past services of
Mr. Larsen in connection with the merger and the increased
responsibilities of Mr. Larsen in performing the duties of
a principal executive officer of a fully-operating public
company following the merger. Relative to the benchmarking
surveys described above, his base salary is above the
75th percentile for early and late stage private companies,
below our key comparable company and between the median and the
75th percentile of our public company peers.
Mr. Larsen, a founder of VirnetX, has driven the
organizations performance, leading it from inception,
through the early
start-up
phase and through several rounds of financing. Mr. Larsen
will be critical to our ability to pursue our licensing strategy
going forward.
Mr. Sliney is our chief financial officer and his base
salary is below the median of early stage private companies,
below the median for late stage private companies and our public
company peers, and below our key comparable company. In
establishing Mr. Slineys base salary, our
compensation committee primarily considered
Mr. Slineys experience in public company work, his
transactional and strategic skills, his level of responsibility,
past contributions to our performance and expected contributions
to our further success.
49
Discretionary
Annual Incentive Bonus
Actual bonus awards for each Named Executive Officer are listed
in Executive Compensation Summary Compensation
Table on page 32 of this report. No bonuses were paid
to Mr. Larsen or Mr. Sliney in the fiscal year 2008.
Long-Term
Incentive Program
In determining the amount of the stock option grants made to
Mr. Larsen and to Mr. Sliney in 2008, our compensation
committee evaluated data derived from the same benchmarking
analysis described above that was used to establish cash
compensation amounts.
In 2008, Mr. Larsen was not granted any options such that
the aggregate of all of his equity incentive shares outstanding
under our 2007 Stock Plan represents a fully diluted percentage
ownership of the Company that was below the median for early
stage private companies, and between the median and the
75th percentile for late stage private companies. In
addition, the Black-Scholes option value of all of his equity
incentive shares outstanding under our 2007 Stock Plan is higher
than our key comparable company and between the median and
75th percentile of our public company peers.
In 2008, Mr. Sliney was not granted any options such that
the aggregate of all of his equity incentive shares outstanding
under our 2007 Stock Plan represents a fully diluted percentage
ownership of the Company that was below the median for early
stage private companies, and at the median for late stage
private companies. In addition, the Black-Scholes option value
of all of his equity incentive shares outstanding under our 2007
Stock Plan is below our key comparable company and between the
median and 75th percentile of our public company peers.
Summary
Compensation Table
The table that follows shows the compensation earned for the
last three (3) fiscal years by our Named Executive
Officers, as defined in Item 407(m) of
Regulation S-K:
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Name & Principal Position
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Year
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($)
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|
($)
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|
($)
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($)(1)
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($)
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($)
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($)(2)
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($)
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Kendall Larsen
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2008
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275,000
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275,000
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|
Chief Executive Officer,
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2007
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245,000
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244,211
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1,015,612
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1,504,823
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President and Director
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2006
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237,039
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7,665
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244,704
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William E. Sliney
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2008
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98,442
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(3)
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98,442
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Chief Financial Officer
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2007
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36,460
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(4)
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15,313
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1,882,146
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1,933,919
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2006
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30,000
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30,000
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(1)
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The amounts in this column reflect
the estimated grant date present value of (1) $4.761 for
the stock options granted to Kendall Larsen during fiscal year
2007, and (2) $4.913 for the stock options granted to
William E. Sliney during fiscal year 2007, which have been
calculated using the Black-Scholes stock option pricing model.
Reference Note 6 Stock Plan in our
Form 10-K
for the period ended December 31, 2007, filed with the SEC
on March 31, 2008, identifies the assumptions made in the
valuation of option awards in accordance with SFAS 123(R).
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(2)
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The amounts in this column reflect
compensation earned by the Named Executive Officer for
consulting services he provided to the Company.
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(3)
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Mr. Slineys annual base
salary was decreased to $43,752 in June 2008 when increases in
our support staff, including the hiring of a corporate
controller, enabled Mr. Sliney to reduce his workload.
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(4)
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Mr. Sliney became our Chief
Financial Officer in October 2007 with an annual base
salary of $175,000. The salary earned by Mr. Sliney in 2007
reflects approximately three (3) months of service as our Chief
Financial Officer.
|
50
2008
Grants of Plan-Based Awards
The following table reflects that no grants of stock options
were made during the fiscal year ended December 31, 2008 to
our Named Executive Officers:
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Grant
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All Other
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Date
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Stock
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Exercise
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Fair
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Estimated Future Payouts
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Estimated Future Payouts
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All Other
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Awards:
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or Base
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Value of
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Under Non-Equity Incentive
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Under Equity Incentive
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Stock
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Number of
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Price of
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Stock or
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Plan Awards
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Plan Awards
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Awards:
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Securities
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Option
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Option
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Grant
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Approval
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Threshold
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Target
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Maximum
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Threshold
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Target
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Maximum
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Number of
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Underlying
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Awards
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Awards
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Name
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Date
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Date
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($)
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($)
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($)
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(#)(1)
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(#)
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(#)(1)
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Shares
|
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Options
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($/share)
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($)(2)
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Kendall Larsen
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n/a
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n/a
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n/a
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n/a
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n/a
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n/a
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n/a
|
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n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Chief Executive Officer, President & Director
|
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William E. Sliney
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n/a
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n/a
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|
n/a
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|
n/a
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n/a
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|
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|
n/a
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|
n/a
|
|
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|
n/a
|
|
|
|
n/a
|
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|
n/a
|
|
Chief Financial Officer
|
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|
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|
(1)
|
|
Our equity incentive plan does not
include thresholds or maximums as defined in Item 402(d) of
Regulation S-K.
|
Outstanding
Equity Awards at 2008 Fiscal Year-End
The following table sets forth, for each of our Named Executive
Officers, the number and exercise price of unexercised options,
and the number and market value of stock awards that have not
vested as of the end of fiscal year 2008:
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|
Equity
|
|
|
|
|
|
|
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|
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|
|
Incentive
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Plan Awards
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
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|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable (#)
|
|
|
Unexercisable (#)
|
|
|
Options (#)
|
|
|
Price ($)
|
|
|
Date
|
|
|
Kendall Larsen
|
|
|
99,290
|
|
|
|
155,545
|
|
|
|
|
|
|
|
6.468
|
|
|
|
12/31/2012
|
(1)
|
Chief Executive Officer, President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Sliney
|
|
|
103,755
|
|
|
|
279,340
|
|
|
|
|
|
|
|
5.88
|
|
|
|
12/30/2017
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As Mr. Larsen is a holder of more than 10% of the
Companys equity, per our equity incentive plan, his
options expire five (5) years from grant. |
Option
Exercises and Stock Vested in Fiscal Year 2008
The following table shows the options exercised and stock vested
held by our Named Executive Officers in the fiscal year 2008:
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|
|
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|
|
|
|
|
|
Options Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Acquired on
|
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|
Value Realized
|
|
|
Acquired on
|
|
|
Value Realized
|
|
Name
|
|
Exercise (#)
|
|
|
on Exercise ($)
|
|
|
Vesting (#)
|
|
|
on Vesting ($)
|
|
|
Kendall Larsen
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Chief Executive Officer, President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Sliney
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Pension
Benefits for Fiscal Year 2008
None. We do not maintain a pension plan as
such term is described in Item 402(h) of
Regulation S-K.
Nonqualified
Deferred Compensation for Fiscal Year 2008
None. We do not maintain a nonqualified
defined contribution or other nonqualified deferred compensation
plan as such term is described in Item 402(i) of
Regulation S-K.
Transactions
with Related Persons
Our Code of Ethics requires each of our directors, employees,
officers, and consultants to disclose any significant interest
in any related party transaction and that interest must be
approved in writing by our legal department. If it is determined
that the transaction is required to be reported under SEC rules,
then the transaction will be subject to the review and approval
by our audit committee of our Board. A copy of our Code of
Ethics is available on our website at www.virnetx.com in the
Corporate Governance link under the
Investors tab.
The charter of our audit committee affirms that one of our audit
committees responsibilities is to review and approve
material related party transactions and related party
transactions that are required to be disclosed in our public
filings. We annually require each of our directors and executive
officers to complete a directors and officers
questionnaire that elicits information about related party
transactions as such term is defined by SEC rules and
regulations. These procedures are intended to determine whether
any such related party transaction impairs the independence of a
director or presents a conflict of interest on the part of a
director, employee, or officer.
The following is a description of each transaction in the last
fiscal year and each currently proposed transaction in which:
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|
|
we have been or are to be a participant;
|
|
|
|
the amount involved exceeds $120,000; and
|
|
|
|
any of our directors, executive officers, holders of more than
5% of our capital stock, or any immediate family member of, or
person sharing the household with, any of these individuals, had
or will have a direct or indirect material interest.
|
Stock
Option Grants
We have granted stock options to our executive officers and
certain of our directors under our 2007 Stock Plan.
In connection with the consummation of the merger between
VirnetX Holding Corporation and VirnetX, we assumed certain
obligations under an Advisory Service Agreement dated
November 6, 2006 by and between VirnetX and MDB Capital
Group LLC, as amended by the terms of that certain Release
Agreement between the same parties, which was executed on
July 5, 2007. MDB Capital Group was a stockholder of
VirnetX prior to the merger and Christopher Marlett, a principal
at MDB Capital Group, is currently one of our stockholders as a
result of the merger. Christopher Marlett, as of
December 31, 2008 beneficially owned approximately 5.14% of
our issued and outstanding shares of common stock. MDB Capital
Groups affiliates include Anthony DiGiandomenico and
Robert Levande, each of whom is one of our existing stockholders
as a result of the merger.
52
Additionally, in connection with the consummation of the merger,
we entered into the following agreements and transactions with
certain of our directors, executive officers and 5% stockholders:
Indemnification
Agreements
We entered into Indemnification Agreements with each person who
became one of VirnetX Holding Corporations directors or
officers in connection with the consummation of the merger,
pursuant to which, among other things, we will indemnify such
directors and officers to the fullest extent permitted by
Delaware law, and provide for advancement of legal expenses
under certain circumstances.
Registration
Rights Agreement
Effective as of July 5, 2007, we entered into a
Registration Rights Agreement with all of the persons who were
issued shares of our common stock and securities convertible
into shares of our common stock in the merger.
Pursuant to the Registration Rights Agreement, commencing six
months after the closing of the merger, the security holders
have a right to request that we register for resale (a) the
shares of common stock issued to such persons in the merger and
(b) the shares of common stock underlying convertible
notes, options and warrants issued to such persons in the
merger. We are required to cause each such registration
statement filed as a result of such requests to be declared
effective under the Securities Act as promptly as possible after
the filing thereof and to keep such registration statement
continuously effective under the Securities Act until the
earlier of (1) the date when all shares included in the
registration statement have been sold; (2) the date that
all shares can be sold pursuant to Rule 144; and
(3) one year from the effective date of such registration
statement.
Additionally, the Registration Rights Agreement provides the
security holders with piggyback registration rights
such that at any time there is not an effective registration
statement covering the common stock described above and we file
a registration statement relating to an offering for our own
account or the account of others under the Securities Act, other
than in connection with any acquisition of any entity or
business or equity securities issuable in connection with stock
options or other employee benefit plans and other than in
connection with this offering, then we are required to send
notice to the security holders of such intended filing at least
20 days prior to filing such registration statement and we
are required to automatically include in such registration
statement all shares of common stock issued in the merger and
all shares of common stock underlying convertible notes, options
and warrants issued in the merger.
Each security holder also has indemnified us, our directors,
officers, agents, and certain other control persons against
damages arising out of or based upon: (1) such security
holders failure to comply with the prospectus delivery
requirements of the Securities Act or (2) such security
holders provision of any untrue or alleged untrue
statement of a material fact to be contained in any registration
statement or prospectus, or arising out of or relating to any
such security holders omission or alleged omission of a
material fact required to be stated therein or necessary to make
the statements contained in such registration statement or
prospectus not misleading.
Lock-Up
Agreements
Effective as of July 5, 2007, we entered into a
lock-up
agreement with certain of the persons who were issued shares of
our common stock in the merger and all persons who exchanged
VirnetX options for VirnetX Holding Corporation options in the
merger, pursuant to which we imposed certain restrictions on the
sale of our common stock or any securities convertible into or
which may be exercised to purchase any shares of our common
stock acquired in connection with the merger for a period of at
least 12 months after the consummation of the merger. That
lock-up
agreement expired on July 5, 2008. In addition, all of our
officers and directors, as well as certain of our stockholders,
entered into a
lock-up
agreement with the underwriter of our December 2007 public
offering, which restricts sales of their shares until
December 31, 2008. Certain of those shares are now no
longer subject to the transfer restrictions of such
underwriters
lock-up
agreement from our December 2007 offering. Only shares
beneficially owned by our directors and officers, which
53
represent 26.16% of our outstanding common stock as of
December 31, 2008, currently remain subject to the
provisions of such underwriters
lock-up
agreement.
Transactions
Between the Company and William E. Sliney
From March 2002 until July 5, 2007, the Company utilized
the office space and equipment of its then officer, William E.
Sliney, at no cost. Management estimates the value thereof to be
immaterial.
Promoters
and Control Persons
Glenn Russell was a founder and owned approximately 60% of the
outstanding shares of VirnetX Holding Corporation immediately
prior to the merger between VirnetX Holding Corporation and
VirnetX. Mr. Russell received no compensation in connection
with the merger between VirnetX and VirnetX Holding Corporation.
Mr. Russells historical compensation from VirnetX
Holding Corporation in his capacity as its Chief Executive
Officer prior to the merger has been disclosed in VirnetX
Holding Corporations reports filed with the SEC under the
Securities Exchange Act of 1934, as amended.
On December 12, 2007, we entered into a Voting Agreement
with the following stockholders that collectively own
4,766,666 shares of our common stock, representing
approximately 13.66% of our 34,899,985 shares outstanding
as of December 31, 2008:
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San Gabriel Fund, LLC
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JMW Fund, LLC
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John P. McGrain
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The John P. McGrain Grantor Retained Annuity Trust u/t/d/
June 25, 2007
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John P. McGrain, SEP IRA
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John P. McGrain, 401K
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The Westhampton Special Situations Fund, LLC
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The Kirby Enterprise Fund, LLC
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Kearney Properties, LLC
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Kearney Holdings, LLC
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Charles F. Kirby, Roth IRA
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Charles F. Kirby
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The Voting Agreement requires each of the above stockholders to
vote all of the shares of our voting stock held by them from
time to time in favor of the directors nominated by our Board of
Directors and in a manner proportional to all the other votes
cast by shares present and voting with respect to any other
matter brought to the stockholders for a vote. This voting
arrangement is an initial and continuing listing requirement for
our common stock to be and remain listed on the American Stock
Exchange.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and
directors, and persons who own more than 10% of a registered
class of our equity securities, to file reports of ownership on
Form 3 and changes in ownership on Form 4 or
Form 5 with the SEC. Such officers, directors, and 10%
stockholders are also
54
required by SEC rules to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review
of the copies of such forms we received, we believe that during
the 2007 fiscal year all Section 16(a) filing requirements
applicable to our officers, directors, and 10% stockholders were
satisfied.
Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of our
common stock as of December 31, 2008 by:
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all persons known to us, based on statements filed by such
persons pursuant to Section 13(d) or 13(g) of the Exchange
Act, to be the beneficial owners of more than 5% of our common
stock and based on the records of U.S. Stock Transfer
Corporation, our transfer agent;
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each director;
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each of our Named Executive Officers in the table under
Executive Compensation Summary Compensation
Table; and
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all current directors and executive officers as a group.
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Except as otherwise noted and subject to applicable community
property laws, the persons named in this table have, to our
knowledge, sole voting and investing power for all of the shares
of common stock held by them.
This table lists applicable percentage ownership based on
34,899,985 shares of common stock outstanding as of
December 31, 2008. Options to purchase shares of our common
stock that are exercisable within 60 days of
December 31, 2008 are deemed to be beneficially owned by
the persons holding these options for the purpose of computing
the number of shares owned by, and percentage ownership of, that
person, but are not treated as outstanding for the purpose of
computing any other persons number of shares owned or
ownership percentage.
55
Except as indicated by footnote, and subject to applicable
community property laws, each person identified in the table
possesses sole voting and investment power with respect to all
capital stock shown to be held by that person. The address of
each executive officer and director, unless indicated otherwise,
is
c/o VirnetX
Holding Corporation, 5615 Scotts Valley Drive, Suite 110,
Scotts Valley, California 95066.
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Number of
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Shares
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Percent
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Beneficially
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of
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Name and Address of Beneficial Owner
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Owned(l)
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Class(2)
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5% or Greater Stockholders:
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Gregory Hugh Bailey
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2,343,342
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(10)
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6.71
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%
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15 Barbery Place, Suite 809
Toronto, Canada
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Kendall Larsen
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8,402,482
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(3)
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24.01
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%
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Robert M. Levande
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2,084,101
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(4)
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5.97
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%
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575 Madison Ave. Suite 1006
New York, NY 10022
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Blue Screen LLC
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1,764,428
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(5)
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5.06
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%
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7663 Fisher Island Drive
Miami, Florida 33109
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Christopher A. Marlett Living Trust
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1,792,766
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(6)
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5.14
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%
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420 Wilshire Boulevard,
Suite 1020
Santa Monica, California 90401
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Directors and Executive Officers:
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Kendall Larsen
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8,402,482
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(3)
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24.01
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%
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Edmund C. Munger
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760,200
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(7)
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2.14
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%
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William E. Sliney
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103,921
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(8)
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*
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Thomas M. OBrien
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25,833
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(9)
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*
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Michael F. Angelo
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67,349
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(9)
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*
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Scott C. Taylor
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25,833
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(9)
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*
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All directors and executive officers as a group
(6 persons):
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9,385,618
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(3)(7)(8)(9)
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26.16
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%
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(1) |
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Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Shares of common stock subject to
options and warrants which are exercisable or convertible at or
within 60 days of December 31, 2008 are deemed
outstanding for computing the percentage of the person holding
such option or warrant but are not deemed outstanding for
computing the percentage of any other person. The indication
herein that shares are beneficially owned is not an admission on
the part of the listed stockholder that he, she or it is or will
be a direct or indirect beneficial owner of those shares. |
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(2) |
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Based upon 34,899,985 shares of common stock issued and
outstanding on December 31, 2008. |
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(3) |
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Includes 99,290 shares issuable pursuant to options
exercisable within 60 days. |
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(4) |
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Includes 1,876,521 shares held by Robert M. Levande, who
has voting and investment power with respect to the
207,580 shares held by the Arthur Brown Trust FBO
Carolyn Brown Levande. |
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(5) |
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Includes 103,790 shares held by Nicholas Lewin directly who
has voting and investment power with respect to the
1,660,638 shares held by Blue Screen LLC. |
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(6) |
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Christopher A. Marlett has voting and investment power with
respect to the 1,792,766 shares held by the Christopher A.
Marlett Living Trust. |
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(7) |
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Includes 691,933 shares issuable pursuant to options
exercisable within 60 days. |
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(8) |
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Includes 103,755 shares issuable pursuant to options
exercisable within 60 days. |
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(9) |
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Includes 25,833 shares issuable pursuant to options
exercisable within 60 days. |
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(10) |
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Includes 2,275,075 shares directly held by Gregory H.
Bailey who has voting and investment power with respect to the
68,267 shares held by Palantir Group, Inc. |
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(*) |
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Less than 1%. |
56
CORPORATE
GOVERNANCE
Our Corporate Governance Guidelines
Our Board of Directors has established guidelines that it
follows in matters of corporate governance. The following is a
summary of those guidelines. A complete copy of the documents
underlying our guidelines is available online at www.virnetx.com
in the Corporate Governance link under the
Investors tab, or in paper form upon request to our
corporate secretary.
Role of
the Board
Our directors are appointed to oversee the actions and results
of our management. They were selected for their educational
background, professional experience, knowledge of our business,
integrity, professional reputation, independence, wisdom and
ability to represent the best interests of our stockholders.
Their responsibilities include:
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providing general oversight of the business;
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approving corporate strategy;
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approving major management initiatives;
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providing oversight of legal and ethical conduct;
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overseeing our management of significant business risks;
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selecting, compensating, and evaluating directors;
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evaluating Board processes and performance; and
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reviewing and implementing recommendations and reports of the
compensation committee on our compensation practices.
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Composition
of the Board of Directors
Mix of
Independent Directors and
Officer-Directors
Our Board has determined that it is beneficial for us and our
stockholders to have a Board with a majority of independent
directors and for our chief executive officer to also be a Board
member. Other officers may, from time to time, be Board members,
but no officer other than the chief executive officer should
expect to be elected to our Board by virtue of his or her office.
Selection
of Director Candidates
Our Board is responsible for selecting candidates for Board
membership and for establishing the criteria to be used in
identifying potential candidates. Our Board delegates the
screening process to the nominating and corporate governance
committee.
Independence
Determinations
Our Board annually determines the independence of directors
based on a review by the directors and the nominating and
corporate governance committee. No director is considered
independent unless our Board has determined that he or she has
no material relationship with the Company, either directly or as
a partner, stockholder, or officer of an organization that has a
material relationship with the Company.
We have adopted the following standards for director
independence in compliance with the American Stock Exchange and
Item 407 of
Regulation S-Ks
corporate governance listing standards:
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no director qualifies as independent if such person
has a relationship which, in the determination of at least a
majority of the Board, would interfere with exercise of
independent judgment in carrying out the responsibilities of a
director;
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57
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a director who is an officer or employee of us or our
subsidiaries, or one whose immediate family member is an
executive officer of us or our subsidiaries, is not
independent until three years after the end of such
employment relationship;
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a director who accepts, or whose immediate family member
accepts, more than $100,000 in compensation from us or any of
our subsidiaries during any period of 12 consecutive months
within the three years preceding the determination of
independence, other than certain permitted payments such as
compensation for Board or Board committee service, payments
arising solely from investments in our securities, compensation
paid to a family member who is a non-executive employee of us or
a subsidiary of ours, or benefits under a tax-qualified
retirement plan is not considered independent;
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a director who is, or who has a family member who is, a partner
in, or a controlling stockholder or an executive officer of, any
organization to which we made, or from which we received,
payments for property or services that exceed 5% of the
recipients consolidated gross revenues for that year, or
$200,000, whichever is more, is not independent
until three years after falling below such threshold;
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a director who is employed, or one whose immediate family member
is employed, as an executive officer of another company where
any of our, or any of our subsidiaries, present executives
serve on that companys compensation committee is not
independent until three years after the end of such
service or employment relationship; and
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a director who is, or who has a family member who is, a current
partner of our independent registered public accounting firm,
Farber Hass Hurley LLP, or was a partner or employee of Farber
Hass Hurley LLP who worked on our audit is not
independent until three years after the end of such
affiliation or employment relationship.
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Our Board has determined that Michael F. Angelo, Thomas M.
OBrien and Scott C. Taylor meet the aforementioned
independence standards. There are no family relationships among
any of our directors or executive officers.
Director
Compensation and Equity Ownership
Our compensation committee annually reviews director
compensation. Any recommendations for changes are made to our
full Board by our compensation committee.
In order to align directors incentives with the creation
of stockholder value, we believe that directors should hold
meaningful equity ownership positions in the Company;
accordingly, a significant portion of overall director
compensation is in the form of equity of the Company.
Board
Meetings and Committees and Annual Meeting Attendance
Our Board held a total of ten meetings and acted by written
consent four times during the calendar year ended
December 31, 2008. Mr. OBrien attended eight out
of the nine Board meetings; otherwise, every director has
attended every Board meeting and the meetings of all committees
to which he is a member. Since June 29, 2007, our Board had
a standing audit committee, compensation committee and
nominating and corporate governance committee. Our audit
committee charter, compensation committee charter, and
nominating and corporate governance committee charter, each as
adopted by the Board, are posted on our website at
www.virnetx.com in the Corporate Governance link
under the Investors tab.
We encourage, but do not require, our Board members to attend
our annual meetings of stockholders. We expect all Board members
to be present at this Annual Meeting.
Stockholders
Communications Process
Any of our stockholders who wish to communicate with our Board,
a committee of our Board, our non-management directors as a
group, or any individual member of our Board, may send
correspondence to our
58
Corporate Secretary at VirnetX Holding Corporation, 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066.
Our Corporate Secretary will compile and submit on a periodic
basis all stockholder correspondence to our entire Board, or, if
and as designated in the communication, to a committee of our
Board, our non-management directors as a group, or an individual
Board member. The independent directors of our Board review and
approve the stockholders communications process
periodically to ensure effective communication with stockholders.
Code of
Ethics
We have adopted a Code of Ethics for all employees and directors
to prohibit conflicts of interest between our employees and the
Company. A copy of our Code of Ethics is available on our
website at
http://www.virnetx.com/
in the Corporate Governance link under the
Investors tab, or by writing to us at VirnetX
Holding Corporation, 5615 Scotts Valley Drive, Suite 110,
Scotts Valley, California 95066, Attention: Investor Relations.
We intend to post on our website any amendment to, or waiver
from, a provision of our Code of Ethics within four
(4) business days following the date of such amendment or
waiver. We do not anticipate any such amendments or waivers.
Committees
of the Board of Directors
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Nominating
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and
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Corporate
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Governance
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Compensation
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Audit
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Director
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Committee
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Committee
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Committee
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Michael F. Angelo
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Chair
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X
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X
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Kendall Larsen
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Edmund C. Munger
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Thomas M. OBrien
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X
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X
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Chair
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Scott C. Taylor
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X
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Chair
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X
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Nominating
and Corporate Governance Committee Matters
Membership
and Independence
Our nominating and corporate governance committee met once
during the fiscal year ended December 31, 2008.
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our nominating and
corporate governance committee. Mr. Angelo is the chairman
of our nominating and corporate governance committee. Our Board
has determined that each of Messrs. Angelo, OBrien
and Taylor meet current SEC and American Stock Exchange
requirements for independence. The nominating and corporate
governance committee is responsible for, among other things:
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assisting our Board in identifying prospective director nominees
and recommending to the Board director nominees for each annual
meeting of stockholders, vacancy or newly created director
position;
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developing and recommending to our Board governance principles
applicable to us, including the Code of Ethics;
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overseeing the evaluation of our Board and management; and
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delegating such of its authority and responsibilities as it
deems proper to members of the committee or a subcommittee.
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59
A more detailed description of our nominating and corporate
governance committees functions can be found in our
nominating and corporate governance committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Stockholder
Recommendations and Nominees
The policy of our nominating and corporate governance committee
is to consider properly submitted recommendations for candidates
to our Board from stockholders. In evaluating such
recommendations, our nominating and corporate governance
committee seeks to achieve a balance of experience, knowledge,
integrity, and capability on our Board and to address the
membership criteria set forth under Director
Qualifications below. Any stockholder recommendations for
consideration by our nominating and corporate governance
committee should include the candidates name, biographical
information, information regarding any relationships between the
candidate and the Company within the last three years, at least
three personal references, a statement of recommendation of the
candidate from the stockholder, a description of Common Stock
beneficially owned by the stockholder, a description of all
arrangements between the candidate and the recommending
stockholder and any other person pursuant to which the candidate
is being recommended, a written indication of the
candidates willingness to serve on our Board, and a
written indication to provide such other information as the
nominating and corporate governance committee may reasonably
request.
Stockholder recommendations to our Board should be sent to our
Corporate Secretary at VirnetX Holding Corporation, 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066.
Director
Qualifications
Our nominating and corporate governance committee evaluates and
recommends candidates for membership on our Board consistent
with criteria established by the committee. Our nominating and
corporate governance committee has not formally established any
specific, minimum qualifications that must be met by each
candidate for our Board or specific qualities or skills that are
necessary for one or more of the members of our Board to
possess. However, our nominating and corporate governance
committee, when considering a potential non-incumbent candidate,
will factor into its determination the following qualities of a
candidate: educational background, professional experience,
including whether the person is a current or former chief
executive officer or chief financial officer of a public company
or the head of a division of a large international organization,
knowledge of our business, integrity, professional reputation,
independence, wisdom and ability to represent the best interests
of our stockholders.
Identification
and Evaluation of Nominees for Directors
Our nominating and corporate governance committee uses a variety
of methods for identifying and evaluating nominees for director.
Our nominating and corporate governance committee regularly
assesses the appropriate size and composition of our Board, the
needs of our Board and the respective committees of our Board
and the qualifications of candidates in light of these needs.
Candidates may come to the attention of the nominating and
corporate governance committee through stockholders, management,
current members of our Board, or search firms. The evaluation of
these candidates may be based solely upon information provided
to the committee or may also include discussions with persons
familiar with the candidate, an interview of the candidate, or
other actions the committee deems appropriate, including the use
of third parties to review candidates.
Audit
Committee Matters
Membership
and Independence
Our audit committee met eight times during the fiscal year ended
December 31, 2008.
60
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our audit committee.
Mr. OBrien is the chairman of our audit committee.
Our Board has determined that Messrs. Angelo, OBrien
and Taylor each satisfy the requirements for independence under
the rules and regulations of the American Stock Exchange and the
SEC. Our Board has also determined that Mr. OBrien
qualifies as an audit committee financial expert as
defined in the SEC rules and satisfies the financial
sophistication requirements of the American Stock Exchange. Our
audit committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended, or the Exchange Act.
Responsibilities
Our audit committees responsibilities include the
following:
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appointment of and approval of compensation for our independent
public accounting firm, including oversight of its independence;
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oversight of our accounting and financial reporting processes;
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oversight of the audits of our financial statements;
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oversight of the effectiveness of our internal control over
financial reporting; and
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preparing the audit committee report that the SEC requires in
our annual proxy statement.
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A more detailed description of our audit committees
functions can be found in our audit committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Compensation
Committee Matters
Membership
and Independence
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our compensation
committee. Mr. Taylor is the chairman of our compensation
committee. Our Board has determined that each member of our
compensation committee meets the requirements for independence
under the rules of the American Stock Exchange, and is a
non-employee director within the meaning of the
Exchange Act, and is an outside director, within the
meaning of the Code.
Scope
of Authority
Our compensation committees responsibilities include the
following:
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exclusive authority for determining our chief executive
officers compensation;
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determining for other executive officers: annual base salary,
annual incentive bonus, including the specific goals and amount,
equity compensation, employment agreements, severance
arrangements and change in control agreements/provisions, and
any other benefits or compensation arrangement, including
delegating its authority on these matters with regard to our
non-officer employees and consultants to appropriate supervisory
personnel;
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evaluating and recommending to our Board compensation plans,
policies, and programs for our chief executive officer and other
executive officers;
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administering our equity incentive plans; and
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preparing the compensation committee report that the SEC
requires in our annual proxy statement.
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Except with respect to determining the chief executive
officers compensation, the Committee may delegate its
authority to a subcommittee of the committee and, to the extent
permitted by applicable law, the
61
committee may delegate to officers or appropriate supervisory
personnel the authority to grant stock awards to non-executive,
non-director
employees.
A more detailed description of our compensation committees
functions can be found in our compensation committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Our
Compensation Committees Processes and
Procedures
Our compensation committees primary processes for
establishing and overseeing executive compensation include:
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Meetings. Our compensation committee acted by
written consent one time during the fiscal year ended
December 31, 2008; and
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Role of executive officers. Our president and
chief executive officer generally attends compensation committee
meetings and sometimes makes recommendations to our compensation
committee regarding the amount and form of the compensation of
the other executive officers and key employees. He is not
present for any of the executive sessions or for any discussion
of his own compensation.
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Directors compensation is established by our Board upon
the recommendation of our directors and our compensation
committee.
Compensation
Committee Interlocks and Insider Participation
None of Messrs. Angelo, OBrien and Taylor, who
comprise our compensation committee, has served as one of our
officers or employees in the past year. Other than our
subsidiaries, no executive officer currently serves, or in the
past year has served, as a member of a board or compensation
committee of another entity where that entitys executive
officer serves on our Board or compensation committee.
62
DESCRIPTION
OF SECURITIES
On a post-split basis, we are authorized to issue an aggregate
of 110,000,000 shares of capital stock, 100,000,000 of
which are shares of common stock, par value $0.0001 per share,
and 10,000,000 of which are shares of preferred stock, par value
$0.0001 per share. As of December 31, 2008, on a post-split
basis, 34,899,985 shares of our common stock were issued
and outstanding and no shares of our preferred stock were issued
and outstanding.
Common
Stock
All outstanding shares of our common stock are of the same class
and have equal rights and attributes.
Voting. The holders of our common stock are
entitled to one vote per share on all matters submitted to a
vote of stockholders. Our common stock does not have cumulative
voting rights. Persons who hold a majority of the outstanding
shares of our common stock entitled to vote on the election of
directors can elect all of the directors who are eligible for
election.
Dividends. Subject to the preferential
dividend rights and consent rights of any series of preferred
stock that we may from time to time designate, holders of our
common stock are entitled to share equally in dividends, if any,
as may be declared from time to time by our Board of Directors
out of funds legally available.
Liquidation and dissolution. In the event of
our liquidation, dissolution or winding up, subject to the
preferential liquidation rights of any series of preferred stock
that we may from time to time designate, the holders of our
common stock are entitled to share ratably in all of our assets
remaining after payment of all liabilities and preferential
liquidation rights.
Preferred
Stock
Our Certificate of Incorporation authorizes the issuance of
shares of preferred stock with designations, rights and
preferences determined from time to time by our Board of
Directors. Accordingly, our Board of Directors is empowered,
without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting, or other rights which
could adversely affect the voting power or other rights of the
holders of the common stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in
control of the Company.
The descriptions of our common stock and preferred stock above
are only summaries and are qualified in their entirety by the
provisions of our Certificate of Incorporation and By-Laws,
copies of which are attached or referenced as exhibits to the
registration statement of which this prospectus forms a part.
Warrants
Issued in Previous Securities Offerings
On a post-split basis, warrants for the issuance of
266,667 shares of our common stock were issued in July 2007
and exercisable at $0.75 per share. All of these warrants were
net exercised by the warrant holders on January 21, 2008
and March 26, 2008. The net aggregate shares issued in the
amount of 232,771 are issued and outstanding.
In addition, we issued warrants to purchase 300,000 shares
of our common stock at $4.80 per share to the underwriter of our
December 2007 stock issuance. Those warrants are first
exercisable in 2008 and expire in 2012. These warrants provide
for anti-dilution protection in the event of stock splits and
dividends.
Warrants
to be Issued as Part of this Offering
We are offering three types of warrants in this offering:
warrants to purchase 1,250,000 shares of our common stock
at an exercise price of $2.00 per share; warrants to purchase
1,250,000 shares of our common stock at an exercise price
of $3.00 per share; and warrants to purchase
1,250,000 shares of our common stock at an exercise price
of $4.00 per share. We refer to the three types of warrants,
collectively, as the warrants. The warrants will be issued in
registered form under a warrant agency agreement between
Corporate Stock Transfer, Inc., as warrant agent, and us. Each
type of warrant issued pursuant to this offering is an exhibit
to
63
the warrant agency agreement. You should review a copy of the
warrant agency agreement, which has been filed as an exhibit to
the registration statement of which this prospectus is a part,
for a complete description of the terms and conditions
applicable to the warrants. The following is a brief summary of
the warrants and is subject in all respects to the provisions
contained in the warrants.
Each warrant represents the right to purchase 0.5 additional
shares of our common stock at an exercise price equal to either
$2.00, $3.00, or $4.00, subject to adjustment as described
below, and depending on the particular warrant. Each warrant may
be exercised on or after the applicable closing date of this
offering through and including the
18-month
anniversary of the first closing date. The warrants may be
exercised by surrendering to the warrant agent the warrant
certificate evidencing the warrants to be exercised with the
accompanying exercise notice, appropriately completed, duly
signed and delivered, together with cash payment of the exercise
price.
Upon surrender of the warrant certificate, with the exercise
notice appropriately completed and duly signed and cash payment
of the exercise price, on and subject to the terms and
conditions of the warrant, we will deliver or cause to be
delivered, to or upon the written order of such holder, the
number of whole shares of common stock to which the holder is
entitled, which shares may be delivered in book-entry form. If
an effective registration statement covering the shares issuable
upon exercise of the warrants is not available at the time of
exercise, a holder may exercise the warrants on a cashless
basis, in which case the number of shares issued to the holder
shall be calculated as set forth in the warrant. If less than
all of the warrants evidenced by a warrant certificate are to be
exercised, a new warrant certificate will be issued for the
remaining number of warrants.
Holders of warrants will be able to exercise their warrants only
if a registration statement relating to the shares of common
stock underlying the warrants is then in effect, or the exercise
of such warrants is exempt from the registration requirements of
the Securities Act. A holder of a warrant also will be able to
exercise warrants only if the shares of common stock underlying
the warrant are qualified for sale or are exempt from
qualification under the applicable securities or blue sky laws
of the states in which such holder (or other persons to whom it
is proposed that shares be issued on exercise of the warrants)
reside.
All warrants will include a company call feature that will give
the company the right to require the holder of the warrant to
exercise the warrant when the Companys average closing
stock price on the American Stock Exchange, or any successor
national securities exchange thereto, equals or exceeds two
times the applicable warrants purchase price on any five
consecutive trading days.
The exercise price and the number of shares underlying the
warrants are subject to appropriate adjustment in the event of
stock splits, stock dividends on our common stock, stock
combinations or similar events affecting our common stock. In
addition, in the event we consummate any merger, consolidation,
sale or other reorganization event in which our common stock is
converted into or exchanged for securities, cash or other
property or we consummate a sale of substantially all of our
assets, then following such event, the holders of the warrants
will be entitled to receive upon exercise of the warrants the
kind and amount of securities, cash or other property which the
holders would have received had they exercised the warrants
immediately prior to such reorganization event.
No fractional shares of common stock will be issued in
connection with the exercise of a warrant. In lieu of fractional
shares, we will round up such fractional interest to the next
whole share. A warrant may be transferred by a holder without
our consent, upon surrender of the warrant to us, properly
endorsed (by the holder executing an assignment in the form
attached to the warrant). The warrants will not be listed on any
securities exchange or automated quotation system and we do not
intend to arrange for any exchange or quotation system to list
or quote the warrants. The shares issuable upon exercise of the
warrants will be listed on the American Stock Exchange.
64
Anti-Takeover
Effects of Delaware Law, our Certificate of Incorporation and
our By-Laws
We have a number of protective provisions that could delay,
discourage or prevent a third party from acquiring the company
without the approval of our Board of Directors. Our protective
provisions include:
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A staggered Board of Directors: This means
that only one or two directors (since we have a five-person
Board of Directors) will be up for election at any given annual
meeting. This has the effect of delaying the ability of
stockholders to effect a change in control of the Board of
Directors since it will take two annual meetings to effectively
replace at least three directors which represents a majority of
the Board of Directors;
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Blank check preferred stock: Our Board of
Directors has the authority to establish the rights, preferences
and privileges of our 10,000,000 authorized but unissued shares
of preferred stock. Therefore, this stock may be issued at the
discretion of our Board of Directors with preferences over your
shares of common stock in a manner that is materially dilutive
to existing stockholders. In addition, blank check preferred
stock can be used to create a poison pill which is
designed to deter a hostile bidder from buying a controlling
interest in our stock without the approval of our Board of
Directors. We have not adopted such a poison pill,
but our Board of Directors will have the ability to do so in the
future very rapidly and without stockholder approval;
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Advance notice requirements for director nominations and for
new business to be brought up at stockholder
meetings: Stockholders wishing to submit director
nominations or raise matters to a vote of the stockholders must
provide notice to us within very specific date windows in order
to have the matter voted on at the meeting. This has the effect
of giving our Board of Directors and management more time to
react to stockholder proposals generally and could also have the
effect of delaying a stockholder proposal to a subsequent
meeting to the extent such proposal is not raised in a timely
manner for an upcoming meeting;
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Elimination of stockholder actions by written
consent: This has the effect of eliminating the
ability of a stockholder or a group of stockholders representing
a majority of the outstanding shares to take actions rapidly and
without prior notice to our Board of Directors and management or
to the minority stockholders. Along with the advance notice
requirements described above, this provision also gives our
Board of Directors and management more time to react to proposed
stockholder actions;
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Super majority requirement for stockholder amendments to the
By-laws: Our By-laws may be altered or amended or
new By-laws adopted by the affirmative vote of at least
662/3%
of the outstanding shares. This has the effect of requiring a
substantially greater vote of the stockholders to approve any
changes to our By-laws; and
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Elimination of the ability of stockholders to call a special
meeting of the stockholders: Only the Board of
Directors or management can call special meetings of the
stockholders. This could mean that stockholders, even those who
represent a significant block of shares, may need to wait for
the annual meeting before nominating directors or raising other
business proposals to be voted on by the stockholders.
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Transfer
Agent, Registrar and Warrant Agent
The transfer agent and registrar for our common stock and
warrant agent for our warrants sold in this offering is
Corporate Stock Transfer, Inc. of Denver, Colorado.
65
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock was previously traded in the over-the-counter
market on the Nasdaq OTC Bulletin Board under the symbols
VNXH and prior to that PASW. On
December 26, 2007, our common stock began trading on the
AMEX under the symbol VHC. The following table shows
the price range of our common stock, as reported on the OTC
Bulletin Board and on the American Stock Exchange for each
quarter ended during the last two fiscal years and the first
three quarters of fiscal 2008 on a post-split basis.
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Quarter Ended
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High
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Low
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3/31/06
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$
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0.60
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$
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0.36
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6/30/06
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$
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0.53
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$
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0.21
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9/30/06
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$
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0.50
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$
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0.30
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12/31/06
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$
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0.90
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$
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0.36
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3/31/07
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$
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5.97
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$
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0.63
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6/30/07
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$
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5.10
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$
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3.36
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9/30/07
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$
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5.10
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$
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3.96
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12/31/07
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$
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6.75
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$
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4.08
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3/31/08
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$
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6.95
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$
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4.26
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6/30/08
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$
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7.06
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$
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3.50
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9/30/08
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$
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7.06
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$
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1.26
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12/31/08
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$
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2.85
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$
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0.89
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Holders
As of December 31, 2008, there were 96 holders of record of
our common stock.
Dividends
We have not paid any cash dividends on our common stock, and do
not anticipate paying cash dividends in the foreseeable future.
Our current policy is to retain earnings, if any, to fund
operations, and the development and growth of our business. Any
future determination to pay cash dividends will be at the
discretion of our Board of Directors and will be dependent upon
our financial condition, operation results, capital
requirements, applicable contractual restrictions, restrictions
in our organizational documents, and any other factors that our
Board of Directors deems relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
On April 17, 1998, when we operated under the name PASW,
Inc., we adopted an equity incentive program. Under this
program, we may grant incentive stock options, non-statutory
stock options, stock appreciation rights, stock bonuses and
rights to acquire restricted stock to employees, directors and
consultants (except for incentive stock options which may only
be granted to employees). The number of shares of common stock
initially reserved for issuance under this program was
150,580 shares post-split. As of September 30, 2008,
there were no outstanding options or rights under this program
and we dont intend to grant any equity incentives in the
future under this plan.
In connection with the merger between VirnetX Holding
Corporation and VirnetX, our Board of Directors approved our
adoption of the VirnetX 2005 Stock Plan, as amended, to cover
grants of stock options and restricted stock units to our
employees and consultants. Our Board of Directors renamed this
stock plan the VirnetX 2007 Stock Plan. The total number of
shares of our common stock reserved for issuance under the
VirnetX 2007 Stock Plan is 11,624,469, of which as of
October 31, 2007, there were 4,028,418 shares
remaining available for future grants. Our stockholders approved
the VirnetX 2007 Stock Plan at our 2008 annual
stockholders meeting.
66
LEGAL
PROCEEDINGS
We believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft
on February 15, 2007 by filing a complaint in the United
States District Court of the Eastern District of Texas, Tyler
Division. Pursuant to the complaint, we allege that Microsoft
infringes two of our U.S. patents: U.S. Patent
No. 6,502,135 B1, entitled Agile Network Protocol for
Secure Communications with Assured System Availability,
and U.S. Patent No. 6,839,759 B2, entitled
Method for Establishing Secure Communication Link Between
Computers of Virtual Private Network Without User Entering Any
Cryptographic Information. On April 5, 2007, we filed
an amended complaint specifying certain accused products at
issue and alleging infringement of a third, recently issued
U.S. patent: U.S. Patent No. 7,188,180 B2,
entitled Method for Establishing Secure Communication Link
Between Computers of Virtual Private Network. We are
seeking both damages, in an amount subject to proof at trial,
and injunctive relief. Microsoft answered the amended complaint
and asserted counterclaims against us on May 4, 2007.
Microsoft counterclaimed for declarations that the three patents
are not infringed, are invalid and are unenforceable. Microsoft
seeks an award of its attorneys fees and costs. We filed a
reply to Microsofts counterclaims on May 24, 2007.
Discovery has begun, a Markman hearing on claim construction is
scheduled for February 2009, and the trial is scheduled to begin
on October 12, 2009. We have served our infringement
contentions directed to certain of Microsofts operating
system and unified messaging and collaboration applications. On
March 31, 2008, Microsoft filed a Motion to Dismiss for
lack of standing, which was denied by the court pursuant to an
order dated June 3, 2008. Also pursuant to that court
decision, on June 10, 2008, SAIC joined us in our lawsuit
as a plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
Except for those filing that are under seal because
they contain confidential information, filings made by the
parties to the United States District Court of the Eastern
District of Texas, Tyler Division in connection with this
lawsuit are publicly available, after registration and payment
of a fee, on the Public Access to Court Electronic Records, or
PACER, website. In order to review such filings made in
connection with this lawsuit, please follow the following
instructions:
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Go to www.pacer.uscourts.gov
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Click Register for PACER and register
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On PACER Web Links page, scroll down and click Texas
Eastern District Court
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Click Court Information
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Click Reports at top of page
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Click Docket Sheet
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Enter 6:07-cv-80 in case number box
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Click Run Report
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Notwithstanding anything to the contrary set forth in any of
the Companys filings under the Securities Act of 1933 or
the Securities Exchange Act of 1934 that might incorporate
future filings, including this registration statement, of which
this prospectus forms a part, in whole or in part, the
information set forth on the Public Access to Court Electronic
Records, or PACER, website shall not be deemed to be a part of
or incorporated by reference into any such filings. The Company
does not warrant the accuracy or completeness of the PACER
website, or the adequacy of the PACER website and expressly
disclaims liability for errors or omissions on such website.
Because we have determined that Microsofts alleged
unauthorized use of our patents would cause us severe economic
harm and the failure to cause Microsoft to discontinue its use
of such patents could result in
67
the termination of our business, we have dedicated a significant
portion of our economic resources, to date, to the prosecution
of the Microsoft litigation and expect to continue to do so for
the foreseeable future.
Although we believe Microsoft infringes three of our patents and
we intend to vigorously prosecute this case, at this stage of
the litigation the outcome cannot be predicted with any degree
of reasonable certainty. Additionally, the Microsoft litigation
will be costly and time-consuming, and we can provide no
assurance that we will obtain a judgment against Microsoft for
damages
and/or
injunctive relief. Should the District Court issue a judgment in
favor of Microsoft, and in connection with such judgment
determine that we had acted in bad faith or with fraudulent
intent, or we were otherwise found to have exhibited inequitable
conduct, the Court could award attorney fees to Microsoft, which
would be payable by us.
In the near term, we will dedicate significant time and
resources to the Microsoft litigation. The risks associated with
such dedication of time and resources are set forth in the
Risk Factors section of this prospectus.
One or more potential intellectual property infringement claims
may also be available to us against certain other companies who
have the resources to defend against any such claims. Although
we believe these potential claims are worth pursuing, commencing
a lawsuit can be expensive and time-consuming, and there is no
assurance that we will prevail on such potential claims. In
addition, bringing a lawsuit may lead to potential counterclaims
which may preclude our ability to commercialize our initial
products, which are currently in development.
Currently, we are not a party to any other pending legal
proceedings, and are not aware of any proceeding threatened or
contemplated against us by any governmental authority or other
party.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
including attorneys fees, judgments, fines and amounts
paid in settlement in connection with various actions, suits or
proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the right of the
corporation, a derivative action, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to
any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard
is applicable in the case of derivative actions, except that
indemnification only extends to expenses including
attorneys fees incurred in connection with the defense or
settlement of such actions, and the statute requires court
approval before there can be any indemnification where the
person seeking indemnification has been found liable to the
corporation. The statute provides that it is not exclusive of
other indemnification that may be granted by a
corporations certificate of incorporation, bylaws,
agreement, a vote of stockholders or disinterested directors or
otherwise.
Our Certificate of Incorporation provides that we will indemnify
and hold harmless, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as
amended from time to time, each person that such section grants
us the power to indemnify.
The Delaware General Corporation Law permits a corporation to
provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability for:
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any breach of the directors duty of loyalty to the
corporation or its stockholders;
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
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any transaction from which the director derived an improper
personal benefit.
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Our Certificate of Incorporation provides that, to the fullest
extent permitted by applicable law, none of our directors will
be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director. Any repeal
or modification of this provision will be prospective only and
will not adversely affect any limitation, right or protection of
a director of our company existing at the time of such repeal or
modification.
68
UNDERWRITING
Subject to the terms and conditions of an underwriting
agreement, Gilford Securities Incorporated has agreed to
purchase 2,500,000 shares of common stock, warrants to
purchase 1,250,000 shares at an exercise price of $2.00 per
share, warrants to purchase 1,250,000 shares at an exercise
price of $3.00 per share and warrants to purchase
1,250,000 shares at an exercise price of $4.00 per share
from us. The underwriting agreement will provide that our
underwriter is committed to purchase all shares and associated
warrants offered in this offering, other than those covered by
the over-allotment option described below. In the underwriting
agreement, our underwriters obligations are subject to
approval of certain legal matters by their counsel, including,
without limitation, the authorization and validity of the
securities offered hereby, and of various other customary
conditions, representations and warranties contained in the
underwriting agreement, such as receipt by our underwriter of
officers certificates and legal opinions of our counsel.
The shares of common stock (including the shares underlying the
associated warrants) sold in this offering will be listed on the
American Stock Exchange, subject to notice of issuance. We do
not intend to apply for listing of the warrants offered in this
offering on any securities exchange.
Commissions
and Discounts
Our underwriter has advised us that it proposes to offer the
shares and associated warrants directly to the public at the
price set forth on the cover page of this prospectus, and to
certain dealers that are members of the Financial Industry
Regulatory Authority, Inc., or FINRA, at such price less a
concession not in excess of $ per
share and associated warrants. Our underwriter may allow, and
the selected dealers may reallow, a concession not in excess of
$ per share and associated
warrants to certain brokers and dealers. After the offering, the
offering price and concessions and discounts to brokers and
dealers and other selling terms may from time to time be changed
by our underwriter.
We have agreed to pay our underwriter a cash payment of 7% of
the aggregate public offering price of the shares and associated
warrants offered (including any shares and associated warrants
offered upon exercise of the over-allotment option). We have
agreed to pay our underwriter up to $35,000 as a reimbursement
for our underwriters travel, due diligence and other road
show expenses and expenses incurred by the underwriters
counsel. In addition, we have paid approximately $186,000 in
fees and expenses of our underwriters outside legal
counsel for services performed as placement agents counsel
for a best-efforts placement of equity securities by us that we
did not pursue.
The following table sets forth the public offering price and
underwriting discount to be paid by us to our underwriter and
the proceeds, before expenses, to us. The underwriting agreement
between the underwriter and us has been filed as an exhibit to
the registration statement filed with the SEC in connection with
this offering. This information assumes either no exercise or
full exercise by our underwriter of its over-allotment option.
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Per Share and
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Associated
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Without
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With
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Warrants
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Option(1)
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Option
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Public offering price
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$
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$
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$
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Discount
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$
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$
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$
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Proceeds before expenses(2)
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$
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$
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$
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We have granted our underwriter an option, exercisable for
45 days after the date of this prospectus, to purchase a
number of shares of common stock and associated warrants equal
to 15% of the number of shares and associated warrants sold in
this offering by us solely to cover over-allotments, if any, at
the same price as the initial shares and associated warrants
offered. |
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(2) |
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The offering expenses are estimated to be $1,034,196. |
69
Underwriter
Warrants
In addition, we have agreed pursuant to the terms and conditions
of an underwriters warrant agreement to issue to our
underwriter at the closing of this offering, for nominal
consideration, warrants to purchase 250,000 shares of common
stock (representing a number of shares of common stock equal to
10% of the number of shares sold in this offering), exclusive of
the over-allotment option. These warrants will be exercisable
for a four year period commencing on the first anniversary of
the effective date of the registration statement of which this
prospectus forms a part at an exercise price equal to 120% of
the price of our common stock offered by this prospectus, or
$ per share. These warrants will
be restricted from sale, transfer, assignment or hypothecation
for a period of one year from the closing of this offering by
our underwriter, except to officers of our underwriter and
broker-dealers participating in this offering and their bona
fide officers and partners, by operation of law or by reason of
our reorganization. The FINRA views these warrants as
underwriting compensation and requires that the warrants be
locked up for 180 days following the effectiveness of the
registration statement of which this prospectus forms a part
pursuant to FINRA Conduct Rule 2710 (g)(1).
Our underwriter has been granted certain demand and piggyback
registration rights under these warrants, which rights will
expire on the fifth and seventh anniversaries, respectively, of
the effective date of the registration statement of which this
prospectus is a part.
These warrants contain provisions for appropriate adjustment in
the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar
transaction. The warrants do not entitle our underwriter or a
permissible transferee to any rights as a shareholder until the
warrants are exercised and shares of our common stock are
purchased pursuant to the exercise of the warrants.
These warrants and the shares of our common stock issuable upon
their exercise may not be offered for sale except in compliance
with the applicable provisions of the Securities Act of 1933, as
amended. We are registering the shares of our common stock
issuable upon exercise of the warrants in the registration
statement of which this prospectus forms a part.
Electronic
Distribution; Directed Share Program
Our underwriter has advised us that it will not engage in any
electronic offer, sale or distribution of our shares. Neither we
nor our underwriter will use any third party to host or provide
access to our preliminary prospectus on the Internet.
We will not have a directed share program for our employees or
any others.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit our underwriter from bidding for and purchasing our common
stock. In connection with this offering, however, our
underwriter may engage in stabilizing transactions,
over-allotment transactions, covering transactions and penalty
bids in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended.
|
|
|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
|
|
Over-allotment involves sales by our underwriter of shares and
associated warrants in excess of the number of shares and
associated warrants our underwriter is obligated to purchase,
which creates a short position. The short position may be either
a covered short position or a naked short position. In a covered
short position, the number of shares and associated warrants
over-allotted by our underwriter is not greater than the number
of shares and associated warrants that it may purchase in the
over-allotment option. In a naked short position, the number of
shares and associated warrants involved is greater than the
number of shares and associated warrants in the over-allotment
option. Our underwriter may close out any covered short position
by either exercising its over-allotment option or purchasing
shares in the open market.
|
70
|
|
|
|
|
Covering transactions involve the purchase of common stock in
the open market after the distribution has been completed in
order to cover short positions. In determining the source of
shares to close out the short position, our underwriter will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which it
may purchase shares through the over-allotment option. If our
underwriter sells more shares than could be covered by the
over-allotment option (a naked short position) the position can
only be closed out by buying shares in the open market. A naked
short position is more likely to be created if our underwriter
is concerned that there could be downward pressure on the price
of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
|
|
|
|
Penalty bids permit our underwriter to reclaim a selling
concession from a selected dealer when the common stock
originally sold by the selected dealer is purchased in a
stabilizing covering transaction to cover short positions.
|
These stabilizing transactions, covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our common stock or preventing or retarding a
decline in the market price of our common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. Neither we nor our
underwriter makes any prediction or any representation as to the
direction or magnitude of any effect that the transactions
described above may have on the price of our common stock.
Neither we nor our underwriter makes any representation that our
underwriter will engage in these transactions. These
transactions may be effected on the American Stock Exchange or
otherwise and, if commenced, may be discontinued without notice
at any time.
Lock-Up
Arrangements
We and each of our executive officers and directors have agreed
to lock-up
provisions regarding future transfers or sales of our equity
securities for a period of 90 days after this offering,
subject to extension in certain circumstances, as described in
our agreement with the underwriter.
Our officers and directors who beneficially own
9,130,097 shares of common stock, including
716,956 shares issuable upon exercise of stock options,
have agreed with our underwriter not to sell their shares of
common stock for 90 days from the closing of this offering
without the written consent of our underwriter. Following the
expiration of the
lock-up
agreement with our underwriter, shares of our common stock held
beneficially by our officers and directors will remain subject
to holding period restrictions on sale or other transfer under
Rule 144 of the Securities Act.
Our underwriter has no present intention to waive or shorten the
lock-up
period. The granting of any waiver of release would be
conditioned, in the judgment of our underwriter, on such sale
not materially adversely impacting the prevailing trading market
for our common stock on the American Stock Exchange.
Specifically, factors such as average trading volume, recent
price trends and the need for additional public float in the
market for our common stock would be considered in evaluating
such a request to waive or shorten the lockup period.
Indemnification
We have agreed to indemnify our underwriter and its controlling
persons against specified liabilities, including liabilities
under the Securities Act or to contribute to payments that our
underwriter may be required to make for such liabilities.
However, we have been advised that in the opinion of the SEC,
indemnification for liabilities arising under the Securities Act
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
LEGAL
MATTERS
The validity of the offered securities will be passed upon for
us by Orrick, Herrington & Sutcliffe LLP, Menlo Park,
California. Lowell Ness, a partner of Orrick,
Herrington & Sutcliffe LLP, is our Secretary. As of
71
the completion of this offering, Orrick, Herrington &
Sutcliffe LLP and partners in that firm beneficially own an
aggregate of 124,548 shares of our common stock. Certain legal
matters will be passed upon for the underwriter by DLA Piper LLP
(US), East Palo Alto, California and New York, New York.
EXPERTS
The consolidated financial statements of VirnetX Holding
Corporation as of and for the periods therein indicated included
in the prospectus have been audited by the independent
registered public accounting firm of Farber Hass Hurley LLP, to
the extent and for the periods set forth in their report
appearing in this prospectus, and are included in reliance upon
such report given upon the authority of Farber Hass Hurley LLP
as experts in auditing and accounting. The financial statements
of VirnetX, Inc. as of December 31, 2006 and 2005 and for
the year ended December 31, 2006 and the period from
August 1, 2005 (date of inception) to December 31,
2005 included in the prospectus have been included in reliance
upon such report given upon the authority of Burr,
Pilger & Mayer LLP as experts in auditing and
accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1
with the SEC of which this prospectus is a part under the
Securities Act with respect to the offered securities. This
prospectus does not contain all of the information included in
the registration statement, and statements contained in this
prospectus concerning the provisions of any document are not
necessarily complete. For further information about us and the
offered securities covered by this prospectus, you should read
the registration statement including its exhibits.
COMMISSION
POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and
their respective controlling persons, or otherwise, we have been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
PROVISION
FOR INDEMNIFICATION
Delaware
General Corporation Law
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed
actions, suits or proceedings in which such person is made a
party by reason of such person being or having been a director,
officer, employee or agent to the company. The Delaware General
Corporation Law provides that Section 145 is not exclusive
of other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability for any breach of the directors duty
of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, for unlawful payments
of dividends or unlawful stock repurchases, redemptions or other
distributions or for any transaction from which the director
derived an improper personal benefit.
72
Certificate
of Incorporation
Our Certificate of Incorporation provides that the personal
liability of the directors of the company shall be eliminated to
the fullest extent permitted by the provisions of
Section 102(b)(7) of the Delaware General Corporation Law,
as the same may be amended and supplemented.
Our Certificate of Incorporation provides that the company
shall, to the fullest extent permitted by the provisions of
Section 145 of the Delaware General Corporation Law, as the
same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section
from and against any and all of the expenses, liabilities or
other matters referred to in or covered by said section, and the
indemnification provided for therein shall not be deemed
exclusive of any other rights to which those indemnified may be
entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators
of such a person.
Indemnification
Agreements
We have also entered into indemnification agreements with our
directors and officers. The indemnification agreements provide
indemnification to our directors and officers under certain
circumstances for acts or omissions which may not be covered by
directors and officers liability insurance.
Liability
Insurance
We have also obtained directors and officers
liability insurance, which insures against liabilities that our
directors or officers may incur in such capacities.
73
FINANCIAL
STATEMENTS
Financial
Statements Index
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Page
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-8
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F-22
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F-23
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F-24
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|
F-25
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|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
VirnetX Holding Corporation
We have audited the accompanying consolidated balance sheet of
VirnetX Holding Corporation (the Company; a
development stage enterprise) as of December 31, 2007, and
the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for the year
ended December 31, 2007 and the period from August 2,
2005 (date of inception) to December 31, 2007. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were
we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company as of
December 31, 2007, and the results of their operations and
their cash flows for the year ended December 31, 2007 and
the period from August 2, 2005 (date of inception) to
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Farber
Hass Hurley LLP
Granada Hills, California
March 31, 2008
F-2
REPORT OF
INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
VirnetX, Inc.
We have audited the accompanying balance sheet of VirnetX, Inc.,
(a development stage enterprise) as of December 31, 2006
and the related statements of operations, stockholders
equity (deficit), and cash flows for the year ended
December 31, 2006 and the period from August 2, 2005
(date of inception) to December 31, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America (United
States) and in accordance with the auditing standards of the
Public Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amount and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of VirnetX, Inc., as of December 31, 2006, and the results
of its operations and cash flows for the year ended
December 31, 2006 and for the period from August 2,
2005 (date of inception) to December 31, 2005, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Burr,
Pilger & Mayer LLP
Palo Alto, CA
April 30, 2007, except for the
effects of the
1-for-3
reverse
stock split discussed in Note 1
as to which the date is March 31, 2008.
F-3
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,589,447
|
|
|
$
|
139,997
|
|
Accounts receivable
|
|
|
5,860
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
399,201
|
|
|
|
26,945
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,994,508
|
|
|
|
166,942
|
|
Property and equipment, net
|
|
|
32,658
|
|
|
|
27,087
|
|
Intangible and other assets
|
|
|
252,000
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,279,166
|
|
|
$
|
195,123
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
531,790
|
|
|
$
|
87,386
|
|
Current portion of long-term obligation
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
579,790
|
|
|
|
87,386
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation, net of current portion
|
|
|
204,000
|
|
|
|
|
|
Commitments and contingencies:
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per share
|
|
|
|
|
|
|
|
|
Authorized: 10,000,000 shares and 12,285,715, shares at
December 31, 2007 and December 31, 2006, respectively
|
|
|
|
|
|
|
|
|
Issued and outstanding: 0 shares and 1,404,000 shares,
at December 31, 2007 and December 31, 2006,
respectively Liquidation preference: $0 and $1,404,000, at
December 31, 2007 and December 31, 2006, respectively
|
|
|
|
|
|
|
1,377,625
|
|
Common stock, par value $0.0001 per share
|
|
|
|
|
|
|
|
|
Authorized: 100,000,000 shares and 20,000,000 shares,
at December 31, 2007 and December 31, 2006,
respectively
|
|
|
|
|
|
|
|
|
Issued and outstanding: 34,667,214 shares and
17,582,009 shares, at December 31, 2007 and
December 31, 2006, respectively
|
|
|
3,467
|
|
|
|
1,758
|
|
Additional paid-in capital
|
|
|
19,467,890
|
|
|
|
1,012,321
|
|
Due from stockholder
|
|
|
|
|
|
|
(150
|
)
|
Deficit accumulated during the development stage
|
|
|
(10,975,981
|
)
|
|
|
(2,283,817
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
8,495,376
|
|
|
|
107,737
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
9,279,166
|
|
|
$
|
195,123
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Cumulative from
|
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
August 2, 2005
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Revenue Royalties
|
|
$
|
74,866
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,866
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
684,316
|
|
|
|
554,187
|
|
|
|
56,000
|
|
|
|
1,294,503
|
|
Selling, general and administrative
|
|
|
8,040,894
|
|
|
|
853,488
|
|
|
|
826,478
|
|
|
|
9,720,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,725,210
|
|
|
|
1,407,675
|
|
|
|
882,478
|
|
|
|
11,015,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,650,344
|
)
|
|
|
(1,407,675
|
)
|
|
|
(882,478
|
)
|
|
|
(10,940,497
|
)
|
Interest and other income (expense), net
|
|
|
(41,820
|
)
|
|
|
6,336
|
|
|
|
|
|
|
|
(35,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,692,164
|
)
|
|
$
|
(1,401,339
|
)
|
|
$
|
(882,478
|
)
|
|
$
|
(10,975,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(.36
|
)
|
|
$
|
(.08
|
)
|
|
$
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
24,312,287
|
|
|
|
17,087,462
|
|
|
|
15,217,092
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
During
|
|
|
Total
|
|
|
|
Series A Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Due from
|
|
|
Development
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholder
|
|
|
Stage
|
|
|
Equity (Deficit)
|
|
|
Balance at inception (August 2, 2005)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Common stock issued to founders
|
|
|
|
|
|
|
|
|
|
|
13,285,107
|
|
|
|
1,329
|
|
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Proceeds from issuance of restricted stock units to employees at
$0.0001 per share in October 2005
|
|
|
|
|
|
|
|
|
|
|
3,321,277
|
|
|
|
332
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Stock-based compensation from restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799,920
|
|
|
|
|
|
|
|
|
|
|
|
799,920
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(882,478
|
)
|
|
|
(882,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
16,606,384
|
|
|
|
1,661
|
|
|
|
798,539
|
|
|
|
|
|
|
|
(882,478
|
)
|
|
|
(82,278
|
)
|
Proceeds from issuance of preferred stock at $1.00 per share in
February 2006, net of issuance cost of $26,375
|
|
|
1,404,000
|
|
|
|
1,377,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377,625
|
|
Proceeds from issuance of restricted stock units to employees at
$0.01 per share in March and October 2006
|
|
|
|
|
|
|
|
|
|
|
975,625
|
|
|
|
97
|
|
|
|
1,953
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
1,900
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,210
|
|
|
|
|
|
|
|
|
|
|
|
130,210
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,619
|
|
|
|
|
|
|
|
|
|
|
|
81,619
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,401,339
|
)
|
|
|
(1,401,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,404,000
|
|
|
|
1,377,625
|
|
|
|
17,582,009
|
|
|
|
1,758
|
|
|
|
1,012,321
|
|
|
|
(150
|
)
|
|
|
(2,283,817
|
)
|
|
|
107,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
|
|
|
|
|
|
|
|
124,548
|
|
|
|
12
|
|
|
|
29,988
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Shares issued for merger
|
|
|
|
|
|
|
|
|
|
|
1,665,800
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
Debt converted to stock, net
|
|
|
|
|
|
|
|
|
|
|
2,016,016
|
|
|
|
202
|
|
|
|
1,499,648
|
|
|
|
150
|
|
|
|
|
|
|
|
1,500,000
|
|
Stock issued for cash at $.75 per share, net
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
|
|
400
|
|
|
|
2,953,249
|
|
|
|
|
|
|
|
|
|
|
|
2,953,649
|
|
Stock issued for cash at $4.00 per share, net
|
|
|
|
|
|
|
|
|
|
|
3,450,000
|
|
|
|
345
|
|
|
|
11,776,773
|
|
|
|
|
|
|
|
|
|
|
|
11,777,118
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
818,869
|
|
|
|
|
|
|
|
|
|
|
|
818,869
|
|
Preferred stock converted to common stock
|
|
|
(1,404,000
|
)
|
|
|
(1,377,625
|
)
|
|
|
5,828,841
|
|
|
|
583
|
|
|
|
1,377,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,692,164
|
)
|
|
|
(8,692,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
34,667,214
|
|
|
$
|
3,467
|
|
|
$
|
19,467,890
|
|
|
$
|
|
|
|
$
|
(10,975,981
|
)
|
|
$
|
8,495,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
August 2, 2005
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,692,164
|
)
|
|
$
|
(1,401,339
|
)
|
|
$
|
(882,478
|
)
|
|
$
|
(10,975,981
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
818,869
|
|
|
|
211,829
|
|
|
|
799,920
|
|
|
|
1,830,618
|
|
Depreciation and amortization
|
|
|
18,609
|
|
|
|
7,689
|
|
|
|
|
|
|
|
26,298
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(392,256
|
)
|
|
|
34,225
|
|
|
|
(61,170
|
)
|
|
|
(419,201
|
)
|
Other assets
|
|
|
|
|
|
|
(1,094
|
)
|
|
|
|
|
|
|
(1,094
|
)
|
Accounts payable
|
|
|
444,404
|
|
|
|
87,386
|
|
|
|
|
|
|
|
531,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,802,538
|
)
|
|
|
(1,061,304
|
)
|
|
|
(143,728
|
)
|
|
|
(9,007,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(22,955
|
)
|
|
|
(34,776
|
)
|
|
|
|
|
|
|
(57,731
|
)
|
Cash acquired in acquisition
|
|
|
14,009
|
|
|
|
|
|
|
|
|
|
|
|
14,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,946
|
)
|
|
|
(34,776
|
)
|
|
|
|
|
|
|
(43,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of notes payable
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Repayment of notes payable
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
Proceeds from issuance of preferred stock, net of issuance costs
|
|
|
|
|
|
|
1,147,625
|
|
|
|
|
|
|
|
1,147,625
|
|
Proceeds from issuance of restricted stock units
|
|
|
|
|
|
|
1,900
|
|
|
|
280
|
|
|
|
2,180
|
|
Proceeds from advance from preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
230,000
|
|
|
|
230,000
|
|
Proceeds from exercise of options
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Proceeds from convertible debt
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
Proceeds from sale of common stock
|
|
|
14,730,934
|
|
|
|
|
|
|
|
|
|
|
|
14,730,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16,260,934
|
|
|
|
1,149,525
|
|
|
|
230,280
|
|
|
|
17,640,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
8,449,450
|
|
|
|
53,445
|
|
|
|
86,552
|
|
|
|
8,589,447
|
|
Cash and cash equivalents, beginning of period
|
|
|
139,997
|
|
|
|
86,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
8,589,447
|
|
|
$
|
139,997
|
|
|
$
|
86,552
|
|
|
$
|
8,589,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for taxes
|
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
|
|
|
$
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
|
41,630
|
|
|
|
|
|
|
|
|
|
|
|
41,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of advance into preferred stock
|
|
$
|
|
|
|
$
|
230,000
|
|
|
$
|
|
|
|
$
|
230,000
|
|
Royalty obligation assumed to obtain intangible assets
|
|
$
|
252,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
252,000
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
Note 1
|
Formation
and Business of the Company
|
VirnetX Holding Corporation (we, us,
our or the Company) is a development
stage company focused on commercializing a patent portfolio for
providing solutions for secure real-time communications such as
instant messaging, or IM, and voice over Internet
protocol, or VoIP.
In July 2007 we effected a merger between PASW, Inc., a company
which had at the time of the merger, publicly traded common
stock with limited operations, and VirnetX, Inc., which became
our principal operating subsidiary. As a result of this merger,
the former security holders of VirnetX, Inc. came to own a
majority of our outstanding common stock.
Under generally accepted accounting principles in the United
States, the accompanying financial statements have been prepared
as if VirnetX, Inc., a company whose inception date was
August 2, 2005, who is our predecessor for accounting
purposes, had acquired PASW, Inc. on July 5, 2007.
Accordingly, the accompanying statement of operations include
the operations of VirnetX, Inc. from August 2, 2005 to
December 31, 2007 and the operations of PASW, Inc. from
July 5, 2007 to December 31, 2007. The historical
share activity of VirnetX, Inc. has been retroactively restated
to account for the 12.454788 to one exchange rate which was
applicable to certain convertible instruments as explained in
Note 10 and Note 11 and for our one for three reverse
stock split which was implemented on October 29, 2007.
Our principal business activities to date are our efforts to
commercialize our patent portfolio. We also conduct the
remaining activities of PASW, Inc., which are generally limited
to the collection of royalties on certain Internet-based
communications by a wholly owned Japanese subsidiary of PASW
pursuant to the terms of a single license agreement. The revenue
generated by this agreement is not significant.
Although we believe we may derive revenues in the future from
our principal patent portfolio and are currently endeavoring to
develop certain of those patents into marketable products, we
have not done so to date. As such, we are in the development
stage and consequently are subject to the risks associated with
development stage companies, including the need for additional
financings, the uncertainty that our patent and technology
licensing program development efforts will produce
revenue-bearing licenses for us, the uncertainty that our
development initiatives will produce successful commercial
products as well as the uncertainty of marketing and customer
acceptance of such products.
These financial statements are prepared on a going concern basis
that contemplates the realization of assets and discharge of
liabilities in the normal course of business. We have incurred
net operating losses and negative cash flows from operations. At
December 31, 2007, we had a deficit accumulated in the
development stage of $10,975,891. However, management believes
the $8,589,000 cash on hand at December 31, 2007 is
sufficient to meet our working capital needs for 2008 or until
significant revenue is generated from operations.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
the VirnetX Holding Company, a development stage enterprise, and
its wholly owned subsidiaries. All intercompany transactions
have been eliminated.
These financial statements reflect the historical results of
VirnetX, Inc. and subsequent to the merger date of July 5,
2007, the historical consolidated results of VirnetX Holding
Corporation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported
F-8
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
Revenue
Recognition
We recognize revenue in accordance with SEC Staff Accounting
Bulletin 104. We are a licensor of software and generate
revenue primarily from the one-time sales of licensed software.
Generally, revenue is recognized upon shipment of the licensed
software. For multiple element license arrangements, the license
fee is allocated to the various elements based on fair value.
When a multiple element arrangement includes rights to a
post-contract customer support, the portion of the license fee
allocated to each function is recognized ratably over the term
of the arrangement.
Cash
and Cash Equivalents
We consider all highly liquid investments purchased with
original maturities of three months or less at the date of
purchase to be cash equivalents.
Property
and Equipment
Property and equipment are stated at historical cost, less
accumulated depreciation and amortization. Depreciation and
amortization are computed using the accelerated and straight
line methods over the estimated useful lives of the assets,
which range from five to seven years. Repair and maintenance
costs are charged to expense as incurred.
Concentration
of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are primarily maintained at one
financial institution in the United States. Deposits held with
this financial institution may exceed the amount of insurance
provided on such deposits. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000. During the
year ended December 31, 2007 we had, at times, funds that
were uninsured. The uninsured balance at December 31, 2007
was in excess of $8,000,000. We have not experienced any losses
on our deposits of cash and cash equivalents.
Intangible
Assets
We record intangible assets at cost, less accumulated
amortization. Amortization of intangible assets is provided over
their remaining estimated useful lives, which range from 3 to
16 years, on either a straight line basis or as revenue is
generated by the assets.
Impairment
of Long-Lived Assets
We identify and record impairment losses on intangible and other
long-lived assets used in operations when events and changes in
circumstances indicate that the carrying amount of an asset
might not be recoverable. Recoverability is measured by
comparison of the anticipated future net undiscounted cash flows
to the related assets carrying value. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the projected discounted future net cash flows
arising from the asset.
F-9
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Research
and Development
Research and development costs include expenses paid to outside
development consultants and compensation related expenses for
our engineering staff. Research and development costs are
expensed as incurred. Acquired research and development costs
are expensed upon acquisition and are part of total research and
development expense.
Income
Taxes
We account for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Effective January 1, 2007, we have adopted FASB
Interpretation No. 48, or FIN 48, Accounting for
Uncertainty in Income Taxes using the prospective method allowed
by FIN 48. The adoption of FIN 48 did not have a
material impact on our financial statements.
Fair
Value of Financial Instruments
Carrying amounts of our financial instruments, including cash
and cash equivalents, accounts payable, notes payable, and
accrued liabilities approximate their fair values due to their
short maturities. The carrying amount of our minimum royalty
payment obligation approximates fair value because it is
recorded at a discounted calculation.
Stock-Based
Compensation
Our accounting for share-based compensation is in accordance
with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or
SFAS 123(R), which requires the measurement and recognition
of compensation expense in the statement of operations for all
share-based payment awards made to employees and directors
including employee stock-options based on estimated fair values.
Using the modified retrospective transition method of adopting
SFAS 123(R), the herein financial statements presented
reflect compensation expense for stock-based awards as if the
provisions of SFAS 123(R) had been applied from the date of
inception.
In addition, as required by Emerging Issues Task Force Consensus
No. 96-18,
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services, we record stock and options
granted to non-employees at fair value of the consideration
received or the fair value of the equity instruments issued as
they vest over the performance period.
Earnings
Per Share
SFAS No. 128, Earnings Per Share requires
presentation of basic earnings per share, or Basic EPS, and
diluted earnings per share, or Diluted EPS. Basic earnings per
share is computed by dividing earnings available to common
stockholders by the weighted average number of outstanding
common shares during the period. Diluted earnings per share is
computed by dividing net income by the weighted average number
of share outstanding including potentially dilutive securities
such as options, warrants and convertible debt. Since we
incurred a loss for the period, any common stock equivalents
have been excluded because their effect would be anti-dilutive.
F-10
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141(R), Business
Combinations and SFAS No. 160,
Accounting and Reporting of Noncontrolling Interests in
Consolidated Financial Statements an amendment to
ARB No. 51. These Standards will significantly
change the accounting and reporting for business combination
transactions and noncontrolling (minority) interests in
consolidated financial statements, including capitalizing at the
acquisition date the fair value of acquired in-process research
and development, and, remeasuring and writing down these assets,
if necessary, in subsequent periods during their development.
These new standards will be applied prospectively for business
combinations that occur on or after January 1, 2009, except
that presentation and disclosure requirements of SFAS 160
regarding noncontrolling interests shall be applied
retroactively. The implementation of these standards is not
expected to have a material impact on the consolidated
statements of operations or financial position.
In December 2007, the FASB ratified EITF
No. 07-1,
Accounting for Collaborative Agreements. This
standard provides guidance regarding financial statement
presentation and disclosure of collaborative agreements, as
defined, which includes arrangements regarding the developing
and commercialization of products and product candidates.
EITF 07-01
is effective as of January 1, 2009. Implementation of this
standard is not expected to have a material impact on the
consolidated statements of operations or financial position.
In June 2007, the FASB ratified
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to be used in Future Research and Development
Activities. This standard requires that nonrefundable
advance payments for goods and services that will be used or
rendered in future research and development activities pursuant
to executory contractual arrangements be deferred and recognized
as an expense in the period the related goods are delivered or
services are performed. EITF
No. 07-3
became effective as of January 1, 2008 and it did not have
a material impact on the consolidated statements of operations
or financial position upon adoption.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, or SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to
investors request for expanded information about the
extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the
effect of fair valued measurements on earnings.
SFAS No. 157 applies whenever standards require (or
permit) assets or liabilities to be measured at fair value, and
does not expand the use of fair value in any new circumstances.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years, with early
adoption permitted, except for the impact of FASB Staff Position
(FSP) 157-2.
FSP 157-2
deferred the adoption of SFAS 157 for non financial assets
and liabilities until years ended after November 15, 2008.
The Company must adopt these requirements no later than the
first quarter of 2008.
On March 19, 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement
No. 133, or SFAS No. 161. SFAS No. 161
requires enhanced disclosures about an entitys derivative
and hedging activities. These enhanced disclosures will discuss
(a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We have
not determined the impact, if any SFAS No. 161 will
have on our consolidated financial statements.
F-11
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Our major classes of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Office furniture
|
|
$
|
10,129
|
|
|
$
|
9,150
|
|
Computer equipment
|
|
|
48,827
|
|
|
|
25,626
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,956
|
|
|
|
34,776
|
|
Less accumulated depreciation
|
|
|
(26,298
|
)
|
|
|
(7,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,658
|
|
|
$
|
27,087
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2007
and 2006 was $18,609 and $7,689, respectively. There was no
depreciation expense for the period from August 2, 2005
(date of inception) to December 31, 2005.
As of December 31, 2007, we had ten issued U.S. and 8
issued foreign technology related patents, in addition to
pending U.S. and foreign patent applications. The term of
our issued U.S. and foreign patents runs through the period
2019 to 2024. Most of our issued patents were acquired by our
principal operating subsidiary, VirnetX, Inc., from Science
Applications International Corporation, or SAIC, pursuant to an
Assignment Agreement dated December 21, 2006, and a Patent
License and Assignment Agreement dated August 12, 2005, as
amended on November 2, 2006, including documents prepared
pursuant to the November amendment, and as further amended on
March 12, 2008. We are required to make payments to SAIC
based on the revenue generated from our ownership or use of the
patents assigned to us by SAIC. Minimum annual royalty payments
of $50,000 are due beginning in 2008. Royalty amounts vary
depending upon the type of revenue generating activities, and
certain royalty categories are subject to maximums and other
limitations. SAIC is entitled to receive a portion of the
proceed revenues, monies or any form of consideration paid for
the acquisition of VirnetX or from the settlement of certain
patent infringement claims of ours. We have granted SAIC a
security interest in some of our intellectual property,
including the patents and patent applications we obtained from
SAIC, to secure these payment obligations.
Generally upon our default of our agreement with SAIC and
certain other events, we are required to convey to SAIC our
interests in the patents and patent applications acquired from
SAIC without consideration.
At December 31, 2007, in accordance with SFAS 142,
Accounting for Goodwill and Other Intangible
Assets, we recorded the fair value of the $50,000
annual guaranteed payments we have agreed to pay to SAIC in 2008
through 2012 as a liability, calculated using a discount rate of
8%. This liability will accrue interest at the 8% rate during
the period it is outstanding. We recorded a related asset equal
in amount to the liability as an intangible asset which will be
amortized over the expected revenue generating period of our
agreement with SAIC.
F-12
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the expected amortization of the
intangible assets is as follows:
|
|
|
|
|
2008
|
|
$
|
48,000
|
|
2009
|
|
|
48,000
|
|
2010
|
|
|
48,000
|
|
2011
|
|
|
48,000
|
|
2012
|
|
|
48,000
|
|
Thereafter
|
|
|
12,000
|
|
|
|
|
|
|
Total
|
|
$
|
252,000
|
|
|
|
|
|
|
As of December 31, 2007, the obligation matures as follows:
|
|
|
|
|
2008
|
|
$
|
48,000
|
|
2009
|
|
|
44,000
|
|
2010
|
|
|
40,000
|
|
2011
|
|
|
36,000
|
|
2012
|
|
|
32,000
|
|
Thereafter
|
|
|
52,000
|
|
|
|
|
|
|
Total
|
|
$
|
252,000
|
|
|
|
|
|
|
We lease our office facility under a non-cancelable operating
lease that expires in August 2012.
Rent expense for the years ended December 31, 2007 and 2006
was $14,925 and $8,209 respectively. For the period from
August 2, 2005 (date of inception) to December 31,
2005, there was no rent expense.
In 2005, VirnetX, Inc. adopted the 2005 Stock Plan, or the Plan,
which was assumed by us upon the closing of the transaction
between VirnetX Holding Corporation and VirnetX, Inc. on
July 5, 2007. The Plan provides for the granting of stock
options and restricted stock units to employees and consultants
of ours. Stock options granted under the Plan may be incentive
stock options or nonqualified stock options. Incentive stock
options, or ISOs, may only be granted to our employees
(including officers and directors). Nonqualified stock options,
or NSOs, may be granted to our employees and consultants.
Options under the Plan may be granted for a period of up to ten
years and at prices no less than 85% of the estimated fair
market value of the shares on the date of grant as determined by
the board of directors, provided, however, that the exercise
price of an ISO and NSO shall not be less than 100% or 85% of
the estimated fair market value of the shares at the date of
grant, respectively, and the exercise price of an ISO and NSO
granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant.
F-13
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
|
|
Weighted
|
|
|
|
Available
|
|
|
Number of
|
|
|
Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares reserved for the Plan at inception
|
|
|
11,624,469
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
(3,321,277
|
)
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
8,303,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
(1,058,657
|
)
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,868,218
|
)
|
|
|
1,868,218
|
|
|
$
|
.24
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
5,376,317
|
|
|
|
1,868,218
|
|
|
$
|
.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,324,925
|
)
|
|
|
2,324,925
|
|
|
|
4.96
|
|
Options exercised
|
|
|
|
|
|
|
(124,548
|
)
|
|
|
.24
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,051,392
|
|
|
|
4,068,595
|
|
|
$
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
|
Stock-Based
Compensation
|
We account for equity instruments issued to employees in
accordance with the provision of SFAS 123(R) which requires
that such issuances be recorded at their fair value on the grant
date. The recognition of the expense is subject to periodic
adjustment as the underlying equity instrument vests.
We have elected to adopt the modified retrospective application
method as provided by SFAS 123(R) and, accordingly,
financial statement amounts for the periods presented herein
reflect results as if the fair value method of expensing equity
awards had been applied from inception.
Stock-based compensation expense is included in general and
administrative expense for each period as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Stock-Based Compensation by Type of Award
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Restricted stock units
|
|
$
|
0
|
|
|
$
|
130,210
|
|
|
$
|
799,920
|
|
|
$
|
930,130
|
|
Employee stock options
|
|
|
818,869
|
|
|
|
81,619
|
|
|
|
0
|
|
|
|
900,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
818,869
|
|
|
$
|
211,829
|
|
|
$
|
799,920
|
|
|
$
|
1,830,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the unrecorded deferred
stock-based compensation balance related to stock options was
$8,806,496, which will be amortized as expense over an estimate
weighted average vesting amortization period of approximately
3.1 years.
The fair value of each option grant was estimated on the date of
grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
Risk-free interest rate
|
|
|
3.32
|
%
|
|
|
4.77
|
%
|
Expected life
|
|
|
6.5
|
years
|
|
|
6
|
years
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Based on the Black-Scholes option pricing model, the weighted
average estimated fair value of employee stock option grants was
$4.96 and $.19 for the years ended December 31, 2007 and
2006, respectively.
The expected life was determined using the simplified method
outlined in Staff Accounting Bulletin No. 107, or
SAB 107, taking the average of the vesting term and the
contractual term of the option. Expected volatility of the stock
options was based upon historical data and other relevant
factors, such as the volatility of comparable publicly-traded
companies at a similar stage of life cycle. The Company has not
provided an estimate for forfeitures because the Company has no
history of forfeited options and believes that all outstanding
options at December 31, 2007 will vest. In the future, the
Company may change this estimate based on actual and expected
future forfeiture rates.
The following table summarizes activity under the equity
incentive plans for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Options granted
|
|
|
1,868,218
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,868,218
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,324,925
|
|
|
|
4.96
|
|
|
|
9.7
|
|
|
|
|
|
Options exercised
|
|
|
(124,548
|
)
|
|
|
0.24
|
|
|
|
|
|
|
$
|
468,300
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,068,595
|
|
|
$
|
2.94
|
|
|
|
9.1
|
|
|
$
|
11,961,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value is calculated at the difference between the
market price of the Companys stock on the last trading day
of the year ($5.88) and the exercise price of the options. For
options exercised, the intrinsic value is the difference between
market price and the exercise price on the date of exercise.
F-15
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Range of
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life (Years)
|
|
|
$
|
0.24
|
|
|
|
1,743,690
|
|
|
|
8.4
|
|
|
$
|
0.24
|
|
|
|
560,669
|
|
|
$
|
0.24
|
|
|
|
8.4
|
|
|
4.20
|
|
|
|
1,347,899
|
|
|
|
9.5
|
|
|
|
4.20
|
|
|
|
572,925
|
|
|
|
4.20
|
|
|
|
9.5
|
|
|
5.88 - 6.47
|
|
|
|
977,026
|
|
|
|
9.9
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,068,595
|
|
|
|
9.1
|
|
|
$
|
2.94
|
|
|
|
1,133,594
|
|
|
$
|
2.24
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, we issued warrants to purchase 266,667 of our
common shares at $.75 per share in conjunction with the July
stock issuance. The warrants expire in 2012. We issued warrants
to purchase 300,000 of our common shares at $4.80 per share to
the underwriter of our December 2007 stock issuance. Those
warrants are first exercisable in 2008 and expire in 2012.
|
|
Note 9
|
Earnings
Per Share
|
Basic earnings per share is based on the weighted average number
of shares outstanding for a period . Diluted earnings per share
is based upon the weighted average number of shares and
potentially dilutive common shares outstanding. Potential common
shares outstanding principally include stock options, warrants,
restricted stock units and other equity awards under our stock
plan. Since the Company has incurred losses, the effect of any
common stock equivalent would be anti-dilutive.
The following table sets forth the basic and diluted earnings
per share calculations (in 000s, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(8,692
|
)
|
|
$
|
(1,401
|
)
|
|
$
|
(882
|
)
|
Weighted average number of shares outstanding
|
|
|
24,312
|
|
|
|
17,087
|
|
|
|
15,217
|
|
Basic earnings (loss) per share
|
|
$
|
(0.36
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
For the years ended December 31, 2007 and 2006, there were
the following stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Options
|
|
|
4,068,595
|
|
|
|
1,868,218
|
|
Warrants
|
|
|
566,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,635,262
|
|
|
|
1,868,218
|
|
|
|
|
|
|
|
|
|
|
Our Amended and Restated Certificate of Incorporation, as
amended in October 2007, authorizes us to issue
10,000,000 shares of $0.0001 par value per share
preferred stock having rights, preferences and privileges to be
designated by our Board of Directors. There were no shares of
preferred stock outstanding at
F-16
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
December 31, 2007. All of the VirnetX, Inc. preferred stock
converted into VirnetX, Inc. common stock on a
1-for-1
basis immediately prior to the merger between us and VirnetX,
Inc., so at the date of the merger, each preferred share of
VirnetX, Inc. converted to 12.454788 shares of our common
stock. These shares were subsequently adjusted for the impact of
the one for three reverse split in October 2007. The VirnetX,
Inc. preferred stock outstanding at December 31, 2006
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Shares
|
|
|
Shares
|
|
Series
|
|
Date Issued
|
|
Issue Price
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Series A Preferred
|
|
March 27, 2006
|
|
$
|
1.00
|
|
|
|
2,000,000
|
|
|
|
1,404,000
|
|
The preferred stock at December 31, 2006 had voting rights
equal to an equivalent number of the common stock into which it
was convertible, and voted together as one class with the common
stock.
The preferred stock at December 31, 2006 were entitled to
receive dividends prior to and in preference to any declaration
or payment of dividends on the common stock, at the rate of
$0.08 per share per annum on each outstanding share of
Series A preferred stock, payable quarterly. Such dividends
were payable only when and if declared by the Board of Directors
and are not cumulative. No such dividends were ever declared or
paid. After payment of such dividends, any additional dividends
would be distributed among Series A preferred stock and
common stock pro rata based on the number of shares of common
stock then held by each holder (assuming conversion of all such
Series A preferred stock into common stock.)
The preferred stock at December 31, 2006 had a preference
in liquidation of $1,404,000 or $1.00 per share. In the event of
liquidation, the holders of Series A preferred shares were
entitled to receive preference on any distribution of any assets
equal to $1.00 per share, plus any declared but unpaid
dividends. The remaining assets, if any, would then be
distributed among the holders of common stock and preferred
stock, pro rata based on the number of shares of common stock
held by each holder, assuming the conversion of all such
redeemable convertible preferred stock, until the holders of a
the Series A preferred stock shall have received an
aggregate of $2.00 per share. If VirnetX, Inc.s legally
available assets were insufficient to satisfy the liquidation
preferences, the assets would be distributed ratably among the
holders of the Series A preferred stock, in proportion to
the amounts each holder would receive if VirnetX, Inc. had
sufficient assets and funds to pay the full preferential amount.
The preferred stock at December 31, 2006 had conversion
rights, at the option of the holder, into a number of fully paid
and non assessable shares of common stock as is determined by
dividing $1.00 by the conversion price applicable to such share,
determined as hereafter provided, in effect on the due date the
certificate is surrendered for conversion. The initial
conversion price per share of Series A preferred stock was
$1.00 and was subject to adjustments in accordance with
antidilution provisions, including stock splits and stock
dividends, contained in VirnetX, Inc.s certificate of
incorporation. Each share of Series A preferred stock
automatically converted into shares of common stock at the
conversion price at the time in effect for such share
immediately upon the earlier of (1) VirnetX, Inc.s
sale of its common stock in a firm commitment underwritten
public offering resulting in aggregate cash proceeds to VirnetX,
Inc. of not less than $8 million, (2) any reverse
merger yielding working capital to VirnetX, Inc. of at least
$8 million and resulting in VirnetX, Inc.s shares
being registered under Securities Exchange Act of 1934,
(3) the date specified by the written consent or agreement
of the holders of a majority of the then outstanding shares of
Series A preferred stock.
At December 31, 2006, VirnetX, Inc. had reserved sufficient
shares of common stock for issuance upon conversion of the
convertible preferred stock.
At December 31, 2006 and 2007, the Series A preferred
stock was not mandatorily redeemable.
F-17
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Each share of common stock has the right to one vote. The
holders of common stock are entitled to receive dividends
whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of holders of
all classes of stock outstanding having priority rights as to
dividends. No dividends have been declared by the Board from
inception through December 31, 2007. The Companys
restated articles of incorporation authorizes the Company to
issue up to 100,000,000 shares of $.0001 par value
common stock.
In August 2005, the Company issued 13,285,107 shares to
founders for aggregate proceeds of $200.
The Company also issued Restricted Stock Units, or RSUs, to
employees and consultants as discussed in Note 7.
All share amounts have been retroactively restated to reflect
the conversion rate of 12.454788/1 used to effect the merger
between VirnetX, Inc. and VirnetX Holding Corporation and the
reverse stock split of
1/3
effective in October 2007.
|
|
Note 12
|
Employee
Benefit Plan
|
During 2007, we sponsored a defined contribution, 401K plan,
covering substantially all our employees. The Companys
matching contribution to the plan in 2007 was approximately
$5,600. There was no plan in 2006 or 2005.
In February 2007 we borrowed $500,000 from a group of preferred
shareholders. The note accrued interest at 6% and was
convertible into our common stock at $.75 per share upon the
completion of the transaction in which VirnetX, Inc. came to be
our wholly owned subsidiary, or the Transaction.
Also in February 2007 we borrowed $1,000,000 from a third party.
That note paid interest, in cash, at 10% and was convertible
into our common stock at $.75 per share upon the completion of
the Transaction. A portion, $350,000 of the proceeds of that
note were placed as a retainer with our litigation counsel. The
same investor purchased $3,000,000 in common stock at $.75 per
share, net of expenses of approximately $47,000. That deposit
was placed in an escrow account which was released at the close
of the Transaction.
|
|
Note 14
|
Short
Term Borrowings
|
During 2007 we borrowed funds on a short-term basis. In June
2007 we borrowed $50,000 at 10% interest. These funds were
repaid in July 2007. In December 2007, we borrowed $200,000 in
the aggregate from two investors. These funds were repaid, with
an aggregate of $2,000 interest, in December 2007.
The Company has Federal and state net operating loss
carryforwards of approximately $9,100,000 available to offset
future taxable income. The Federal and state loss carryforwards
expire beginning in 2025 and 2015 respectively. There are
restrictions on the ability of the Company to utilize the
benefit in any one year. As a result, the Company has fully
reserved any deferred tax benefit from these net operating loss
carryforwards.
The Company has Federal and state tax credit carryforwards of
approximately $300,000 to reduce future income tax expense. The
Federal tax credits expire beginning in 2025. The state tax
credits currently do not have an expiration date.
F-18
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The components of the income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision for income taxes at the federal & state
statutory rate
|
|
$
|
(3,200,000
|
)
|
|
$
|
(600,000
|
)
|
|
$
|
(390,000
|
)
|
Stock-based compensation
|
|
|
300,000
|
|
|
|
100,000
|
|
|
|
350,000
|
|
Research and development credits
|
|
|
(100,000
|
)
|
|
|
(200,000
|
)
|
|
|
|
|
Valuation allowance
|
|
|
3,000,000
|
|
|
|
700,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The elements of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax benefit of net operating loss carryforwards
|
|
$
|
3,400,000
|
|
|
$
|
500,000
|
|
|
$
|
40,000
|
|
Research and development credits
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,700,000
|
|
|
|
700,000
|
|
|
|
40,000
|
|
Less valuation allowance
|
|
|
(3,700,000
|
)
|
|
|
(700,000
|
)
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the deferred tax valuation allowance was an
increase of $3,000,000, $660,000 and $40,000 in the periods
ended 2007, 2006 and 2005, respectively.
|
|
Note 16
|
Merger of
VirnetX, Inc. and VirnetX Holding Corporation
|
In July 2007, VirnetX Holding Corporation consummated a reverse
triangular merger in which the Companys wholly-owned
subsidiary merged with and into VirnetX, Inc. with VirnetX, Inc.
as the surviving Corporation to the merger. As a result of the
merger VirnetX, Inc. became a wholly-owned subsidiary of the
Company, and the pre-merger shareholders of VirnetX Inc.
exchanged their shares in VirnetX, Inc. for shares of the common
stock of the Company. As a result, the VirnetX, Inc. is
considered the acquiror of VirnetX Holding Corporation for
accounting purposes.
The key terms of the merger include the following:
|
|
|
|
|
Our officers and directors, except for the chief financial
officer, were replaced upon completion of the transaction so
that the officers and directors of VirnetX, Inc. became our
officers and directors.
|
|
|
|
VirnetX, Inc.s convertible notes payable for $1,000,000
and $500,000 were converted into the Companys common stock
in July 2007.
|
|
|
|
VirnetX, Inc.s escrowed convertible note proceeds of
$3,000,000 were released from escrow and converted into the
Companys common stock in July 2007.
|
|
|
|
|
|
The Company issued 29,551,398 shares of our common stock
and options to purchase 1,743,670 shares of common stock to
the pre-merger shareholders, convertible note holders and option
holders of VirnetX, Inc. in exchange for 100% of the issued and
outstanding capital stock and securities of VirnetX, Inc.
Additionally, we issued to MDB Capital Group LLC and its
affiliates, warrants to purchase an aggregate of
266,667 shares of our common stock of the Company pursuant
to the provisions of the MDB Service Agreement, which we assumed
from VirnetX, Inc. in connection with the merger.
|
F-19
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
We believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft
on February 15, 2007 by filing a complaint in the United
States District Court for the Eastern District of Texas, Tyler
Division. Pursuant to the complaint, we allege that Microsoft
infringes two of our U.S. patents: U.S. Patent
No. 6,502,135 B1, entitled Agile Network Protocol for
Secure Communications with Assured System Availability,
and U.S. Patent No. 6,839,759 B2, entitled
Method for Establishing Secure Communication Link Between
Computers of Virtual Private Network Without User Entering Any
Cryptographic Information. On April 5, 2007, we filed
an amended complaint specifying certain accused products at
issue and alleging infringement of a third, recently issued
U.S. patent: U.S. Patent No. 7,188,180 B2,
entitled Method for Establishing Secure Communication Link
Between Computers of Virtual Private Network. We are
seeking both damages, in an amount subject to proof at trial,
and injunctive relief. Microsoft answered the amended complaint
and asserted counterclaims against us on May 4, 2007.
Microsoft counterclaimed for declarations that the three patents
are not infringed, are invalid and are unenforceable. Microsoft
seeks an award of its attorneys fees and costs. We filed a
reply to Microsofts counterclaims on May 24, 2007.
Discovery has begun and the trial is scheduled to begin on
October 12, 2009. We have served our infringement
contentions directed to certain of Microsofts operating
system and unified messaging and collaboration applications. On
March 31, 2008, Microsoft filed a Motion to Dismiss for
lack of standing, which was denied by the court pursuant to an
order dated June 3, 2008. Also pursuant to that court
decision, on June 10, 2008, SAIC joined us in our lawsuit
as a plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to VirnetX. Microsoft was not required to search
disaster recovery tapes for additional information.
Although we believe Microsoft infringes three of our patents and
we intend to vigorously prosecute this case, at this stage of
the litigation the outcome cannot be predicted with any degree
of reasonable certainty. Additionally, the Microsoft litigation
will be costly and time-consuming, and we can provide no
assurance that we will obtain a judgment against Microsoft for
damages
and/or
injunctive relief. Should the District Court issue a judgment in
favor of Microsoft, and in connection with such judgment
determine that we had acted in bad faith or with fraudulent
intent, or we were otherwise found to have exhibited inequitable
conduct, the Court could award attorney fees to Microsoft, which
would be payable by us.
Because the outcome of this litigation cannot be estimated at
this time, we have made no provision for loss or expenses in the
accompanying financial statements.
F-20
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
Note 18
|
Quarterly
Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(amounts in thousands except per share)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
47
|
|
|
$
|
28
|
|
Loss from operations
|
|
|
(410
|
)
|
|
|
(1,526
|
)
|
|
|
(2,589
|
)
|
|
|
(4,125
|
)
|
Net loss
|
|
|
(410
|
)
|
|
|
(1,572
|
)
|
|
|
(2,566
|
)
|
|
|
(4,144
|
)
|
Net loss per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(.015
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Loss from operations
|
|
|
(376
|
)
|
|
|
(340
|
)
|
|
|
(294
|
)
|
|
|
(398
|
)
|
Net loss
|
|
|
(374
|
)
|
|
|
(349
|
)
|
|
|
(284
|
)
|
|
|
(394
|
)
|
Net loss per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
F-21
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,260,170
|
|
|
$
|
8,589,447
|
|
Accounts receivable, net
|
|
|
4,144
|
|
|
|
5,860
|
|
Prepaid expense and other current assets
|
|
|
529,531
|
|
|
|
399,201
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,793,845
|
|
|
|
8,994,508
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
33,307
|
|
|
|
32,658
|
|
Intangible and other assets
|
|
|
252,000
|
|
|
|
252,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,079,152
|
|
|
$
|
9,279,166
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,467,412
|
|
|
$
|
531,790
|
|
Current portion long-term obligation
|
|
|
44,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,511,412
|
|
|
|
579,790
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation, net of current portion
|
|
|
160,000
|
|
|
|
204,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per share, authorized
10,000,000 shares, issued and outstanding: 0 shares at
September 30, 2008 and December 31, 2007, respectively
|
|
|
0
|
|
|
|
0
|
|
Common stock, par value $0.0001 per share, authorized
100,000,000 shares, issued and outstanding:
34,899,985 shares at September 30, 2008 and 34,667,214
at December 31, 2007, respectively
|
|
|
3,489
|
|
|
|
3,467
|
|
Additional paid-in capital
|
|
|
21,383,434
|
|
|
|
19,467,890
|
|
Accumulated deficit
|
|
|
(19,979,183
|
)
|
|
|
(10,975,981
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,407,740
|
|
|
|
8,495,376
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,079,152
|
|
|
$
|
9,279,166
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-22
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Revenue royalties
|
|
$
|
23,905
|
|
|
$
|
46,664
|
|
|
$
|
182,821
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
215,513
|
|
|
|
200,062
|
|
|
|
1,927,839
|
|
General and administrative
|
|
|
2,755,568
|
|
|
|
2,435,262
|
|
|
|
18,341,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
(2,971,081
|
)
|
|
|
(2,635,324
|
)
|
|
|
(20,268,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,947,176
|
)
|
|
|
(2,588,660
|
)
|
|
|
(20,086,153
|
)
|
Interest and other income, net
|
|
|
24,301
|
|
|
|
22,377
|
|
|
|
106,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,922,875
|
)
|
|
$
|
(2,566,283
|
)
|
|
$
|
(19,979,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,899,985
|
|
|
|
30,580,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Revenue royalties
|
|
$
|
107,955
|
|
|
$
|
46,664
|
|
|
$
|
182,821
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
633,335
|
|
|
|
468,240
|
|
|
|
1,927,839
|
|
General and administrative
|
|
|
8,620,276
|
|
|
|
4,103,509
|
|
|
|
18,341,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
(9,253,611
|
)
|
|
|
(4,571,749
|
)
|
|
|
(20,268,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,145,656
|
)
|
|
|
(4,525,085
|
)
|
|
|
(20,086,153
|
)
|
Interest and other income (expense), net
|
|
|
142,454
|
|
|
|
(23,111
|
)
|
|
|
106,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(19,979,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,866,480
|
|
|
|
11,135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-23
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(19,979,183
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,470
|
|
|
|
12,425
|
|
|
|
39,768
|
|
Stock-based compensation
|
|
|
1,915,544
|
|
|
|
348,572
|
|
|
|
3,746,162
|
|
(Increase) in current assets
|
|
|
(128,614
|
)
|
|
|
(561,195
|
)
|
|
|
(548,909
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
937,644
|
|
|
|
678,622
|
|
|
|
1,469,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,265,158
|
)
|
|
|
(4,069,772
|
)
|
|
|
(15,272,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired in acquisition
|
|
|
0
|
|
|
|
0
|
|
|
|
14,009
|
|
Purchase of fixed assets
|
|
|
(14,119
|
)
|
|
|
(17,401
|
)
|
|
|
(71,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,119
|
)
|
|
|
(17,401
|
)
|
|
|
(57,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible debt
|
|
|
0
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
Payment of long-term obligation
|
|
|
(50,000
|
)
|
|
|
0
|
|
|
|
(50,000
|
)
|
Proceeds from sale of common stock
|
|
|
0
|
|
|
|
2,983,439
|
|
|
|
14,730,934
|
|
Proceeds from issuance of preferred stock
|
|
|
0
|
|
|
|
0
|
|
|
|
1,147,625
|
|
Proceeds from issuance of restricted stock and options
|
|
|
0
|
|
|
|
0
|
|
|
|
262,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(50,000
|
)
|
|
|
4,483,439
|
|
|
|
17,590,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(6,329,277
|
)
|
|
|
396,266
|
|
|
|
2,260,170
|
|
Cash beginning
|
|
|
8,589,447
|
|
|
|
139,997
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash ending
|
|
$
|
2,260,170
|
|
|
$
|
536,263
|
|
|
$
|
2,260,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-24
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
Note 1
|
Basis of
Presentation
|
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States, or GAAP,
have been condensed or omitted. Results of operations for the
interim periods presented are not necessarily indicative of
results which may be expected for any other interim period or
for the year as a whole. The accompanying unaudited interim
financial statements include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation. The information
contained in this quarterly report on
Form 10-Q
should be read in conjunction with the audited financial
statements and related notes for the year ended
December 31, 2007 which are contained in the Companys
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission, or the SEC,
on March 31, 2008.
|
|
Note 2
|
Formation
and Business of the Company
|
VirnetX Holding Corporation (we, us,
our or the Company) is a development
stage company focused on commercializing a patent portfolio for
providing solutions for secure real-time communications such as
instant messaging, or IM, and voice over Internet protocol, or
VoIP.
In July 2007 we effected a merger between PASW, Inc., a company
which had at the time of the merger, publicly traded common
stock with limited operations, and VirnetX, Inc., which became
our principal operating subsidiary. As a result of this merger,
the former security holders of VirnetX, Inc. came to own a
majority of our outstanding common stock.
Under GAAP, the accompanying financial statements have been
prepared as if VirnetX, Inc., a company with an inception date
of August 2, 2005 and which is our predecessor for
accounting purposes, had acquired PASW, Inc. on July 5,
2007. Accordingly, the accompanying statements of operations
include the consolidated results for the periods ended
September 30, 2008 as well as the deficit accumulated
during the development stage, which includes the operations of
VirnetX, Inc. from August 2, 2005 to September 30,
2008 and the operations of PASW, Inc. from July 5, 2007 to
September 30, 2008. The historical share activity of
VirnetX, Inc. has been retroactively restated to account for the
exchange rate used in affecting the merger and for a one for
three reverse stock split completed on October 29, 2007.
Our principal business activities to date are our efforts to
commercialize our patent portfolio. We also conduct the
remaining activities of PASW, Inc., which are generally limited
to the collection of royalties on certain Internet-based
communications by a wholly owned Japanese subsidiary of PASW,
Inc. pursuant to the terms of a single license agreement. The
revenue generated by this agreement is not significant.
Although we believe we may derive revenues in the future from
our principal patent portfolio and are currently endeavoring to
develop certain of those patents into marketable products, we
have not done so to date. As such, we are in the development
stage and consequently are subject to the risks associated with
development stage companies, including the need for additional
financings, the uncertainty that our patent and technology
licensing program development efforts will produce
revenue-bearing licenses for us, the uncertainty that our
development initiatives will produce successful commercial
products as well as the uncertainty of marketing and customer
acceptance of such products.
|
|
Note 3
|
Earnings
Per Share
|
SFAS No. 128, Earnings Per Share requires
presentation of basic earnings per share and diluted earnings
per share. Basic earnings per share are computed by dividing
earnings available to common stockholders by the weighted
average number of outstanding common shares during the period.
Diluted earnings per share is computed by dividing net income by
the weighted average number of shares outstanding
F-25
VIRNETX
HOLDING CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
including potentially dilutive securities such as options,
warrants and convertible debt. Because we incurred a loss for
each period presented, all such potentially dilutive securities
have been excluded because their effect would be anti-dilutive.
|
|
Note 4
|
Patent
Portfolio
|
As of September 30, 2008, we had 11 issued U.S. and
eight issued foreign technology related patents, and have
several pending U.S. and foreign patent applications. The
term of our issued U.S. and foreign patents runs through
the period 2019 to 2024. Most of our issued patents were
acquired by our principal operating subsidiary, VirnetX, Inc.,
from Science Applications International Corporation, or SAIC,
pursuant to an Assignment Agreement dated December 21,
2006, and a Patent License and Assignment Agreement dated
August 12, 2005, as amended on November 2, 2006,
including documents prepared pursuant to the November amendment,
and as further amended on March 12, 2008. We are required
to make payments to SAIC based on the revenue generated from our
ownership or use of the patents assigned to us by SAIC. Minimum
annual royalty payments of $50,000 are due beginning in 2008.
Royalty amounts vary depending upon the type of revenue
generating activities, and certain royalty categories are
subject to maximums and other limitations. We have granted SAIC
a security interest in some of our intellectual property,
including the patents and patent applications we obtained from
SAIC, to secure these payment obligations.
Generally upon our default of our agreement with SAIC and
certain other events, we are required to convey to SAIC our
interests in the patents and patent applications acquired from
SAIC without consideration.
During the nine months ended September 30, 2008, we made
our first minimum annual payment of $50,000 to SAIC. As of
September 30, 2008, we had not received any royalty revenue
on the patents nor begun to amortize the related intangible
asset.
We lease our office facility under a non-cancelable operating
lease that ends in 2012. We recognize rent expense on a
straight-line basis over the term of the lease.
|
|
|
|
|
|
|
Minimum Required Lease
|
|
For the Period
|
|
Payments in Period
|
|
|
October 1 through December 31, 2008
|
|
$
|
9,409
|
|
2009
|
|
|
42,100
|
|
2010
|
|
|
53,400
|
|
2011
|
|
|
58,900
|
|
2012
|
|
|
40,300
|
|
|
|
|
|
|
|
|
$
|
204,109
|
|
|
|
|
|
|
In 2005, VirnetX, Inc. adopted the 2005 Stock Plan, or the Plan,
which was assumed by us upon the closing of the transaction
between VirnetX Holding Corporation and VirnetX, Inc. on
July 5, 2007. The Plan provides for the granting of stock
options and restricted stock units to our employees, directors
and consultants. Stock options granted under the Plan may be
incentive stock options or nonqualified stock options. Incentive
stock options, or ISOs, may only be granted to our employees
(including officers and directors). Nonqualified stock options,
or NSOs, may be granted to our employees and consultants.
F-26
VIRNETX
HOLDING CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Options under the Plan may be granted for a period of up to ten
years and at prices not less than 85% of the estimated fair
market value of the shares on the date of grant as determined by
the board of directors, provided, however, that the exercise
price of an ISO and NSO shall not be less than 100% or 85% of
the estimated fair market value of the shares at the date of
grant, respectively, and the exercise price of an ISO and NSO
granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant.
There were 4,318,596 options outstanding at September 30,
2008 and 4,068,595 at December 31, 2007 with an average
exercise price of $4.34 at September 30, 2008 and $2.94 at
December 31, 2007. As of September 30, 2008, there
were 2,801,391 shares available to be granted under the
Plan.
There were 100,000 options granted during the period
July 1, 2008 through September 30, 2008. No options
were exercised in the nine months ended September 30, 2008.
|
|
Note 7
|
Stock-Based
Compensation
|
We account for equity instruments issued to employees in
accordance with the provisions of Statement of Financial
Accounting Standard No. 123 (revised 2004), Shared-Based
Payment, or SFAS 123(R), which requires that such
issuances be recorded at their fair value on the grant date.
Expense recognized is subject to periodic adjustment as the
underlying equity instrument vests. We have elected to adopt the
modified retrospective application method as provided by
SFAS 123(R) and, accordingly, financial statement amounts
for the periods presented herein reflect results as if the fair
value method of expensing equity awards had been applied from
inception.
Stock-based compensation expense is included in general and
administrative expense for each period ended September 30,
2008. Total stock-based compensation expense was $678,646 and
$1,915,544 for the three and nine months ended
September 30, 2008 respectively.
As of September 30, 2008, the unrecorded deferred
stock-based compensation balance related to stock options was
$7,886,317, which will be amortized as expense over the related
vesting period. As of September 30, 2008, the weighted
average vesting period was approximately 2.0 years.
The fair value of option grants was estimated on the date of
grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Volatility
|
|
|
190.00
|
%
|
|
|
100.00
|
%
|
Risk-free interest rate
|
|
|
3.83
|
%
|
|
|
3.32
|
%
|
Expected life
|
|
|
6.3 years
|
|
|
|
6.5 years
|
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average grant date fair value of stock options granted
|
|
$
|
3.54
|
|
|
$
|
4.96
|
|
The expected life was determined using the simplified method
outlined in Staff Accounting Bulletin No. 107,
extended by SAB 110, using the average of the vesting term
and the contractual term of the option. Expected volatility of
the stock options was based upon historical data and other
relevant factors, such as the volatility of comparable
publicly-traded companies at a similar stage of life cycle. The
Company has not provided an estimate for forfeitures because the
Company has no history of forfeited options and believes that
all outstanding options at September 30, 2008 will vest. In
the future, the Company may change this estimate based on actual
and expected future forfeiture rates.
F-27
During 2007, we issued warrants to purchase 266,667 shares
of our common stock at $0.75 per share. The warrants expire in
2012. In January 2008, 233,334 of these warrants were exercised
in a cashless exercise transaction. As a result of the January
2008 exercise, a total of 203,911 shares of our common
stock were issued. In March 2008, 33,333 of these warrants were
exercised in a cashless exercise transaction. As a result of the
March 2008 exercise, a total of 28,860 shares of our common
stock were issued.
During 2007, we issued warrants to purchase 300,000 shares
of our common stock at $4.80 per share to the underwriter of our
December 2007 stock issuance. Those warrants are first
exercisable in 2008 and expire in 2012.
We believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft
on February 15, 2007 by filing a complaint in the United
States District Court for the Eastern District of Texas, Tyler
Division, or the District Court. Pursuant to the complaint, we
allege that Microsoft infringes two of our U.S. patents:
U.S. Patent No. 6,502,135 B1, entitled Agile
Network Protocol for Secure Communications with Assured System
Availability, and U.S. Patent No. 6,839,759 B2,
entitled Method for Establishing Secure Communication Link
between Computers of Virtual Private Network without User
Entering Any Cryptographic Information. On April 5,
2007, we filed an amended complaint specifying certain accused
products at issue and alleging infringement of a third, recently
issued U.S. patent: U.S. Patent No. 7,188,180 B2,
entitled Method for Establishing Secure Communication Link
between Computers of Virtual Private Network. We are
seeking both damages, in an amount subject to proof at trial,
and injunctive relief. Microsoft answered the amended complaint
and asserted counterclaims against us on May 4, 2007.
Microsoft counterclaimed for declarations that the three patents
are not infringed, are invalid and are unenforceable. Microsoft
seeks an award of its attorneys fees and costs. We filed a
reply to Microsofts counterclaims on May 24, 2007. We
have served our infringement contentions directed to certain of
Microsofts operating system and unified messaging and
collaboration applications.
A Markman hearing on claim construction is scheduled for
February 2009, and the trial is scheduled to begin on
October 12, 2009. On March 31, 2008, Microsoft filed
its Motion to Dismiss our case. On June 3, 2008, the court
denied the Motion to Dismiss filed by Microsoft. The
courts order denying Microsofts motion expressly
confirms our constitutional standing to sue for patent
infringement. Also pursuant to the court decision on
June 10, 2008, SAIC joined us in our lawsuit as a
plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
Although we believe Microsoft infringes three of our patents and
we intend to vigorously pursue this case, at this stage of the
litigation the outcome cannot be predicted. Additionally, the
Microsoft litigation will be costly and time-consuming, and we
can provide no assurance that we will obtain a judgment against
Microsoft for damages
and/or
injunctive relief. Should the District Court issue a judgment in
favor of Microsoft, and in connection with such judgment
determine that we had acted in bad faith or with fraudulent
intent, or we were otherwise found to have exhibited inequitable
conduct, the Court could award attorney fees to Microsoft, which
would be payable by us.
Because the outcome of this litigation cannot be estimated at
this time, we have made no provision for loss or future expenses
in the accompanying financial statements.
F-28
2,500,000 Shares of Common
Stock
Warrants to Purchase
3,750,000 Shares of Common Stock
VIRNETX HOLDING
CORPORATION
PROSPECTUS
Gilford Securities
Incorporated
,
2009
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 14.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth all expenses to be paid by us in
connection with this offering based on an assumed public
offering price of $1.50. All amounts shown are estimates other
than the registration fee and assume no exercise of warrants.
|
|
|
|
|
|
|
Amount to be
|
|
|
|
Paid
|
|
|
SEC registration fee
|
|
$
|
696
|
|
Printing and engraving
|
|
|
90,000
|
|
Underwriters fees and expenses
|
|
|
297,500
|
|
Legal fees and expenses
|
|
|
300,000
|
|
Accounting fees and expenses
|
|
|
13,000
|
|
Miscellaneous
|
|
|
333,000
|
|
Total
|
|
|
1,034,196
|
|
|
|
Item 15.
|
Indemnification
of Directors and Officers.
|
Delaware
General Corporation Law
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed
actions, suits or proceedings in which such person is made a
party by reason of such person being or having been a director,
officer, employee or agent to the company. The Delaware General
Corporation Law provides that Section 145 is not exclusive
of other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability for any breach of the directors duty
of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, for unlawful payments
of dividends or unlawful stock repurchases, redemptions or other
distributions or for any transaction from which the director
derived an improper personal benefit.
Certificate
of Incorporation
Our Certificate of Incorporation provides that the personal
liability of the directors of the company shall be eliminated to
the fullest extent permitted by the provisions of
Section 102(b)(7) of the Delaware General Corporation Law,
as the same may be amended and supplemented.
Our Certificate of Incorporation provides that the company
shall, to the fullest extent permitted by the provisions of
Section 145 of the Delaware General Corporation Law, as the
same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section
from and against any and all of the expenses, liabilities or
other matters referred to in or covered by said section, and the
indemnification provided for therein shall not be deemed
exclusive of any other rights to which those indemnified may be
entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such
II-1
office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a
person.
Indemnification
Agreements
We have also entered into indemnification agreements with our
directors and officers. The indemnification agreements provide
indemnification to our directors and officers under certain
circumstances for acts or omissions which may not be covered by
directors and officers liability insurance.
Liability
Insurance
We have also obtained directors and officers
liability insurance, which insures against liabilities that our
directors or officers may incur in such capacities.
A list of exhibits included as part of this registration
statement is set forth in the Exhibit Index.
(a)
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to
II-2
such purchaser by means of any of the following communications,
the undersigned registrant will be a seller to the purchaser and
will be considered to offer or sell such securities to such
purchaser:
i. Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
The undersigned registrant will provide to the underwriter at
the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430(A) and contained in a form of prospectus filed by
the undersigned registrant pursuant to Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this
registration statement as of the time the SEC declared it
effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of
those securities.
The undersigned registrant hereby further undertakes that:
For determining liability under the Securities Act to any
purchaser: Each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other
than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the
registration statement will, as to any purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-1
and has duly caused this Amendment No. 8 to the Registration
Statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Scotts Valley, State of California,
on January 26, 2009.
VIRNETX HOLDING CORPORATION
Name: Kendall Larsen
|
|
|
|
Title:
|
President and Chief Executive Officer
|
In accordance with the requirements of the Securities Act, this
Registration Statement on
Form S-1
was signed by the following persons in the capacities and on the
dates stated:
|
|
|
|
|
|
|
Signature and Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ Kendall
Larsen
Kendall
Larsen
|
|
President, Chief Executive Officer (Principal Executive Officer)
and Director
|
|
January 26, 2009
|
|
|
|
|
|
*
William
E. Sliney
|
|
Chief Financial Officer (Principal Accounting and Financial
Officer)
|
|
January 26, 2009
|
|
|
|
|
|
*
Edmund
C. Munger
|
|
Director
|
|
January 26, 2009
|
|
|
|
|
|
*
Scott
C. Taylor
|
|
Director
|
|
January 26, 2009
|
|
|
|
|
|
*
Michael
F. Angelo
|
|
Director
|
|
January 26, 2009
|
|
|
|
|
|
*
Thomas
M. OBrien
|
|
Director
|
|
January 26, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Kendall
Larsen
Kendall
Larsen
Attorney-in-fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement between VirnetX Holding
Corporation and Gilford Securities Incorporated*
|
|
2
|
.1
|
|
Agreement and Plan of Merger of PASW, Inc., a Delaware
corporation and PASW, Inc., a California corporation dated
May 25,
2007(1)
|
|
2
|
.2
|
|
Certificate of Merger filed with the Secretary of State of the
State of Delaware on May 30,
2007(1)
|
|
2
|
.3
|
|
Agreement and Plan of Merger and Reorganization among PASW,
Inc., VirnetX Acquisition, Inc. and VirnetX, Inc. dated as of
June 12,
2007(1)
|
|
3
|
.1
|
|
Certificate of Incorporation of the
Company(1)
|
|
3
|
.2
|
|
By-Laws of the
Company(1)
|
|
4
|
.1
|
|
Form of Warrant Agency Agreement by and between VirnetX Holding
Corporation and Corporate Stock Transfer, Inc. as Warrant Agent*
|
|
4
|
.2
|
|
Form of Underwriters Warrant*
|
|
5
|
.1
|
|
Opinion of Orrick, Herrington & Sutcliffe LLP*
|
|
10
|
.1
|
|
Amendment No. 2 to Patent License and Assignment Agreement
by and between VirnetX, Inc. and Science Applications
International Corporation, dated as of March 12,
2008(2)
|
|
10
|
.2
|
|
IP Brokerage Agreement by and between ipCapital Group, Inc. and
VirnetX, Inc., effective as of March 13,
2008(2)
|
|
10
|
.3
|
|
Engagement Letter by and between VirnetX Holding Corporation and
ipCapital Group, Inc. dated March 12,
2008(2)
|
|
21
|
.1
|
|
Subsidiaries of the
Registrant(3)
|
|
23
|
.1
|
|
Consent of Farber Hass Hurley LLP, Independent Auditors
|
|
23
|
.2
|
|
Consent of Burr, Pilger & Mayer LLP, Independent
Accountants
|
|
23
|
.3
|
|
Consent of Orrick, Herrington & Sutcliffe LLP
(contained in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (contained in the signature pages hereto)
|
|
99
|
.1
|
|
2007 Stock
Plan(4)
|
|
|
|
* |
|
Previously filed. |
|
(1) |
|
Incorporated by reference to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
July 12, 2007. |
|
(2) |
|
Incorporated by reference to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
March 18, 2008. |
|
(3) |
|
Incorporated by reference to the Companys Form 10-K filed
with the Securities and Exchange Commission on March 31,
2008. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-8
filed with the Securities and Exchange Commission on
March 25, 2008. |
exv23w1
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
We hereby consent to the use in this Registration Statement on
Form S-1
of our report dated March 31, 2008 relating to the
financial statements of VirnetX Holding Corporation as of
December 31, 2007 and for the year then ended and for the
cumulative period from August 2, 2005 (date of inception)
to December 31, 2007 which appear in such Registration
Statement. We also consent to the reference to us under the
heading Experts in such Registration Statement.
/s/ Farber Hass Hurley LLP
Farber Hass Hurley LLP
Granada Hills, CA
January 26, 2009
exv23w2
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We
hereby consent to the use in this Amendment No. 8 to the Registration Statement on
Form S-1 of our report dated April 30, 2007,
except for the effects of the 1-for-3 reverse stock split discussed
in Note 1 of the financial statements as to which the date is March 31, 2008, relating to the
financial statements of VirnetX, Inc. as of December 31, 2005 and 2006 and for the period from
August 2, 2005 (date of inception) to December 31, 2005 and
the year ended December 31, 2006, which appears in
such Registration Statement. We also consent to the reference to us
under the heading Experts in such Registration Statement.
|
|
|
|
|
|
|
|
/s/ Burr, Pilger & Mayer LLP
|
|
|
Palo Alto, California |
|
|
January 23, 2009 |
|
|
|
corresp
|
|
|
|
|
ORRICK, HERRINGTON & SUTCLIFFE LLP
1000 Marsh Road
Menlo Park, CA 94025
tel 650-614-7400
fax 650-614-7401
www.orrick.com |
|
|
|
|
|
|
|
|
|
|
|
Lowell D. Ness |
|
|
|
|
(650) 614-7455 |
|
|
|
|
lness@orrick.com |
January 26, 2009
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission (Mail Stop 4561)
100 F Street, N.E.
Washington, D.C. 20549
Re: |
|
VirnetX Holding Corporation (the Company)
Registration Statement on Form S-1 (the Registration Statement)
File No. 333-153645 |
Dear Ms. Jacobs,
In
connection with todays filing of Amendment No. 8 to the Registration Statement, a marked copy of
the Registration Statement, which shows all changes made since the filing of Amendment No. 7 to the
Registration Statement on January 16, 2009, has been provided to you under separate cover. The
changes have been made largely as a result of the reduction in the size of the offering in light of the current difficult capital market conditions. The changes reflect a revision to the number of shares and
associated warrants being sold pursuant to the Registration Statement and a change to the assumed public
offering price. The changes to the Registration Statement are confined to the
fee table on the cover page of the Registration Statement and, in the
Prospectus, the offering summary, the use of proceeds, the
description of securities, the disclosure relating to the
Companys cash position and liquidity contained in the risk
factors and the MD&A, and
underwriting. Conforming changes have also been made to Item 14
in Part II of the Registration Statement.
The revisions to the fee table stem from discussions had by DLA Piper (US),
underwriters counsel, with Mr. Biles and Mr. Buchanan in the Financial Industry Regulatory Authoritys
Corporate Financing Department and are intended to conform the proposed maximum aggregate offering amount reflected in the fee table to the reduced offering size, which, the Company has been informed,
will greatly facilitate the Departments issuance of its non-objection opinion with respect to the underwriting arrangements.
Although the size of the offering has decreased since the filing of Amendment No. 7 to the Registration
Statement, the Companys intended use of
proceeds from the offering has not changed. However, as these changes do affect the expected net
proceeds from the offering, the Company has accordingly revised the number of months for which it
may have sufficient liquidity to pursue its operations, in conformity with Comment No. 2 in the Staffs comment letter dated January 13, 2009.
Should you have any questions, please contact me at (650) 714-7455.
January 26, 2009
VirnetX Holding Corporation
Page 2
Thank you in advance for your continued assistance with this offering.
Very truly yours,
|
|
|
|
|
|
Lowell D. Ness |
|
|
Orrick, Herrington & Sutcliffe LLP |
|
|
cc: Kendall Larsen (VirnetX Holding Corporation)
Christopher C. Paci (DLA Piper LLP (US))
/Enclosures/
2