þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the quarterly period ended September 30, 2009
|
OR
|
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Delaware
|
77-0390628
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
5615
Scotts Valley Drive, Suite 110
|
|
Scotts
Valley, California
|
95066
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
Page
|
|
|
Item
1. Financial
Statements (Unaudited)
|
3
|
Condensed Consolidated Balance Sheets at September 30, 2009 and December
31, 2008
|
3
|
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2009 and 2008
|
4
|
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2009 and 2008
|
5
|
Notes to Condensed Consolidated Financial Statements
|
6
|
Item
2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
|
13
|
Item
3. Quantitative and
Qualitative Disclosures About Market Risk
|
19
|
Item
4. Controls
and Procedures
|
19
|
PART
II — OTHER INFORMATION
|
|
|
|
Item
1. Legal
Proceedings
|
20
|
Item
1A. Risk Factors
|
21
|
Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds
|
35
|
Item
3. Defaults
Upon Senior Securities
|
36
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
36
|
Item
5. Other
Information
|
36
|
Item
6. Exhibits
|
36
|
Signatures
|
38
|
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
||
|
|
(Unaudited)
|
|
|
|
|||
ASSETS
|
|
|
|
|
||||
Current
assets
|
|
|
|
|
|
|
||
Cash
and cash equivalents
|
|
$
|
4,016,248
|
|
|
$
|
457,155
|
|
Accounts
receivable, net
|
|
|
—
|
|
|
|
1,154
|
|
Prepaid
expense and other current assets
|
90,008
|
189,847
|
||||||
Total
current assets
|
|
|
4,106,256
|
|
|
|
648,156
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
23,994
|
|
|
|
32,565
|
|
Intangibles
|
|
|
168,000
|
|
|
|
204,000
|
|
Deferred
offering costs
|
|
|
—
|
|
|
|
94,261
|
|
Total
assets
|
|
$
|
4,298,250
|
|
|
$
|
978,982
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
4,203,919
|
|
|
$
|
1,669,333
|
|
Current
portion of long-term obligation
|
|
|
40,000
|
|
|
|
44,000
|
|
Total
current liabilities
|
|
|
4,243,919
|
|
|
|
1,713,333
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligation, net of current portion
|
|
|
120,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001 per share, authorized 10,000,000 shares; issued
and outstanding: 0
shares at September 30, 2009 and December 31, 2008,
respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, par value $0.0001 per share, authorized 100,000,000 shares, issued
and outstanding:39,750,927
shares at September 30, 2009 and 34,899,985 at December 31, 2008,
respectively
|
|
|
3,975
|
|
|
|
3,489
|
|
Additional
paid-in capital
|
|
|
32,931,376
|
|
|
|
22,150,321
|
|
Deficit
accumulated during the development stage
|
|
|
(33,001,020
|
)
|
|
|
(23,048,161
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
(65,669
|
)
|
|
|
(894,351
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,298,250
|
|
|
$
|
978,982
|
|
Three
months ended
September
30, 2009
|
Three
months ended
September
30, 2008
|
|||||||
Revenue
— royalties
|
|
$
|
3,233
|
|
|
$
|
23,905
|
|
Operating
expense
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
215,243
|
|
|
|
215,513
|
|
General
and administrative
|
|
|
2,412,101
|
|
|
|
2,755,568
|
|
Total
operating expense
|
|
|
(2,627,344
|
)
|
|
|
(2,971,081
|
)
|
Loss
from operations
|
|
|
(2,624,111
|
)
|
|
|
(2,947,176
|
)
|
Interest
and other income, net
|
|
|
1,360
|
|
|
|
24,301
|
|
Net
loss
|
|
$
|
(2,622,751
|
)
|
|
$
|
(2,922,875
|
)
|
Basic
and diluted loss per share
|
$
|
(0.07
|
)
|
$ | (0.08 |
)
|
||
Weighted
average shares outstanding
|
|
|
37,264,263
|
|
|
34,899,985
|
|
|
|
Nine
months ended
September
30, 2009
|
|
|
Nine
months ended September 30, 2008
|
|
|
For
the period
August
2, 2005
(Date
of Inception) to
September
30, 2009
|
|
|||
Revenue
— royalties
|
|
$
|
13,594
|
|
|
$
|
107,955
|
|
|
$
|
222,204
|
|
Operating
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
657,499
|
|
|
|
633,335
|
|
|
|
2,797,326
|
|
General
and administrative
|
|
|
9,313,786
|
|
|
|
8,620,276
|
|
|
|
30,544,654
|
|
Total
operating expense
|
|
|
(9,971,285
|
)
|
|
|
(9,253,611
|
)
|
|
|
(33,341,980
|
)
|
Loss
from operations
|
|
|
(9,957,691
|
)
|
|
|
(9,145,656
|
)
|
|
(33,119,776
|
)
|
|
Interest
and other income, net
|
|
|
4,832
|
|
|
|
142,454
|
|
|
118,756
|
|
|
Net
loss
|
|
$
|
(9,952,859
|
)
|
|
$
|
(9,003,202
|
)
|
|
$
|
(33,001,020
|
)
|
Basic
and diluted loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
37,264,263
|
|
|
|
34,866,480
|
|
|
|
|
|
|
|
Nine
months ended
September
30, 2009
|
|
|
Nine
months ended
September
30, 2008
|
|
|
Cumulative
Period
from
August
2, 2005
(Date
of Inception) to
September 30, 2009
|
|
|||
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|||
Net
loss
|
|
$
|
(9,952,859
|
)
|
|
|
(9,003,202
|
)
|
|
|
(33,001,020
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
2,232,876
|
|
|
|
1,915,544
|
|
|
|
6,745,925
|
|
Depreciation
and amortization
|
|
|
47,999
|
|
|
|
13,470
|
|
|
|
142,920
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
100,993
|
|
|
(128,614)
|
|
|
|
(199,503
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
2,534,586
|
|
|
|
937,644
|
|
|
|
4,204,127
|
|
Net
cash used in operating activities
|
|
|
(5,036,405
|
)
|
|
|
(6,265,158
|
)
|
|
(22,107,551
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(3,430
|
)
|
|
|
(16,119
|
)
|
|
|
(81,877
|
)
|
Cash
acquired in acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
14,009
|
|
Net
cash used in investing activities
|
|
|
(3,430
|
)
|
|
|
(16,119
|
)
|
|
(67,868
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
Repayment
of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(250,000
|
)
|
Proceeds
from issuance of preferred stock, net of issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
1,147,625
|
|
Proceeds
from issuance of restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
2,180
|
|
Proceeds
from advance from preferred stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
230,000
|
|
Proceeds
from exercise of options
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
Proceeds
from convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
Payment
of royalty obligation less imputed interest
|
|
|
(44,000
|
)
|
|
|
(48,000
|
)
|
|
|
(92,000
|
)
|
Proceeds
from sale of common stock and warrants, net
|
|
|
8,642,928
|
|
|
|
—
|
|
|
|
23,373,862
|
|
Net
cash provided by (used in) financing activities
|
|
|
8,598,928
|
|
|
|
(48,000
|
)
|
|
26,191,667
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,559,093
|
|
|
(6,329,277
|
)
|
|
4,016,248
|
|
||
Cash
and cash equivalents, beginning of period
|
|
|
457,155
|
|
|
|
8,589,447
|
|
|
|
—
|
|
Cash
and cash equivalents, end of period
|
$
|
4,016,248 |
$
|
2,260,170
|
$ |
4,016,248
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for taxes
|
|
$
|
5,373
|
|
|
$
|
—
|
|
|
$
|
15,374
|
|
Cash
paid during the period for interest
|
|
$
|
6,000
|
|
|
$
|
—
|
|
|
53,252
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of advance into preferred stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230,000
|
|
Royalty
obligation assumed to obtain intangible assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
252,000
|
|
For
the Period
|
|
Minimum
Required
Lease
Payments
in
Period
|
|
|
October
1 through December 31, 2009
|
|
$
|
12,778
|
|
2010
|
|
|
54,595
|
|
2011
|
|
|
59,242
|
|
2012
|
|
|
30,202
|
|
|
|
$
|
156,817
|
|
|
|
|
|
|
Options
Outstanding
|
|
||||||
|
|
Shares
Available
|
|
|
Number
|
|
|
Weighted
Average
|
|
|||
|
|
for
Grant
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Balance
at December 31, 2008
|
|
|
2,651,392
|
|
|
|
4,468,595
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock units granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
granted
|
|
|
(1,317,195
|
)
|
|
|
1,317,195
|
|
|
|
1.18
|
|
Options
exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
1,334,197
|
|
|
|
5,785,790
|
|
|
$
|
2.58
|
|
|
|
Nine
months ended
September
30, 2009
|
|
Year
Ended
December
31, 2008
|
||||
Volatility
|
|
|
120.00
|
%
|
|
|
190.00
|
%
|
Risk-free
interest rate
|
|
|
2.93
|
%
|
|
|
4.21
|
%
|
Expected
life
|
|
6.1
years
|
|
|
6.7
years
|
|
||
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average
grant date fair value of stock options granted
|
|
$
|
1.18
|
|
|
$
|
3.09
|
|
·
|
our
lawsuit against Microsoft;
|
·
|
infrastructure;
|
·
|
sales
and marketing;
|
·
|
research
and development;
|
·
|
personnel;
and
|
·
|
general
business enhancements.
|
·
|
our
lawsuit against Microsoft;
|
·
|
infrastructure;
|
·
|
sales
and marketing;
|
·
|
research
and development;
|
·
|
personnel;
and
|
·
|
general
business enhancements.
|
·
|
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.
|
·
|
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;
|
·
|
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.
|
·
|
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.
|
·
|
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
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.
|
·
|
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.
|
·
|
substantially
greater financial, technical and marketing
resources;
|
·
|
a
larger customer
base;
|
·
|
better
name recognition;
and
|
·
|
more
expansive product
offerings.
|
·
|
our
applications for patents, trademarks and copyrights relating to our
business may not be granted and, if granted, may be challenged or
invalidated;
|
·
|
issued
trademarks, copyrights, or patents may not provide us with any competitive
advantages;
|
·
|
our
efforts to protect our intellectual property rights may not be effective
in preventing misappropriation of our technology;
or
|
·
|
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.
|
·
|
the need for continued development of the financial and information management systems; |
·
|
the
need to manage relationships with future licensees, resellers,
distributors and strategic
partners;
|
·
|
the
need to hire and retain skilled management, technical and other personnel
necessary to support and manage our business;
and
|
·
|
the
need to train and manage our employee
base.
|
·
|
challenges
caused by distance, language and cultural
differences;
|
·
|
legal,
legislative and regulatory
restrictions;
|
·
|
currency
exchange rate
fluctuations;
|
·
|
economic
instability;
|
·
|
longer
payment cycles in some
countries;
|
·
|
credit
risk and higher levels of payment
fraud;
|
·
|
potentially
adverse tax consequences;
and
|
·
|
other
higher costs associated with doing business
internationally.
|
·
|
developments
in our litigation against
Microsoft;
|
·
|
large
purchases or sales of common
stock;
|
·
|
actual
or anticipated announcements of new products or services by us or our
competitors;
|
·
|
general
conditions in the markets in which we compete;
and
|
·
|
general
economic and financial
conditions.
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
Super majority requirement for
stockholder amendments to the Bylaws: Stockholder
proposals to alter or amend our Bylaws or to adopt new Bylaws can only be
approved by the affirmative vote of at least 66 2/3% of the outstanding
shares.
|
·
|
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.
|
Exhibit
Number
|
|
Description
|
|
|
|
4.1
|
|
Form of Series I Warrant attached as Exhibit C-I
to the Securities Purchase Agreement dated September 2, 2009
(1)
|
|
|
|
4.2
|
Form of Series II Warrant attached as Exhibit C-II
to the Securities Purchase Agreement dated September 2, 2009
(2)
|
|
4.3
|
Form of Series III Warrant attached as Exhibit
C-III to the Securities Purchase Agreement dated September 2, 2009
(3)
|
|
4.5
|
Registration Rights Agreement dated as of
September 2, 2009 by and between VirnetX Holding Corporation and
each purchaser identified on the signature pages thereto
(4)
|
|
4.6
|
|
Securities Purchase Agreement, dated September 2, 2009, by and between VirnetX Holding Corporation, and each purchaser identified on the signature pages thereto
(5)
|
|
|
|
31.1
|
|
Certification
of the President and Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
32.1
|
|
Certification
of the President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
|
|
|
|
32.2
|
|
Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**
|
|
||
* Filed herewith.
|
||
** Furnished
herewith.
|
(1)
|
Incorporated by reference to Exhibit 4.1 to the
Company’s Form 8-K (Commission File No. 001-33852) filed with the
Securities and Exchange Commission on September 3,
2009.
|
|
|
|
|
(2)
|
Incorporated by reference to Exhibit 4.2 to the
Company’s Form 8-K (Commission File No. 001-33852) filed with the
Securities and Exchange Commission on September 3,
2009.
|
|
|
|
|
(3)
|
Incorporated by reference to Exhibit 4.3 to the
Company’s Form 8-K (Commission File No. 001-33852) filed with the
Securities and Exchange Commission on September 3,
2009.
|
|
|
|
|
(4)
|
Incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K (Commission File No. 001-33852) filed with the
Securities and Exchange Commission on September 3,
2009.
|
|
|
|
|
(5)
|
Incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K (Commission File No. 001-33852) filed with the
Securities and Exchange Commission on September 3,
2009.
|
|
VIRNETX
HOLDING CORPORATION
By: /s/ Kendall
Larsen
Kendall
Larsen
Chief
Executive Officer (Principal Executive Officer)
By:
/s/ William E.
Sliney
William
E. Sliney
Chief
Financial Officer (Principal Accounting and Financial
Officer)
|
/s/
KENDALL LARSEN
Kendall
Larsen
President
and Chief Executive Officer
(Principal
Executive Officer)
|
/s/
WILLIAM E. SLINEY
William
E. Sliney
Chief
Financial Officer
(Principal
Accounting and Financial Officer)
|
/s/
KENDALL LARSEN
Kendall
Larsen
President
and Chief Executive Officer
(Principal
Executive Officer)
|
/s/
WILLIAM E. SLINEY
William
E. Sliney
Chief
Financial Officer
(Principal
Accounting and Financial Officer)
|