PROSPECTUS |
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-162145
|
ABOUT
THIS PROSPECTUS
|
ii
|
SUMMARY
|
1
|
RISK
FACTORS
|
7
|
DIVIDEND
POLICY
|
20
|
SELECTED
FINANCIAL DATA
|
20
|
SELECTED
QUARTERLY FINANCIAL DATA
|
20
|
USE
OF PROCEEDS
|
21
|
THE
PRIVATE PLACEMENT TRANSACTION
|
21
|
MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
30
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
30
|
BUSINESS
|
31
|
MANAGEMENT
|
40
|
EXECUTIVE
COMPENSATION DISCUSSION AND ANALYSIS
|
43
|
CORPORATE
GOVERNANCE
|
52
|
SELLING
SECURITY HOLDERS
|
59
|
PLAN
OF DISTRIBUTION
|
63
|
DESCRIPTION
OF SECURITIES
|
65
|
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
69
|
LEGAL
PROCEEDINGS
|
71
|
LEGAL
MATTERS
|
72
|
EXPERTS
|
72
|
WHERE
YOU CAN FIND MORE INFORMATION
|
73
|
COMMISSION
POSITION ON INDEMNIFICATION
|
73
|
PROVISION
FOR INDEMNIFICATION
|
73
|
FINANCIAL
STATEMENTS
|
F-1
|
Background
|
We
have filed this registration statement on Form S- 1 to register shares of
our common stock and shares of our common stock underlying the Series I
Warrants, the Series II Warrants and the Series III Warrants issued in a
private placement transaction on September 11, 2009.
|
Securities
Offered Pursuant to this Prospectus
|
2,380,942
shares of common stock and an aggregate of 8,046,946 shares of common
stock underlying the warrants issued in the private placement transaction,
comprised of:
-
3,246,959 shares of common stock underlying the Series I Warrants with an
exercise price of $3.93 per share, of which (i) up to 627,923 shares of
common stock are issuable pursuant to certain anti-dilution adjustment
provisions in the Series I Warrants, and (ii) 238,094 shares of common
stock are issuable pursuant to a warrant issued to Dawson James
Securities, Inc., the placement agent in connection with the private
placement transaction;
-
2,419,045 shares of common stock underlying the Series II Warrants
exercisable on a cashless basis with an exercise price of $0.01 per share;
and
-
2,380,942 shares of common stock underlying the Series III Warrants with
an exercise price of $2.52 per share.
|
Transaction
Proceeds
|
Assuming
the cash exercise of the Series I and Series III Warrants, and including
the cash proceeds received by us from the sale of common stock issued to
the investors at the closing, we will receive gross proceeds of
approximately $22,292,759 from this transaction. We anticipate
that all net proceeds obtained by us from the transaction will be used for
our working capital purposes. See “Use of Proceeds” for further detail
about how we intend to use the proceeds under varying conditions.
Any
proceeds from the sale of the securities offered by this prospectus will
be received by the selling security holders for their own account, and we
will not receive any proceeds from the sale of any securities offered by
this prospectus.
|
NYSE
Amex symbol for our common stock
|
Our
common stock is listed on the NYSE Amex under the symbol
“VHC”.
|
|
·
|
Automatic and seamless to the
user. After a one-time registration, users connect
securely on a “zero-click” or “single-click”
basis.
|
|
·
|
Secure data
communications. Users create secure networks with people
they trust and communicate over a secure
channel.
|
|
·
|
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.
|
|
·
|
Authenticated
users. Users know they are communicating with
authenticated users with secure domain
names.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Implement
a patent and technology licensing program to commercialize our
intellectual property, including our GABRIEL Connection Technologytm.
|
|
·
|
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.
|
|
·
|
Leverage
our patent portfolio, technology and software to develop a suite of
products that can be sold directly to end-user
enterprises.
|
|
Nine
Months
Ended
September 30,
2009
|
Nine
Months
Ended
September 30,
2008
|
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
Year
Ended
December 31,
2006
|
|||||||||||||||
Revenue:
|
$ | 13,594 | $ | 107,955 | $ | 133,744 | $ | 74,866 | $ | — | ||||||||||
Total
operating expenses:
|
9,971,285 | 9,253,611 | 12,355,332 | 8,725,210 | 1,407,675 | |||||||||||||||
Total
other income (expenses), net:
|
4,832 | 142,454 | 149,408 | (41,820 | ) | 6,336 | ||||||||||||||
Net
loss:
|
$ | (9,952,859 | ) | $ | (9,003,202 | ) | $ | (12,072,180 | ) | $ | (8,692,164 | ) | $ | (1,401,339 | ) |
As
of
September 30,
2009
|
As
of
December 31,
2008
|
As
of
December 31,
2007
|
As
of
December 31,
2006
|
|||||||||||||
Cash
and cash equivalents:
|
$ | 4,016,248 | $ | 457,155 | $ | 8,589,447 | $ | 139,997 | ||||||||
Total
assets:
|
4,298,250 | 978,982 | 9,279,166 | 195,123 | ||||||||||||
Accounts
payable and accrued expenses:
|
4,203,919 | 1,669,333 | 531,790 | 87,386 | ||||||||||||
Total
stockholders’ equity (deficit):
|
$ | (65,669 | ) | $ | (894,351 | ) | $ | 8,495,376 | $ | 107,737 |
|
·
|
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.
|
For
the Nine Months ended September 30, 2009
|
For
the Nine Months ended September 30, 2008
|
For
the year ended December 31, 2008
|
For
the year ended December 31, 2007
|
For
the year ended December 31, 2006
|
Period
From August 5, 2005 (Date of Inception) to December 31, 2005
|
|||||||||||||||||||
(amounts
in thousands except per share)
|
||||||||||||||||||||||||
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||||||
Revenue
|
$ | 13,594 | $ | 107,955 | $ | 133,744 | $ | 74,866 | $ | 0 | $ | 0 | ||||||||||||
Operating
expenses
|
9,971,285 | 9,253,611 | 12,355,332 | 8,725,210 | 1,407,675 | 882,478 | ||||||||||||||||||
Net
loss
|
(9,952,859 | ) | (9,003,202 | ) | (12,072,180 | ) | (8,692,164 | ) | (1,401,339 | ) | (882,478 | ) | ||||||||||||
Loss
per share
|
$ | (.27 | ) | $ | (.26 | ) | $ | (.35 | ) | $ | (.36 | ) | (.08 | ) | $ | (.06 | ) | |||||||
Consolidated
Balance Sheet Data
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 4,016,248 | $ | 2,260,170 | $ | 457,155 | $ | 8,589,447 | $ | 139,997 | $ | 86,552 | ||||||||||||
Total
assets
|
4,298,250 | 3,079,152 | 978,982 | 9,279,166 | 195,123 | 147,722 | ||||||||||||||||||
Long-term
obligation
|
120,000 | 160,000 | 160,000 | 204,000 | 0 | 0 | ||||||||||||||||||
Stockholders
’ equity (deficit)
|
$ | (65,669 | ) | $ | 1,407,740 | $ | (894,351 | ) | $ | 8,495,376 | $ | 107,737 | $ | (82,278 | ) |
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
(amounts
in thousands except per share)
|
||||||||||||||||
2009
|
||||||||||||||||
Revenue
|
$ | 3 | $ | 7 | $ | 3 | N/A | |||||||||
Loss
from operations
|
(3,405 | ) | (3,928 | ) | (2,624 | ) | N/A | |||||||||
Net
loss
|
(3,403 | ) | (3,927 | ) | (2,623 | ) | N/A | |||||||||
Net
loss per common share
|
$ | (0.09 | ) | $ | (0.11 | ) | $ | (0.07 | ) | N/A | ||||||
2008
|
||||||||||||||||
Revenue
|
$ | 33 | $ | 51 | $ | 24 | $ | 26 | ||||||||
Loss
from operations
|
(3,102 | ) | (3,096 | ) | (2,947 | ) | (3,077 | ) | ||||||||
Net
loss
|
(3,032 | ) | (3,049 | ) | (2,923 | ) | (3,068 | ) | ||||||||
Net
loss per common share
|
$ | (0.09 | ) | $ | (0.09 | ) | $ | (0.08 | ) | $ | (0.08 | ) | ||||
2007
|
||||||||||||||||
Revenue
|
$ | 0 | $ | 0 | $ | 47 | $ | 28 | ||||||||
Loss
from operations
|
(766 | ) | (1,233 | ) | (2,589 | ) | (4,137 | ) | ||||||||
Net
loss
|
(781 | ) | (1,231 | ) | (2,566 | ) | (4,114 | ) | ||||||||
Net
loss per common share
|
$ | (0.04 | ) | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.15 | ) |
·
|
our
lawsuit against Microsoft;
|
·
|
infrastructure;
|
·
|
sales
and marketing;
|
·
|
research
and development;
|
·
|
personnel;
and
|
·
|
general
business enhancements.
|
For the Year
|
Minimum
Required Lease Payments in Period
|
|||
2009
|
$ | 44,373 | ||
2010
|
54,595 | |||
2011
|
59,242 | |||
2012
|
30,202 | |||
$ | 188,412 |
Options
Outstanding
|
||||||||||||
Shares
Available for Grant
|
Number
of Shares
|
Weighted
Average 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 | ||||||||
Restricted
stock units granted
|
— | — | — | |||||||||
Options
granted
|
(420,000 | ) | 420,000 | 3.42 | ||||||||
Options
exercised
|
— | — | — | |||||||||
Options
cancelled
|
20,000 | (20,000 | ) | 4.20 | ||||||||
Balance
at December 31, 2008
|
2,651,392 | 4,468,595 | $ | 2.98 |
·
|
Automatic and seamless to the
user. After a one-time registration, users connect
securely on a “zero-click” or “single-click” basis.
|
·
|
Secure data
communications. Users create secure networks with people
they trust and communicate over a secure channel.
|
·
|
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.
|
·
|
Authenticated
users. Users know they are communicating with
authenticated users with secure domain names.
|
·
|
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.
|
·
|
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 12 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.
|
·
|
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.
|
·
|
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.
|
·
|
Implement
a patent and technology licensing program to commercialize our
intellectual property, including our GABRIEL Connection Technology TM
.
|
·
|
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.
|
·
|
Leverage
our existing patent portfolio and technology to develop a suite of
products that can be sold directly to end-user enterprises.
|
·
|
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.
|
·
|
GABRIEL Connection
Technology TM
Software Development Kit,
or SDK: OEM customers who want to adopt the GABRIEL
Connection Technology TM
as their solution for establishing secure connections using secure domain
names within their products will purchase an SDK license. The
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.
|
·
|
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:
|
·
|
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.
|
·
|
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.
|
·
|
Relay server
software: Allows customers to dynamically maintain
connections and relay data to private IP addresses for network devices
that reside behind firewalls.
|
·
|
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.
|
·
|
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 Technology TM
in an individual customer’s products and services.
|
·
|
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.
|
·
|
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 design results in SBCs becoming a
single point of congestion on the network, as well as a single point of
failure. SBCs are also limited to the physical network they
secure.
|
·
|
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 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.
|
U.S.
Patent Number
Link
to Patent
|
Title
of Patent
|
6,502,135
|
Agile
network protocol for secure communications with assured system
availability
|
6,618,761
|
Agile
network protocol for secure communications with assured system
availability
|
6,826,616
|
Method
for establishing secure communication link between computers of virtual
private network
|
6,834,310
|
Preventing
packet flooding of a computer on a computer network
|
6,839,759
|
Method
for establishing secure communication link between computers of virtual
private network without user entering any cryptographic information
|
6,907,473
|
Agile
network protocol for secure communications with assured system
availability
|
7,010,604
|
Agile
network protocol for secure communications with assured system
availability
|
7,133,930
|
Agile
network protocol for secure communications with assured system
availability
|
7,188,180
|
Method
for establishing secure communication link between computers of virtual
private network
|
7,209,479
|
Third
party VPN certification
|
7,418,504
|
Agile
network protocol for secure communications using secure domain names
|
7,490,151
|
Establishment
of a secure communication link based on a domain name service (DNS)
request
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
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 VirnetX’s 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 VirnetX’s 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
VirnetX’s industry, and (3) actual product returns and allowances.
|
·
|
Royalty
payments are calculated based on each quarter and payment is due within
30 days following the end of each quarter.
|
·
|
Beginning
18 months after January 1, 2007, we must make a minimum
guaranteed annual royalty payment of $50,000.
|
·
|
The
maximum cumulative royalty paid in respect to our revenue-generating
activities in our field of use shall be no more than $35 million.
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
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:
|
·
|
our
failure to pay SAIC an aggregate cumulative amount of at least
$7.5 million within seven years after January 1, 2007;
|
·
|
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
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
Name
|
Age
|
Position
|
Kendall
Larsen
|
52
|
President,
Chief Executive Officer and Director
|
William
E. Sliney
|
71
|
Chief
Financial Officer (Interim)
|
Edmund
C. Munger
|
65
|
Director
|
Scott
C. Taylor
|
45
|
Director
|
Michael
F. Angelo
|
50
|
Director
|
Thomas
M. O’Brien
|
43
|
Director
|
|
·
|
Early and late stage private
companies using a semi-annual survey of private, venture-backed companies
that have received at least one round of financing from a professional
U.S.-based venture capital firm. 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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
attracting and retaining the most
talented and dedicated executives
possible;
|
|
·
|
correlating annual and long-term
cash and stock incentives to achievement of measurable performance
objectives; and
|
|
·
|
aligning executives’ incentives
with stockholder value
creation.
|
|
·
|
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 generally occurs each year in the fourth quarter
and adjustments are made from time to time to ensure market
competitiveness.
|
|
·
|
Discretionary Annual Incentive
Bonus. Each year, our compensation committee establishes a target
discretionary annual incentive bonus pool based on a percentage of an
executive’s base salary and the achievement of corporate and individual
objectives. Our compensation committee may award discretionary annual
incentive bonuses to our chief executive officer or 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.
|
|
·
|
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.
|
|
·
|
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 executive’s existing long-term incentives, and retention
considerations. In determining the number of stock options to be granted
to executives, we take into account the individual’s position, scope of
responsibility, ability to affect profits and stockholder value, the
individual’s historic and recent performance, the value of stock options
in relation to other elements of the individual executive’s total
compensation, and the individual’s potential ownership as a percentage of
our total outstanding shares relative to comparable companies. We expect
to continue to use stock options as a long-term incentive vehicle
because:
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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
|
|
·
|
the
vesting period of stock options encourages executive retention and the
preservation of stockholder
value.
|
Name
& Principal
|
|||||||||||||||||||||
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards ($) (1)
|
All
Other
Compensation
($)(2)
|
Total
($)
|
|||||||||||||||
Kendall
Larsen
|
2008
|
275,000
|
—
|
253,903
|
528,903
|
||||||||||||||||
Chief
Executive Officer, President and Director
|
2007
|
245,000
|
244,211
|
21,159
|
510,370
|
||||||||||||||||
2006
|
237,039
|
—
|
7,665
|
244,704
|
|||||||||||||||||
William
E. Sliney
|
2008
|
98,442
|
—
|
470,536
|
568,978
|
||||||||||||||||
Chief
Financial Officer
|
2007
|
36,460
|
15,313
|
39,211
|
90,984
|
||||||||||||||||
2006
|
30,000
|
30,000
|
(1)
|
The
amounts in this column reflects amounts recognized for financial statement
reporting purposes for the stated fiscal years for stock options granted
in that fiscal year and in prior fiscal years, in accordance with SFAS
123R. However, these amounts do not include any reduction for risk of
forfeiture related to service-based vesting. The option awards included in
this expense amount were granted from December 31, 2007 through
December 31, 2008. These amounts reflect our accounting expense for
these awards and do not represent the actual value that may be realized by
the Named Executive Officers. There can be no assurance that these amounts
will ever be realized. For information on the valuation assumptions used
in valuing stock option awards, refer to the Note to the consolidated
financial statements contained in the Company’s Annual Report on Form 10-K
for the fiscal year in which the stock option was granted titled “Stock
Based Compensation.”
|
|
(2)
|
The
amounts in this column reflect compensation earned by the Named Executive
Officer for consulting services he provided to the Company.
|
Number
of
|
||||||||||||||||||||
Securities
|
||||||||||||||||||||
Underlying
|
Number
of Securities
|
|||||||||||||||||||
Unexercised
|
Underlying
|
Option
|
Option
|
|||||||||||||||||
Options
|
Unexercised
Options
|
Exercise
|
Expiration
|
|||||||||||||||||
Name
|
Grant
Date
|
Exercisable
(#)
|
Unexercisable
(#)
|
Price
($)
|
Date
|
|||||||||||||||
Kendall
Larsen
|
||||||||||||||||||||
Chief
Executive Officer,
|
03/23/2006
|
41,516
|
-0-
|
0.2408712
|
03/22/2016
|
|||||||||||||||
President
and Director
|
12/31/2007
|
53,330
|
159,989
|
(1)
|
6.468
|
12/30/2012
|
||||||||||||||
William
E. Sliney
Chief
Financial Officer
|
12/31/2007
|
95,774
|
287,321
|
(1)
|
5.88
|
12/30/2017
|
(1)
|
On
the first anniversary of the date of grant, 1/4th of the shares vested and
became exercisable, with 1/48th of the shares vesting and becoming
exercisable each month thereafter.
|
|
·
|
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.
|
|
·
|
San Gabriel
Fund, LLC
|
|
·
|
JMW
Fund, LLC
|
|
·
|
John
P. McGrain
|
|
·
|
The
John P. McGrain Grantor Retained Annuity Trust u/t/d/ June 25,
2007
|
|
·
|
John
P. McGrain, SEP IRA
|
|
·
|
John
P. McGrain, 401K
|
|
·
|
The
Westhampton Special Situations Fund,
LLC
|
|
·
|
The
Kirby Enterprise Fund, LLC
|
|
·
|
Kearney
Properties, LLC
|
|
·
|
Kearney
Holdings, LLC
|
|
·
|
Charles
F. Kirby, Roth IRA
|
|
·
|
Charles
F. Kirby
|
|
·
|
all
persons known to us, based on statements filed by such persons pursuant to
Section 13(d) or 13(g) of the Exchange Act or in statements made to us, to
be the beneficial owners of more than 5% of our common stock and based on
the records of Corporate Stock Transfer, Inc., our transfer
agent;
|
|
·
|
each
director;
|
|
·
|
each
of our Named Executive Officers in the table under “Executive Compensation
— Summary Compensation Table” on page 46 of this prospectus;
and
|
|
·
|
all
current directors and executive officers as a
group.
|
Name and Address of Beneficial Owner
|
Amount
and Nature
of
Beneficial
Ownership (1)
|
Percent
Of
Class(2)
|
||
5%
or Greater Stockholders:
|
||||
Gregory
H. Bailey
c/o
15 Barberry Place, Suite 809
Toronto,
Ontario, Canada M2K1G9(3)
|
2,328,342(3)
|
5.86%
|
||
Kendall
Larsen
5615 Scotts Valley Dr., #110
Scotts Valley,
CA 95066
|
9,449,492(4)
|
23.46%
|
||
Robert
M. Levande
730
Fifth Ave., 9th Floor
New
York, NY 10019
|
2,084,101(5)
|
5.24%
|
||
Directors
and Executive Officers:
|
||||
Kendall
Larsen
|
9,449,492(4)
|
23.46%
|
||
Edmund
C. Munger
|
1,034,762(6)
|
2.54%
|
||
William
E. Sliney
|
196,713(7)
|
*
|
||
Thomas
M. O’Brien
|
161,664(8)
|
*
|
||
Michael
F. Angelo
|
86,516(9)
|
*
|
||
Scott
C. Taylor
|
45,000(10)
|
*
|
||
All
directors and executive officers as a group (6 persons):
|
10,974,147 (4)(6)(7)(8)
(9)
(10)
|
26.43%
|
||
(1)
|
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 November 30, 2009 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.
|
(2)
|
Based
upon 39,750,927 shares of common stock issued and outstanding on November
30, 2009.
|
(3)
|
Consists
of (i) 2,260,075 shares directly held by Gregory H. Bailey, and (ii)
68,267 shares held by Palantir Group, Inc., of which Mr. Bailey has voting
and investment power.
|
(4)
|
Consists
of (i) 532,198 shares issuable pursuant to options exercisable as follows:
148,175 options held by Mr. Larsen and 384,023 options held by Mrs.
Larsen; (ii) 608,530 shares held by Mrs. Larsen; (iii) 5,572 shares held
in brokerage accounts by Mrs. Larsen’s two adult children (the
“Sheehan Children”); (iv) 100,000 shares held in irrevocable trusts for
the benefit of the Sheehan Children and (v) 50,000 shares held in an
irrevocable trust for the benefit of Mr. Larsen’s son. Mr.
Larsen disclaims beneficial ownership of the 764,102 shares held by Mrs.
Larsen, the Sheehan Children and his son.
|
(5)
|
Consists
of (i) 1,876,521 shares directly held by Robert M. Levande and (ii)
207,580 shares held by the Arthur Brown Trust FBO Carolyn Brown Levande,
of which Mr. Levande has voting and investment power.
|
(6)
|
Includes
(i) 908,161 shares issuable pursuant to vested options and (ii) 35,001
shares issuable pursuant to warrants.
|
(7)
|
Includes
(i) 191,547 shares issuable pursuant to vested options and (ii) 3,000
shares issuable pursuant to warrants.
|
(8)
|
Includes
(i) 45,000 shares issuable pursuant to vested options and (ii) 69,999
shares issuable pursuant to warrants.
|
(9)
|
Includes
45,000 shares issuable pursuant to vested options.
|
(10)
|
Shares
issuable pursuant to vested options.
|
(*)
|
Less than 1% .
|
|
·
|
providing
general oversight of the business;
|
|
·
|
approving
corporate strategy;
|
|
·
|
approving
major management initiatives;
|
|
·
|
providing
oversight of legal and ethical
conduct;
|
|
·
|
overseeing
our management of significant business
risks;
|
|
·
|
selecting,
compensating, and evaluating
directors;
|
|
·
|
evaluating
Board processes and
performance; and
|
|
·
|
reviewing
and implementing recommendations and reports of the compensation committee
on our compensation
practices.
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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”;
|
|
·
|
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 recipient’s consolidated gross revenues for
that year, or $200,000, whichever is more, is not “independent” until
three years after falling below such
threshold;
|
|
·
|
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 company’s
compensation committee is not “independent” until three years after the
end of such service or employment
relationship; and
|
|
·
|
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.
|
Director
|
Nominating
and
Corporate
Governance
Committee
|
Compensation
Committee
|
Audit
Committee
|
|||
Michael
F. Angelo
|
Chair
|
X
|
X
|
|||
Kendall
Larsen
|
||||||
Edmund
C. Munger
|
||||||
Thomas
M. O’Brien
|
X
|
X
|
Chair
|
|||
Scott
C. Taylor
|
X
|
Chair
|
X
|
|
·
|
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;
|
|
·
|
developing
and recommending to our Board governance principles applicable to us,
including the Code of Ethics;
|
|
·
|
overseeing
the evaluation of our Board and
management; and
|
|
·
|
delegating
such of its authority and responsibilities as it deems proper to members
of the committee or a
subcommittee.
|
|
·
|
appointment
of and approval of compensation for our independent public accounting
firm, including oversight of its
independence;
|
|
·
|
oversight
of our accounting and financial reporting
processes;
|
|
·
|
oversight
of the audits of our financial
statements;
|
|
·
|
oversight
of the effectiveness of our internal control over financial
reporting; and
|
|
·
|
preparing
the audit committee report that the SEC requires in our annual proxy
statement.
|
|
·
|
exclusive
authority for determining our chief executive officer’s
compensation;
|
|
·
|
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;
|
|
·
|
evaluating
and recommending to our Board compensation plans, policies, and programs
for our chief executive officer and other executive
officers;
|
|
·
|
administering
our equity incentive
plans; and
|
|
·
|
preparing
the compensation committee report that the SEC requires in our annual
proxy statement.
|
|
·
|
Meetings. Our
compensation committee acted by written consent one time during the fiscal
year ended December 31,
2008; and
|
|
·
|
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.
|
|
·
|
each non-employee director will
receive a quarterly cash retainer of
$5,000;
|
|
·
|
each non-employee director who
serves as a member of our audit committee will receive a quarterly cash
retainer of $625; each non-employee director who serves as a member of our
compensation or nominating and corporate governance committees will
receive a quarterly cash retainer of $500 for each
committee;
|
|
·
|
each non-employee director who
serves as a chair of our audit committee will receive a quarterly cash
retainer of $3,125; each non-employee director who serves as a chair of
our compensation or nominating and corporate governance committees will
receive a quarterly cash retainer of $1,250;
and
|
|
·
|
each non-employee director who
attends a board meeting will receive a cash payment of $1,500 ($500 for
telephone participation) and each non-employee director who attends a
committee meeting will receive a cash payment of $1,000 ($500 for
telephone
participation).
|
|
·
|
each new non-employee director
will be granted an option to purchase 30,000 shares of common stock with a
per-share exercise price equal to the fair market value of that stock on
the date of grant and which will vest monthly with respect to 1/36th of
the total number of shares subject to the option, conditioned upon
continued service as a director; provided that these options automatically
become exercisable in full immediately prior to a “Change of Control” as
defined in the 2007 Stock Plan;
and
|
|
·
|
each existing non-employee
director will be granted an option to purchase 10,000 shares of common
stock with a per-share exercise price equal to the fair market value of
that stock on the date of grant and which will be fully vested on the date
of grant.
|
Fees
Earned
|
Option
|
|||||||||||
or
Paid in
|
Awards
|
|||||||||||
Name
|
Cash
($)
|
($)(1)
|
Total($)
|
|||||||||
Michael
F. Angelo
|
38,500
|
85,240
|
123,740
|
|||||||||
Thomas
M. O’Brien
|
44,000
|
85,240
|
129,240
|
|||||||||
Scott
C. Taylor
|
38,500
|
85,240
|
123,740
|
(1)
|
The
amounts in this column reflect amounts recognized for financial statement
reporting purposes for stock options granted in the fiscal year ended
December 31, 2008 and in prior fiscal years, in accordance with
Statement of Financial Standards (“SFAS”)
No. 123R, “Share-Based Payment” (“SFAS 123R”).
However, these amounts do not include any reduction for risk of forfeiture
related to service-based vesting. The option awards included in this
expense amount were granted from December 31, 2007 through
December 31, 2008. These amounts reflect our accounting expense for
these awards and do not represent the actual value that may be realized by
our non-executive directors. There can be no assurance that these amounts
will ever be realized. The outstanding options held by each director at
2008 year end were as follows: Mr. Angelo (40,000),
Mr. O’Brien (40,000) and Mr. Taylor (40,000).
|
Securities
Beneficially Owned Prior to Offering
|
Beneficial Ownership
After the Offering
|
||||||||
Name
of selling security holder
|
Shares
of Common Stock being registered
|
Shares
of Common Stock Underlying Warrants being registered+
|
Other
Shares and Shares Underlying other Warrants
|
Total
Shares Beneficially Owned+
|
Number
of Total Shares Being Registered
|
Total
Shares Owned After Offering (1)
|
Percent
(2)
|
||
Albert
James Poliak (26)
|
-
|
37,906
|
-
|
30,575
|
37,906
|
-
|
*
|
||
Anthony
Athanas
|
39,682
|
129,195
|
22,500(3)
|
181,862
|
168,877
|
22,500
|
*
|
||
Bret
Marc Shapiro (27)
|
-
|
15,965
|
-
|
12,877
|
15,965
|
-
|
*
|
||
Capital
Ventures International (4)
|
496,032
|
1,614,956
|
-
|
1,992,064
|
2,110,988
|
-
|
*
|
||
Chad
K. Kirby
|
55,555
|
180,874
|
43,945(5)
|
267,053
|
236,429
|
43,945
|
*
|
||
Charles
Curtis
|
39,682
|
129,195
|
5,500(6)
|
164,862
|
168,877
|
5,500
|
*
|
||
Dawson
James Securities, Inc. (7)
|
-
|
57,997
|
-
|
46,781
|
57,997
|
-
|
*
|
||
Douglas
F. Kaiser (28)
|
-
|
37,906
|
-
|
30,575
|
37,906
|
-
|
*
|
||
Drs.
Robert F. & Qin C. Ryan
|
19,841
|
64,598
|
18,750(8)
|
98,431
|
84,439
|
18,750
|
*
|
||
Frank
Salvatore (29)
|
-
|
37,906
|
-
|
30,575
|
37,906
|
-
|
*
|
||
Gregory
A. Harrison
|
39,682
|
129,195
|
36,000(9)
|
195,362
|
168,877
|
36,000
|
*
|
||
Gregory
J. Wood (10)
|
63,492
|
206,715
|
1,008,000(11)
|
1,262,983
|
270,207
|
1,008,000
|
*
|
||
Gus
Blass II
|
59,523
|
193,793
|
359,900(12)
|
598,944
|
253,316
|
359,900
|
*
|
||
Hudson
Bay Fund LP (13)
|
178,572
|
581,387
|
-
|
717,145
|
759,959
|
-
|
*
|
||
Hudson
Bay Overseas Fund Ltd. (14)
|
317,459
|
1,033,568
|
-
|
1,274,915
|
1,351,027
|
-
|
*
|
||
Jay
R. Angle
|
95,238
|
310,072
|
10,000
(24)
|
392,475
|
405,310
|
10,000
|
*
|
||
Jay
R. Kuhne
|
79,365
|
258,393
|
-
|
318,729
|
337,758
|
-
|
*
|
||
John
Baleno
|
11,904
|
38,757
|
-
|
47,806
|
50,661
|
-
|
*
|
||
John
J. Blum Jr.
|
59,523
|
193,793
|
30,000
(25)
|
269,044
|
253,316
|
30,000
|
*
|
||
John
R. Rogers
|
43,650
|
142,114
|
7,500(15)
|
182,798
|
185,764
|
7,500
|
*
|
||
Joseph
Thomas Watters, III
|
39,682
|
129,195
|
11,900(16)
|
171,262
|
168,877
|
11,900
|
*
|
||
Kenneth
J. Licht
|
39,682
|
129,195
|
100,000(17)
|
259,362
|
168,877
|
100,000
|
*
|
||
Nancy
L. Schmid
|
59,523
|
193,793
|
516,574(18)
|
755,618
|
253,316
|
516,574
|
*
|
||
Peter
Wardenburg, Trustee, Wardenburg 2009 Family Trust (19)
|
39,682
|
129,195
|
-
|
159,362
|
168,877
|
-
|
*
|
||
Ramius
Advisors, LLC (20)
|
595,237
|
1,937,943
|
-
|
2,390,471
|
2,533,180
|
-
|
*
|
||
Ramius
Enterprise Master Fund Ltd. (21)
|
178,571
|
581,383
|
-
|
717,141
|
759,954
|
-
|
*
|
||
RCG
PB, Ltd. (22)
|
416,666
|
1,356,560
|
-
|
1,673,330
|
1,773,226
|
-
|
*
|
||
Robert
D. Keyser, Jr. (30)
|
-
|
37,906
|
-
|
30,575
|
37,906
|
-
|
*
|
||
Scott
E. Schalk (31)
|
-
|
40,171
|
-
|
32,402
|
40,171
|
-
|
*
|
||
Thomas
Russell Curtis
|
-
|
25,705
|
46,400(32)
|
67,134
|
25,705
|
46,400
|
*
|
||
Thomas
W. Hands (33)
|
-
|
3,720
|
-
|
3,000
|
3,720
|
-
|
*
|
||
Vestal
Venture Capital (23)
|
7,936
|
25,838
|
-
|
31,870
|
33,774
|
-
|
*
|
(1)
|
The
identified selling security holders provided us with information with
respect to their securities ownership. Because the selling
security holders may sell all, part or none of their respective shares or
other securities, we are unable to estimate the number of shares or other
securities that will be held by the selling security holders upon resale
of the securities being offered by this prospectus. We have,
therefore, assumed for the purposes of the registration statement related
to this prospectus that the selling security holders will sell all of
their securities. See “Plan of
Distribution.”
|
(2)
|
Calculated
based on Rule 13(d)-3(d)(1)(i) of the Exchange Act using 39,750,927 shares
of common stock outstanding as of September 11, 2009. In
calculating each respective selling security holder’s percentage, we did
not assume the issuance of any other shares issuable upon exercise of
outstanding warrants except for those underlying the holder’s own
derivative securities.
|
(3)
|
Warrants
to purchase 22,500 shares of common stock previously acquired by Mr.
Athanas.
|
(4)
|
Heights
Capital Management, Inc., the authorized agent of Capital Ventures
International (“CVI”), has discretionary authority to vote and dispose of
the shares held by CVI and may be deemed to be the beneficial owner of
these shares. Martin Kobinger,
in his capacity as Investment Manager of Heights Capital Management, Inc.,
may also be deemed to have investment discretion and voting power over the
shares held by CVI. Mr. Kobinger disclaims any such beneficial ownership
of the shares. CVI is not a registered broker-dealer. CVI is affiliated
with one or more registered broker-dealers. CVI purchased the shares being
registered hereunder in the ordinary course of business and at the time of
purchase, had no agreements or understandings, directly or indirectly,
with any other person to distribute such
shares.
|
(5)
|
Shares
of common stock previously acquired by Mr.
Kirby.
|
(6)
|
Includes
warrants to purchase 5,500 shares of common stock previously acquired by
Mr. Curtis.
|
(7)
|
Dawson
James is a registered broker-dealer that received a warrant to purchase
238,094 shares of common stock in connection with serving as placement
agent for the private placement transaction. The warrant is
initially exercisable for $3.93 per share. Mr. Albert J. Poliak, President
of Dawson James, has voting and investment power over these
securities. 191,313 of the initial 238,094 warrants have been
transferred to registered brokers affiliated with Dawson James who are
listed in this table as Selling Security
Holders.
|
(8)
|
Warrants
to purchase 18,750 shares of common stock previously acquired by Drs.
Robert F. & Qin C. Ryan.
|
(9)
|
Warrants
to purchase 36,000 shares of common stock previously acquired by Mr.
Harrison.
|
(10)
|
Mr.
Wood is the Senior Director of Corporate Communications of VirnetX Holding
Corporation.
|
(11)
|
Includes
908,000 shares of common stock previously acquired by Mr. Wood, 50,000
shares of common stock held in the name of The Dustan D. Sheehan
Irrevocable Trust, and 50,000 shares of common stock held in the name of
The Joshua D. Sheehan Irrevocable Trust (collectively, the
“Trusts”). Mr. Wood serves as trustee of the Trusts and
exercises voting and investment power over the shares of common stock held
by the Trusts.
|
(12)
|
Includes
269,900 shares of common stock and warrants to purchase 90,000 shares of
common stock previously acquired by Mr.
Blass.
|
(13)
|
Sander
Gerber has voting and investment power over these
securities. Sander Gerber disclaims beneficial ownership over
the securities held by Hudson Bay Fund LP. The selling
stockholder acquired the securities offered for its own account in the
ordinary course of business, and at the time it acquired the securities,
it had no agreements, plans or understandings, directly or indirectly to
distribute the securities.
|
(14)
|
Sander
Gerber has voting and investment power over these
securities. Sander Gerber disclaims beneficial ownership over
the securities held by Hudson Bay Overseas Fund Ltd. The
selling stockholder acquired the securities offered for its own account in
the ordinary course of business, and at the time it acquired the
securities, it had no agreements, plans or understandings, directly or
indirectly to distribute the
securities.
|
(15)
|
Warrants
to purchase 7,500 shares of common stock previously acquired by Mr.
Rogers.
|
(16)
|
Shares
of common stock previously acquired by Mr.
Watters.
|
(17)
|
Shares
of common stock previously acquired by Mr.
Licht.
|
(18)
|
Includes
466,574 shares of common stock previously acquired by Ms. Schmid and
50,000 shares of common stock held in the name of The Parker W. Larsen
Irrevocable Trust (the “Trust”). Ms. Schmid serves as trustee of the Trust
and exercises voting and investment power over the shares of common stock
held by the Trust.
|
(19)
|
Peter
Wardenburg, as Trustee of the Wardenburg 2009 Family Trust, has voting and
investment control over the shares of common stock and warrants held by
the Wardenburg 2009 Family Trust.
|
(20)
|
Ramius
Advisors, LLC (“Ramius Advisors”) is the investment manager of Ramius
Enterprise Master Fund Ltd (“Ramius Enterprise”) and RCG PB, Ltd. (“RCG
PB”) and consequently has voting control and investment discretion over
securities held by Ramius Enterprise and RCG PB.
Ramius
Advisors did not participate directly as an investor in the Company’s
private placement transaction on September 11, 2009 and did not purchase
any shares of the Company’s common stock or warrants to purchase shares of
the Company’s common stock. The 2,533,180 shares of the
Company’s common stock registered for Ramius Advisors’ account in the
selling security holder table reflect the sum of the shares of common
stock and shares of common stock underlying the Series I Warrants, Series
II Warrants and Series III Warrants held directly by Ramius Enterprise and
RCG PB, in the amounts of 759,954 and 1,773,226,
respectively.
|
|
Ramius
Advisors disclaims beneficial ownership of these
securities. Ramius LLC (“Ramius”) is the managing member of
Ramius Advisors and may be considered the beneficial owner of any
securities deemed to be beneficially owned by Ramius
Advisors. Ramius disclaims beneficial ownership of these
securities. Cowen Group, Inc. (“Cowen”) is the managing member
of Ramius and may be considered the beneficial owner of any securities
deemed to be beneficially owned by Ramius. Cowen disclaims
beneficial ownership of these securities. RCG Holdings LLC
(“RCG Holdings”) is the majority shareholder of Cowen and may be
considered the beneficial owner of any securities deemed to be
beneficially owned by Cowen. RCG Holdings disclaims beneficial
ownership of these securities. C4S & Co., L.L.C. (“C4S”) is
the managing member of RCG Holdings and may be considered the beneficial
owner of any securities deemed to be beneficially owned by RCG
Holdings. C4S disclaims beneficial ownership of these
securities. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss
and Jeffrey M. Solomon are the sole managing members of C4S and may be
considered beneficial owners of any securities deemed to be beneficially
owned by C4S. Messrs. Cohen, Stark, Strauss and Solomon
disclaim beneficial ownership of these
securities.
|
|
Ramius
Advisors is not a registered broker-dealer. The investment adviser
to RCG PB, Ltd and Ramius Enterprise Master Fund Ltd is Ramius Advisors,
LLC. An affiliate of Ramius Advisors , LLC is a FINRA member and a
registered broker-dealer. However, this affiliate will not sell any
shares to be offered by RCG PB or Ramius Enterprise through the prospectus
and will receive no compensation whatsoever in connection with the sales
of shares by RCG PB or Ramius Enterprise through the prospectus.
|
(21)
|
Ramius
Advisors is the investment manager of Ramius Enterprise and consequently
has voting control and investment discretion over securities held by
Ramius Enterprise. Ramius Advisors disclaims beneficial
ownership of these securities. Ramius is the managing member of
Ramius Advisors and may be considered the beneficial owner of any
securities deemed to be beneficially owned by Ramius
Advisors. Ramius disclaims beneficial ownership of these
securities. Cowen Group, Inc. (“Cowen”) is the managing member
of Ramius and may be considered the beneficial owner of any securities
deemed to be beneficially owned by Ramius. Cowen disclaims
beneficial ownership of these securities. RCG Holdings LLC
(“RCG Holdings”) is the majority shareholder of Cowen and may be
considered the beneficial owner of any securities deemed to be
beneficially owned by Cowen. RCG Holdings disclaims beneficial
ownership of these securities. C4S is the managing
member of RCG Holdings and may be considered the beneficial owner of any
securities deemed to be beneficially owned by RCG Holdings. C4S
disclaims beneficial ownership of these securities. Peter A.
Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the
sole managing members of C4S and may be considered beneficial owners of
any securities deemed to be beneficially owned by C4S. Messrs.
Cohen, Stark, Strauss and Solomon disclaim beneficial ownership of these
securities.
Ramius
Enterprise is not a registered broker-dealer. Ramius Enterprise
is an affiliate of a registered broker-dealer. The investment
adviser to Ramius Enterprise is Ramius Advisors. An affiliate
of Ramius Advisors is a registered broker-dealer. However, this
affiliate will not sell any shares to be offered by Ramius Enterprise
through this prospectus and will receive no compensation whatsoever in
connection with sales of shares by Ramius Enterprise through this
prospectus. Ramius Enterprise purchased the shares being registered
hereunder in the ordinary course of business and at the time of purchase,
had no agreements or understandings, directly or indirectly, with any
other person to distribute such shares.
|
(22)
|
Ramius
Advisors is the investment manager of RCG PB, Ltd and consequently has
voting control and investment discretion over securities held by RCG
PB. Ramius Advisors disclaims beneficial ownership of these
securities. Ramius is the managing member of Ramius Advisors
and may be considered the beneficial owner of any securities deemed to be
beneficially owned by Ramius Advisors. Ramius disclaims
beneficial ownership of these securities. Cowen Group, Inc.
(“Cowen”) is the managing member of Ramius and may be considered the
beneficial owner of any securities deemed to be beneficially owned by
Ramius. Cowen disclaims beneficial ownership of these
securities. RCG Holdings LLC (“RCG Holdings”) is the majority
shareholder of Cowen and may be considered the beneficial owner of any
securities deemed to be beneficially owned by Cowen. RCG
Holdings disclaims beneficial ownership of these
securities. C4S is the managing member of RCG Holdings and may
be considered the beneficial owner of any securities deemed to be
beneficially owned by RCG Holdings. C4S disclaims beneficial
ownership of these securities. Peter A. Cohen, Morgan B. Stark,
Thomas W. Strauss and Jeffrey M. Solomon are the sole managing members of
C4S and may be considered beneficial owners of any securities deemed to be
beneficially owned by C4S. Messrs. Cohen, Stark, Strauss and
Solomon disclaim beneficial ownership of these
securities.
|
(23)
|
Allan
R. Lyons, as managing member of the managing general partner of Vestal
Venture Capital, has voting and investing control over the shares held by
Vestal Venture Capital. Vestal Venture Capital is not a
registered broker-dealer. Vestal Venture Capital is an
affiliate of a registered broker-dealer. Vestal Venture Capital purchased
the shares being registered hereunder in the ordinary course of business
and at the time of purchase, had no agreements or understandings, directly
or indirectly, with any other person to distribute such shares.
|
(24)
|
Shares
of common stock previously acquired by Mr. Angle.
|
(25)
|
Includes
warrants to purchase 15,000 shares of common stock and 15,000 shares of
common stock previously acquired by Mr. Blum.
|
(26)
|
Mr.
Poliak is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(27)
|
Mr.
Shapiro is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(28)
|
Mr.
Kaiser is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(29)
|
Mr.
Salvatore is a registered broker-dealer and is affiliated with Dawson
James Securities, Inc.
|
(30)
|
Mr.
Keyser is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(31)
|
Mr.
Schalk is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(32)
|
Shares
of common stock previously acquired by Mr. Curtis. Mr. Curtis
is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
(33)
|
Mr.
Hands is a registered broker-dealer and is affiliated with Dawson James
Securities, Inc.
|
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
|
·
|
in
transactions through broker-dealers that agree with the selling security
holders to sell a specified number of such shares at a stipulated price
per share;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
·
|
a
combination of any such methods of sale;
or
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
|
●
|
The
Series I Warrants give the investors in the transaction rights to
purchase the same number of shares purchased in the transaction over
a 5-year term at an exercise price equal to 125% of the price per share
paid in the transaction, subject to anti-dilution protection that
could reduce the exercise price; provided however, that in no event shall
such exercise price be reduced to less than $3.17 (the closing price per
share of our common stock) subject to adjustments for reverse and forward
stock splits, stock dividends, stock combinations and other similar
transactions affecting the Company’s common stock. The Series I Warrants
are not exercisable until March 11, 2010 and expire on March 11,
2015. Aside from the anti-dilution adjustment associated with
the exercise price premium, the Series I Warrants are not subject to any
further adjustments with respect to the exercise price or number of shares
covered. The aggregate number of shares of common stock
registered by this prospectus includes 627, 923 shares of our common stock
issuable pursuant to the anti-dilution protection provisions
described above. We will not receive proceeds from any shares
issued pursuant to the anti-dilution protection
provisions.
|
|
●
|
The
Series II Warrants give the investors in the transaction pricing
protection for the transaction with a floor price of $1.25 per
share. In the event the market price of our common stock
declines between the closing of the transaction and the earlier of (i) 15
business days after the date this registration statement is declared
effective and (ii) the date Rule 144 becomes available for resale of the
common stock registered pursuant to this prospectus (such date that is the
earlier of clause (i) and (ii) is referred to in this registration
statement as the “Warrant Exercise Date”), the Series II Warrants will be
automatically exercised on a cashless exercise basis and a number of
additional shares will be issued to the investors in order to effectively
reduce the per share purchase price paid in the private placement
transaction to the greater of (i) 80% of the 15-day volume weighted
average trading price per share of our common stock immediately prior to
the Warrant Exercise Date and (ii) $1.25 per share. At the
Warrant Exercise Date, the Series II Warrants will either be automatically
exercised on a cashless exercise basis if our stock price is lower at the
Warrant Exercise Date as described above, or they will terminate
unexercised. The adjustment associated with the Series II
Warrants does not affect either the exercise price or number of shares
covered by either the Series I Warrants or the Series III
Warrants.
|
|
●
|
At
the Warrant Exercise Date, the Series III Warrants give the investors in
the transaction a 60-day right to purchase an additional $6.0 million
of our common stock at $2.52 per share. The Series III Warrants
are not subject to any adjustments with respect to the exercise price or
number of shares covered.
|
Series I
Warrants
|
Series II
Warrants
|
Series III
Warrants
|
|
Number
of shares issuable upon exercise of warrants
|
3,246,959
|
2,419,045
|
2,380,942
|
Time
frame during which the warrants can be exercised (1)
|
The
Series I Warrants are exercisable commencing on March 11, 2010 and ending
on March 11, 2015.
|
At
the Warrant Exercise Date (as defined above), the Series II Warrants will
either be automatically exercised on a cashless exercise basis if our
stock price is lower at the Warrant Exercise Date as described above, or
they will terminate unexercised.
|
At
the Warrant Exercise Date, the Series III Warrants give the investors in
the transaction a 60-day right to purchase an additional $6.0 million of
our common stock at $2.52 per share.
|
Percentage
of shares currently outstanding represented by the shares underlying each
series of warrant (1)
|
8.2%
|
6.1%
|
6.0%
|
Economic
effect of exercise of warrants on existing stockholders (2)
|
n/a
(3)
|
$1.93
(4)
|
n/a
(3)
|
|
·
|
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.
|
|
·
|
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 exiting 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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 66-2/3% 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.
|
|
·
|
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.
|
Quarter Ended
|
High
|
Low
|
||||||
3/31/07
|
$ | 5.97 | $ | 0.63 | ||||
6/30/07
|
$ | 5.10 | $ | 3.33 | ||||
9/30/07
|
$ | 5.10 | $ | 3.96 | ||||
12/31/07
|
$ | 6.75 | $ | 4.08 | ||||
3/31/08
|
$ | 6.95 | $ | 4.26 | ||||
6/30/08
|
$ | 7.06 | $ | 3.50 | ||||
9/30/08
|
$ | 4.07 | $ | 1.26 | ||||
12/31/08
|
$ | 2.98 | $ | 0.89 | ||||
3/31/09
|
$ | 1.55 | $ | 1.06 | ||||
6/30/09
|
$ | 2.00 | $ | 1.05 | ||||
9/30/09
|
$ | 5.00 | $ | 1.20 |
Plan Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options,
Warrants
and Rights
(a)
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
Number
of Securities Remaining Available for Future Issuance
Under Equity
Compensation
Plans Excluding Securities Reflected in Column (a)
(c)
|
|||
Equity
compensation plans approved by security holders
|
4,468,595
|
2.98
|
2,651,392
|
|||
Equity
compensation plans not approved by security holders
|
—
|
—
|
||||
Total
|
4,468,595
|
2.98
|
2,651,392
|
Page
|
|
Report
of Farber Hass Hurley LLP, Independent Registered Public Accounting
Firm
|
F-2
|
Consolidated
Financial Statements
|
|
Consolidated
Balance Sheets of VirnetX Holding Corporation for the years ended December
31, 2008 and December 31, 2007
|
F-3
|
Consolidated
Statements of Operations of VirnetX Holding Corporation for the years
ended December 31, 2008 and December 31, 2007 and for the period from
August 2, 2005 (date of inception) to December 31, 2008
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) of VirnetX Holding
Corporation for the years ended December 31, 2008 and December 31, 2007
and for the period from August 2, 2005 (date of inception) to December 31,
2008
|
F-5
|
Consolidated
Statements of Cash Flows of VirnetX Holding Corporation for the years
ended December 31, 2008 and December 31, 2007 and for the period from
August 2, 2005 (date of inception) to December 31, 2008
|
F-6
|
Notes to
Financial Statements of VirnetX Holding Corporation
|
F-7
|
Unaudited Condensed
Consolidated Financial Statements
|
|
Condensed
Consolidated Balance Sheets at September 30, 2009 and
December 31, 2008
|
F-17
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008
|
F-18
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2009 and 2008
|
F-19
|
Notes
to Condensed Consolidated Financial Statements
|
F-20
|
/s/ Farber Hass Hurley LLP |
As
of
December 31,
2008
|
As
of
December 31,
2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 457,155 | $ | 8,589,447 | ||||
Accounts
receivable
|
1,154 | 5,860 | ||||||
Prepaid
expenses and other current assets
|
189,847 | 399,201 | ||||||
Total
current assets
|
648,156 | 8,994,508 | ||||||
Property
and equipment, net
|
32,565 | 32,658 | ||||||
Intangible
and other assets
|
204,000 | 252,000 | ||||||
Deferred
offering costs
|
94,261 | --- | ||||||
Total
assets
|
$ | 978,982 | $ | 9,279,166 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 1,669,333 | $ | 531,790 | ||||
Current
portion of long-term obligation
|
44,000 | 48,000 | ||||||
Total
current liabilities
|
1,713,333 | 579,790 | ||||||
Long-term
obligation, net of current portion
|
160,000 | 204,000 | ||||||
Commitments
and contingencies:
|
— | — | ||||||
Stockholders’
equity (deficit):
|
||||||||
Preferred
stock, par value $0.0001 per share
|
||||||||
Authorized: 10,000,000 shares
at December 31, 2008 and December 31, 2007,
respectively
|
||||||||
Issued
and outstanding: 0 shares at December 31, 2008 and
December 31, 2007, respectively
|
||||||||
Common
stock, par value $0.0001 per share
|
||||||||
Authorized: 100,000,000 shares
at December 31, 2008 and December 31, 2007,
respectively
|
||||||||
Issued
and outstanding: 34,899,985 shares and
34,667,214 shares, at December 31, 2008 and December 31,
2007, respectively
|
3,489 | 3,467 | ||||||
Additional
paid-in capital
|
22,150,321 | 19,467,890 | ||||||
Deficit
accumulated during the development stage
|
(23,048,161 | ) | (10,975,981 | ) | ||||
Total
stockholders’ equity (deficit)
|
(894,351 | ) | 8,495,376 | |||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 978,982 | $ | 9,279,166 |
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
Cumulative
from
August 2,
2005
(Date
of Inception)
to
December 31,
2008
|
||||||||||
Revenue —
Royalties
|
$ | 133,744 | $ | 74,866 | $ | 208,610 | ||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
845,324 | 684,316 | 2,139,827 | |||||||||
General
and administrative
|
11,510,008 | 8,040,894 | 21,230,868 | |||||||||
Total
operating expenses
|
12,355,332 | 8,725,210 | 23,370,695 | |||||||||
Loss
from operations
|
(12,221,588 | ) | (8,650,344 | ) | (23,162,085 | ) | ||||||
Interest
and other income (expense), net
|
149,408 | (41,820 | ) | 113,924 | ||||||||
Net
loss
|
$ | (12,072,180 | ) | $ | (8,692,164 | ) | $ | (23,048,161 | ) | |||
Basic
and diluted loss per share
|
$ | (.35 | ) | $ | (.36 | ) | ||||||
Weighted
average shares outstanding
|
34,875,471 | 24,312,287 |
Deficit
|
||||||||||||||||||||||||||||||||
Accumulated
|
Total
|
|||||||||||||||||||||||||||||||
Additional
|
Due
from
|
During
|
Stockholders’
|
|||||||||||||||||||||||||||||
Series
A Preferred Stock
|
Common
Stock
|
Paid-in
|
Stock-
|
Development
|
Equity
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
holder
|
Stage
|
(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
|
0
|
(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
|
|||||||||||||||||||||||
Cashless
exercise of warrants
|
—
|
—
|
232,771
|
22
|
—
|
—
|
—
|
22
|
||||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
2,682,431
|
—
|
—
|
2,682,431
|
||||||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(12,072,180
|
)
|
(12,072,180
|
)
|
||||||||||||||||||||||
Balance
at December 31, 2008
|
—
|
—
|
34,899,985
|
$
|
3,489
|
$
|
22,150,321
|
—
|
$
|
(23,048,161
|
)
|
$
|
(894,351
|
)
|
||||||||||||||||||
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
Cumulative
Period
from
August 2,
2005
(Date
of Inception)
to
December 31,
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (12,072,180 | ) | $ | (8,692,164 | ) | $ | (23,048,161 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Stock-based
compensation
|
2,682,431 | 818,869 | 4,513,049 | |||||||||
Depreciation
and amortization
|
68,623 | 18,609 | 94,921 | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Prepaid
expenses and other assets
|
119,799 | (392,256 | ) | (300,496 | ) | |||||||
Accounts
payable and accrued liabilities
|
1,137,751 | 444,404 | 1,669,541 | |||||||||
Net
cash used in operating activities
|
(8,063,576 | ) | (7,802,538 | ) | (17,071,146 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of property and equipment
|
(20,716 | ) | (22,955 | ) | (78,447 | ) | ||||||
Cash
acquired in acquisition
|
— | 14,009 | 14,009 | |||||||||
Net
cash used in investing activities
|
(20,716 | ) | (8,946 | ) | (64,438 | ) | ||||||
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 | |||||||||
Proceeds
from issuance of restricted stock units
|
— | — | 2,180 | |||||||||
Proceeds
from advance from preferred stockholders
|
— | — | 230,000 | |||||||||
Proceeds
from exercise of options
|
— | 30,000 | 30,000 | |||||||||
Proceeds
from convertible debt
|
— | 1,500,000 | 1,500,000 | |||||||||
Payment
of royalty obligation less imputed interest
|
(48,000 | ) | — | (48,000 | ) | |||||||
Proceeds
from sale of common stock
|
— | 14,730,934 | 14,730,934 | |||||||||
Net
cash provided by (used in) financing activities
|
(48,000 | ) | 16,260,934 | 17,592,739 | ||||||||
Net
increase in cash and cash equivalents
|
(8,132,292 | ) | 8,449,450 | 457,155 | ||||||||
Cash
and cash equivalents, beginning of period
|
8,589,447 | 139,997 | — | |||||||||
Cash
and cash equivalents, end of period
|
$ | 457,155 | $ | 8,589,447 | $ | 457,155 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for taxes
|
$ | 9,201 | $ | 800 | $ | 10,801 | ||||||
Cash
paid during the year for interest
|
$ | 5,622 | $ | 41,630 | $ | 47,252 | ||||||
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 | $ | 252,000 |
December 31
|
||||||||
2008
|
2007
|
|||||||
Office
furniture
|
$ | 17,239 | $ | 10,129 | ||||
Computer
equipment
|
61,209 | 48,827 | ||||||
Total
|
78,448 | 58,956 | ||||||
Less
accumulated depreciation
|
(45,883 | ) | (26,298 | ) | ||||
$ | 32,565 | $ | 32,658 |
2009
|
$ | 48,000 | ||
2010
|
48,000 | |||
2011
|
48,000 | |||
2012
|
48,000 | |||
Thereafter
|
12,000 | |||
Total
|
$ | 204,000 |
2009
|
$ | 44,000 | ||
2010
|
40,000 | |||
2011
|
36,000 | |||
2012
|
32,000 | |||
Thereafter
|
52,000 | |||
Total
|
$ | 204,000 |
For the Year
|
Minimum
Required
Lease
Payments
in
Period
|
|||
2009
|
$ | 44,373 | ||
2010
|
54,595 | |||
2011
|
59,242 | |||
2012
|
30,202 | |||
$ | 188,412 |
Options
Outstanding
|
||||||||||||
Shares
Available
for
Grant
|
Number
of
Shares
|
Weighted
Average 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 | ||||||||
Restricted
stock units granted
|
— | — | — | |||||||||
Options
granted
|
(420,000 | ) | 420,000 | 3.42 | ||||||||
Options
exercised
|
--- | --- | --- | |||||||||
Options
cancelled
|
20,000 | (20,000 | ) | 4.20 | ||||||||
Balance
at December 31, 2008
|
2,651,392 | 4,468,595 | $ | 2.98 |
Stock-Based
Compensation
by Type
of
Award
|
Year
Ended
December 31,
2008
|
Year
Ended December 31,
2007
|
Cumulative
Period
from
August 2,
2005
(Date
of Inception)
to
December 31,
2008
|
|||||||||
Restricted
stock units
|
$ | - | $ | - | $ | 930,130 | ||||||
Employee
stock options
|
2,682,431 | 818,869 | 3,582,919 | |||||||||
Total
stock-based compensation
|
$ | 2,682,431 | $ | 818,869 | $ | 4,513,049 |
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
|
Volatility
|
190%
|
100%
|
Risk-free
interest rate
|
4.21%
|
3.32%
|
Expected
life
|
6.7 years
|
6.5 years
|
Expected
dividends
|
0%
|
0%
|
Weighted
|
||||||||||||
Average
|
||||||||||||
Weighted
|
Remaining
|
Aggregate
|
||||||||||
Number
of
Shares
|
Average
Exercise
|
Contractual
Life
(Years)
|
Intrinsic
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 | ||||||||||
Options
exercised
|
(124,548 | ) | 0.24 | |||||||||
Options
cancelled
|
- | - | ||||||||||
Outstanding
at December 31, 2007
|
4,068,595 | 2.94 | ||||||||||
Options
granted
|
420,000 | 3.42 | ||||||||||
Options
exercised
|
- | - | ||||||||||
Options
cancelled
|
(20,000 | ) | 4.20 | |||||||||
Outstanding
at December 31, 2008
|
4,468,595 | $ | 2.98 |
8.7
|
$ |
2,160,633
|
Options
Outstanding
|
Options
Vested and Exercisable
|
|||||||||||||||||||||||||
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||
$0.24 | 1,743,670 | 7.4 | $ | 0.24 | 1,138,230 | 7.4 | $ | 0.24 | ||||||||||||||||||
4.20 | 1,327,899 | 8.6 | 4.20 | 513,543 | 8.6 | 4.20 | ||||||||||||||||||||
5.88-6.47 | 977,026 | 9.0 | 6.00 | 264,257 | 9.0 | 6.00 | ||||||||||||||||||||
1.74-6.20 | 420,000 | 9.6 | 3.42 | 47,500 | 9.6 | 5.06 | ||||||||||||||||||||
4,468,595 | 8.7 | $ | 2.98 | 1,963,530 | 8.7 | $ | 2.17 |
Period Ended
December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
loss
|
$ | (12,072 | ) | $ | (8,692 | ) | ||
Weighted
average number of shares outstanding
|
34,875 | 24,312 | ||||||
Basic
earnings (loss) per share
|
$ | (0.35 | ) | $ | (0.36 | ) |
2008
|
2007
|
|||||||
Options
|
4,468,595 | 4,068,595 | ||||||
Warrants
|
300,000 | 566,667 |
Period
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Provision
for income taxes at the federal & state statutory rate
|
$ | (4,100,000 | ) | $ | (3,200,000 | ) | ||
Stock-based
compensation
|
900,000 | 300,000 | ||||||
Research
and development credits
|
(100,000 | ) | (100,000 | ) | ||||
Valuation
allowance
|
3,300,000 | 3,000,000 | ||||||
Tax
provision
|
$ | 0 | $ | 0 |
Period
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Tax
benefit of net operating loss carryforwards
|
$ | 7,000,000 | $ | 3,400,000 | ||||
Research
and development credits
|
400,000 | 300,000 | ||||||
Subtotal
|
7,400,000 | 3,700,000 | ||||||
Less
valuation allowance
|
(7,400,000 | ) | (3,700,000 | ) | ||||
$ | 0 | $ | 0 |
|
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 our common stock in July
2007.
|
|
An
escrow account containing proceeds of $3,000,000 was released from escrow
in exchange for our issuance of common stock in July
2007.
|
|
We
issued 29,551,398 shares of our common stock and options to purchase
1,785,186 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.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
(amounts
in thousands except per share)
|
||||||||||||||||
2008
|
||||||||||||||||
Revenue
|
$ | 33 | $ | 51 | $ | 24 | $ | 26 | ||||||||
Loss
from operations
|
(3,102 | ) | (3,096 | ) | (2,947 | ) | (3,077 | ) | ||||||||
Net
loss
|
(3,032 | ) | (3,049 | ) | (2,923 | ) | (3,068 | ) | ||||||||
Net
loss per common share
|
$ | (0.09 | ) | $ | (0.09 | ) | $ | (0.08 | ) | $ | (0.08 | ) | ||||
2007
|
||||||||||||||||
Revenue
|
$ | 0 | $ | 0 | $ | 47 | $ | 28 | ||||||||
Loss
from operations
|
(766 | ) | (1,233 | ) | (2,589 | ) | (4,137 | ) | ||||||||
Net
loss
|
(781 | ) | (1,231 | ) | (2,566 | ) | (4,114 | ) | ||||||||
Net
loss per common share
|
$ | (0.04 | ) | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.15 | ) | ||||
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
|