virnetx_posam-041610.htm
As
filed with the Securities and Exchange Commission on April 16 , 2010
Registration
No. 333-153645
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
POST-EFFECTIVE
AMENDMENT NO. 3
on
Form S-3
to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________
VirnetX
Holding Corporation
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of Incorporation or Organization)
|
5615
Scotts Valley Drive, Suite 110
Scotts
Valley, California 95066
(831) 438-8200
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive
Offices)
|
77-0390628
(I.R.S.
Employer
Identification
Number)
|
_______________
Kendall
Larsen
Chief
Executive Officer
5615
Scotts Valley Drive, Suite 110
Scotts
Valley, California 95066
(831) 438-8200
(Name,
Address, Including Zip Code, and Telephone Number,
Including
Area Code, of Agent for Service)
_______________
Approximate date of commencement of
proposed sale to the public: From time to time after the
effective date of this Registration Statement.
Approximate date of commencement of
proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: ý
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company þ
|
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
_______________
This
Post-Effective Amendment No. 3 on Form S-3
to the Registration Statement on Form S-1 (File No. 333-153645) (the
“Registration Statement”) of VirnetX Holding Corporation (the “Company”) is
being filed to (i) convert the Registration
Statement from Form S-1 to Form S-3, and
(ii) make certain other updating revisions to the information contained
herein. No additional securities are being registered. All
filing fees payable in connection with the registration of the
Company’s warrants to purchase shares of the Company’s common stock and the
common stock issuable upon exercise thereunder were previously paid with the
original filing of the Registration Statement on September 24,
2008.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated April 16 ,
2010.
PROSPECTUS
VIRNETX HOLDING
CORPORATION
Warrants
and 2,596,000 Shares of Common Stock Issuable Upon Exercise of
Warrants
________________
The Company is filing this prospectus to maintain an effective registration statement
registering the issuance of securities issued by the Company in its
January 2009 underwritten public offering that are
still outstanding, including (i) warrants
to purchase 1,235,000 shares of our common stock at an exercise price of $3.00 per share (the “$3.00 Warrants”), of which warrants to purchase 135,000 shares of our
common stock were issued pursuant to the exercise of the underwriter’s over allotment option, (ii) warrants to
purchase 1,235,000 shares of our common stock at an exercise price of $4.00 per share (the
“$4.00 Warrants”), of which warrants to purchase 135,000 shares of our
common stock were issued pursuant to the exercise of the underwriter’s over allotment option, and (iii) warrants to purchase 126,000 shares of our common stock at an exercise
price of $1.80 per share issued to the
underwriter of our January 2009 public
offering. The $3.00 Warrants and $4.00
Warrants were originally issued in a public offering pursuant
to a prospectus dated January 27, 2009. This prospectus also covers
the offer and sale of 2,596,000 shares of
common stock issuable upon exercise of the warrants offered
hereby. We will receive proceeds from the cash exercise of the
warrants but not from the sale of the shares of common stock underlying the
warrants.
Our
common stock is listed on the NYSE Amex Stock Exchange under the symbol “VHC.”
The warrants to purchase common stock at $3.00 per share, and the warrants
to purchase common stock at $4.00 per share, all covered by this prospectus,
began trading on the OTC Bulletin Board on March 13, 2009 under the symbols
VHCOZ and VHCOL, respectively. On April 15,
2010, the last reported sales price of our common stock as reported on the NYSE
Amex Stock Exchange was $5.23 per
share.
________________
Our
business and an investment in our common stock and warrants to purchase shares
of our common stock involve significant risk. Those risks are described under
the caption “Risk Factors” beginning on page 5 of this
prospectus.
________________
NEITHER THE SECURITIES AND EXCHANGE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
SHARES OF COMMON STOCK OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________________
The date
of this prospectus
is ,
2010
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
|
ii
|
|
|
SUMMARY
|
1
|
|
|
RISK
FACTORS
|
5
|
|
|
DIVIDEND
POLICY
|
20
|
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
|
|
USE
OF PROCEEDS
|
21
|
|
|
THE
OFFERING
|
22
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
29
|
|
|
BUSINESS
|
|
|
|
MANAGEMENT |
41 |
|
|
COMPENSATION
DISCUSSION AND ANALYSIS
|
|
|
|
CORPORATE
GOVERNANCE
|
54
|
|
|
DESCRIPTION
OF SECURITIES
|
61
|
|
|
PLAN
OF DISTRIBUTION
|
65
|
|
|
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
66
|
|
|
LEGAL
PROCEEDINGS
|
67
|
|
|
LEGAL
MATTERS
|
68
|
|
|
EXPERTS
|
68
|
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
68
|
|
|
CERTAIN
DOCUMENTS INCORPORATED BY REFERENCE |
68 |
|
|
COMMISSION
POSITION ON INDEMNIFICATION
|
69
|
|
|
PROVISION
FOR INDEMNIFICATION
|
69
|
|
|
FINANCIAL
STATEMENTS
|
F-1
|
|
|
EXHIBIT
INDEX |
II-7 |
ABOUT
THIS PROSPECTUS
This
prospectus does not contain all of the information set forth in the registration
statement of which this prospectus is a part, as permitted by the rules and
regulations of the Securities and Exchange Commission, or
the SEC . For additional information regarding us and the offered
securities, please refer to the registration statement of which this prospectus
is a part. Before purchasing any of the offered securities, you
should carefully read this prospectus, together with the additional information
described under the section of this prospectus titled “Where You Can Find More
Information” on page 68. In particular,
you should carefully consider the risks and uncertainties described under the
section titled “Risk Factors” in this prospectus starting on page 5 or otherwise incorporated by reference in this prospectus
before you decide whether to purchase any common stock. These risks
and uncertainties, together with those not known to us or those that we may deem
immaterial, could impair our business and ultimately affect the price of the
offered securities. Any statement contained in the
prospectus concerning the provisions of any document filed as an exhibit to the
registration statement or otherwise filed with the SEC is not necessarily
complete, and in each instance, reference is made to the copy of the document
filed.
You
should rely only on the information contained or
incorporated by reference in this prospectus. We have not authorized
any other person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. No
offers are being made hereby in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this prospectus is accurate
only as of the date on this cover. Our business, financial condition, results of
operations and prospects may have changed since that date.
VIRNETX
HOLDING CORPORATION
SUMMARY
The following summary provides an
overview of certain information about our company and the underwritten public offering
and may not contain all the information that may be important to you. This summary is qualified in
its entirety by and should be read together with the information contained in other
parts of this prospectus. You should carefully read this entire prospectus before
making a decision about whether to invest in the offered
securities.
This prospectus contains
“forward-looking” statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a “safe harbor” for statements about
future events, products and future financial performance that are based on the
beliefs of, estimates made by and information currently available to our
management. Except for the historical information contained herein, the outcome of the
events described in these forward-looking statements is subject to risks and
uncertainties. See “Risk Factors” for a discussion of these risks and uncertainties.
The following discussion should be read in conjunction with and is qualified in
its entirety by reference to our consolidated financial statements included
elsewhere in this prospectus. Actual results and the outcome or timing of certain events
may differ significantly from those stated or implied by these forward-looking
statements due to the factors listed under “Risk Factors,” and from time to time in
our other filings with the Securities and Exchange Commission, or SEC. For this
purpose, using the terms “believe,” “expect,” “expectation,” “anticipate,” “can,”
“should,” “would,” “could,” “estimate,” “appear,” “based on,” “may,” “intended,”
“potential,” “indicate,” “are emerging” and “possible” or similar statements are
forward-looking statements that involve risks and uncertainties that could cause
our actual results and the outcome and timing of certain events to differ materially
from those stated or implied by these forward-looking statements. By
making forward-looking statements, we have not assumed any obligation to, and you should
not expect us to, update or revise those statements because of new
information, future events or otherwise.
As used herein, “we,” “us,” “our,”
or the “Company” means VirnetX Holding Corporation and its wholly-owned subsidiaries,
including VirnetX, Inc., collectively, on a consolidated
basis.
The
Offering
Securities
Offered
|
Warrants and 2,596,000 shares of common stock issuable upon exercise of warrants (as described in
more detail below).
|
Offering
Proceeds
|
Assuming
the exercise of all the warrants of this
offering in cash, we will receive gross proceeds of
$11,115,000. We anticipate that
all net proceeds obtained by us from the offering will be used for our
working capital purposes.
|
Description
of the Warrants
|
We
are registering two types of
warrants , along with the shares of common
stock underlying the warrants, that were issued in
our January 2009 underwritten public offering. The warrants
were issued in registered form under a
warrant agency agreement between Corporate Stock Transfer, Inc., as
warrant agent, and us. The two types of
warrants have similar terms but are exercisable at different prices. For
each share purchased at the closing of the January
2009 public offering, an investor received a warrant to purchase 0.5 shares of
our common stock at $2.00 per share (which were all exercised and/or
expired in March 2010), 0.5 shares of our common stock at $3.00 per share
and 0.5 shares of our common stock at $4.00 per share (fractional shares
will be rounded up). All warrants are exercisable on or after the applicable
closing date of the offering through and
including the 18-month anniversary of the first closing date. All warrants
also include a call feature that gives us the right to require the holder
of the warrant to exercise the warrant when our average closing stock
price over five consecutive trading days is equal to or exceeds two times
the applicable warrant’s purchase price, failing which the warrant will
terminate.
We are also registering warrants, along
with the shares of common stock underlying the warrants, to purchase
126,000 shares of our common stock at an exercise price of $1.80 per share
issued to the underwriter of our January 2009 public
offering.
|
Use
of Proceeds
|
To
fund product development, pursue our litigation strategy and for general
working capital needs. See the "Use of Proceeds," and
“Liquidity and Capital Resources” sections in this prospectus for
additional information.
|
NYSE
Amex symbol for our common stock
|
Our
common stock is listed on the NYSE Amex under the symbol
“VHC.”
|
Risk
Factors
|
See
“Risk Factors” beginning on page 5 of this prospectus and the other
information in this prospectus for a discussion of factors you should
consider before you decide to invest in our
securities.
|
The
Company
We are
developing and commercializing software and technology solutions for securing
real-time communications over the Internet. Our patented GABRIEL
Connection Technology™ combines industry standard encryption protocols with our
patented techniques for automated domain name system, or DNS, lookup mechanisms,
enabling users to create a secure communication link using secure domain
names. We also intend to establish the exclusive secure domain name
registry in the United States and other key markets around the world. Our
software and technology solutions provide the security platform required by
next-generation Internet-based applications such as instant messaging, or IM,
voice over Internet protocol, or VoIP, mobile services, streaming video, file
transfer and remote desktop. Our technology generates secure
connections on a “zero-click” or “single-click” basis, significantly simplifying
the deployment of secure real-time communication solutions by eliminating the
need for end users to enter any encryption information.
Our
portfolio of intellectual property is the foundation of our business
model. We currently have 12 patents in the United States and eight
international patents, as well as several pending U.S. and foreign patent
applications. Our patent portfolio is primarily focused on securing
real-time communications over the Internet, as well as related services such as
the establishment and maintenance of a secure domain name
registry. Our software and technology solutions also have additional
applications in operating systems and network security. On December
2, 2009, we declared to the 3GPP (3rd Generation Partnership Project) that our
U.S. and international patents are or may be essential to Long Term Evolution
(LTE) and 4G wireless specifications. We believe that we will hold the majority
of 4G essential patents related to Series 33 specifications that define security
standards for LTE/4G and are prepared to license the use of our patents for
incorporation into 4G related products such as chips, servers, smartphones,
laptop computers, etc. Our employees include the core development team behind
our patent portfolio, technology and software. This team has worked together for
over ten years and is the same team that invented and developed this technology
while working at Science Application International Corporation, or SAIC. SAIC is
a FORTUNE 500® scientific, engineering, and technology applications company that
uses its deep domain knowledge to solve problems of vital importance to the
nation and the world, in national security, energy and the environment, critical
infrastructure and health. We acquired this patent portfolio in 2006,
and it now serves as the foundation of our planned licensing and service
offerings. We expect to derive the majority of our revenue from
license fees and royalties associated with these patents. We also
intend to continue our research and development efforts to further strengthen
and expand our patent portfolio, and over time, we plan to leverage this
portfolio to develop a product suite that can be sold to enterprise customers
and developers.
We intend
to license our patents and our GABRIEL Connection Technology™ to original
equipment manufacturers, or OEMs, within the IP-telephony, mobility,
fixed-mobile convergence and unified communications markets. The
leaders in these markets include Alcatel-Lucent, Avaya Inc., Cisco Systems,
Inc., Juniper Networks, Inc., LM Ericsson Telephone Company, Motorola, Inc., NEC
Corporation, Nokia Corporation, Nortel Networks Corporation, Samsung Electronics
Co. Ltd. and Sony Ericsson Mobile Communications AB, among others. On
December 9, 2009, we announced the start of beta testing of our GABRIEL
Connection Technology™. In this testing we intend to include invited beta users
from outside the company. This phase of beta testing is expected to be completed
around mid-year 2010.
We also
intend to license our patent portfolio, technology and software, including our
secure domain name registry service, to communication service providers as well
as to system integrators. We believe that the market opportunity for
our software and technology solutions is large and expanding. As part
of our licensing strategy, in March 2008, we hired ipCapital Group, a leading
advisor on licensing technology and intellectual property, to initiate
discussions with several major potential licensees. Since its
founding in 1998, ipCapital Group has supported the licensing efforts of clients
across a variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. On December
23, 2009, we signed a letter of intent with VeriSign, Inc. or VeriSign, under
which VirnetX and VeriSign will collaborate to assess and evaluate the
technical, market and commercial viability to jointly develop and provide mobile
directory services and solutions using secure domain names or “PKI” certificate
infrastructure consistent with VirnetX intellectual property. The letter of intent also
provided for a “no shop” period until March 23, 2010, during which period the
parties have agreed not to solicit or encourage proposals from any other person
or entity regarding a similar strategic relationship. On March
24, 2010, we entered into an agreement with VeriSign to extend the binding
exclusivity period under the letter of intent until June 4, 2010. We
continue to have discussions with other prospective customers/partners in our
target markets outside the scope of the potential strategic relationship with
VeriSign.
Industry
Overview
The
Internet is increasingly evolving into a rich medium used by individuals and
businesses to conduct commerce, share information and engage in real-time
communications including email, text messaging, IM, and voice and video
calls. This communications experience is richer and more complex than
ever before. Session initiation protocol, or SIP, was developed to
enable the convergence of voice and data networks and today is the predominant
industry standard for establishing multimedia communications over the Internet
such as voice, video, instant messaging, presence information and file
transfer. SIP, as well as other real-time collaboration protocols
such as XMPP, use DNS lookup as its primary means of connecting Internet devices
but is an open architecture that remains inherently
unsecure.
We
believe that accessing a diversity of services from a single device, anytime and
anywhere, and the ability to access these same services from a range of devices,
are emerging as key market requirements. The portions of the
IP-telephony, mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology solutions are
forecasted by Infonetics to grow total revenues from approximately
$59 billion in 2006 to approximately $162 billion by 2011,
representing a compound annual growth rate, or CAGR, of approximately
22%. This growing trend represents a significant opportunity for
VirnetX to license its patent portfolio, technology and software, and establish
its secure domain name registry.
Our
Solutions
Our
software and technology solutions, including our secure domain name registry,
our patents and our GABRIEL Connection Technology™ are designed to secure all
types of real-time communications over the Internet. Our technology
uses industry standard encryption methods with our patented DNS lookup
mechanisms to create a secure communication link between users intending to
communicate in real time over the Internet. Our technology can be
built into network infrastructure, operating systems or silicon chips developed
for a communication or computing device to secure real-time communications over
the Internet between any number of devices. Our technology
automatically encrypts data allowing organizations and individuals to establish
communities of secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or SPDs, are designed
to be fully-customizable and support rich content applications such as IM, VoIP,
mobile services, streaming video, file transfer and remote desktop in a
completely secure environment. Our approach is a unique and patented
solution that provides the robust security platform required by these rich
content applications and real-time communications over the
Internet. The key benefits and features of our technology include the
following:
·
|
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.
|
Competitive
Strengths
We
believe the following competitive strengths will enable our success in the
marketplace:
·
|
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.
|
Our
Strategy
Our
strategy is to become the market leader in securing real-time communications
over the Internet and to establish our GABRIEL Communications TechnologyTM as
the industry standard security platform. Key elements of our strategy
are to:
·
|
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 existing patent portfolio and technology to develop a suite of
products that can be sold directly to end-user
enterprises.
|
In
furtherance of our strategy, in March 2008, we engaged ipCapital Group to help
us support and grow our licensing business. The ipCapital Group is a
leading advisor on licensing technology and intellectual
property. Through our alliance with ipCapital Group, we are actively
engaged in discussions with several potential customers in our target
markets. ipCapital Group is led by John Cronin. Prior to
founding ipCapital Group, Mr. Cronin was a distinguished inventor at IBM
for 17 years where he patented 100 inventions, published over 150 technical
papers, received IBM’s “Most Distinguished Inventor Award,” and was recognized
as IBM’s “Top Inventor.” As a member of the senior technical staff
and the prestigious IBM Academy, Mr. Cronin led an intellectual asset team
that spearheaded efforts to produce and manage the development of intellectual
property at IBM. Eventually known as “The IBM Patent Factory,” this
select group supported the division that increased IBM’s annual licensing
revenue from $30 million in 1992 to more than $1 billion in 1997 when
Mr. Cronin left IBM. Since its founding in 1998, ipCapital Group
has supported the licensing efforts of clients across a variety of technologies
and markets, resulting in transactions representing several hundred million
dollars of value.
On
December 2, 2009, we declared to the 3GPP (3rd Generation Partnership Project)
that our U.S. and international patents are or may be essential to Long Term
Evolution (LTE) and 4G wireless specifications. We believe that we will hold the
majority of 4G essential patents related to Series 33 specifications that define
security standards for LTE/4G and are prepared to license the use of our patents
for incorporation into 4G related products such as chips, servers, smartphones,
laptop computers and similar
products.
Microsoft
Litigation
We
believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft on
February 15, 2007, the February 2007 lawsuit, by filing a complaint in the
United States District Court of the Eastern District of Texas, Tyler
Division. Pursuant to the complaint, we allege that Microsoft
infringes two of our U.S. patents: U.S. Patent
No. 6,502,135 B1, entitled “Agile Network Protocol for Secure
Communications with Assured System Availability,” and U.S. Patent
No. 6,839,759 B2, entitled “Method for Establishing Secure Communication
Link Between Computers of Virtual Private Network Without User Entering Any
Cryptographic Information.” On April 5, 2007, we filed an amended complaint
specifying certain accused products at issue and alleging infringement of a
third, recently issued U.S. patent: U.S. Patent
No. 7,188,180 B2, entitled “Method for Establishing Secure Communication
Link Between Computers of Virtual Private Network.” We are seeking both damages
and injunctive relief. Microsoft answered the amended complaint and
asserted counterclaims against us on May 4, 2007. Microsoft
counterclaimed for declarations that our patents are not infringed, are invalid
and are unenforceable. Microsoft seeks an award of its attorneys’
fees and costs. We filed a reply to Microsoft’s counterclaims on
May 24, 2007. We have served our infringement contentions directed to
certain of Microsoft’s operating system and unified messaging and collaboration
applications. On March 31, 2008, Microsoft filed a motion to
dismiss for lack of standing, which was denied by the court pursuant to an order
dated June 3, 2008. Also pursuant to that court decision, on
June 10, 2008, SAIC joined us in our lawsuit as a plaintiff. On
November 19, 2008, the court granted our motion to amend our infringement
contentions, permitting us to provide increased specificity and citations to
Microsoft’s proprietary documents and source code to support our infringement
case against Microsoft’s accused products, including, among other things,
Windows XP, Vista, Server 2003, Server 2008, Live Communication Server, Office
Communication Server and Office Communicator.
On July
30, 2009, the United States District Court for the Eastern District of Texas,
Tyler Division, issued its Markman Order in the Microsoft litigation. On March
16, 2010, the jury awarded us a $105,750,000 verdict against Microsoft for
infringing two of our patents. The jury also found that Microsoft’s
patent infringement was willful. We will request injunctive relief at
a later date. We expect Microsoft to appeal this decision and will
vigorously defend our rights in any appeal.
In
addition to the February 2007 lawsuit, we filed a new complaint on March 17,
2010, or the March 2010 lawsuit, alleging infringement by Microsoft of U.S.
Patent Nos. 6,502,135
and 7,188,180 by Microsoft’s Windows 7 and Windows Server 2008 R2 software
products. We refer to the March 2010 lawsuit and the February 2007 lawsuit
collectively as the Microsoft litigation, or the litigation against
Microsoft.
Because
we have determined that Microsoft’s alleged unauthorized use of our patents
would cause us severe economic harm and the failure to cause Microsoft to
discontinue its use of such patents could result in the termination of our
business, we have dedicated a significant portion of our economic resources, to
date, to the prosecution of the Microsoft litigation and expect to continue to
do so for the foreseeable future.
Although
we believe Microsoft infringes certain of our patents and have received a
favorable verdict from the jury on March 16, 2010, and we intend to continue to
vigorously prosecute the Microsoft litigation, we cannot predict the final
outcome of the Microsoft litigation with any degree of reasonable certainty.
Additionally, the Microsoft litigation and appeals process will be
costly and time-consuming, and we can provide no assurance that we will
ultimately collect on any judgment against Microsoft for damages and/or
injunctive relief.
In the
near term, we will dedicate significant time and resources to the Microsoft
litigation. The risks associated with such dedication of time and resources are
set forth in the “Risk Factors” section of this prospectus.
One or
more potential intellectual property infringement claims may also be available
to us against certain other companies who have the resources to defend against
any such claims. Although we believe these potential claims are worth
pursuing, commencing a lawsuit can be expensive and time-consuming, and there is
no assurance that we will prevail on such potential claims. In
addition, bringing a lawsuit may lead to potential counterclaims which may
preclude our ability to commercialize our initial products, which are currently
in development.
Currently,
we are not a party to any other pending legal proceedings, and are not aware of
any proceeding threatened or contemplated against us by any governmental
authority or other party.
In
addition to the legal proceedings discussed above, in December 2009, Microsoft
submitted a reexamination request to the USPTO to challenge the validity of
certain claims on certain of our patents at issue in connection with the
Microsoft litigation. In January 2010, the USPTO confirmed the
validity of certain claims, while taking “non-final action” on other of
Microsoft’s claims. We are in the process of responding to the
non-final action, and the process is ongoing.
Corporate
Information
Our
principal executive offices are located at 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, and our phone number is
(831) 438-8200. We maintain a website at www.virnetx.com. Information
contained on our website does not comprise a part of this
prospectus.
In
November 2006, we acquired certain patents from SAIC. In July 2007, we effected
a reverse merger between PASW, Inc., a publicly traded company with limited
operations, and VirnetX, which became our principal operating subsidiary. As a
result of this merger, the former security holders of VirnetX came to own a
majority of our outstanding common stock. On October 29, 2007, we changed
our name from PASW, Inc. to VirnetX Holding Corporation.
VirnetXtm and
GABRIEL Connection Technologytm are
our trademarks in the United States. This prospectus includes product names,
trade names and trademarks of other companies. All other product names, trade
names and trademarks appearing in this prospectus are the property of their
respective holders.
RISK
FACTORS
You should carefully consider the
following material risks in addition to the other information set forth in this
prospectus before making any investment in the offered securities. The risks and
uncertainties described below are not the only ones we face. Additional risks and uncertainties
not presently known to us or that we currently believe to be immaterial may also
adversely affect our business. If any of these risk factors occurs, you could lose
substantial value or your entire investment in the offered
securities.
Risks
Related To Existing and Future Litigation
Our
litigation against Microsoft is ongoing, and we expect such litigation and
the appeals process to be time-consuming and costly, which may adversely affect
our financial condition and our ability to operate our business.
We have
initiated two lawsuits against Microsoft: one in February 2007 and one in March
2010. On
February 15, 2007, we initiated a lawsuit by filing a complaint against
Microsoft in the United States District Court for the Eastern District of Texas,
Tyler Division, pursuant to which we allege that Microsoft infringes two of our
patents regarding the creation of virtual private networks, or
VPNs. We seek damages and injunctive relief. On
April 5, 2007, we filed an amended complaint, pursuant to which we allege
that Microsoft infringes a third patent. We
subsequently removed one of our patents from the case. On March 16, 2010,
the jury awarded us a $105,750,000 verdict against Microsoft for infringing
two of our patents. The jury also found that Microsoft’s patent
infringement was willful. We will request injunctive relief at a
later date. We expect Microsoft to appeal this decision and we will
vigorously defend our rights in any appeal, but we cannot assure you that the
litigation will result in a final outcome that is favorable to our company or
our stockholders.
On
March 17, 2010, we filed a new complaint against Microsoft alleging that
Microsoft's Windows 7 and Windows Server 2008 R2 software
products infringe two of our patents. We refer to the February
2007 and March 2010 lawsuits collectively in this prospectus as the
Microsoft litigation. Similar to the lawsuit we filed against Microsoft in
February 2007, we cannot assure you that the March 2010 lawsuit will result in a
final outcome that is favorable to our company or our stockholders.
In
addition to pursuing the commercialization of our GABRIEL Connection Technology™
and our portfolio of intellectual property, given the scope and importance of
the Microsoft litigation to us, we expect to allocate a majority of our existing
cash and any proceeds we may receive from the cash exercise of warrants issued
in our January 2009 public offering and our September 2009 private placement
transaction towards the fees and expenses associated with the Microsoft
litigation. Although we have entered into a fixed fee engagement with
McKool Smith on June 9, 2009 to act as our lead counsel in connection with the
Microsoft lawsuit filed in March 2007, we anticipate that the legal
proceedings against
Microsoft may continue for several years and may require significant
expenditures for legal fees and other expenses. Although we view the McKool
Smith fixed fee arrangement as a positive arrangement and one that will help us
manage our expenses in connection with the litigation, we anticipate that our
legal fees and other expenses associated with this litigation will be material and will negatively impact our
financial condition and results of operations. Such impact may
result in our inability to continue our business or to pursue other business
initiatives not associated with the Microsoft litigation.
The time
and effort required of our management to effectively pursue the Microsoft
litigation may adversely affect our ability to operate our business, since time
spent on matters related to the lawsuit will take away from the time spent on
managing and operating our business. Microsoft has counterclaimed for
declarations that the two patents are not infringed, are invalid and are
unenforceable. If Microsoft’s counterclaims are successful on appeal,
or if they prevail in the lawsuit filed in March 2010, such outcomes
may preclude our ability to commercialize our initial
products.
While
we believe Microsoft infringes our patents, we can provide no assurance that we
will be successful in our lawsuit through appeal.
We
believe that Microsoft infringes on certain of our patents, but obtaining
and collecting a judgment against Microsoft may be difficult or
impossible. Patent litigation is inherently risky and the outcome is
uncertain. Microsoft is a large, well-financed company with
substantially greater resources than us. We believe that Microsoft
will devote a substantial amount of resources in an attempt to prove that either
their products do not infringe our patents or that our patents are not valid and
are unenforceable. At this time, we cannot predict the final outcome
of this litigation.
We
are devoting a substantial amount of our financial and management resources to
the Microsoft litigation, and if we are unsuccessful in this lawsuit, our
financial condition may be adversely affected, and we may not
survive.
Currently,
we are devoting substantial time, effort and financial resources to the
Microsoft litigation. We are a development stage company with no
finished product, and, although our business strategy is focused primarily on
bringing patented products to market, our business strategy also depends greatly
on collecting on our judgment before our financial resources are
depleted. In the event we are not successful through appeal and do
not subsequently obtain monetary and injunctive relief, we may not have enough
financial resources to continue our operations.
The
burdens of being a public company may adversely affect our ability to pursue the
Microsoft litigation.
As a
public company, our management must devote substantial time, attention and
financial resources to comply with U.S. securities laws. This
may have a material adverse affect on management’s ability to effectively pursue
the Microsoft litigation as well as our other business
initiatives. In addition, our disclosure obligations under
U.S. securities laws require us to disclose information publicly that will
be available to Microsoft as well as any other future litigation
opponents. We may, from time to time, be required to disclose
information that will have a material adverse affect on our litigation
strategies. This information may enable our litigation opponents to
develop effective litigation strategies that are contrary to our
interests.
We
may commence additional legal proceedings against third parties who we believe
are infringing on our intellectual property rights, and if we are forced to
litigate to defend our intellectual property rights, or to defend claims by
third parties against us relating to intellectual property rights, legal fees
and court injunctions could adversely affect our financial condition or end our
business.
Disputes
regarding the ownership of technologies and intellectual property rights are
common and we may have intellectual property infringement claims against other
parties in addition to our claims against Microsoft. If we decide to commence
actions against any additional parties, doing so may be expensive and
time-consuming, which may adversely affect our financial condition and results
of operations. Moreover, there can be no assurance that we would be
successful in these additional legal proceedings and the existence and outcome
of any such litigation could harm our business. In addition,
commencing lawsuits may lead to potential counterclaims which may preclude our
ability to develop and commercialize our initial products.
Risks
Related to Our Business and Our Industry
We
are a development stage company with virtually no revenues.
We are a
development stage company with a very small amount of revenue and do not expect
to generate additional revenues unless and until our patent portfolio, or part
of it, is commercialized. We may need to raise additional capital to fund our
operations and our litigation against Microsoft and there can be no assurance
that we will be successful in doing so on acceptable terms or at
all. Our inability to generate sufficient cash flow or raise other
funds to meet our expenses, obligations and sustain our operations raises
substantial doubt about our ability to continue as a going concern.
We
anticipate incurring operating losses and negative cash flows for the
foreseeable future resulting in uncertainty of future profitability and
limitations on our operations.
We
anticipate that we will incur operating losses and negative cash flows in the
foreseeable future, and we will accumulate increasing deficits as we increase
our expenditures for:
·
|
our
Microsoft litigation;
|
·
|
research
and development;
|
·
|
general
business enhancements.
|
We need
to significantly increase our revenue if we are to attain profitability and
there is no assurance that we will be able to do so. In the event that we are
unable to achieve profitability or raise sufficient funding to cover our losses
in the near term, we will be unable to meet our expenses and obligations as they
come due, and this raises substantial doubts as to our ability to continue as a
going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Our
business plan for commercializing our patents and technology is new and
unproven, and therefore we can provide no assurance that we will be successful
in pursuing it.
We intend
to develop products to provide a security platform for real-time communications;
however, this is not a defined market. We expect to depend on our
intellectual property licensing fees for the majority of our
revenues. Our ability to generate licensing fees is highly dependent
on mainstream market adoption of real-time communications based on SIP or using
DNS lookup protocols as well as customer adoption of our GABRIEL Communication
Technology™ and our secure domain name registry. We cannot assure you
that customers will adopt our products and services, or that we will succeed in
building a profitable business based on our business plan.
If
we are not able to adequately protect our patented rights, our operations would
be negatively impacted.
Our
ability to compete largely depends on the superiority, uniqueness and value of
our technology and intellectual property. To protect our intellectual
property rights, we rely on a combination of patent, trademark, copyright and
trade secret laws, confidentiality agreements with our employees and third
parties, and protective contractual provisions. Further, we can give
no assurances that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against us or that any such assertions or prosecutions will not
materially adversely affect our business.
In
December 2009, Microsoft submitted a reexamination request to the USPTO to
challenge the validity of two of our patents at issue in connection with the
Microsoft litigation. In January 2010, the USPTO confirmed the validity of
certain claims, while taking "non-final action" on other of Microsoft's
claims. We are in the process of responding to the non-final action, and
the process is ongoing.
Regardless
of whether these or any future claims are valid or can be successfully asserted,
defending against such claims could cause us to incur significant costs, could
jeopardize or substantially delay a successful outcome in our Microsoft
litigation or any future litigation, and could divert resources away from our
other activities. In addition, assertion of infringement claims could
result in injunctions that prevent us from distributing our
products. In addition to challenges against our existing patents, any
of the following could also reduce the value of our intellectual property now,
or in the future:
·
|
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.
|
In
addition, we may not be able to effectively protect our intellectual property
rights in certain foreign countries where we may do business in the future or
from which competitors may operate. While we have numerous pending
international patents, obtaining such patents will not necessarily protect our
technology or prevent our international competitors from developing similar
products or technologies. Our inability to adequately protect our
patented rights would have a negative impact on our operations and
revenues.
In
addition, legal standards relating to the validity, enforceability, and scope of
protection of intellectual property rights in Internet-related businesses are
uncertain and still evolving. Because of the growth of the Internet
and Internet related businesses, patent applications are continuously and
simultaneously being filed in connection with Internet-related
technology. There are a significant number of U.S. and foreign
patents and patent applications in our areas of interest, and we believe that
there has been, and is likely to continue to be, significant litigation in the
industry regarding patent and other intellectual property rights.
We
may or may not be able to capitalize on potential market opportunities related
to our licensing strategy or our patent portfolio.
Our
business strategy calls for us to enter into licensing relationships with the
leading companies in our target market in order to reach a larger end-user base
than we could reach through direct sales and marketing efforts. We
have engaged ipCapital Group to help develop our licensing strategy and to
introduce us to five potential strategic licensees of our
technology. In connection with this engagement, we agreed to pay
ipCapital Group 10% of the royalties of each resulting licensing arrangement, up
to an aggregate maximum of $2 million per licensee, or $10 million in
the aggregate. There can be no assurance that we will be able to
capitalize on the potential market opportunity. Our inability to
generate licensing revenues associated with the potential market opportunity
could result from a number of factors, including, but not limited
to:
·
|
our
capital resources may be
insufficient;
|
·
|
our
management team may not have sufficient bandwidth to successfully
capitalize on all of the opportunities identified by ipCapital
Group;
|
·
|
we
may not be successful in entering into licensing relationships with our
targeted customers on commercially acceptable
terms; and
|
·
|
the
validity of certain claims of certain of our patents underlying our
licensing opportunity currently being challenged in our litigation
against Microsoft, and by Microsoft, through the USPTO reexamination
process.
|
Our
business greatly depends on the growth of IM, VoIP, mobile services, streaming
video, file transfer and remote desktop and other next-generation Internet-based
applications.
We cannot
assure you that next-generation Internet-based applications such as instant
messaging, or IM, voice over Internet protocol, or VoIP, mobile services,
streaming video, file transfer and remote desktop will continue to gain
widespread market acceptance. The Internet may ultimately prove not
to be a viable commercial marketplace for such applications for a number of
reasons, including:
·
|
unwillingness
of consumers to shift to VoIP and use other such next-generation
Internet-based applications;
|
·
|
refusal
to purchase security products to secure information transmitted through
such applications;
|
·
|
perception
by the licensees of unsecure communication and data
transfer;
|
·
|
lack
of concern for privacy by licensees and
users;
|
·
|
limitations
on access and ease of use;
|
·
|
congestion
leading to delayed or extended response
times;
|
·
|
inadequate
development of Internet infrastructure to keep pace with increased levels
of use; and
|
·
|
increased
government regulations.
|
If
the market for IM, VoIP, mobile services, streaming video, file transfer and
remote desktop does not grow as anticipated, our business would be adversely
affected.
The
success of our products that secure IM, VoIP, mobile services, streaming video,
file transfer and remote desktop, among other real-time communications
applications, depends on the growth in the number of users, which in turn
depends on the Internet gaining more widespread acceptance as the basis for
these real-time communications applications. These real-time
communications applications are still in early stages of market acceptance and
we cannot assure you that they will continue to develop a broader
audience. For example, potential new users may view VoIP as
unattractive relative to traditional telephone services for a number of reasons,
including the need to purchase computer headsets or the perception that the
price advantage for VoIP is insufficient to justify the perceived
inconvenience.
While
the use of IM and other next-generation Internet-based applications has grown
rapidly in personal and professional use, there can be no assurance that users
will pay to secure their use of such applications.
Many
services such as Microsoft, Yahoo! and America Online offer IM free of
charge. However, security solutions for these services are not free,
and OEMs may not want to adopt such security solutions if users of IM do not see
the value and do not want to pay for such security solutions. If
personal and professional users of IM and other next-generation Internet-based
solutions do not want to pay for the security solutions, we will have difficulty
marketing and selling our products and technologies.
We
expect that we will experience long and unpredictable sales cycles, which may
impact our quarterly operating results.
We expect
that our sales cycles will be long and unpredictable due to a number of
uncertainties such as:
·
|
the
need to educate potential customers about our patent rights and our
product and service capabilities;
|
·
|
customers’
willingness to invest potentially substantial resources and modify their
network infrastructures to take advantage of our
products;
|
·
|
customers’
budgetary constraints;
|
·
|
the
timing of customers’ budget
cycles; and
|
·
|
delays
caused by customers’ internal review
processes.
|
We
expect that we will be substantially dependent on a concentrated number of
customers. If we are unable to establish, maintain or replace our
relationships with customers and develop a diversified customer base, our
revenues may fluctuate and our growth may be limited.
We expect
that for the foreseeable future, a significant portion of our revenues will be
generated from a limited number of customers. There can be no
guarantee that we will be able to obtain such customers, or if we do so, to
sustain our revenue levels from these customers. If we cannot
establish, maintain or replace the limited group of customers that we anticipate
will generate a substantial majority revenues, or if they do not generate
revenues at the levels or at the times that we anticipate, our ability to
maintain or grow our revenues will be adversely affected.
If
we do not successfully develop our planned products and services in a
cost-effective manner to customer demand in the rapidly evolving market for
Internet and IP-based communications services, our business may
fail.
The
market for communications services is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. We are currently focused on
developing products to provide security solutions for real-time
communications. Our future success will depend, in part, on our
ability to use new technologies effectively, to continue to develop our
technical expertise, to enhance our existing services and to develop new
services that meet changing customer needs on a timely and cost-effective
basis. We may not be able to adapt quickly enough to changing
technology, customer requirements and industry standards. If we fail
to use new technologies effectively, to develop our technical expertise and new
services, or to enhance existing services on a timely basis, either internally
or through arrangements with third parties, our product and service offerings
may fail to meet customer needs, which would adversely affect our revenues and
prospects for growth.
In
addition, if we are unable, for technological, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, we could lose customers, strategic alliances and market
share. Sudden changes in user and customer requirements and
preferences, the frequent introduction of new products and services embodying
new technologies and the emergence of new industry standards and practices could
render our existing products, services and systems obsolete. The
emerging nature of products and services in the technology and communications
industry and their rapid evolution will require that we continually improve the
performance, features and reliability of our products and
services. Our success will depend, in part, on our ability
to:
·
|
design,
develop, launch and/or license our planned products, services and
technologies that address the increasingly sophisticated and varied needs
of our prospective
customers; and
|
·
|
respond
to technological advances and emerging industry standards and practices on
a cost-effective and timely basis.
|
The
development of our planned products and services and other patented technology
involves significant technological and business risks and requires substantial
expenditures and lead time. We may be unable to use new technologies
effectively. Updating our technology internally and licensing new
technology from third-parties may also require us to incur significant
additional expenditures.
If
our products do not gain market acceptance, we may not be able to fund future
operations.
A number
of factors may affect the market acceptance of our planned products or any other
products we develop or acquire, including, among others:
·
|
the
price of our products relative to other products that seek to secure
real-time communication;
|
·
|
the
perception by users of the effectiveness of our
products;
|
·
|
our
ability to fund our sales and marketing
efforts; and
|
·
|
the
effectiveness of our sales and marketing
efforts.
|
If our
products do not gain market acceptance, we may not be able to fund future
operations, including the development of new products and/or our sales and
marketing efforts for our current products, which inability would have a
material adverse effect on our business, financial condition and operating
results.
Our
products are highly technical and may contain undetected errors, which could
cause harm to our reputation and adversely affect our business.
Our
products are highly technical and complex and, when deployed, may contain errors
or defects. In addition, we rely on third parties for software
development and technology services, and there may be errors in the development
processes used by our third party counterparts that may adversely affect our end
products. Despite testing, some errors in our products may only be
discovered after a product has been installed and used by
customers. Any errors or defects discovered in our products after
commercial release could result in failure to achieve market acceptance, loss of
revenue or delay in revenue recognition, loss of customers and increased service
and warranty cost, any of which could adversely affect our business, operating
results and financial condition. In addition, we could face claims
for product liability, tort or breach of warranty, including claims relating to
changes to our products made by our channel partners. The performance
of our products could have unforeseen or unknown adverse effects on the networks
over which they are delivered as well as on third-party applications and
services that utilize our services, which could result in legal claims against
us, harming our business. Furthermore, we expect to provide
implementation, consulting and other technical services in connection with the
implementation and ongoing maintenance of our products, which typically involves
working with sophisticated software, computing and communications
systems. We expect that our contracts with customers will contain
provisions relating to warranty disclaimers and liability limitations, which may
not be upheld. Defending a lawsuit, regardless of its merit, is
costly and may divert management’s attention and adversely affect the market’s
perception of us and our products. In addition, if our business
liability insurance coverage proves inadequate or future coverage is unavailable
on acceptable terms or at all, our business, operating results and financial
condition could be adversely impacted.
Malfunctions
of third-party communications infrastructure, hardware and software exposes us
to a variety of risks we cannot control.
In
addition, our business will also depend upon the capacity, reliability and
security of the infrastructure owned by third parties that we will use to deploy
our offerings. We have no control over the operation, quality or
maintenance of a significant portion of that infrastructure or whether or not
those third parties will upgrade or improve their equipment. We
depend on these companies to maintain the operational integrity of our
connections. If one or more of these companies is unable or unwilling
to supply or expand its levels of service to us in the future, our operations
could be severely interrupted. Also, to the extent the number of
users of networks utilizing our future products suddenly increases, the
technology platform and secure hosting services which will be required to
accommodate a higher volume of traffic may result in slower response times or
service interruptions. System interruptions or increases in response
time could result in a loss of potential or existing users and, if sustained or
repeated, could reduce the appeal of the networks to users. In
addition, users depend on real-time communications; outages caused by increased
traffic could result in delays and system failures. These types of
occurrences could cause users to perceive that our solution does not function
properly and could therefore adversely affect our ability to attract and retain
licensees, strategic partners and customers.
System
failure or interruption or our failure to meet increasing demands on our systems
could harm our business.
The
success of our license and service offerings will depend on the uninterrupted
operation of various systems, secure data centers and other computer and
communication networks that we establish. To the extent the number of
users of networks utilizing our future products suddenly increases, the
technology platform and hosting services which will be required to accommodate a
higher volume of traffic may result in slower response times, service
interruptions or delays or system failures. Our systems and
operations will also be vulnerable to damage or interruption from:
·
|
power
loss, transmission cable cuts and other telecommunications
failures;
|
·
|
damage
or interruption caused by fire, earthquake, and other natural
disasters;
|
·
|
computer
viruses or software
defects; and
|
·
|
physical
or electronic break-ins, sabotage, intentional acts of vandalism,
terrorist attacks and other events beyond our
control.
|
System
interruptions or failures and increases or delays in response time could result
in a loss of potential or existing users and, if sustained or repeated, could
reduce the appeal of the networks to users. These types of
occurrences could cause users to perceive that our solution does not function
properly and could therefore adversely affect our ability to attract and retain
licensees, strategic partners and customers.
Any
significant problem with our systems or operations could result in lost revenue,
customer dissatisfaction or lawsuits against us. A failure in the
operation of our secure domain name registration system could result in the
inability of one or more registrars to register and maintain secure domain names
for a period of time. A failure in the operation or update of the
master directory that we plan to maintain could result in deletion or
discontinuation of assigned secure domain names for a period of
time. The inability of the registrar systems we establish, including
our back office billing and collections infrastructure, and telecommunications
systems to meet the demands of an increasing number of secure domain name
requests could result in substantial degradation in our customer support service
and our ability to process registration requests in a timely
manner.
If
we experience security breaches, we could be exposed to liability and our
reputation and business could suffer.
We will
retain certain confidential customer information in our secure data centers and
secure domain name registry. It will be critical to our business
strategy that our facilities and infrastructure remain secure and are perceived
by the marketplace to be secure. Our secure domain name registry
operations will also depend on our ability to maintain our computer and
telecommunications equipment in effective working order and to reasonably
protect our systems against interruption, and potentially depend on protection
by other registrars in the shared registration system. The secure
domain name servers that we will operate will be critical hardware to our
registry services operations. Therefore, we expect to have to expend
significant time and money to maintain or increase the security of our
facilities and infrastructure.
Security
technologies are constantly being tested by computer professionals, academics
and “hackers.” Advances in the techniques for attacking security
solutions could make some or all of our products obsolete or
unmarketable. Likewise, if any of our products are found to have
significant security vulnerabilities, then we may need to dedicate engineering
and other resources to eliminate the vulnerabilities and to repair or replace
products already sold or licensed to our customers. Despite our
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses, attacks by hackers or similar disruptive
problems. It is possible that we may have to expend additional
financial and other resources to address such problems. Any physical
or electronic break-in or other security breach or compromise of the information
stored at our secure data centers and domain name registration systems may
jeopardize the security of information stored on our premises or in the computer
systems and networks of our customers. In such an event, we could
face significant liability and customers could be reluctant to use our
services. Such an occurrence could also result in adverse publicity
and therefore adversely affect the market’s perception of the security of
electronic commerce and communications over IP networks as well as of the
security or reliability of our services.
We
may incur significant expenses and damages because of liability
claims.
An actual
or perceived breach of our security solutions could result in a product
liability claim against us. A substantial product liability claim
against us could harm our operating results and financial
condition. In addition, any actual or perceived breach of our
security solution, whether or not caused by the failure of one of our products,
could hurt our reputation and cause potential customers to turn to our
competitors’ products.
Our
ability to sell our solutions will be dependent on the quality of our technical
support, and our failure to deliver high-quality technical support services
could have a material adverse effect on our sales and results of
operations.
If we do
not effectively assist our customers in deploying our products, succeed in
helping our customers quickly resolve post-deployment issues and provide
effective ongoing support, or if potential customers perceive that we may not be
able achieve to the foregoing, our ability to sell our products would be
adversely affected, and our reputation with potential customers could be
harmed. In addition, as we expand our operations internationally, our
technical support team will face additional challenges, including those
associated with delivering support, training and documentation in languages
other than English. As a result, our failure to deliver and maintain
high-quality technical support services to our customers could result in
customers choosing to use our competitors’ products instead of ours in the
future.
There
has been increased competition for security solutions in the real-time
communications industry, as more companies seek to provide products and services
similar to our proposed products and services, and because larger and
better-financed competitors may affect our ability to operate our business and
achieve profitability, our business may fail.
We expect
competition for our products and services to be intense. We expect to
compete directly against other companies offering similar security products and
services that will compete directly with our proposed products and
services. We also expect that we will compete against established
vendors within the IP-telephony, mobility, fixed-mobile convergence and unified
communications markets. These companies may incorporate other
competitive technologies into their product offerings, whether developed
internally or by third parties. For the foreseeable future,
substantially all of our competitors are likely to be larger, better-financed
companies that may develop products superior to our proposed products, which
could create significant competitive advantages for those
companies. Our future success depends on our ability to compete
effectively with our competitors. As a result, we may have difficulty
competing with larger, established competitor companies. Generally,
these competitors have:
·
|
substantially
greater financial, technical and marketing
resources;
|
·
|
a
larger customer base;
|
·
|
better
name recognition; and
|
·
|
more
expansive product offerings.
|
These
competitors are likely to command a larger market share than us, which may
enable them to establish a stronger competitive position, in part, through
greater marketing opportunities. Further, our competitors may be able
to respond more quickly to new or emerging technologies and changes in user
preferences and to devote greater resources to developing and operating networks
of affinity websites. These competitors may develop products or
services that are comparable or superior. If we fail to address
competitive developments quickly and effectively, we may not be able to remain a
viable entity.
If
we fail to meet our obligations to SAIC, we may lose our rights to key
technologies on which our business depends.
Our
business depends on our rights to and under the patents we obtained from
SAIC. Our agreements with SAIC impose various obligations on us,
including payment obligations and minimum royalties that we must pay to
SAIC. If SAIC believes that we have failed to meet these obligations,
SAIC could seek to limit or reacquire the assigned patent rights, which could
lead to costly and time-consuming litigation and, potentially, a loss of our
rights in these patents. During the period of any such litigation,
our ability to carry out the development and commercialization of potential
products could be significantly and negatively affected. The loss or
restriction of our rights in our patents would result in our inability to
continue our business.
When
we attempt to implement our secure domain name registry services business, we
may be subject to government and industry regulation and oversight which may
impede our ability to achieve our business strategy.
The
U.S. government has historically controlled the authoritative domain name
system, or DNS, root server since the inception of the Internet. On
July 1, 1997, the President of the United States directed the
U.S. Secretary of Commerce to privatize the management of the domain name
system in a manner that increases competition and facilitates international
participation in its management.
On
September 29, 2006, the U.S. Department of Commerce extended its
delegation of authority by entering into a new agreement with the Internet
Corporation for Assigned Names and Numbers, or ICANN, a California non-profit
corporation headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers and registrars
that manage the assignment of top level domain names associated with the
authoritative DNS root directory. Although other DNS root directories
are possible to create and manage privately without accreditation from ICANN,
the possibility of conflicting name and number assignments makes it less likely
that users would widely adopt a top level domain name associated with an
alternative DNS root directory provided by a non-ICANN-accredited registry
service.
On
June 26, 2008, ICANN announced that it will be relaxing its prior position
and will begin to issue generic top level domain names, or gTLDs, more broadly
than it had previously. ICANN expects to begin to take applications
for gTLDs in April or May of 2009 with an application fee of $100,000 or more
per application. ICANN expects the first of these customized gTLDs to
be issued in the fourth quarter of 2009.
We are
currently evaluating whether we will apply to become an ICANN-accredited
registry provider with respect to one or more customized gTLDs, or create our
own alternative DNS root directory to manage the assignment of non-standard
secure domain names. We have not yet begun discussions with ICANN and
we cannot assure you that we will be successful in obtaining ICANN accreditation
for our registry service on terms acceptable to us or at all. Whether
or not we obtain accreditation from ICANN, we will be subject to the ongoing
risks arising out of the delegation of the U.S. government’s
responsibilities for the domain name system to the U.S. Department of
Commerce and ICANN and the evolving government regulatory environment with
respect to domain name registry services.
The
laws governing online secure communications are largely unsettled, and if we
become subject to various government regulations, costs associated with those
regulations may materially adversely affect our business.
The
current regulatory environment for our services remains unclear. We
can give no assurance that our planned product offerings will be in compliance
with local, state and/or U.S. federal laws or other
laws. Further, we can give no assurance that we will not
unintentionally violate such laws or that such laws will not be modified, or
that new laws will be enacted in the future which would cause us to be in
violation of such laws.
VoIP
services are not currently subject to all of the same regulations that apply to
traditional telephony. The U.S. Federal Communications
Commission has imposed some traditional telephony requirements on VoIP such as
disability access requirements and other obligations. It is possible
that federal and state legislatures may seek to impose increased fees and
administrative burdens on VoIP, data and video providers. Such
regulations could result in substantial costs depending on the technical changes
required to accommodate the requirements, and any increased costs could erode
the pricing advantage over competing forms of communication and adversely affect
consumer adoption of VoIP products generally.
The use
of the Internet and private IP networks to provide voice, video and other forms
of real-time, two-way communications services is a relatively recent
development. Although the provisioning of such services is currently
permitted by U.S. law and is largely unregulated within the United States,
several foreign governments have adopted laws and/or regulations that could
restrict or prohibit the provisioning of voice communications services over the
Internet or private IP networks. More aggressive domestic or
international regulation of the Internet in general, and Internet telephony
providers and services specifically, may materially and adversely affect our
business, financial condition, operating results and future prospects,
particularly if increased numbers of governments impose regulations restricting
the use and sale of IP telephony services.
In
addition to regulations addressing Internet telephony and broadband services,
other regulatory issues relating to the Internet in general could affect our
ability to provide our planned security solutions. Congress has
adopted legislation that regulates certain aspects of the Internet, including
online content, user privacy, taxation, liability for third-party activities and
jurisdiction. In addition, a number of initiatives pending in
Congress and state legislatures would prohibit or restrict advertising or sale
of certain products and services on the Internet, which may have the effect of
raising the cost of doing business on the Internet generally.
Telephone
carriers have petitioned governmental agencies to enforce regulatory tariffs,
which, if granted, would increase the cost of online communication, and such
increase in cost may impede the growth of online communication and adversely
affect our business.
The
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructures, and many high traffic areas have begun to
experience interruptions in service. As a result, certain local
telephone carriers have petitioned governmental agencies to enforce regulatory
tariffs on IP telephony traffic that crosses over the traditional telephone
networks. If any of these petitions or the relief that they seek is
granted, the costs of communicating via online could increase substantially,
potentially adversely affecting the growth in the use of online secure
communications. Any of these developments could have an adverse
effect on our business.
The
departure of Kendall Larsen, our Chief Executive Officer and President, and/or
other key personnel could compromise our ability to execute our strategic plan
and may result in additional severance costs to us.
Our
success largely depends on the skills, experience and efforts of our key
personnel, including Kendall Larsen, our Chief Executive Officer and
President. We have no employment agreements with any of our key
executives that prevent them from leaving us at any time. In
addition, we do not maintain key person life insurance for any of our officers
or key employees. The loss of Mr. Larsen, or our failure to
retain other key personnel, would jeopardize our ability to execute our
strategic plan and materially harm our business.
We
will need to recruit and retain additional qualified personnel to successfully
grow our business.
Our
future success will depend in part on our ability to attract and retain
qualified operations, marketing and sales personnel as well as
engineers. Inability to attract and retain such personnel could
adversely affect our business. Competition for engineering, sales,
marketing and executive personnel is intense, particularly in the technology and
Internet sectors and in the regions where our facilities are
located. We can provide no assurance that we will attract or retain
such personnel.
Growth
of internal operations and business may strain our financial
resources.
We intend
to significantly expand the scope of our operating and financial systems in
order to build our business. Our growth rate may place a significant
strain on our financial resources for a number of reasons, including, but not
limited to, the following:
·
|
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.
|
The
addition of new infrastructure services, networks, vertical categories and
affinity websites and the attention they demand, on top of the attention
demanded by our pending litigation with Microsoft, may also strain our
management resources. We cannot give you any assurance that we will
adequately address these risks and, if we do not, our ability to successfully
expand our business could be adversely affected.
If
we expand into international markets, our inexperience outside the United States
would increase the risk that our international expansion efforts will not be
successful, which would in turn limit our prospects for growth.
We may
explore expanding our business to outside the United
States. Expansion into international markets requires significant
management attention and financial resources. In addition, we may
face the following risks associated with any expansion outside the United
States:
·
|
challenges
caused by distance, language and cultural
differences;
|
·
|
legal,
legislative and regulatory
restrictions;
|
·
|
currency
exchange rate fluctuations;
|
·
|
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.
|
These
risks could harm our international expansion efforts, which would in turn harm
our business prospects.
We
will continue to incur significant costs as a result of being a public
company.
As a
public company, we will continue to incur significant legal, accounting and
other expenses that VirnetX did not incur as a private company. The
laws, rules and regulations governing public companies to increase our legal and
financial compliance costs and make some activities more time-consuming and
costly, and these costs could be material to us.
Failing
to maintain the effectiveness of our internal control over financial reporting
could cause the cost related to remediation to increase and could cause our
stock price to decline.
In the
future, our management may identify deficiencies regarding the design and
effectiveness of our system of internal control over financial reporting that we
engage in pursuant to Section 404 of the Sarbanes-Oxley Act, or
Section 404, as part of our periodic reporting obligations. Such
deficiencies could include those arising from turnover of qualified personnel or
arising as a result of acquisitions, which we may not be able to remediate in
time to meet the continuing reporting deadlines imposed by Section 404 and
the costs of which may harm our results of operations. In addition, if we fail
to maintain the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to
ensure that our management can conclude on an ongoing basis that we have
effective internal controls. We also may not be able to retain an independent
registered public accounting firm with sufficient resources to attest to and
report on our internal controls in a timely manner. Moreover, our registered
public accounting firm may not agree with our management’s future assessments
and may deem our controls ineffective if we are unable to remediate on a timely
basis. If in the future we are unable to assert that we maintain effective
internal controls, our investors could lose confidence in the accuracy and
completeness of our financial reports which could cause our stock price to
decline.
Our
ability to sell our solutions will be dependent on the quality of our technical
support, and our failure to deliver high-quality technical support services
could have a material adverse effect on our sales and results of
operations.
If we do
not effectively assist our customers in deploying our products, succeed in
helping our customers quickly resolve post-deployment issues and provide
effective ongoing support, or if potential customers perceive that we may not be
able achieve the foregoing, our ability to sell our products would be adversely
affected, and our reputation with potential customers could be
harmed. In addition, as we expand our operations internationally, our
technical support team will face additional challenges, including those
associated with delivering support, training and documentation in languages
other than English. As a result, our failure to deliver and maintain
high-quality technical support services to our customers could result in
customers choosing to use our competitors’ products instead of ours in the
future.
Risks
Related to Our Stock
The exercise of our outstanding
warrants may result in a dilution of our current stockholders' voting power and
an increase in the number of shares eligible for future resale in the public
market which may negatively impact the market price of our
stock.
The
exercise of some or all of our outstanding warrants could significantly dilute
the ownership interests of our existing stockholders. As of December 31, 2009,
we had outstanding warrants to purchase an aggregate of 12,271,946 shares of
common stock, including (i) the warrant to purchase 300,000 shares of common
stock issued to the underwriter of our December 2007 sale of common shares and
warrants, (ii) the warrants to purchase 1,235,000 shares of common stock at an
exercise price of $2.00 per share issued pursuant to our January 2009 sale of
common shares and warrants (which were all exercised and/or expired in
March 2010), (iii) the warrants to purchase 1,235,000 shares of common stock at
an exercise price of $3.00 per share issued pursuant to our January 2009 sale of
common shares and warrants, (iv) the warrants to purchase 1,235,000 shares of
common stock at an exercise price of $4.00 per share issued pursuant to our
January 2009 sale of common shares and warrants, (v) the warrant to purchase
220,000 shares of common stock at an exercise price of $1.80 per share issued to
the underwriter of our January 2009 sale of common shares and warrants, (vi) the
warrants to purchase 3,246,959 shares of common stock underlying the Series I
Warrants issued pursuant to our September 2009 private placement transaction,
(vii) the warrants to purchase up to 2,419,023 shares of common stock underlying
the Series II Warrants issued pursuant to our September 2009 private placement
transaction (all of which automatically expired unexercised in January 2010),
and (viii) the warrants to purchase up to 2,380,942 shares of common stock
underlying the Series III Warrants issued pursuant to our September 2009 private
placement transaction (all of which were exercised in February
2010). To the extent warrants are exercised, additional shares of
common stock will be issued, and such issuance may dilute existing stockholders
and increase the number of shares eligible for resale in the public
market. Additionally, the issuance of up to 7,553,700 shares of
common stock issuable upon exercise of vested stock options and other awards
outstanding as of December 31, 2009 pursuant to our incentive plan will further
dilute our existing stockholders’ voting interest.
In
addition to the dilutive effects described above, the exercise of those
securities would lead to a potential increase in the number of shares eligible
for resale in the public market. Sales of substantial numbers of such shares in
the public market could adversely affect the market price of our
shares.
We may seek to raise additional funds, finance
acquisitions or develop strategic relationships by issuing capital stock that
would dilute your ownership.
We have financed our operations, and we expect to
continue to finance our operations, acquisitions and develop strategic
relationships, by issuing equity or convertible debt securities, which could
significantly reduce the percentage ownership of our existing
stockholders. Furthermore, any newly issued securities could have
rights, preferences and privileges senior to those of our existing
stock. Moreover, any issuances by us of equity securities may be at
or below the prevailing market price of our stock and in any event may have a
dilutive impact on your ownership interest, which could cause the market price
of stock to decline. We may also raise additional funds through the
incurrence of debt or the issuance or sale of other securities or instruments
senior to our common shares. The
holders of any debt securities or instruments we may issue would have rights
superior to the rights of our common stockholders.
Trading
in our common stock is limited and the price of our common stock may be subject
to substantial volatility, particularly in light of the instability in the
financial and capital markets.
Our
common stock is listed on NYSE Amex, but its daily trading volume has been
limited, sporadic and volatile. Over the past year the market price of our
common stock has experienced significant fluctuations. Between
June 30, 2008 and December 31, 2009, the reported last sale price for our
common stock has ranged from $7.06 to $1.06 per share. With such
volatility, there can be no assurance that we will remain qualified to be listed
on NYSE Amex.
In April
2009, we received a letter from the NYSE Amex stating that, based on the NYSE
Amex’s review of publicly available information, we were considered to be below
the NYSE Amex’s continued listing standards. After submitting a plan
of compliance to the NYSE Amex and additional evaluation by the Exchange, we
were informed in October 2009 that we had resolved the continued listing
deficiencies. We cannot assure you that we will not receive
additional deficiency letters in the future, or that we will continue to satisfy
the continued listing standards in order to remain listed on the
Exchange.
If our
securities were delisted from trading on NYSE Amex and we are unable to list our
securities on another securities exchange, our securities may be able to be
listed on the OTC Bulletin Board or the “Pink Sheets,” which may adversely
affect the liquidity and price of our common stock. In addition, we
expect the price of our common stock to continue to be volatile as a result of a
number of factors, including, but not limited to, the following:
·
|
developments
in our litigation against
Microsoft;
|
·
|
quarterly
variations in our operating
results;
|
·
|
large
purchases or sales of common stock;
|
·
|
actual
or anticipated announcements of new products or services by us or
competitors;
|
·
|
general
conditions in the markets in which we
compete; and
|
·
|
economic
and financial conditions.
|
Because
ownership of our common shares is concentrated, you and other investors will
have minimal influence on stockholder decisions.
As of
December 31, 2009, our executive officers and directors beneficially owned an
aggregate of 10,297,935 shares, or approximately 26% of our then
outstanding common stock. In addition, a group of stockholders that,
as of December 31, 2007, held 4,766,666 shares, or approximately 12%
of our then outstanding common stock, have entered into a voting agreement with
us that requires them to vote all of their shares of our voting stock in favor
of the director nominees approved by our Board of Directors at each director
election going forward, and in a manner that is proportional to the votes cast
by all other voting shares as to any other matters submitted to the stockholders
for a vote. As a result, our existing officers and directors could significantly
influence stockholder actions of which you disapprove or that are contrary to
your interests. This ability to exercise significant influence could
prevent or significantly delay another company from acquiring or merging with
us.
Our
protective provisions could make it difficult for a third party to successfully
acquire us even if you would like to sell your shares to them.
We have a
number of protective provisions that could delay, discourage or prevent a third
party from acquiring control of us without the approval of our Board of
Directors. Our protective provisions include:
·
|
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 By-laws: Stockholder
proposals to alter or amend our By-laws or to adopt new By-laws can only
be approved by the affirmative vote of at least 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.
|
Securities
analysts may not cover our common stock and this may have a negative impact on
our common stock’s market price.
The
trading market for our common stock may depend on the research and reports that
securities analysts publish about us or our business. We do not have
any control over these analysts. There is no guarantee that
securities analysts will cover our common stock. If securities
analysts do not cover our common stock, the lack of research coverage may
adversely affect our common stock’s market price. If we are covered
by securities analysts, and our stock is downgraded, our stock price would
likely decline. If one or more of these analysts ceases to cover us
or fails to publish regularly reports on us, we could lose or fail to gain
visibility in the financial markets, which could cause our stock price or
trading volume to decline.
Our
business is subject to risks associated with the ongoing financial crisis and
weakening global economy.
The
recent severe tightening of the credit markets, turmoil in the financial
markets, and weakening global economy impacts our ability to raise needed
capital and enter into customer agreements. These slowdowns are
expected to worsen if these economic conditions are prolonged or deteriorate
further. Further, these conditions and uncertainty about future
economic conditions make it challenging for us to forecast our operating
results, make business decisions and identify the risks that may affect our
business, financial condition and results of operations. If we are
not able to timely and appropriately adapt to changes resulting from the
difficult macroeconomic environment, our business, financial condition, and
results of operations may be significantly negatively affected.
We
have no current intention of declaring or paying any cash dividends on our
common stock.
We do not
plan to declare or pay any cash dividends on our common stock. Our
current policy is to use all funds and any earnings in the operation and
expansion of our business.
DIVIDEND
POLICY
We have
not in the past paid, and do not expect for the foreseeable future to pay,
dividends on our common stock. Instead, we anticipate that all of our earnings,
if any, in the foreseeable future will be used for working capital and other
general corporate purposes. Any future determination to pay dividends on our
common stock will be at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements and contractual restrictions.
SELECTED
CONSOLIDATED FINANCIAL DATA
You
should read the selected consolidated financial data set forth below in
conjunction with our consolidated financial statements, the notes to our
consolidated financial statements and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained elsewhere in this
prospectus. Our historical results are not necessarily indicative of
results to be expected for future periods.
|
|
|
For
the year ended December 31, 2009
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
(deficit)
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
The
following table provides a summary of selected financial results of operations
by quarter for the years ended December 31, 2009 and 2008, and the quarters
ended March 31, June 30, and September 30, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands except per share)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3
|
|
|
$ |
7
|
|
|
$ |
3
|
|
|
$ |
13
|
|
Loss
from operations
|
|
|
(3,405
|
) |
|
|
(3,928
|
) |
|
|
(2,624
|
) |
|
|
(3,131 |
) |
Net
loss
|
|
|
(3,403
|
) |
|
|
(3,927
|
) |
|
|
(2,623
|
) |
|
|
(3,130 |
) |
Net
loss per common share
|
|
$ |
(0.09
|
) |
|
$ |
(0.11
|
) |
|
$ |
(0.07
|
) |
|
$ |
(0.08 |
) |
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
|
) |
USE
OF PROCEEDS
All
shares of our common stock and warrants to purchase shares of our common stock
offered by this prospectus were issued in our January 2009 underwritten public
offering. We will not receive any of the proceeds from the sale of our common
stock issuable upon exercise of warrants. However, if a warrant holder exercises
a warrant in order to obtain underlying shares of common stock to sell, or if we
utilize the call feature in the warrants and require the exercise of the
outstanding warrants, we would receive cash proceeds if the exercise price is
paid in cash. Assuming the cash exercise of all the warrants, we
will receive net proceeds of approximately $10,800,000. As of March 12,
2010 we have received proceeds in the amount of $2,000,000. We will not
receive any proceeds from the cashless exercise of the warrants.
We
anticipate that all net proceeds obtained from the exercise of warrants will be
used to fund our working capital purposes. Given our relatively low
overhead structure and the importance of a successful result of the Microsoft
litigation to us, we anticipate that the majority of the proceeds we receive
from the exercise of warrants will be allocated to fund the fees and expenses
associated with our Microsoft litigation.
As was
disclosed in a Current Report on Form 8-K dated June 11, 2009 filed by us with
the SEC, we entered into an engagement letter (the “Engagement Letter”) with
McKool Smith (“McKool”) confirming McKool as our lead counsel in the February
2007 lawsuit against Microsoft Corporation. McKool has agreed to represent us
for a fixed fee of $3 million and a contingency fee of 8% of the litigation
proceeds. In the event of a judgment or settlement below an agreed upon amount
(designed to approximate the total legal fees associated with the matter),
McKool’s fixed fee will be limited to the actual time spent by McKool, up to a
maximum of $3 million, plus the contingency fee of 8% of the litigation
proceeds. McKool’s out-of-pocket expenses are not capped pursuant to the
Engagement Letter but are estimated to be approximately $1 million.
Given the
fixed fee arrangement, and assuming that (i) all warrants issued in the January
2009 offering and registered by this prospectus are exercised in cash and we
receive net proceeds totaling approximately $10,800,000, and (ii) all Series I
warrants issued in our September 2009 private placement transaction and
registered by a prospectus on file with the SEC (File No. 333-162145) are
exercised in cash and we receive net proceeds totaling $21,092,759, we
anticipate that the allocation of the net proceeds from the two transactions
will be approximately 20% towards fees associated with the Microsoft litigation,
20% towards research and development expenses, 15% to general professional fees,
and 45% towards general working capital purposes.
As is
disclosed in the Liquidity and Capital Resources section of this prospectus, and
has been disclosed in our previous filings with the SEC, we anticipate that our
existing cash and cash equivalents, which include the proceeds we raised from
the initial sale of shares of our common stock in connection with this January
2009 offering and our September 2009 private placement transaction, are not
currently sufficient to fund our operations for longer than through the end
of the third quarter of 2010. Although the fixed fee arrangement entered into
with McKool will assist us in managing our expenses and reducing the portion of
our expenses spent towards litigation, should we not raise the total anticipated
net proceeds in this offering, and we are not therefore able to allocate such
proceeds to the Microsoft litigation, our intellectual property offerings, and
other general working capital purposes as discussed above, we may need to raise
additional funds through, but not limited to, public or private offerings,
third-party debt facilities, or strategic partnerships. See the
section in this Prospectus entitled “Risk Factors: We may seek to
raise additional funds, finance acquisitions, or develop strategic relationships
by issuing capital stock that would dilute your ownership.” for additional
disclosure regarding the potential dilutive impact that such additional raises
would have on our existing stockholders.
The
foregoing represents our best estimate of the allocations of the proceeds of
this offering based on our present plans and business conditions. The amounts
and timing of expenditures for each purpose described above may vary
significantly depending on numerous factors, including, without limitation, the
progress of the Microsoft litigation and the progress of our research and
development activities. There can be no assurances that unforeseen events or
changes in business conditions will not result in the application of proceeds of
this offering in a manner other than is described in this prospectus. Any such
reallocation of the net proceeds from the offering would be substantially
limited to the categories set forth above.
THE
OFFERING
In
January 2009, we closed an underwritten public offering of 2,470,000 shares of
our common stock, including 270,000 of which were issued pursuant to the
underwriter’s over-allotment option, plus warrants to purchase 1,235,000 shares
of common stock at $2.00 per share (the “$2 Warrants”), including 135,000 of
which were issued pursuant to the underwriter’s over-allotment option, warrants
to purchase 1,235,000 shares of common stock at $3.00 per share (the “$3
Warrants”), including 135,000 of which were issued pursuant to the underwriter’s
over-allotment option, and warrants to purchase 1,235,000 shares of common stock
at $4.00 per share (the “$4 Warrants”), including 135,000 of which were issued
pursuant to the underwriter’s over-allotment option. The offering at $1.50 per
unit raised gross proceeds of approximately $3,700,000 before deducting the
underwriter’s fees and other costs of the offering. The net cash
raised was approximately $3,300,000.
All
warrants covered by this prospectus became exercisable on January 30, 2009,
the closing date of the offering . The $3
Warrants and the $4 Warrants remain exercisable through and including the
18-month anniversary date of the closing of the offering. The $3
Warrants and the $4 Warrants include a call feature that gives us the right to
require the holder of the warrant to exercise the warrant if our average closing
stock price over five consecutive trading days is equal to or exceeds two times
the applicable warrant’s purchase price, failing which the warrants will
terminate if not previously exercised by the holders of such warrants. On
February 24, 2010, we exercised in full our rights to call the $2
Warrants. The $2 Warrants expired in their entirety unless earlier
exercised on March 11, 2010.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Company
Overview
We are a
development stage company focused on commercializing a patent portfolio for
securing real-time communications over the Internet. These patents
were acquired by our principal operating subsidiary, VirnetX, from Science
Applications International Corporation, or SAIC. SAIC is a FORTUNE
500® scientific, engineering, and technology applications company that uses its
deep domain knowledge to solve problems of vital importance to the nation and
the world, in national security, energy and the environment, critical
infrastructure, and health.
Although
we believe we may derive revenues in the future from our principal patent
portfolio and are currently endeavoring to develop certain of those patents into
marketable products, we have not done so to date. Because we have
limited capital resources, our revenues are insignificant and our expenses,
including but not limited to those we expect to incur in our patent infringement
case against Microsoft, are substantial, we may be unable to successfully
complete our business plans, our business may fail and your investment in our
securities may become worthless. See “Risk Factors” for additional
information.
We are in
the development stage and consequently we are subject to the risks associated
with development stage companies including: the need for additional financings;
the uncertainty that our patent and technology licensing program development
efforts will produce revenue bearing licenses for us; the uncertainty that our
development initiatives will produce successful commercial products as well as
the marketing and customer acceptance of such products; competition from larger
organizations; dependence on key personnel; uncertain patent protection; and
dependence on corporate partners and collaborators. To achieve successful
operations, we will require additional capital to continue research and
development and marketing efforts. No assurance can be given as to
the timing or ultimate success of obtaining future funding.
Developments
from the year ended December 31, 2009
On
January 30, 2009, we closed an underwritten public offering of 2,470,000
shares of our common stock at $1.50 per share. As further described in the
prospectus for the offering filed on EDGAR, for each share purchased in the
offering, an investor received registered warrants to purchase 0.5 shares of our
common stock at $2.00 per share, 0.5 shares of our common stock at $3.00 per
share and 0.5 shares of our common stock at $4.00 per share. These
warrants were listed for trading on the OTC Bulletin Board under the symbols
“VHCOW”, “VHCOZ”, and “VHCOL”, respectively. We also issued warrants
to purchase 220,000 shares of common stock at an exercise price of $1.80 per
share issued to the underwriter of our January 2009 offering. The
offering raised proceeds of $3.7 million before fees and expenses, and $3.3 net
of fees and expenses.
On
February 10, 2009, VirnetX Inc., our wholly-owned subsidiary, was awarded
U.S. patent number 7,490,151 by the United States Patent and Trademark Office.
The new patent, titled “Establishment of a secure communication link based on a
domain name service (DNS) request” describes a secure mechanism for
communication over the Internet. In conjunction with the issuance of this
patent, we will seek to commercialize these exclusive rights in the United
States by establishing the secure domain name registry service for the Internet.
Additional information about the patent can be found at the Internet website
www.uspto.gov.
On
June 9, 2009, we entered into an engagement letter with McKool Smith,
confirming McKool as our lead counsel in the February 2007 lawsuit against
Microsoft Corporation. McKool has agreed to represent us in the Microsoft
Litigation for a fixed fee of $3 million and a contingency fee of 8% of the
litigation proceeds. In the event of a judgment or settlement below an agreed
upon amount (designed to approximate the total legal fees associated with the
matter), McKool’s fixed fee will be limited to the actual time spent by McKool,
up to a maximum of $3 million, plus the contingency fee of 8% of the
litigation proceeds. McKool’s out-of-pocket expenses are not capped pursuant to
the engagement letter but are estimated to be approximately $1 million.
Subsequently, with our permission, McDermott Will & Emery filed a motion to
withdraw as our counsel from this case, which was granted by the court on July
8, 2009. A copy of the engagement letter with McKool is attached as an
exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30,
2009. We have submitted a request for confidential treatment for
certain portions of the engagement letter. Those portions have been
redacted and have been provided separately to the Securities and Exchange
Commission.
On
June 26, 2009, we filed an unopposed motion with the United States District
Court for the Eastern District of Texas for an order granting an approximate
ninety day continuance of the trial and to enter a new docket control order in
the ongoing patent infringement litigation with Microsoft Corporation. This
order was granted on June 30, 2009 and the new trial date was set for March 8,
2010.
On July
19, 2009, the NYSE Amex LLC (the “Exchange”) notified us that it had
accepted our previously submitted plan of compliance and, pursuant to the plan,
had granted us an extension to regain compliance with the Exchange’s continued
listing standards. In addition to approving the plan, the Exchange
determined that we are not currently subject to the stockholders’ equity
requirements, given our compliance with certain alternative listing standards
relating, among other things, to our current market
capitalization. Nonetheless, the Exchange continued to believe that
it would be necessary and appropriate for us to take certain actions to
strengthen our financial condition. As a result, the Exchange granted us an
extension until October 30, 2009 to regain compliance with the financial
condition continued listing standard.
On July
30, 2009, the United States District Court for the Eastern District of Texas,
Tyler Division, issued its Markman Order in the Microsoft litigation in
connection with the Markman hearing on claim construction that was held on
February 19, 2009. In
September 2009, we closed a private placement of 2,380,942 shares of our common
stock at a purchase price of $2.52 per share. In addition to shares of common
stock, we also issued (i) Series I warrants to purchase approximately an
additional 2,380,942 shares of our common stock with an exercise price of $3.93
per share subject to adjustment, (ii) Series II warrants to purchase up to
approximately an additional 2,419,023 shares of our common stock, subject to
adjustment, with an automatic cashless exercise basis with an exercise price of
$0.01 per share and (iii) Series III warrants to purchase approximately an
additional 2,380,942 shares of common stock with an exercise price of $2.52 per
share. A registration statement on Form S-1 (File No. 333-162145) was taken
effective on December 22, 2009 covering the registration of the common stock and
warrants to purchase shares of common stock issued pursuant to this private
placement transaction.
On
October 9, 2009, we received a letter from the Exchange stating that, based upon
a review of publicly available information, we had resolved the continued
listing deficiencies referenced in the Exchange’s letter dated April 30,
2009. The Exchange noted that our continued listing eligibility will
continue to be assessed on an ongoing basis. We are now subject to
the provisions of Section 1009(h) of the Exchange’s Company Guide that states
that if we, within 12 months of October 30, 2009, are again determined to be
below the continued listing standards, the Exchange staff may take appropriate
action, which, depending upon the circumstances, may include providing us with
an opportunity to submit a plan to the Exchange advising the Exchange of action
we have taken, or will take, that would bring us into compliance with the
continued listing standards, or the Exchange may initiate delisting proceedings,
which could result in our common stock being delisted from the
Exchange.
On
December 23, 2009, we signed a letter of intent with VeriSign, Inc., or
VeriSign, under which VirnetX Inc. and VeriSign will collaborate to assess and
evaluate the technical, market and commercial viability to jointly develop and
provide mobile directory services and solutions using secure domain names and
PKI certificate infrastructure consistent with VirnetX Inc. intellectual
property. The letter of intent also provided for a “no shop” period until March
23, 2010, during which period the parties have agreed not to solicit or
encourage proposals from any other person or entity regarding a strategic
relationship.
Recent Developments
On
January 14, 2010, the Series II Warrants expired unexercised and terminated
without any additional shares of common stock being issued to private placement
investors.
On
February 24, 2010, we announced that all Series III Warrants issued had been
exercised in full and we issued 2,380,942 shares of our common stock. The
aggregate cash exercise proceeds from the Series III Warrants totaled
$6,000,000. After payment of fees and commissions, we received net proceeds of
approximately $5,400,000.
On
February 24, 2010, we exercised in full our rights to call the $2.00 warrants
issued by us in connection with our 2009 public offering. Those warrants expired
in their entirety unless earlier exercised on March 11, 2010. The aggregate cash
exercise proceeds from the $2.00 warrants if exercised in full would total
$2,470,000. After payment of fees and commissions, we expect to receive net
proceeds of approximately $2,335,000. As of March 12, 2010 we had received
proceeds in the amount of $2,000,000.
On March
16, 2010, a jury awarded us a $105,750,000 verdict against Microsoft for
infringing two of our patents. The jury also found that Microsoft’s patent
infringement was willful.
On March
17, 2010, we filed a new complaint against Microsoft alleging infringement of
our U.S. Patent Nos. 6,502,135 and 7,188,180 by Microsoft’s Windows 7 and
Windows Server 2008 R2 software products.
On March
24, 2010, we entered into an agreement to extend a letter of intent with
VeriSign, under which VirnetX intends to work with VeriSign to create a
technical pilot for providing services that could include VirnetX’s exclusive
secure domain name registry and managed connection and relay services along with
providing a complete PKI solution for VirnetX’s secure domain name
initiative. This falls under the original December 23, 2009, letter
of intent objectives to collaborate in the development of mobile directory
services and solutions using secure domain names and PKI certificate
infrastructure. The strategic relationship contemplated by the letter
of intent remains subject to, among other things, the negotiation, execution and
delivery of definitive agreements. The letter of intent also provides
for a binding exclusivity period until June 4, 2010, during which period the
parties have agreed not to solicit or encourage proposals from any other person
or entity regarding a strategic relationship, the primary purpose thereof is to
assess and evaluate the technical, market and commercial viability to jointly
develop and provide the services contemplated by the letter of
intent.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. The critical accounting policies we employ in the preparation
of our consolidated financial statements are those which involve impairment of
long-lived assets, income taxes, fair value of financial instruments and
stock-based compensation.
Impairment
of Long-Lived Assets
We
identify and record impairment losses on long-lived assets used in operations
when events and changes in circumstances indicate that the carrying amount of an
asset might not be recoverable, but not less than annually. Recoverability is
measured by comparison of the anticipated future net undiscounted cash flows to
the related assets’ carrying value. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the projected discounted future net
cash flows arising from the asset.
Income
Taxes
We
account for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Fair
Value of Financial Instruments
Carrying
amounts of our financial instruments, including cash and cash equivalents,
accounts payable, and accrued liabilities, approximate their fair values due to
their short maturities.
Stock-Based
Compensation
We
account for share-based compensation in accordance with the fair value method,
which requires the measurement and recognition of compensation expense in the
statement of operations for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair
values. Using the modified retrospective transition method of
adopting this standard, the financial statements presented herein reflect
compensation expense for stock-based awards as if the provisions of this
standard had been applied from the date of our inception.
In
addition, we record stock and options granted to non-employees at fair value of
the consideration received or the fair value of the equity investments issued as
they vest over the performance period.
New
Accounting Pronouncements
In July
2006, the Financial Accounting Standards Board (“FASB”) clarified the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
and prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. The minimum threshold is defined as a tax position that is more
likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement. The
guidance must be applied to all existing tax positions upon initial
adoption. The cumulative effect of applying the guidance at adoption
is to be reported as an adjustment to beginning retained earnings for the year
of adoption. The accounting for uncertainty in income taxes was effective
for the first quarter of 2008. The adoption of accounting for uncertainty
in income taxes did not have an impact to the Company’s financial
statements.
In
September 2006, the FASB established a framework for measuring fair value
in accordance with United States Generally Accepted Accounting Principles
(“GAAP”) and expanded disclosure about fair value measurements including valuing
securities in markets that are not active. The Company adopted the
framework for measuring fair value effective January 1, 2009 with the exception
of the application of the framework to non-recurring, non-financial assets and
non-financial liabilities. The adoption of the framework for
measuring fair value did not have a significant impact on the Company’s results
of operations or financial position.
In March
2008, the FASB amended and expanded the disclosure requirements for derivative
instruments and hedging activities by requiring enhanced disclosures about how
and why the Company uses derivative instruments, how derivative instruments and
related hedged items are accounted for, and how derivative instruments and
related hedged items affect the Company’s financial position, financial
performance and cash flows. These requirements were effective for
fiscal years beginning after November 15, 2008. The Company adopted the
amended and expanded disclosure requirements for derivatives instruments and
hedging activities as of January 1, 2009, and adoption did not have a material
effect on the Company’s consolidated financial statements.
In June
2008, the FASB issued guidance requiring that unvested instruments granted in
share-based payment transactions that contain nonforfeitable rights to dividends
or dividend equivalents are participating securities subject to the two-class
method of computing earnings per share. This guidance is effective
for financial statements issued for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The
adoption did not have a material effect on the Company’s consolidated financial
statements.
In April
2009, the FASB required disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements, effective for interim reporting periods ending after June
15, 2009, and required those disclosures in summarized financial information at
interim reporting periods. The Company adopted the new disclosure guidance
over fair value of financial instruments, and adoption did not have a material
effect on the Company’s consolidated financial statements.
In April
2009, the FASB issued guidance which establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued (“subsequent
events”). Under the new guidance, entities are required to disclose
the date through which subsequent events were evaluated, as well as the
rationale for why that date was selected. The guidance is effective
for interim and annual periods ending after June 15, 2009. The
Company adopted the provisions of this new guidance as of June 1, 2009, and
adoption did not have a material effect on our consolidated financial
statements. The Company evaluated subsequent events through March 26,
2010.
In June
2009, the FASB established the Accounting Standards
Codification ("Codification") as the single source of authoritative
GAAP to be applied by nongovernmental entities, except for the rules
and interpretive releases of the Securities and Exchange Commission (“SEC”)
under authority of federal securities laws, which are sources of
authoritative GAAP for SEC registrants. While not intended to change
GAAP, the Codification significantly changes the way in which the accounting
literature is referenced and organized. The Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification was adopted as of August 31,
2009. Adoption did not have a material effect on the Company’s
consolidated financial statements.
Operations
Revenue —
Royalties
Revenue
generated for the twelve months ended December 31, 2009 was $26,306 compared to
$208,610 during the period from July 5, 2007 (the closing date of the merger
between us and VirnetX, Inc.) to December 31, 2008. Our revenue in
2009 was solely limited to the royalties earned under a single license agreement
through our Japanese subsidiary. We expect the revenue from this
license to decrease substantially in the future. We do not intend to
enter into additional licenses or generate significant revenue through our
Japanese subsidiary.
Research
and Development Expenses
Research
and development costs include expenses paid to outside development consultants
and compensation-related expenses for our engineering staff. Research
and development costs are expensed as incurred.
Our
research and development expenses increased from $56,000 for the period from
August 2, 2005 (date of inception) to December 31, 2005, to $554,187
for 2006 to $684,316 for 2007 to $845,324 for 2008, and to $864,058 for 2009,
primarily as a result of increased engineering activities for product
development. We expect research and development expenses to increase
as employees are hired to provide in-house research and
development. Because we expect to use outside contractors for
additional product development on a limited basis, we expect those costs to
remain level or decline over time.
General
and Administrative Expenses
General
and administrative expenses include management and administrative personnel
costs, as well as costs of outside legal, accounting, and consulting
services.
Our
general and administrative expenses increased from $826,478 for the period from
August 2, 2005 (date of inception) to December 31, 2005, to $853,488
for 2006 to $8,040,894 for 2007, to $11,510,008 for 2008, and to $12,250,073 for
2009.
Within
general and administrative expenses, professional fees, primarily legal fees,
increased from $12,481 in the period from August 2, 2005 (date of
inception) to December 31, 2005 to $133,199 in 2006 to $5,286,525 in 2007
to $5,798,534 in 2008 and to $6,941,726 in 2009. The fees were
incurred to pursue the litigation with Microsoft, assist in the merger between
VirnetX, Inc. and VirnetX Holding Corporation, audit the financial statements,
assist in obtaining financing and potential contract negotiations and in general
corporate matters. Although we view the McKool Smith fixed fee arrangement as a
positive arrangement and one that will help us manage our expenses in connection
with the Microsoft litigation, we anticipate that our legal fees and other
expenses associated with this litigation will be material and will negatively
impact our financial condition and results of
operations.
Also
within general and administrative, compensation expenses increased from $799,920
in the period from August 2, 2005 (date of inception) to December 31,
2005, to $613,757 in 2006, $2,152,000 in 2007, $2,682,431 in 2008 and $3,031,717
in 2009. Compensation expenses were higher in 2005 compared to 2006
due to the higher proportion of stock-based compensation expense in
2005. The increases from 2006 to 2009 in compensation expenses are
due principally to stock-based compensation expense related to stock options
granted to our employees and directors and an increase in the number of our
employees as we added resources to comply with financial reporting
requirements.
Other
general and administrative expenses increased from $14,077 in the period from
August 2, 2005 (date of inception) to December 31, 2005 to $106,532 in
2006 to $602,639 in 2007, to $3,029,043 in 2008 and decreased to $2,276,630 for
2009, as we incurred costs related to building our infrastructure and litigation
support. We also incurred additional general and administrative
expenses in connection with the implementation of a directors and officers’
insurance policy and certain other costs. The decrease in 2009 in due primarily
to reduced cost in public relations, outsourced services, printing and other
costs.
Liquidity and
Capital Resources
We are in
the development stage and have raised capital since our inception through the
issuance of our equity securities. As of December 31, 2009, we
had a working capital deficiency of approximately $2,456,000 and approximately
$2,000,000 in cash. Subsequent to year end through March 11, 2010, we have
received approximately $7,400,000 from the exercise of warrants. We have used
the net proceeds to fund our operations and provide working capital for general
corporate purposes.
We expect
to finance future cash needs primarily through proceeds from equity or debt
financings, loans, joint ventures, and/or collaborative agreements with
corporate and strategic partners. We also intend to license our patent
portfolio, technology and software, including our secure domain name registry
service.
We expect
to derive the majority of our revenue from license fees and royalties associated
with our patent portfolio, technology and software.
We
anticipate that our existing cash and cash equivalents, including the proceeds
from the completed exercises of warrants noted above are insufficient to fund
our operations for longer than through the end of our third quarter of
2010.
During
2009, our cash flow used in operations was $6,944,000 or an average of
approximately $579,000 per month. During the fourth quarter of 2009, our cash
balance used in operations increased on average to $636,000 per month. With our
2010 average monthly cash requirement including the impact of a reduction of our
working capital deficit at December 31, 2009, we expect our average monthly cash
flow used in operations in 2010 will be modestly greater than in
2009.
Off-Balance
Sheet Arrangements
On June
9, 2009, we entered into an engagement letter with McKool Smith, confirming
McKool as our lead counsel in the February 2007 lawsuit against Microsoft
Corporation. McKool has agreed to represent us in the Microsoft litigation for a
fixed fee of $3 million and a contingency fee of 8% of the litigation proceeds.
In the event of a judgment or settlement below an agreed upon amount (designed
to approximate the total legal fees associated with the matter), McKool’s fixed
fee will be limited to the actual time spent by McKool, up to a maximum of $3
million, plus the contingency fee of 8% of the litigation proceeds. McKool’s
out-of-pocket expenses are not capped pursuant to the engagement letter but are
estimated to be approximately $1 million. A copy of the engagement
letter with McKool is attached as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2009. We submitted a request
for confidential treatment for certain portions of the engagement
letter. Those portions have been redacted and have been provided
separately to the Securities and Exchange Commission.
We lease
our office facility under a non-cancelable operating lease that was amended in
2008 and ends in 2012. We recognize rent expense on a straight-line
basis over the term of the lease. Rent expense for the years ended December 31,
2009 and 2008 was $51,807 and $25,037, respectively.
For the
Year
|
|
Minimum
Required Lease Payments in Period
|
|
|
|
|
|
2010
|
|
$ |
54,595
|
|
2011
|
|
|
59,242
|
|
2012
|
|
|
30,202
|
|
|
|
$
|
144,039
|
|
In 2005,
VirnetX, Inc. adopted the 2005 Stock Plan (the “Plan”), which was assumed by us
upon the closing of the transaction between VirnetX Holding Corporation and
VirnetX, Inc. on July 5, 2007. Our Board of Directors renamed
this Plan the VirnetX Holding Corporation 2007 Stock Plan and our stockholders
approved the Plan at our 2008 annual stockholders’ meeting. The Plan provides
for the issuance of up to 11,624,469 shares of our common stock. To the
extent that any award should expire, become unexercisable or is otherwise
forfeited, the shares subject to such award will again become available for
issuance under the Plan. The Plan provides for the granting of stock
options and stock purchase rights to our employees and
consultants. Stock options granted under the Plan may be incentive
stock options or nonqualified stock options. Incentive stock options
(“ISO”) may only be granted to our employees (including officers and
directors). Nonqualified stock options (“NSO”) and stock purchase
rights may be granted to our employees and consultants.
The Plan
will expire 10 years after it was approved by our Board of Directors.
Options may be granted under the Plan with an exercise price determined
by our Board of Directors, provided, however, that the exercise price of an
ISO or NSO granted to one of our Named Executive Officers shall not be less
than 100% fair market value of the shares at the date of grant and the exercise
price of an ISO granted to a 10% shareholder shall not be less than 110% of the
fair market value of the shares on the date of grant.
Activity
under the Plan is as follows:
|
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
Available for Grant
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
Shares
reserved for the Plan at inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
granted
|
|
|
(1,317,195 |
) |
|
|
1,317,195 |
|
|
|
1.18
|
|
Options
exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
cancelled
|
|
|
83,032 |
|
|
|
—
|
|
|
|
—
|
|
Balance
at December 31, 2009
|
|
|
1,417,229 |
|
|
|
5,785,790 |
|
|
|
2.57 |
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
BUSINESS
The
Company
We are
developing and commercializing software and technology solutions for securing
real-time communications over the Internet. Our patented GABRIEL
Connection Technology™ combines industry standard encryption protocols with our
patented techniques for automated domain name system, or DNS, lookup mechanisms,
enabling users to create a secure communication link using secure domain
names. We also intend to establish the exclusive secure domain name
registry in the United States and other key markets around the world. Our
software and technology solutions provide the security platform required by
next-generation Internet-based applications such as instant messaging, or IM,
voice over Internet protocol, or VoIP, mobile services, streaming video, file
transfer and remote desktop. Our technology generates secure
connections on a “zero-click” or “single-click” basis, significantly simplifying
the deployment of secure real-time communication solutions by eliminating the
need for end users to enter any encryption information.
Our
portfolio of intellectual property is the foundation of our business
model. We currently have 12 patents in the United States and eight
international patents, as well as several pending U.S. and foreign patent
applications. Our patent portfolio is primarily focused on securing
real-time communications over the Internet, as well as related services such as
the establishment and maintenance of a secure domain name
registry. Our software and technology solutions also have additional
applications in operating systems and network security. On December
2, 2009, we declared to the 3GPP (3rd Generation Partnership Project) that our
U.S. and international patents are or may be essential to Long Term Evolution
(LTE) and 4G wireless specifications. We believe that we will hold the majority
of 4G essential patents related to Series 33 specifications that define security
standards for LTE/4G and are prepared to license the use of our patents for
incorporation into 4G related products such as chips, servers, smartphones,
laptop computers, etc. Our employees include the core development team behind
our patent portfolio, technology and software. This team has worked together for
over ten years and is the same team that invented and developed this technology
while working at Science Application International Corporation, or SAIC. SAIC is
a FORTUNE 500® scientific, engineering, and technology applications company that
uses its deep domain knowledge to solve problems of vital importance to the
nation and the world, in national security, energy and the environment, critical
infrastructure and health. We acquired this patent portfolio in 2006,
and it now serves as the foundation of our planned licensing and service
offerings. We expect to derive the majority of our revenue from
license fees and royalties associated with these patents. We also
intend to continue our research and development efforts to further strengthen
and expand our patent portfolio, and over time, we plan to leverage this
portfolio to develop a product suite that can be sold to enterprise customers
and developers.
We intend
to license our patents and our GABRIEL Connection Technology™ to original
equipment manufacturers, or OEMs, within the IP-telephony, mobility,
fixed-mobile convergence and unified communications markets. The
leaders in these markets include Alcatel-Lucent, Avaya Inc., Cisco Systems,
Inc., Juniper Networks, Inc., LM Ericsson Telephone Company, Motorola, Inc., NEC
Corporation, Nokia Corporation, Nortel Networks Corporation, Samsung Electronics
Co. Ltd. and Sony Ericsson Mobile Communications AB, among others. On
December 9, 2009, we announced the start of beta testing of our GABRIEL
Connection Technology™. In this testing we intend to include invited beta users
from outside the company. This phase of beta testing is expected to be completed
around mid-year 2010.
We also
intend to license our patent portfolio, technology and software, including our
secure domain name registry service, to communication service providers as well
as to system integrators. We believe that the market opportunity for
our software and technology solutions is large and expanding. As part
of our licensing strategy, in March 2008, we hired ipCapital Group, a leading
advisor on licensing technology and intellectual property, to initiate
discussions with several major potential licensees. Since its
founding in 1998, ipCapital Group has supported the licensing efforts of clients
across a variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. On December
23, 2009, we signed a letter of intent with VeriSign, Inc. or VeriSign, under
which VirnetX and VeriSign will collaborate to assess and evaluate the
technical, market and commercial viability to jointly develop and provide mobile
directory services and solutions using secure domain names or “PKI” certificate
infrastructure consistent with VirnetX intellectual property. The letter of intent also
provided for a “no shop” period until March 23, 2010, during which period the
parties have agreed not to solicit or encourage proposals from any other person
or entity regarding a similar strategic relationship. On March
24, 2010, we entered into an agreement with VeriSign to extend the binding
exclusivity period under the letter of intent until June 4, 2010. We
continue to have discussions with other prospective customers/partners in our
target markets outside the scope of the potential strategic relationship with
VeriSign.
Industry
Overview
The
Internet is increasingly evolving into a rich medium used by individuals and
businesses to conduct commerce, share information and engage in real-time
communications including email, text messaging, IM, and voice and video
calls. This communications experience is richer and more complex than
ever before. Session initiation protocol, or SIP, was developed to
enable the convergence of voice and data networks and today is the predominant
industry standard for establishing multimedia communications over the Internet
such as voice, video, instant messaging, presence information and file
transfer. SIP, as well as other real-time collaboration protocols
such as XMPP, use DNS lookup as its primary means of connecting Internet devices
but is an open architecture that remains inherently unsecure.
We
believe that accessing a diversity of services from a single device, anytime and
anywhere, and the ability to access these same services from a range of devices,
are emerging as key market requirements. The portions of the
IP-telephony, mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology solutions are
forecasted by Infonetics to grow total revenues from approximately
$59 billion in 2006 to approximately $162 billion by 2011,
representing a compound annual growth rate, or CAGR, of approximately
22%. This growing trend represents a significant opportunity for
VirnetX to license its patent portfolio, technology and software, and establish
its secure domain name registry.
IP
Telephony
IP
telephony includes technologies that use Internet Protocol’s packet-switched
connections to exchange voice, fax, and other forms of information traditionally
carried over the dedicated circuit-switched connections of the public switched
telephone network, or PSTN. The adoption of IP telephony has helped
businesses significantly lower network operating costs by using a common network
for voice and data. As the workforce becomes increasingly dispersed,
mobile features enabled by Internet protocol-based communications such as
presence, unified messaging, peer-to-peer applications, find me/follow me,
white-boarding and document sharing have become more
commonplace. However, the development of the related security
infrastructure has lagged behind, leaving next-generation networks vulnerable to
a multitude of threats including man-in-middle, eavesdropping, domain hijacking,
distributed denial of service, or DDoS, spam over Internet telephony, or SPIT,
and spam over instant messaging, or SPIM. These threats continue to
highlight the need for securing next-generation networks. As the use
of IP telephony systems extends beyond the boundaries of an organization’s
private network, security is likely to become an even bigger
concern. Worldwide revenue from IP telephony products like IP-PBX
including IP phones, service provider VoIP and IMS equipment, VoIP gateways and
hosted VoIP services for businesses is forecasted by Infonetics to grow from
approximately $15 billion in 2006 to approximately $43 billion in
2011, representing a CAGR of approximately 23%. We believe our unique
and patented solution provides the robust security platform required for
providing on-demand secure communication links between enterprises intending to
communicate securely without manually configuring the connections. We
believe a standard security solution such as ours will further accelerate the
adoption of IP telephony products in the market and allow enterprises to take
full advantage of these rich content applications and real-time communications
over the Internet, thereby significantly increasing their return on
investment.
Fixed-Mobile
Convergence
Fixed-mobile
convergence is an environment where wired and wireless phones work together with
Internet Protocol to deliver services (voice, video, data and combinations
thereof) uniformly across multiple access networks, including, among others,
WiMAX, WiFi, cellular and fixed. We believe that the fixed-mobile
convergence infrastructure equipment revenue will grow from approximately
$9 million in 2006 to over $406 million in 2011, representing a CAGR
of approximately 114%. Additionally, according to a thought
leadership paper entitled “Road to Full Convergence” published by Fixed-Mobile
Convergence Alliance, or FMCA, an alliance of leading operators representing a
customer base of over 850 million customers, consumers increasingly feel
the need to be connected and have real-time access to media streams, blogs and
breaking news. During the past ten years, users have become
increasingly technologically sophisticated and are now demanding greater
functionality from the Internet. Today, the Internet is used for
commerce, social networking, online dating and a number of other forms of
media-rich, real-time communication and collaboration. Mobile devices
like dual mode (cellular/WiFi) phones lie at the center of this transition and
have become the device with the closest proximity and relationship to the
user. We believe that accessing a diversity of services from a single
device, anytime and anywhere, and the ability to access the same services from a
range of devices, is emerging as a key market requirement. Worldwide
total dual mode cellular/WiFi phone revenue was approximately $17 billion
in 2006 and is expected to grow to approximately $76 billion in 2011,
representing a CAGR of approximately 35%. The strong projected growth
for converged cellular/WiFi phones and related services in enterprise and
consumer market segments represents a significant opportunity for VirnetX’s
patent portfolio, technology, and software to become the industry standard for
securing real-time communication.
IP
Mobility
Smartphones
are multi-functional devices that handle a wide variety of business-critical
applications and support increasingly complex functions including enhanced data
processing, Internet access, e-mail access, calendars and scheduling, contact
management and the ability to view electronic documents. Users have
continual access to these applications while on the move making them an
increasingly essential business tool for the mobile worker. These
devices enable mobile workers to have similar functionality inside or outside
the office thereby increasing employee efficiency. However, it is
critical that this mobile environment have the same level of security as an
enterprise’s internal network. Worldwide revenue from IP mobility
products like smartphones and mobile data cards is expected to grow from
approximately $26 billion in 2006 to approximately $41 billion by
2011, representing a CAGR of approximately 10%. We believe in order
to realize the full functionality of IP mobility, several challenges including
security must be overcome. When users are mobile, connections and
data need to cross multiple network boundaries, each of which poses a security
threat. Wireless networks present unique threats because rogue users
can enter the enterprise network through wireless access points that may not be
sufficiently protected as part of an organization’s IT security
protocols. Providing authenticated access to the wireless networks
and enterprise applications through the wireless domain are important
requirements and represent a significant market opportunity for VirnetX’s
patented technology and secure domain names to provide users fully authenticated
secure access on a “zero-click” or “single-click” basis.
Unified
Communications
The need
to enhance productivity is putting increasing demand on instant access to, and
the management of, rapidly expanding real-time information. Mobile
collaboration, and the ability to conduct business whether inside or outside of
the office, are high priorities. Business and consumer users are
nomadic and expect instant access everywhere. The ability to
establish multiple secure simultaneous network connections and provide IP
sessions with strong security and encryption will be critical to widespread
deployment of next-generation networks. A shortcoming of this new
communications environment is that the various modes of communication operate
independently from one another and do not integrate easily, if at
all. As the number of devices grows, individual points of contact
multiply and communication becomes more sophisticated and increasingly
vulnerable.
The idea
behind unified communications is to organize the array of communication
methodologies, integrating the various fragmented ways individuals communicate
today into a single communications experience, ultimately increasing utility and
productivity. The basic components comprising unified communications
include: a directory for storing addresses, various modes of
communication with each user/contact (desk phone, mobile phone, IM, etc.),
message storage for all messages regardless of communication method and secure
presence of a user’s status for each mode of communication (available, away,
busy, etc.). Worldwide unified communications market generated
approximately $377 million in revenue in 2006 and is forecasted to grow
rapidly over the next few years generating approximately $813 million in
revenue in 2011, representing a CAGR of approximately 17%. We believe
the growth in unified communication products may not reach its full potential
due to the lack of transparent and seamless security as users hesitate to place
their presence information online for all to see and as organizations block
access due to the lack of credentials verified by a neutral third
party. Our solutions help address these concerns and should enable
significant growth in the unified communications market.
Our
Solutions
Our
software and technology solutions, including our secure domain name registry,
our patents and our GABRIEL Connection Technology™ are designed to secure all
types of real-time communications over the Internet. Our technology
uses industry standard encryption methods with our patented DNS lookup
mechanisms to create a secure communication link between users intending to
communicate in real time over the Internet. Our technology can be
built into network infrastructure, operating systems or silicon chips developed
for a communication or computing device to secure real-time communications over
the Internet between any number of devices. Our technology
automatically encrypts data allowing organizations and individuals to establish
communities of secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or SPDs, are designed
to be fully-customizable and support rich content applications such as IM, VoIP,
mobile services, streaming video, file transfer and remote desktop in a
completely secure environment. Our approach is a unique and patented
solution that provides the robust security platform required by these rich
content applications and real-time communications over the
Internet. The key benefits and features of our technology include the
following:
|
·
|
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.
|
Competitive
Strengths
We
believe the following competitive strengths will enable our success in the
marketplace:
|
·
|
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.
|
Our
Strategy
Our
strategy is to become the market leader in securing real-time communications
over the Internet and to establish our GABRIEL Communications TechnologyTM as
the industry standard security platform. Key elements of our strategy
are to:
|
·
|
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 existing patent portfolio and technology to develop a suite of
products that can be sold directly to end-user
enterprises.
|
In
furtherance of our strategy, in March 2008, we engaged ipCapital Group to help
us support and grow our licensing business. The ipCapital Group is a
leading advisor on licensing technology and intellectual
property. Through our alliance with ipCapital Group, we are actively
engaged in discussions with several potential customers in our target
markets. ipCapital Group is led by John Cronin. Prior to
founding ipCapital Group, Mr. Cronin was a distinguished inventor at IBM
for 17 years where he patented 100 inventions, published over 150 technical
papers, received IBM’s “Most Distinguished Inventor Award,” and was recognized
as IBM’s “Top Inventor.” As a member of the senior technical staff
and the prestigious IBM Academy, Mr. Cronin led an intellectual asset team
that spearheaded efforts to produce and manage the development of intellectual
property at IBM. Eventually known as “The IBM Patent Factory,” this
select group supported the division that increased IBM’s annual licensing
revenue from $30 million in 1992 to more than $1 billion in 1997 when
Mr. Cronin left IBM. Since its founding in 1998, ipCapital Group
has supported the licensing efforts of clients across a variety of technologies
and markets, resulting in transactions representing several hundred million
dollars of value.
On
December 2, 2009, we declared to the 3GPP (3rd Generation Partnership Project)
that our U.S. and international patents are or may be essential to Long Term
Evolution (LTE) and 4G wireless specifications. We believe that we will hold the
majority of 4G essential patents related to Series 33 specifications that define
security standards for LTE/4G and are prepared to license the use of our patents
for incorporation into 4G related products such as chips, servers, smartphones,
laptop computers and similar products.
License
and Service Offerings
We plan
to offer a diversified portfolio of license and service offerings focused on
securing real-time communications over the Internet, including:
|
·
|
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
TechnologyTM Software Development Kit, or
SDK: OEM customers who want to adopt the GABRIEL
Connection TechnologyTM
as their solution for establishing secure connections using secure domain
names within their products will purchase an SDK license. The
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 will
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: Will enable 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: Will allow 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: Will allow customers to dynamically maintain
connections and relay data to private IP addresses for network devices
that reside behind firewalls. Secure
domain name registrar service customers will enter into a technology
licensing and revenue sharing agreement with VirnetX whereby we will
typically receive an up-front licensing fee for the secure domain name
registrar technology, as well as ongoing annual royalties for each secure
domain name issued by the
customer.
|
|
·
|
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 TechnologyTM
in an individual customer’s products and
services.
|
Our
research and development team was the team responsible for inventing the patents
that form the foundation of the technology we intend to license to OEMs and
service providers globally. This team has worked together for over
ten years and, collectively, has over 120 years of experience in
engineering and technology. We intend to leverage this experience and
continue investing in research and development and, over time, expect to
strengthen and expand our patent portfolio, technology, and
software. While we are currently focused on securing real-time
communications over the Internet and establishing the first and only secure
domain name registry, we believe our existing and future intellectual property
portfolio will extend to additional areas including, among others, network
security and operating systems for fixed and mobile devices. On December 9,
2009, we announced the start of beta testing of our GABRIEL Connection
Technology™. In this testing we intend to include invited beta users from
outside the company. This phase of beta testing is expected to last
approximately 6 months.
Customers
We are
currently focused on commercializing our technology and are actively pursuing
our first licensing agreements. We intend to license our patents and
our GABRIEL Connection TechnologyTM to
original equipment manufacturers, or OEMs, within the IP-telephony, mobility,
fixed-mobile convergence and unified communications markets. Notify Technology
Corporation (OTC BB:NTFY), a San Jose (Calif.) based, 70 person, technology
company offering wireless products and services has agreed to join our beta
testing program.
We also
intend to license our patent portfolio, technology and software, including our
secure domain name registry service, to communication service providers as well
as to system integrators. We are in the process of assessing and evaluating the
technical, market and commercial viability of jointly developing and providing
the mobile directory services and solutions using secure domain names and PKI
certificate infrastructure with VeriSign, Inc.
Marketing
and Sales
We plan
to employ a leveraged, partner-oriented, marketing strategy for our patent and
technology licensing program. The marketing strategy for our patent
and technology licensing program will primarily be focused on
OEMs. We have engaged ipCapital Group to accelerate our patent and
technology licensing program with these customers and are actively pursuing our
first licensing agreements.
We plan
to directly market our domain name registry services to our service provider and
system integrator customers. On December 23, 2009, we signed a letter
of intent with VeriSign, Inc., under which VirnetX and VeriSign will collaborate
to assess and evaluate the technical, market and commercial viability to jointly
develop and provide mobile directory services and solutions using secure domain
names and PKI certificate infrastructure consistent with VirnetX intellectual
property. The letter of intent also provided for a “no shop” period until March
23, 2010, during which period the parties have agreed not to solicit or
encourage proposals from any other person or entity regarding a strategic
relationship. On March
24, 2010, we entered into an agreement with VeriSign to extend the binding
exclusivity period under the letter of intent until June 4, 2010.
ipCapital Group is also focused on building our marketing efforts with
these potential customers. Additionally, we hope to leverage our
relationship with SAIC to extend our offering to departments and agencies within
the federal government. SAIC is a FORTUNE 500®
scientific, engineering, and technology applications company that uses its deep
domain knowledge to solve problems of vital importance to the nation and the
world, in national security, energy and the environment, critical
infrastructure, and health.
Once we
begin generating revenue, we intend to build a sales force that will be
responsible for managing accounts and pursuing licensing and sales opportunities
with new customers.
Competition
We
believe our technology and solutions will compete primarily against various
proprietary security solutions. We group these solutions into three
main categories:
|
·
|
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. A traditional firewall or
network address translation, or NAT, device typically block information
like endpoint IP addresses and port numbers required by signaling
protocols, such as SIP and XMPP, to reach and communicate with their
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, dynamic firewall functions, 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.
|
Intellectual
Property and Patent Rights
Our
intellectual property is primarily comprised of trade secrets, patented
know-how, issued and pending patents and technological innovation.
We have a
strong portfolio comprised of 12 patents in the United States and eight
international patents, as well as several pending U.S. and foreign patent
applications. Our patent portfolio is primarily focused on securing
real-time communications over the Internet, as well as related services such as
the establishment and maintenance of a secure domain name
registry. Our software and technology solutions also have additional
applications in operating systems and network security.
We have
included a list of our U.S. patents below. Each patent below is
publicly accessible on the Internet website of the U.S. Patent and Trademark
Office at www.uspto.gov. The various terms of our issued
U.S. and foreign patents will expire during the period from 2019 to
2024.
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
|
Notwithstanding
anything to the contrary set forth in any of the Company’s filings under the
Securities Act of 1933 or the Securities Exchange Act of 1934 that might
incorporate future filings, the information set forth on the United States
Patent and Trademark Office, or the USPTO Website, shall not be deemed to be a
part of or incorporated by reference into any such filings. The
Company does not warrant the accuracy, or completeness or adequacy of the USPTO
Website, and expressly disclaims liability for errors or omissions on such
website.
Assignment
of Patents
Most of
our issued patents were originally acquired from SAIC pursuant to an assignment
agreement by and between VirnetX and SAIC dated December 21, 2006, and a
patent license and assignment agreement by and between VirnetX and SAIC dated
August 12, 2005, as amended on November 2, 2006, including documents
prepared pursuant to the November amendment, and as further amended on
March 12, 2008. VirnetX recorded the assignment from SAIC with
the U.S. Patent and Trademark Office on December 21,
2006.
Key terms
of these agreements are as follows:
|
·
|
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.
|
If a
reversion event occurs due to our failure to pay SAIC an aggregate cumulative
amount of at least $7.5 million within seven years after January 1,
2007, then we will receive from SAIC a non-exclusive license to the reverting
patents in our field of use.
|
·
|
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.
|
Government
Regulation
The laws
governing online secure communications remain largely unsettled, even in areas
where there has been legislative action. It may take years to
determine whether and how existing laws governing intellectual property, privacy
and libel apply to online media. Such legislation may interfere with
the growth in use of online secure communications and decrease the acceptance of
online secure communications as a viable solution, which could adversely affect
our business.
Due to
the Internet’s popularity and increasing use, new laws regulating secure
communications may be adopted. These laws and regulations may cover,
among other things, issues relating to privacy, pricing, taxation,
telecommunications over the Internet, content, copyrights, distribution and
quality of products and services. We intend to comply with all new
laws and regulations as they are adopted.
The
U.S. government has controlled the authoritative domain name system, or
DNS, root server since the inception of the Internet. On July 1,
1997, the President of the United States directed the U.S. Secretary of
Commerce to privatize the management of the domain name system in a manner that
increases competition and facilitates international participation in its
management.
On
September 29, 2006, the U.S. Department of Commerce extended its
delegation of authority by entering into a new agreement with the Internet
Corporation for Assigned Names and Numbers, or ICANN, a California non-profit
corporation headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers and registrars
that manage the assignment of top level domain names associated with the
authoritative DNS root directory. Although it is possible to create
and manage other DNS root directories privately without accreditation from
ICANN, the possibility of conflicting name and number assignments makes it less
likely that users would widely adopt a top level domain name associated with an
alternative DNS root directory provided by a non-ICANN-accredited registry
service.
On
June 26, 2008, ICANN announced that it will be relaxing its prior position
and will begin to issue generic top level domain names, or gTLDs, more broadly
than it had previously. ICANN expects to begin to take applications
for gTLDs in April or May of 2009 with an application fee of $100,000 or more
per application. ICANN expects the first of these customized gTLDs to
be issued in the fourth quarter of 2009.
We are
currently evaluating whether we will apply to become an ICANN-accredited
registry provider with respect to one or more customized gTLDs, or create our
own alternative DNS root directory to manage the assignment of non-standard
secure domain names. We have not yet begun discussions with ICANN and
we cannot assure you that we will be successful in obtaining ICANN accreditation
for our registry service on terms acceptable to us or at all. Whether
or not we obtain accreditation from ICANN, we will be subject to the ongoing
risks arising out of the delegation of the U.S. government’s
responsibilities for the domain name system to the U.S. Department of
Commerce and ICANN and the evolving government regulatory environment with
respect to domain name registry services.
Employees
As of
December 31, 2009, we had 12 full-time employees.
Facilities
Our
principal executive offices are located at 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066. We lease this property from a
third party for a term that ends in 2012. We have no other properties and
believe that our office facility is suitable and appropriately supports our
current business needs.
Corporate
Overview and History
PASW,
Inc. was incorporated in the State of California in November
1992. PASW, Inc. reincorporated in the State of Delaware in March
2007. From inception until January 2003, PASW, Inc. was engaged in
the business of developing and licensing software that enabled Internet and web
based communications. In January 2003, PASW, Inc. sold all of its
operating assets and became a publicly traded company with limited
operations.
VirnetX,
Inc., which we refer to throughout this prospectus as VirnetX, was
incorporated in the State of Delaware in August 2005. In November
2006, VirnetX acquired certain patents from SAIC. In July 2007, we
effected a reverse merger between PASW, Inc. and VirnetX, which became our
principal operating subsidiary. As a result of this merger, the
former security holders of VirnetX came to own a majority of our outstanding
common stock. On October 29, 2007, we changed our name from
PASW, Inc. to VirnetX Holding Corporation.
Available
Information
We file
or furnish various reports, such as registration statements, periodic and
current reports, proxy statements and other materials with the SEC. Our Internet
website address is www.virnetx.com. You may obtain, free of charge on our
Internet website, copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. The information we post is
intended for reference purposes only; none of the information posted on our
website is part of this report or incorporated by reference herein.
In
addition to the materials that are posted on our website, you may read and copy
any materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and other information
statements, and other information regarding issuers, including us, that file
electronically with the SEC. The Internet address of the SEC’s Internet site is
http://www.sec.gov.
MANAGEMENT
The
following table sets forth the respective names, ages and positions of each of
our directors, and executive officers as of March 30, 2010. There are no family
relationships between any of the persons named below. All of our directors were
initially elected to the Board of Directors on July 5, 2007.
Executive
Officers and Directors
Name
|
Age
|
Position
|
|
|
President,
Chief Executive Officer and Director
|
|
|
Chief
Financial Officer (Interim)
|
|
|
|
|
|
|
|
|
|
|
|
|
Kendall
Larsen. Mr. Larsen has been our Chairman of the Board of
Directors, President and Chief Executive Officer since July 5, 2007 and has held
the same positions with VirnetX Inc. since its inception in August 2005. Mr.
Larsen does not hold any director positions with any other reporting or
registered investment companies. From April 2003 to July 2005, Mr. Larsen
focused on pre-incorporation activities related to VirnetX Inc. From April 2002
to April 2003, Mr. Larsen was a Limited Partner at Osprey Ventures, L.P., a
venture fund that makes investments primarily in business and consumer
technology companies. From October 2000 to April 2002, he was Senior Vice
President and General Manager of the Security Products Division of Phoenix
Technologies Ltd., a software and firmware developer. Prior to March 2003, and
for a period of over 20 years, Mr. Larsen has held senior executive positions at
various leading technology companies, including RSA Security, Inc., Xerox
Corporation, Rolm/International Business Machines Corporation, Novell, Inc.,
General Magic, Inc., and Ramp Networks. Mr. Larsen holds a B.S. in Economics
from the University of Utah.
With his
years of managerial experience, Mr. Larsen brings to the Board demonstrated
management ability at senior levels. Mr. Larsen’s day-to-day
leadership and intimate knowledge of our business and operations provide the
Board with Company-specific experience and expertise. Mr. Larsen’s
drive for innovation and excellence position him well to serve as our Chairman,
President and Chief Executive Officer.
William E.
Sliney. Mr. Sliney has been our Chief Financial Officer on an
interim and part-time basis since July 5, 2007. Mr. Sliney previously served as
our President, Chief Financial Officer and Secretary. He also served as our
Chairman of the Board from October 2000 to August 2001 and was a member of our
Board of Directors from October 2000 to July 5, 2007. From March 2004 to March
2006, he was also a director of Enterra Energy Trust (NYSE: ENT), an oil and gas
trust based in Calgary, Alberta that acquires, operates, and exploits petroleum
and natural gas assets in Canada and in the United States. Before joining us,
Mr. Sliney was the Chief Financial Officer of Legacy Software Inc. from 1995 to
1998. From 1993 to 1994, Mr. Sliney was Chief Executive Officer of Gump’s, a
high end department store retailer based in San Francisco. Mr. Sliney received
an M.B.A. from the Anderson School at UCLA.
Edmund C.
Munger. Mr. Munger has been a director since July 5, 2007. He has
been the Chief Technology Officer of VirnetX since July 2006 and a director of
VirnetX since July 2006. From July 1987 to June 2006, Mr. Munger held various
positions including Associate Division Manager, Division Manager, Chief System
Architect and Assistant Vice President at Science Applications International
Corporation (NYSE: SAI), a leading provider of services and solutions to all
branches of the U.S. military, agencies of the Department of Defense, the
intelligence community, the U.S. Department of Homeland Security and other U.S.
government civil agencies, as well as to customers in selected commercial
markets. Mr. Munger is named as a co-inventor on the majority of the patents in
the VirnetX patent portfolio. Mr. Munger received a M.S. in Naval Architecture
and Marine Engineering from MIT and a B.S. in Naval Science from the United
States Naval Academy.
As
co-inventor on the majority of the patents in the VirnetX patent portfolio, Mr.
Munger brings to the Board extraordinary technical knowledge and a deep
understanding of the Company’s business, history and organization and the field
of information security.
Scott C.
Taylor. Mr. Taylor has been a Director since July 5, 2007. Mr.
Taylor serves as Executive Vice President and General Counsel for Symantec
Corporation where he has been employed since February 2007. From January 2002 to
February 2007, Mr. Taylor worked for Phoenix Technologies Ltd. Prior to 2002,
Mr. Taylor has worked at Narus Inc., Symantec Corporation, Pillsbury Madison
& Sutro LLP (now Pillsbury Winthrop Shaw Pittman LLP), ICF Incorporated (now
ICF Consulting) and the U.S. Securities and Exchange Commission in various
roles. Mr. Taylor was admitted to practice law in the State of California in
1993. Mr. Taylor has a B.A. in International Relations from Stanford University
and a J.D. from George Washington University.
Having
served as general counsel for two public companies, including his current
service as Executive Vice President and General Counsel for Symantec
Corporation, a Delaware corporation listed on the Nasdaq Global Select Market,
Mr. Taylor brings to the Board significant knowledge and experience with
corporate governance and public company reporting requirements. In addition, as
an executive in a leading information security solutions company, Mr. Taylor has
strong expertise in issues affecting our industry generally.
Michael F.
Angelo. Angelo has been a director since July 5, 2007. He has been
a Chief Security Architect at NetIQ
Corporation since August 2005. From October 2003 to August 2005, Mr. Angelo was
a Security Architect and Manager, Government Engagements SBU with Microsoft
Corporation. From July 1989 to October 2003, Mr. Angelo was a Staff Fellow at
both Hewlett Packard Company and Compaq Computer Corp. Mr. Angelo also served as
Senior Systems Programmer at the John von Neumann National Supercomputer Center
from September 1985 to July 1989. He was a Sub-Chairman of the National
Institute of Standards and Technology Board of Assessment for Programs/National
Research Council responsible for the CISD review, for fiscal years 2001 and
2002, and a technology contributor and participant on the U.S. Commerce
Department’s Information Systems Technical Advisory Council (ISTAC), from 1999
to the present. Mr. Angelo was named a distinguished lecturer for 2004 and 2005
by Sigma XI, the Scientific Research Society. He currently holds 49 patents,
most in the area of security and authentication, and was also named the 2003
Inventor of the Year for the City of Houston by the Houston Intellectual
Property Lawyers Association.
As a
holder of many patents in the fields of security and authentication, and as a
result of his long and distinguished industry and scholarly background in the
area of computer security and networking, Mr. Angelo brings to the Board
critical technical and industry knowledge and expertise. With that
extensive industry knowledge and having successfully served in multiple
leadership capacities in various types of organizations, Mr. Angelo is uniquely
qualified to serve as chair of the Company’s nominating and governance
committee.
Thomas M. O’Brien has been a
director since July 5, 2007. He has been Senior Vice President of Reit
Management & Research LLC, an institutional manager of real estate, public
real estate investment trusts (“REITs”) and
other public companies, since May 2006 and served as a Vice President of that
company from May 1996 to April 2006. During the last five years,
Mr. O’Brien has held various positions with public entities related to Reit
Management or its affiliates, including serving as: (1) Chief Executive
Officer and President of TravelCenters of America LLC (NYSE Amex: TA), since
February 2007 and a Managing Director since October 2006; and
(2) Chief Executive Officer and President of RMR Funds, a group of publicly
traded closed-end investment management companies from 2003 to
May 2007. From 1988 to 1996, Mr. O’Brien was a senior manager with
Arthur Andersen LLP where he served a number of public company clients. Mr.
O’Brien graduated cum laude from the University of Pennsylvania, Wharton School
of Business, with a B.S. in Economics.
As a
former certified public accountant and Chief Financial Officer of a public
company listed on the NYSE and a current Chief Executive Officer and director of
a public company listed on the NYSE Amex, Mr. O’Brien brings to the Board and
the Audit Committee, of which he is Chairman, a deep understanding of complex
accounting and finance issues faced by the Company and can provide critical
insight into the financial and other reporting requirements of a U.S. public
company. In addition, his extensive capital markets experience is an
invaluable resource as the Company regularly assesses its capital and liquidity
needs.
Significant
Employees
Robert Dunham
Short III. Mr. Short has been the Chief Scientist for VirnetX
since May 2006. From February 2000 to April 2007, Mr. Short was Assistant
Vice President and Division Manager at Science Applications International
Corporation, or SAIC. From 1994 to February 2000, he also held various other
positions at SAIC. Prior to SAIC, he worked at ARCO Power Technologies, Inc.
(Atlantic Richfield Petroleum), Sperry Corporate Technology Center and Sperry
Research Center. Mr. Short is named as a co-inventor on substantially all
of the patents in the VirnetX patent portfolio. He holds a TS/SCI security
clearance. He has a Ph.D in Electrical Engineering from Purdue University along
with a M.S. in Mathematics and a B.S. in Electrical Engineering from Virginia
Tech.
Kathleen
Larsen. Ms. Larsen is our Chief Administrative Officer. Prior
to this position, she served as our Vice President, Administration and Human
Resources since February 2005. From September 2004 until February 2005,
Ms. Larsen focused on equity raise and pre-incorporation activities related
to VirnetX. Ms. Larsen also served as the Treasurer and Chief Financial
Officer of VirnetX from March 2006 until July 2007. From September 2002 to
September 2004, Ms. Larsen was a Commercial Property Manager for JBD
Properties, a real estate developer. Ms. Larsen’s experience includes
Executive Recruiter at Armen and Associates, Senior Director of Human Resources
at CHW Advertising and Human Resource and Office Manager at Realtime Consulting,
Inc./MODIS.
Sameer
Mathur. Mr. Mathur has been the Vice President of Corporate
Development and Marketing for VirnetX since July 2007. Prior to that date,
Mr. Mathur was the Vice President of Business Development of VirnetX since
April 2006. From March 2004 to April 2006, Mr. Mathur was Product Line
Manager for SonicWALL Inc. From April 2003 to March 2004, Mr. Mathur was
Senior Product Manager for Zone Labs Inc, a leading provider of Internet
security software. From June 1996 to April 2003, he was Senior Product Marketing
Manager of Phoenix Technologies Ltd. Prior to June 1996, Mr. Mathur worked
in various engineering and marketing roles for OEC Japan, IBM Japan, and Pertech
Computers Ltd. Mr. Mathur has a B.S. in Engineering from Gujarat
University, India.
Dr. Victor
Larson. Dr. Larson is the Director of Research and Development
and a co-inventor of the VirnetX technologies. Prior to joining VirnetX,
Dr. Larson worked for over 20 years doing system engineering, software
design and technical program management under contract to many branches of the
Department of Defense and the intelligence community. Dr. Larson worked on
numerous advanced prototypes to implement new solutions to secure
communications, remote sensing data extraction and processing, intelligence
information extraction and data visualization. Dr. Larson holds a Ph.D. in
Information Technology from George Mason University, an M.S. in Mechanical
Engineering from Rensselaer Polytechnic Institute, and a B.S. in Mechanical
Engineering from Virginia Tech.
Greg
Wood. Mr. Wood has been with VirnetX since October 2007 and has
been our Senior Director of Corporate Communications since May 2008. His
executive brand experience includes McDonalds, Safeway, Nissan, Burger King,
Taco Bell, Nutri-System, Supercuts and Pacific Gas & Electric with
advertising agencies that include J. Walter Thompson, Chiat/Day,
Tracy-Locke/BBDO, Hoefer Dietrich & Brown and Crossover Creative.
Mr. Wood’s areas of marketing expertise include strategic branding, new
business development, direct, licensing, product merchandising, consumer
education, multicultural, investor relations and public relations. Mr. Wood
holds a B.A. degree from the University of California, Davis.
Advisory
Board Members
The
VirnetX advisory board collaborates with and provides advice and assistance to
the Company, with a focus on facilitating the development and commercialization
of the Company’s licensing program.
John
Cronin. Mr. Cronin has been a member of our advisory board
since October 2008. He is Managing Director and Chairman of ipCapital Group.
John spent over 17 years at IBM Corporation and became its top inventor
with over 100 patents and 150 patent publications. He created and ran “The IBM
Patent Factory” which was essential to helping IBM become number one in US
patents and the team contributed to the start of and success of IBM’s successful
licensing program. Mr. Cronin holds a BSEE, an MSEE, and a B.A. degree in
Psychology from the University of Vermont.
Paul
Henderson. Mr. Henderson has been a member of our advisory
board since October 2008. He is Managing Director of Clarify LLC, a business
advisory firm specializing in intellectual property strategy for both early
stage and established companies. Prior to this, Mr. Henderson was Director
of IP acquisition at Hewlett Packard, or HP. Mr. Henderson also managed
HP’s Product Generation Consulting Group, providing internal advisory and
consulting services to senior leaders of HP businesses. Mr. Henderson holds
MBAs from UC Berkeley Haas School of Business and Columbia Graduate School of
Business and a degree in Chemical Engineering from the University of
Washington.
John F.
Slitz. Mr. Slitz has been a member of our advisory board since
October 2008. He is the founder of World Series of Golf, Inc. and has been its
Chairman of the Board of Directors since 2003. Mr. Slitz was also Vice
President of IBM from 2005 to 2007. From 2002 to 2005, Mr. Slitz served as
Chief Executive Officer and President of Systems Research and Development
(acquired by IBM in 2005). From 2000 to 2002, he was a venture partner at Osprey
Ventures, focusing on investments in middleware software companies.
Mr. Slitz was also a principal at Slitz & Company, a consulting
firm to software and Internet companies. From 1997 to 1999, he was Senior Vice
President of Marketing with Novell, Inc. Mr. Slitz holds a B.A. in
Economics from SUNY at Cortland, MALS in Psychology/Sociology from the Graduate
Faculty New School for Social Research, and an MBA in Management from
Farleigh-Dickinson University.
Compensation
Discussion and Analysis
Overview
This
Compensation Discussion and Analysis describes our compensation program as
it relates to our Named Executive Officers set forth below in the Summary
Compensation Table. In this Compensation Discussion and Analysis, we first
discuss the objectives and philosophy of our executive compensation program.
Next, we review the process our compensation committee follows in deciding how
to compensate our Named Executive Officers. We then provide a brief overview of
the specific elements of our compensation program. Lastly, we present a detailed
discussion and analysis of the compensation committee’s specific decisions about
the compensation of our Named Executive Officers for fiscal year 2009 and, to
the extent that it is relevant to a fair understanding of our Named Executive
Officer’s fiscal year 2009 compensation, the compensation committee’s approach
to compensation for fiscal year 2010.
Objectives
and Philosophy of Executive Compensation
The
primary objectives and philosophy of our peer-based executive compensation
program are:
|
•
|
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.
|
To
achieve these objectives, we implement and maintain compensation plans that tie
a substantial portion of each executive’s overall compensation to key strategic
financial and operational goals such as the establishment and maintenance of key
strategic relationships, the development of our product candidates, the
identification and advancement of additional product candidates, and the
performance of our common stock price. Our compensation committee’s approach
emphasizes the setting of compensation at levels the committee believes are
competitive with executives in other companies of similar size and stage of
development who are operating in the information technology industry while
taking into account our relative performance and our own strategic
goals.
Executive
Compensation Process
We
maintain a peer-based executive compensation program comprised of multiple
elements. We typically review the elements of compensation for our Named
Executive Officers annually. In connection with our review, we
analyze the compensation paid by the following peer companies:
|
•
|
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. While the compensation committee did not formally
approve a specific peer group, the compensation committee did review the
compensation data of nine public companies with the same industry code as
us and otherwise in a comparable industry and having a market
capitalization of between $31 million and $450 million. These companies
include: Ciber, Inc., Computer Task Group, Inc., Entrust, Inc., Evolving
Systems, Inc., iGate Corp., Ness Technologies, Network Engines, PDF
Solutions, Inc., and Procera Networks,
Inc.
|
In
addition to analyzing the above market data, the compensation committee reviews
each individual’s qualifications, experience and relative contributions to the
Company.
Our
compensation committee exclusively makes all compensation decisions with regard
to our chief executive officer and the Company’s other Named 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 Named Executive Officers and key employees. He is not present for any of
the executive sessions or for any discussion of his own
compensation.
Our
compensation committee considers the possible tax consequences to the Company
and to its executives of our compensation programs, the accounting consequences
to the Company of different compensation decisions and the impact of such
decisions on stockholder dilution. With respect to the tax
consequences to the Company, the compensation committee considers the potential
future effects of Section 162(m) of the Internal Revenue Code on the
compensation paid to our Named Executive Officers. Section 162(m) disallows a
tax deduction for any publicly held corporation for individual compensation
exceeding $1.0 million in any taxable year for any of the Named Executive
Officers in the proxy statement, unless compensation is qualified performance
based compensation within the meaning of Section 162(m). In approving the amount
and form of compensation for our Named Executive Officers, our compensation
committee will continue to consider all elements of the cost to us of providing
such compensation, including the potential impact of Section 162(m). However, to
maintain maximum flexibility in designing compensation programs, the
compensation committee will not limit compensation to those levels or types of
compensation that are intended to be deductible or that lead to a particular
accounting result or level of stockholder dilution.
Our
compensation committee structures our executive compensation program in a manner
that it believes does not promote inappropriate risk taking by our executives,
but rather encourages management to take a balanced approach, focused on
achieving our corporate goals.
Our
compensation committee reports to our board on the major items covered at each
compensation committee meeting.
Elements
of Executive Compensation
Our
executive compensation program consists of the following elements:
•
|
Base Salary. Base
salaries for our Named Executive Officers 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 amount for each Named Executive
Officer based on a percentage of the executive’s base
salary. No performance goals are specifically established or
communicated to our Named Executive Officers and our compensation
committee has the sole discretion to determine following the end of the
fiscal year whether and the extent to which the discretionary annual
incentive bonuses will be paid. Our compensation committee generally
utilizes the discretionary annual incentive bonuses to compensate officers
for achieving financial and operational goals and for individual
performance. Performance factors considered when determining bonuses
typically include 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 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 Named
Executive Officers through the use of stock and stock-based awards. Our
2007 Stock Plan was established to provide our employees, including our
Named 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 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 Named 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 our Named Executive Officers, 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.
|
Named Executive Officers’ Fiscal Year
2009 Compensation
Base
Salary
Mr.
Larsen is our president and chief executive officer, as well as a director.
Relative to the benchmarking surveys described above, his base salary is between
the median and the 75th percentile for early and late stage private companies,
below our key comparable company and below the median and the 75th percentile of
our public company peers. Mr. Larsen, a founder of VirnetX Inc., has driven the
organization’s performance, leading it from inception, through the early
start-up phase and through several rounds of financing. Mr. Larsen will be
critical to our ability to pursue our licensing strategy going
forward.
Mr.
Sliney is our chief financial officer and his base salary is below the median
and the 75th percentile of early stage private companies, below the median for
late stage private companies and our public company peers, and below our key
comparable company. In establishing Mr. Sliney’s base salary, our compensation
committee primarily considered Mr. Sliney’s experience in public company work,
his transactional and strategic skills, his level of responsibility, past
contributions to our performance and expected contributions to our further
success.
Due to
the state of the market and the position of the Company, our compensation
committee decided to maintain the annual base salaries of our Named Executive
Officers for fiscal year 2009 at their fiscal year 2008 levels (Mr. Larsen
$275,000 and Mr. Sliney $43,752).
Discretionary
Annual Incentive Bonus
Due to
the state of the market and the position of the Company, our compensation
committee decided not to award any discretionary annual incentive bonuses to our
Named Executive Officers for fiscal year 2008.
Long-Term
Incentive Program
In light
of the fact that base salaries were not going to be increased for fiscal year
2009 and no discretionary annual incentive bonuses were going to be paid with
respect to fiscal year 2008 performance, our compensation committee determined
that it was necessary and appropriate to award Mr. Larsen a stock option
pursuant to our 2007 Stock Plan to purchase 585,425 shares of Company common
stock. In making this determination, the compensation committee
reviewed market data and stockholder dilution and considered whether this grant
would be an appropriate retention and incentive mechanism for Mr.
Larsen. Our compensation committee did not award stock options to any
of our other Named Executive Officers.
Perquisites
Our Named
Executive Officers participate in the same group insurance and employee benefit
plans as our other salaried employees. At this time we do not provide special
benefits or other perquisites to our Named Executive Officers.
Change
of Control Arrangements
Our 2007
Stock Plan allows our Board to determine the terms and condition of awards
issued thereunder. Our Board has made the determination that all options issued
under our 2007 Stock Plan will include the provision that in the event of a
“Change of Control” (as defined in our 2007 Stock Plan), all unvested shares
underlying the option will vest and become exercisable immediately prior to the
consummation of such Change of Control transaction.
Approach
to Fiscal Year 2010 Compensation
•
|
Base Salaries—For
fiscal year 2010, our compensation committee reviewed the base salary and
performance of each of our Named Executive Officers as well as the
performance of the Company and decided to raise the Named Executive
Officers’ salaries by 10% across-the-board. Set forth below are the fiscal
year 2010 base salaries for our Named Executive
Officers:
|
Name
|
|
|
2010
Base Salary
|
|
|
%
Increase
|
|
|
Kendall
Larsen
|
Chief
Executive Officer,
President
and Director
|
|
$ |
302,500 |
|
|
|
10 |
% |
|
William
E. Sliney
|
Chief
Financial Officer
|
|
$ |
48,127 |
1 |
|
|
10 |
% |
|
1 Mr. Sliney’s
base salary has been pro-rated to reflect the fact that Mr. Sliney works for the
Company on a part-time basis.
•
|
Discretionary Annual Incentive
Bonus—Our compensation committee approved the following target
bonus amounts for each of our Named Executive Officers for fiscal year
2010. The target bonus amount is represented as a percentage of
base salary. Payment of actual bonuses will be determined
following the end of fiscal year 2010 in the compensation committee’s sole
discretion and based on the compensation committee’s review of the
Company’s performance and the performance of each Named Executive
Officer.
|
Name
|
|
|
|
|
|
Kendall
Larsen
|
Chief
Executive Officer,
President
and Director
|
|
|
35
|
% |
|
William
E. Sliney
|
Chief
Financial Officer
|
|
|
35 |
% |
|
•
|
Long-Term
Incentives—Our compensation committee approved the following stock
options grants pursuant to our 2007 Stock Plan for each of our Named
Executive Officers for fiscal year 2010, each of which vests monthly over
4 years from the date of grant.
|
Name
|
|
|
|
|
|
Kendall
Larsen
|
Chief
Executive Officer,
President
and Director
|
|
|
|
|
|
William
E. Sliney
|
Chief
Financial Officer
|
|
|
8,750
|
1 |
|
1 Mr.
Sliney’s stock option grant represents a 35,000 share option grant that was
pro-rated to take into account the fact that Mr. Sliney works for the Company on
a part-time basis.
Stock
Ownership Guidelines
We have
not adopted stock ownership guidelines and our 2007 Stock Plan has provided the
principal method for our executive officers to acquire equity in the Company. We
currently do not require our directors or executive officers to own a particular
amount of our common stock. Our compensation committee is satisfied that stock
and option holdings among our directors and executive officers are sufficient at
this time to provide motivation and to align this group’s interests with those
of our stockholders.
Summary
Compensation Table
The
following table sets forth information concerning compensation earned for
services rendered to the Company
by our chief executive officer and our chief
financial officer for the fiscal year ended December 31, 2009.
Collectively, these are our
“Named Executive Officers.”
Name
& Principal
Position
|
|
Year
|
|
Salary ($)
|
|
Bonus ($)
|
|
Option
Awards ($) (1)
|
|
Total ($)
|
Kendall
Larsen
|
|
2009
|
|
$274,213
|
|
|
|
$690,668
(2)
|
|
$964,881
|
Chief
Executive Officer,
President
and Director
|
|
2008
|
|
275,000
|
|
—
|
|
—
|
|
275,000
|
William
E. Sliney
|
|
2009
|
|
43,752
|
|
|
|
|
|
43,752
|
Chief
Financial Officer
|
|
2008
|
|
98,442
|
|
—
|
|
—
|
|
98,442
|
____________
(1)
The amount in this column reflects the aggregate grant date fair value
of the stock option computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, or Financial FASB
ASC Topic 718. There can be no assurance that these amounts will ever be
realized. For information on the valuation assumptions used in valuing this
stock option award, refer to Note 7 titled “Stock Based Compensation” in the
Note to the Financial Statements contained herein.
(2) On
April 3, 2009, Mr. Larsen was awarded options to purchase a total of 585,425
shares of the Company’s common stock under our 2007 Stock
Plan. Of the total shares awarded, 151,558 shares are subject to an
incentive stock option with an exercise price of $1.265 per share that expires
on April 2, 2014. The remaining 433,867 shares awarded are subject
to a nonqualified stock option with an exercise price of $1.15 that
expires on April 2, 2019. On the first anniversary of the date
of grant, 1/4th of the shares subject to each option will vest and become
exercisable, with 1/48th of the shares subject to each option vesting and
becoming exercisable each month thereafter, subject to the recipient's
continued service with the Company and provided that all unvested shares will
vest and become exercisable immediately prior to the consummation of a change of
control of the Company. The options’ exercise prices are respectively
equal to 110% of the fair market value and 100% of the fair market value of the
Company’s common stock on the date of grant. The options’ exercise
prices and expiration dates were determined in accordance with the provisions of
our 2007 Stock Plan for participants who own stock representing more than 10% of
the voting power of all classes of stock of the
Company.
Outstanding
Equity Awards at 2009 Fiscal Year-End
The
following table sets forth, the outstanding exercisable and unexercisable stock
options held by our Named Executive Officers as of the end of fiscal year
2009:
Name
|
|
Grant Date (1)
|
|
Number
of
Securities
Underlying
Unexercised
Options
Exercisable (#)
|
|
Number
of Securities
Underlying
Unexercised
Options
Unexercisable (#)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
Kendall
Larsen
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer,
President and Director
|
|
03/23/2006
|
|
41,516
|
|
0
|
|
0.2408712
|
|
|
03/22/2016
|
|
12/31/2007
|
|
106,660
|
|
106,659
|
|
6.468
|
|
|
12/30/2012
|
|
04/03/2009
|
|
0
|
|
151,558
|
|
1.265
|
|
|
04/02/2014
|
|
|
04/03/2009
|
|
0
|
|
433,867
|
|
1.15
|
|
|
04/02/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
William
E. Sliney
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
12/31/2007
|
|
191,548
|
|
191,547
|
|
5.88
|
|
|
12/30/2017
|
________________
(1)
|
All
of the stock options referenced in this column vest and become exercisable
with respect to the 1/4 of shares on the first anniversary of the
date of grant and 1/48th of the shares each month thereafter,
subject to the recipient's continued service with the Company and
provided that all unvested shares will vest and become exercisable
immediately prior to the consummation of a change of control of the
Company.
|
Transactions
with Related Persons
Our Code
of Ethics requires each of our directors, employees, officers, and consultants
to disclose any significant interest in any related party transaction and that
interest must be approved in writing by our legal department. If it is
determined that the transaction is required to be reported under SEC rules, then
the transaction will be subject to the review and approval by our audit
committee of our Board. A copy of our Code of Ethics is available on our website
at http://www.virnetx.com in the “Highlights” link in the “Corporate Governance”
subcategory under the “Investors” tab.
The
charter of our audit committee affirms that one of our audit committee’s
responsibilities is to review and approve material related party transactions
and related party transactions that are required to be disclosed in our public
filings. We annually require each of our directors and executive officers to
complete a Questionnaire for Directors, Officers and 5% Stockholders that
elicits information about related party transactions as such term is defined by
SEC rules and regulations. These procedures are intended to determine whether
any such related party transaction impairs the independence of a director or
presents a conflict of interest on the part of a director, employee, or
officer.
The
following is a description of each transaction in the last fiscal year and each
currently proposed transaction in which:
|
·
|
we
have been or are to be a
participant;
|
|
·
|
the
amount involved exceeds
$120,000; and
|
|
·
|
any
of our directors, executive officers, holders of more than 5% of our
capital stock, or any immediate family member of, or person sharing the
household with, any of these individuals, had or will have a direct or
indirect material interest.
|
Stock
Option Grants
We have
granted stock options to our executive officers and certain of our directors
under our 2007 Stock Plan. See “Director Compensation” starting on
page 60 and “Named Executive Officers’ Fiscal Year 2009 Compensation”
starting on page 46 for a further description of these option
awards.
Advisory Service Agreement
In
connection with the consummation of the merger between VirnetX Holding
Corporation and VirnetX, we assumed certain obligations under an Advisory
Service Agreement dated November 6, 2006 by and between VirnetX and MDB
Capital Group LLC, as amended by the terms of that certain Release Agreement
between the same parties, which was executed on July 5, 2007. MDB Capital
Group was a stockholder of VirnetX prior to the merger and Christopher Marlett,
a principal at MDB Capital Group, is currently one of our stockholders as a
result of the merger. MDB Capital Group’s affiliates include Anthony
DiGiandomenico and Robert Levande, each of whom is one of our existing
stockholders as a result of the merger.
Additionally,
in connection with the consummation of the merger, we entered into the following
agreements and transactions with certain of our directors, executive officers
and 5% stockholders:
Indemnification
Agreements
We
entered into Indemnification Agreements with each person who became one of
VirnetX Holding Corporation’s directors or officers in connection with the
consummation of the merger between VirnetX Holding Corporation and VirnetX Inc.,
pursuant to which, among other things, we will indemnify such directors and
officers to the fullest extent permitted by Delaware law, and provide for
advancement of legal expenses under certain circumstances. The Indemnification
Agreements are effective as of July 5, 2007 and were filed as exhibits to our
Current Report on Form 8-K filed with the SEC on July 12, 2007.
Registration
Rights Agreement
Effective
as of July 5, 2007, we entered into a Registration Rights Agreement with
all of the persons who were issued shares of our common stock and securities
convertible into shares of our common stock in the merger.
Pursuant
to the Registration Rights Agreement, commencing six months after the closing of
the merger, the security holders have a right to request that we register for
resale (a) the shares of common stock issued to such persons in the merger
and (b) the shares of common stock underlying convertible notes, options
and warrants issued to such persons in the merger. We are required to cause each
such registration statement filed as a result of such requests to be declared
effective under the Securities Act as promptly as possible after the filing
thereof and to keep such registration statement continuously effective under the
Securities Act until the earlier of (1) the date when all shares included
in the registration statement have been sold; (2) the date that all shares
can be sold pursuant to Rule 144; and (3) one year from the effective
date of such registration statement.
Additionally,
the Registration Rights Agreement provides the security holders with “piggyback”
registration rights such that at any time there is not an effective registration
statement covering the common stock described above and we file a registration
statement relating to an offering for our own account or the account of others
under the Securities Act, other than in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock
options or other employee benefit plans and other than in connection with this
offering, then we are required to send notice to the security holders of such
intended filing at least 20 days prior to filing such registration
statement and we are required to automatically include in such registration
statement all shares of common stock issued in the merger and all shares of
common stock underlying convertible notes, options and warrants issued in the
merger.
Each
security holder also has indemnified us, our directors, officers, agents, and
certain other control persons against damages arising out of or based upon:
(1) such security holder’s failure to comply with the prospectus delivery
requirements of the Securities Act or (2) such security holder’s provision
of any untrue or alleged untrue statement of a material fact to be contained in
any registration statement or prospectus, or arising out of or relating to any
such security holder’s omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements contained in such
registration statement or prospectus not misleading.
Lock-Up
Agreements
Effective
as of July 5, 2007, we entered into a lock-up agreement with certain of the
persons who were issued shares of our common stock in the merger and all persons
who exchanged VirnetX options for VirnetX Holding Corporation options in the
merger, pursuant to which we imposed certain restrictions on the sale of our
common stock or any securities convertible into or which may be exercised to
purchase any shares of our common stock acquired in connection with the merger
for a period of at least 12 months after the consummation of the merger.
That lock-up agreement expired on July 5, 2008. In addition, all of our
officers and directors, as well as certain of our stockholders, entered into a
lock-up agreement with the underwriter of our December 2007 public offering,
which restricted sales of their shares until December 31, 2008.
Transactions
Between the Company and William E. Sliney
From
March 2002 until July 5, 2007, the Company utilized the office space and
equipment of its then officer, William E. Sliney, at no cost. Management
estimates the value thereof to be immaterial.
Promoters
and Control Persons
Glenn
Russell was a founder and owned approximately 60% of the outstanding shares of
VirnetX Holding Corporation immediately prior to the merger between VirnetX
Holding Corporation and VirnetX. Mr. Russell received no compensation in
connection with the merger between VirnetX and VirnetX Holding Corporation.
Mr. Russell’s historical compensation from VirnetX Holding Corporation in
his capacity as its Chief Executive Officer prior to the merger has been
disclosed in VirnetX Holding Corporation’s reports filed with the SEC under the
Securities Exchange Act of 1934, as amended.
Voting
Agreement
On
December 12, 2007, we entered into a Voting Agreement with the following
stockholders that collectively own 4,766,666 shares of our common stock,
representing approximately 12.76% of our 37,369,985 shares outstanding as of
April 13, 2009:
|
·
|
The
John P. McGrain Grantor Retained Annuity Trust u/t/d/ June 25,
2007
|
|
·
|
John
P. McGrain, SEP IRA
|
|
·
|
The
Westhampton Special Situations Fund,
LLC
|
|
·
|
The
Kirby Enterprise Fund, LLC
|
|
·
|
Kearney
Properties, LLC
|
|
·
|
Charles
F. Kirby, Roth IRA
|
The
Voting Agreement requires each of the above stockholders to vote all of the
shares of our voting stock held by them from time to time in favor of the
directors nominated by our Board of Directors and in a manner proportional to
all the other votes cast by shares present and voting with respect to any other
matter brought to the stockholders for a vote. This voting arrangement is an
initial and continuing listing requirement for our common stock to be and remain
listed on the NYSE Amex Stock Exchange.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth the beneficial ownership of our common stock as of
March 10, 2010 by:
|
·
|
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
of our Named Executive Officers in the table under “Executive Compensation
— Summary Compensation Table” on page 49 of this prospectus;
and
|
|
·
|
all
current directors and executive officers as a
group.
|
This
table lists applicable percentage ownership based on 43,520,698 shares of common
stock outstanding as of March 10, 2010. Securities that a person has a right to
acquire pursuant to SEC rules within 60 days of March 10, 2010 are deemed to be
beneficially owned by the persons holding these options for the purpose of
computing the number of shares owned by, and percentage ownership of, that
person, but are not treated as outstanding for the purpose of computing any
other person’s number of shares owned or ownership percentage.
Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses, to the best of our knowledge, sole
voting and investment power with respect to all capital stock shown to be held
by that person. The address of each executive officer and director, unless
indicated otherwise, is c/o VirnetX Holding Corporation, 5615 Scotts Valley
Drive, Suite 110, Scotts Valley, California 95066.
Name and Address of Beneficial
Owner
|
|
Amount
and Nature
of
Beneficial
Ownership (1)
|
|
Percent
Of
Class(2)
|
5%
or Greater Stockholders:
|
|
|
|
|
|
Kendall
Larsen
5615 Scotts Valley Dr.,
#110
Scotts Valley,
CA 95066
|
|
|
8,937,989 |
(3) |
|
|
20.17% |
Directors
and Executive Officers:
|
|
|
|
|
|
|
|
Kendall
Larsen
|
|
|
8,937,989 |
(3) |
|
|
20.17% |
Edmund
C. Munger
|
|
|
1,110,900 |
(4) |
|
|
2.50% |
William
E. Sliney
|
|
|
227,998 |
(5) |
|
|
* |
Thomas
M. O’Brien
|
|
|
141,664 |
(6) |
|
|
* |
Michael
F. Angelo
|
|
|
89,849 |
(7) |
|
|
* |
Scott
C. Taylor
|
|
|
48,333 |
(8) |
|
|
* |
All
directors and executive officers as a group (6 persons):
|
|
|
10,556,734 |
(3)-(8) |
|
|
23.12% |
|
|
|
|
|
|
|
|
____________
(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 March 10, 2010 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 43,520,698 shares of common stock issued and outstanding on March 10,
2010.
|
(3)
|
Includes
784,797 shares issuable pursuant to options exercisable as follows:
325,963 options held by Mr. Larsen and 458,834 options held by Mrs.
Larsen. Excludes 608,530 shares held by Mrs. Larsen’s revocable trust and
1,478 shares held by an immediate family member who shares the Larsen
family household. Mr. Larsen disclaims beneficial ownership of
the excluded shares.
|
(4)
|
Includes
(i) 995,966 shares issuable pursuant to vested options and (ii) 23,334
shares issuable pursuant to
warrants.
|
(5)
|
Includes
(i) 223,837 shares issuable pursuant to vested options and (ii) 2,000
shares issuable pursuant to
warrants.
|
(6)
|
Includes
(i) 48,333 shares issuable pursuant to vested options and (ii) 46,666
shares issuable pursuant to
warrants.
|
(7)
|
Includes
48,333 shares issuable pursuant to vested
options.
|
(8)
|
Shares
issuable pursuant to vested
options.
|
CORPORATE
GOVERNANCE
Our
Corporate Governance Guidelines
Our Board
of Directors has established guidelines that it follows in matters of corporate
governance. The following is a summary of those guidelines. A complete copy of
the documents underlying our guidelines is available online at www.virnetx.com
in the “Corporate Governance” link under the “Investors” tab, or in paper form
upon request to our corporate secretary.
Role
of the Board
Our
directors are appointed to oversee the actions and results of our management.
They were selected for their educational background, professional experience,
knowledge of our business, integrity, professional reputation, independence,
wisdom and ability to represent the best interests of our stockholders. Their
responsibilities include:
|
·
|
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.
|
Board
Leadership Structure
The Board
believes that the Company’s Chief Executive Officer is best situated to serve as
Chairman of the Board of Directors because he is the director most familiar with
the Company’s business and industry, and most capable of effectively identifying
strategic priorities and leading the discussion and execution of strategy.
Independent directors and management have different perspectives and roles in
strategy development. The Company’s independent directors bring experience,
oversight and expertise from outside the company and industry, while the Chief
Executive Officer brings company-specific experience and expertise. The Board
believes that the combined role of Chairman and Chief Executive Officer promotes
strategy development and execution, and facilitates information flow between
management and the Board, which are essential to effective
governance.
The
Company does not currently have a lead independent director. To
assure effective independent oversight, the Board has designed its leadership
structure so that independent directors exercise oversight of the Company’s
management and key issues related to strategy and risk. Only independent
directors serve on the audit committee, the compensation committee and the
nominating and corporate governance committee of the Board and all standing
Board committees are chaired by independent directors.
Risk
Oversight
Management
is responsible for the day-to-day management of risks the Company faces, while
the Board, as a whole and through its committees, has responsibility for the
oversight of risk management. In its risk oversight role, the Board has the
responsibility to satisfy itself that the risk management processes designed and
implemented by management are adequate and functioning as designed. The Board
believes that establishing the right “tone at the top” and that full and open
communication between management and the Board are essential for effective risk
management and oversight. Senior management attends the quarterly
Board meetings and is available to address any questions or concerns raised by
the Board on risk management-related and any other matters. Each quarter, the
Board receives presentations from senior management on strategic matters
involving our operations. The Board holds strategic planning sessions with
senior management to discuss strategies, key challenges, and risks and
opportunities for the Company.
While the
Board is ultimately responsible for risk oversight for the Company, our three
Board committees assist the Board in fulfilling its oversight responsibilities
in certain areas of risk. The audit committee assists the Board in fulfilling
its oversight responsibilities with respect to risk management in the areas of
financial reporting, internal controls and compliance with legal and regulatory
requirements. The compensation committee assists the Board in fulfilling its
oversight responsibilities with respect to the management of risks arising from
our compensation policies and programs. The nominating and governance committee
assists the Board in fulfilling its oversight responsibilities with respect to
the management of risks associated with Board organization, membership and
structure, succession planning for our directors and executive officers, and
corporate governance.
Composition
of the Board of Directors
Mix
of Independent Directors and Officer-Directors
Our Board
has determined that it is beneficial for us and our stockholders to have a Board
with a majority of independent directors and for our chief executive officer to
also be a Board member. Other officers may, from time to time, be Board members,
but no officer other than the chief executive officer should expect to be
elected to our Board by virtue of his or her office.
Selection
of Director Candidates
Our Board
is responsible for selecting candidates for Board membership and for
establishing the criteria to be used in identifying potential candidates. Our
Board delegates the screening process to the nominating and corporate governance
committee.
Independence
Determinations
Our Board
annually determines the independence of directors based on a review by the
directors and the nominating and corporate governance committee. No director is
considered independent unless our Board has determined that he or she has no
material relationship with the Company, either directly or as a partner,
stockholder, or officer of an organization that has a material relationship with
the Company.
We have
adopted the following standards for director independence in compliance with the
NYSE Amex Stock Exchange and Item 407 of Regulation S-K’s corporate
governance listing standards:
|
·
|
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.
|
Our Board
has determined that Michael F. Angelo, Thomas M. O’Brien and Scott C. Taylor
meet the aforementioned independence standards. There are no family
relationships among any of our directors or executive officers.
Director
Compensation and Equity Ownership
Our
compensation committee annually reviews director compensation. Any
recommendations for changes are made to our full Board by our compensation
committee.
In order
to align directors’ incentives with the creation of stockholder value, we
believe that directors should hold meaningful equity ownership positions in the
Company; accordingly, a significant portion of overall director compensation is
in the form of equity of the Company.
Board
Meetings and Committees and Annual Meeting Attendance
Our Board
held a total of seven meeting the calendar year ended December 31, 2009.
Every director has attended every Board meeting and the meetings of all
committees to which he is a member. Since June 29, 2007, our Board had a
standing audit committee, compensation committee and nominating and corporate
governance committee. Our audit committee charter, compensation committee
charter, and nominating and corporate governance committee charter, each as
adopted by the Board, are posted on our website at www.virnetx.com in the
“Corporate Governance” link under the “Investors” tab.
We
encourage, but do not require, our Board members to attend our annual meetings
of stockholders. We expect all Board members to be present at our 2010 Annual
Meeting.
Stockholders’
Communications Process
Any of
our stockholders who wish to communicate with our Board, a committee of our
Board, our non-management directors as a group, or any individual member of our
Board, may send correspondence to our Corporate Secretary at VirnetX Holding
Corporation, 5615 Scotts Valley Drive, Suite 110, Scotts Valley, California
95066.
Our
Corporate Secretary will compile and submit on a periodic basis all stockholder
correspondence to our entire Board, or, if and as designated in the
communication, to a committee of our Board, our non-management directors as a
group, or an individual Board member. The independent directors of our Board
review and approve the stockholders’ communications process periodically to
ensure effective communication with stockholders.
Code
of Ethics
We have
adopted a Code of Ethics for all employees and directors to prohibit conflicts
of interest between our employees and the Company. A copy of our Code of Ethics
is available on our website at http://www.virnetx.com/in the “Corporate
Governance” link under the “Investors” tab, or by writing to us at VirnetX
Holding Corporation, 5615 Scotts Valley Drive, Suite 110, Scotts Valley,
California 95066, Attention: Investor Relations.
We intend
to post on our website any amendment to, or waiver from, a provision of our Code
of Ethics within four (4) business days following the date of such
amendment or waiver. We do not anticipate any such amendments or
waivers.
Committees
of the Board of Directors
Director
|
|
Nominating
and
Corporate
Governance
Committee
|
|
Compensation
Committee
|
|
Audit
Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominating
and Corporate Governance Committee Matters
Membership
and Independence
Our
nominating and corporate governance committee met once during the fiscal year
ended December 31, 2009.
Messrs. Angelo,
O’Brien and Taylor, each of whom is a non-employee member of our Board, comprise
our nominating and corporate governance committee. Mr. Angelo is the
chairman of our nominating and corporate governance committee. Our Board has
determined that each of Messrs. Angelo, O’Brien and Taylor meet current SEC
and NYSE Amex Stock Exchange requirements for independence. The nominating and
corporate governance committee is responsible for, among other
things:
|
·
|
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.
|
A more
detailed description of our nominating and corporate governance committee’s
functions can be found in our nominating and corporate governance committee
charter at www.virnetx.com in the “Corporate Governance” link under the
“Investors” tab, or by writing to us at VirnetX Holding Corporation, 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Stockholder
Recommendations and Nominees
The
policy of our nominating and corporate governance committee is to consider
properly submitted recommendations for candidates to our Board from
stockholders. In evaluating such recommendations, our nominating and corporate
governance committee seeks to achieve a balance of experience, knowledge,
integrity, and capability on our Board and to address the membership criteria
set forth under “Director Qualifications” below. Any stockholder recommendations
for consideration by our nominating and corporate governance committee should
include the candidate’s name, biographical information, information regarding
any relationships between the candidate and the Company within the last three
years, at least three personal references, a statement of recommendation of the
candidate from the stockholder, a description of Common Stock beneficially owned
by the stockholder, a description of all arrangements between the candidate and
the recommending stockholder and any other person pursuant to which the
candidate is being recommended, a written indication of the candidate’s
willingness to serve on our Board, and a written indication to provide such
other information as the nominating and corporate governance committee may
reasonably request.
Stockholder
recommendations to our Board should be sent to our Corporate Secretary at
VirnetX Holding Corporation, 5615 Scotts Valley Drive, Suite 110, Scotts
Valley, California 95066.
Director
Qualifications
Our
nominating and corporate governance committee evaluates and recommends
candidates for membership on our Board consistent with criteria established by
the committee. Our nominating and corporate governance committee has not
formally established any specific, minimum qualifications that must be met by
each candidate for our Board or specific qualities or skills that are necessary
for one or more of the members of our Board to possess. However, our nominating
and corporate governance committee, when considering a potential non-incumbent
candidate, will factor into its determination the following qualities of a
candidate: educational background, professional experience, including whether
the person is a current or former chief executive officer or chief financial
officer of a public company or the head of a division of a large international
organization, knowledge of our business, integrity, professional reputation,
independence, wisdom and ability to represent the best interests of our
stockholders.
Identification
and Evaluation of Nominees for Directors
Our
nominating and corporate governance committee uses a variety of methods for
identifying and evaluating nominees for director. Our nominating and corporate
governance committee regularly assesses the appropriate size and composition of
our Board, the needs of our Board and the respective committees of our Board and
the qualifications of candidates in light of these needs. Candidates may come to
the attention of the nominating and corporate governance committee through
stockholders, management, current members of our Board, or search firms. The
evaluation of these candidates may be based solely upon information provided to
the committee or may also include discussions with persons familiar with the
candidate, an interview of the candidate, or other actions the committee deems
appropriate, including the use of third parties to review
candidates.
The
nominating and corporate governance committee considers diversity as one of a
number of factors in identifying nominees for director. It does not, however,
have a formal policy in this regard. The committee views diversity broadly to
include diversity of experience, skills and viewpoint as well as traditional
diversity concepts such as race or gender.
Audit
Committee Matters
Membership
and Independence
Our audit
committee met four times during the fiscal year ended December 31,
2009.
Messrs. Angelo,
O’Brien and Taylor, each of whom is a non-employee member of our Board, comprise
our audit committee. Mr. O’Brien is the chairman of our audit committee.
Our Board has determined that Messrs. Angelo, O’Brien and Taylor each
satisfy the requirements for independence under the rules and regulations of the
NYSE Amex Stock Exchange and the SEC. Our Board has also determined that
Mr. O’Brien qualifies as an “audit committee financial expert” as defined
in the SEC rules and satisfies the financial sophistication requirements of the
NYSE Amex Stock Exchange. Our audit committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, or
the Exchange Act.
Responsibilities
Our audit
committee’s responsibilities include the following:
|
·
|
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.
|
A more
detailed description of our audit committee’s functions can be found in our
audit committee charter at www.virnetx.com in the “Corporate Governance” link
under the “Investors” tab, or by writing to us at VirnetX Holding Corporation,
5615 Scotts Valley Drive, Suite 110, Scotts Valley, California 95066,
Attention: Investor Relations.
Compensation
Committee Matters
Membership
and Independence
Messrs. Angelo,
O’Brien and Taylor, each of whom is a non-employee member of our Board, comprise
our compensation committee. Mr. Taylor is the chairman of our compensation
committee. Our Board has determined that each member of our compensation
committee meets the requirements for independence under the rules of the NYSE
Amex Stock Exchange, and is a “non-employee director” within the meaning of the
Exchange Act, and is an “outside director,” within the meaning of the
Code.
Scope
of Authority
Our
compensation committee’s responsibilities include the following:
|
·
|
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.
|
Except
with respect to determining the chief executive officer’s compensation, the
Committee may delegate its authority to a subcommittee of the committee and, to
the extent permitted by applicable law, the committee may delegate to officers
or appropriate supervisory personnel the authority to grant stock awards to
non-executive, non-director employees.
A more
detailed description of our compensation committee’s functions can be found in
our compensation committee charter at www.virnetx.com in the “Corporate
Governance” link under the “Investors” tab, or by writing to us at VirnetX
Holding Corporation, 5615 Scotts Valley Drive, Suite 110, Scotts Valley,
California 95066, Attention: Investor Relations.
Our
Compensation Committee’s Processes and Procedures
Our
compensation committee’s primary processes for establishing and overseeing
executive compensation include:
|
·
|
Meetings. Our
compensation committee met twice during the fiscal year ended
December 31, 2009; 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.
|
Directors’
compensation is established by our Board upon the recommendation of our
directors and our compensation committee.
Compensation
Committee Interlocks and Insider Participation
None of
Messrs. Angelo, O’Brien and Taylor, who comprise our compensation committee, has
served as one of our officers or employees in the past year. Other than our
subsidiaries, no executive officer currently serves, or in the past year has
served, as a member of a board or compensation committee of another entity where
that entity’s executive officer serves on our Board or compensation
committee.
Director
Compensation
Directors
who are also our employees are not paid an annual retainer, nor are they
compensated for serving on the board. Information regarding compensation
otherwise received by our directors, who are also executive officers, is
provided under the heading “Named Executive Officers’ Fiscal Year 2009
Compensation.”
Cash
Compensation
We
provide the following cash compensation for non-employee directors:
|
·
|
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 ($500 for telephone participation), provided that no additional
committee meeting fee will be paid if the committee meeting is held on the
same day as a full board meeting.
|
Stock
Compensation
We
provide the following stock compensation for non-employee
directors:
|
·
|
each
new non-employee director will be granted an option to purchase 30,000
shares of common stock with a per-share exercise price equal to the fair
market value of that stock on the date of grant and which will vest
monthly with respect to 1/36th of the total number of shares subject to
the option, conditioned upon continued service as a director; provided
that these options automatically become exercisable in full immediately
prior to a “change of control” of the Company;
and
|
|
·
|
each
existing non-employee director will be granted a fully vested option to
purchase 10,000 shares of common stock at the Annual Meeting of
Stockholders with a per-share exercise price equal to the fair market
value of that stock on the date of grant and which will be fully vested on
the date of grant.
|
The
following table shows the compensation earned by or paid to each of our
independent directors during fiscal year 2009:
Name
|
|
Fees
Earned
or
Paid in
Cash ($)
|
|
Option
Awards
($)(1)
|
|
Total($)
|
Michael
F. Angelo
|
|
$35,500
|
|
$15,800
|
|
$51,300
|
Thomas
M. O’Brien
|
|
$41,500
|
|
$15,800
|
|
$57,300
|
Scott
C. Taylor
|
|
$35,500
|
|
$15,800
|
|
$51,300
|
____________
(1) The
amounts in this column reflect the aggregate grant date fair value of the stock
options computed in accordance with Financial Accounting Standards Board’s
Accounting Standards Codification Topic 718, or FASB ASC Topic 718. There can be
no assurance that these amounts will ever be realized. For information on the
valuation assumptions used in valuing these stock option awards, refer to Note 7
titled “Stock Based Compensation” in the Note to the Financial Statements contained herein. The
outstanding options held by each director at 2009 year end were as
follows: Mr. Angelo (50,000), Mr. O’Brien (50,000) and Mr. Taylor
(50,000).
Principal Accountant Fees &
Services
The
following table sets forth the costs we incurred for services provided by Farber
Hass Hurley LLP, our independent registered public accountant, which has audited
our financials for the years ended December 31, 2009 and December 31,
2008.
|
|
Year
Ended
December
31,
|
|
Fee
Category
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$ |
149,000 |
|
|
$ |
125,000 |
|
Audit-Related
Fees
|
|
$ |
12,000 |
|
|
$ |
43,000 |
|
Tax
Fees
|
|
|
--- |
|
|
|
-- |
|
All
Other Fees
|
|
|
--- |
|
|
|
-- |
|
Total
Fees
|
|
$ |
161,000 |
|
|
$ |
168,000 |
|
Audit Fees. Consists of fees billed
for professional services rendered in connection with the audit of our
consolidated financial statements, review of the interim consolidated financial
statements included in our quarterly reports, and accounting services in
connection with securities offerings.
Audit-Related Fees. Consists
of fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of our consolidated financial statements
and are not reported under “Audit Fees.” These services include consultations in
connection with financial accounting and reporting
standards.
Tax Fees. Consists of fees billed
for professional services for tax compliance, tax advice and tax planning. We
have nothing to report in this line item as we did not engage Farber Hass Hurley
LLP to perform tax-related services for the Company.
All Other Fees. We have
nothing to report in this line item as we did not engage Farber Hass Hurley LLP
to perform services not covered by the preceding three
categories.
Audit Committee Pre-Approval of Audit
and Permissible Non-Audit Services of Independent Registered Public
Accounting Firm
Our audit
committee’s policy is to pre-approve all services provided by our independent
registered public accounting firm. For the fiscal year ended December 31, 2009,
our audit committee approved 100% of all services provided by our independent
registered public accounting firm. These services include audit services and
audit-related services. Our independent registered public accounting firm is
required to periodically report to our audit committee regarding the extent of
services provided by our independent registered public accounting firm in
accordance with such pre-approval. Our audit committee may also delegate
pre-approval authority to one or more of its members. Such member(s) must report
any such pre-approval to our audit committee at the next scheduled
meeting.
DESCRIPTION
OF SECURITIES
We are
authorized to issue an aggregate of 110,000,000 shares of capital stock,
100,000,000 of which are shares of common stock, par value $0.0001 per share,
and 10,000,000 of which are shares of preferred stock, par value $0.0001 per
share. As of March 19, 2010, 43,670,328 shares of our common stock were issued
and outstanding and no shares of our preferred stock were issued and
outstanding.
Common
Stock
All
outstanding shares of our common stock are of the same class and have equal
rights and attributes.
Voting. The
holders of our common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Our common stock does not have cumulative
voting rights. Persons who hold a majority of the outstanding shares of our
common stock entitled to vote on the election of directors can elect all of the
directors who are eligible for election.
Dividends. Subject
to the preferential dividend rights and consent rights of any series of
preferred stock that we may from time to time designate, holders of our common
stock are entitled to share equally in dividends, if any, as may be declared
from time to time by our Board of Directors out of funds legally
available.
Liquidation and
Dissolution. In the event of our liquidation, dissolution or
winding up, subject to the preferential liquidation rights of any series of
preferred stock that we may from time to time designate, the holders of our
common stock are entitled to share ratably in all of our assets remaining after
payment of all liabilities and preferential liquidation rights.
Preferred
Stock
Our
Certificate of Incorporation authorizes the issuance of shares of preferred
stock with designations, rights and preferences determined from time to time by
our Board of Directors. Accordingly, our Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting, or other rights which could adversely affect
the voting power or other rights of the holders of the common stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
The
descriptions of our common stock and preferred stock above are only summaries
and are qualified in their entirety by the provisions of our Certificate of
Incorporation and By-Laws, copies of which are attached or referenced as
exhibits to the registration statement of which this prospectus forms a
part.
Warrants
Issued in Previous Securities Offerings
Warrants
for the issuance of 266,667 shares of our common stock were issued in July 2007
and exercisable at $0.75 per share. All of these warrants were net exercised by
the warrant holders on January 21, 2008 and March 26, 2008. The net aggregate
shares issued in the amount of 232,771 are issued and outstanding.
In
addition, we issued warrants to purchase 300,000 shares of our common stock at
$4.80 per share to the underwriter of our December 2007 stock issuance. Those
warrants are first exercisable in 2008 and expire in 2012. These warrants
provide for anti-dilution protection in the event of stock splits and
dividends.
Description
of Warrants Issued in the January 2009 Public Offering
We
offered three types of warrants in our January 2009 underwritten public
offering: (i) warrants to purchase 1,235,000 shares of our common stock at
an exercise price of $2.00 per share (the “$2 Warrants”), including 135,000 of
which were issued pursuant to the underwriter's over-allotment option (which
were all exercised and/or expired in March 2010); (ii) warrants to purchase
1,235,000 shares of our common stock at an exercise price of $3.00 per
share (the “$3 Warrants”), including 135,000 of which were issued pursuant to
the underwriter's over-allotment option; and (ii) warrants to purchase
1,235,000 shares of our common stock at an exercise price of $4.00 per
share (the “$4 Warrants”), including 135,000 of which were issued pursuant to
the underwriter's over-allotment option. The $3 Warrants
and the $4 Warrants are being offered pursuant to this prospectus.
We refer to the three types of warrants, collectively, as the warrants. The
warrants were issued in registered form under a warrant agency agreement between
Corporate Stock Transfer, Inc., as warrant agent, and us. Each type of warrant
issued pursuant to this offering is an exhibit to the warrant agency agreement.
You should review a copy of the warrant agency agreement, which has been filed
as an exhibit to the registration statement of which this prospectus is a part,
for a complete description of the terms and conditions applicable to the
warrants. The following is a brief summary of the warrants and is subject in all
respects to the provisions contained in the actual warrants.
Each
outstanding warrant issued in
connection with this offering represents the right to purchase 0.5
additional shares of our common stock at an exercise price equal to
either $3.00 or $4.00, subject to adjustment as described below, and
depending on the particular warrant. Each warrant that has not otherwise been
exercised or terminated may be exercised on or after the closing date of the
January 2009 underwritten public offering through and including the 18-month
anniversary of the offering’s closing
date. The warrants may be exercised by surrendering to the warrant agent the
warrant certificate evidencing the warrants to be exercised with the
accompanying exercise notice, appropriately completed, duly signed and
delivered, together with cash payment of the exercise price.
Upon
surrender of the warrant certificate, with the exercise notice appropriately
completed and duly signed and cash payment of the exercise price, on and subject
to the terms and conditions of the warrant, we will deliver or cause to be
delivered, to or upon the written order of such holder, the number of whole
shares of common stock to which the holder is entitled, which shares may be
delivered in book-entry form. If an effective registration statement covering
the shares issuable upon exercise of the warrants is not available at the time
of exercise, a holder may exercise the warrants on a cashless basis, in which
case the number of shares issued to the holder shall be calculated as set forth
in the warrant. If less than all of the warrants evidenced by a warrant
certificate are to be exercised, a new warrant certificate will be issued for
the remaining number of warrants.
Holders
of warrants are able to exercise their warrants only if a registration statement
relating to the shares of common stock underlying the warrants is then in
effect, or the exercise of such warrants is exempt from the registration
requirements of the Securities Act. A holder of a warrant also is able to
exercise warrants only if the shares of common stock underlying the warrant are
qualified for sale or are exempt from qualification under the applicable
securities or blue sky laws of the states in which such holder (or other persons
to whom it is proposed that shares be issued on exercise of the warrants)
reside.
The $3
Warrants and $4 Warrants include a company call feature that gives us the right
to require the holder of the warrant to exercise the warrant when our average
closing stock price on NYSE Amex, or any successor national securities exchange
thereto, equals or exceeds two times the applicable warrant’s purchase price on
any five consecutive trading days. On February 24, 2010, we exercised in
full our rights to call the $2 Warrants. The $2 Warrants expired in their
entirety unless earlier exercised on March 11, 2010.
The
exercise price and the number of shares underlying the warrants are subject to
appropriate adjustment in the event of stock splits, stock dividends on our
common stock, stock combinations or similar events affecting our common stock.
In addition, in the event we consummate any merger, consolidation, sale or other
reorganization event in which our common stock is converted into or exchanged
for securities, cash or other property or we consummate a sale of substantially
all of our assets, then following such event, the holders of the warrants will
be entitled to receive upon exercise of the warrants the kind and amount of
securities, cash or other property which the holders would have received had
they exercised the warrants immediately prior to such reorganization
event.
No
fractional shares of common stock will be issued in connection with the exercise
of a warrant. In lieu of fractional shares, we will round up such fractional
interest to the next whole share. A warrant may be transferred by a holder
without our consent, upon surrender of the warrant to us, properly endorsed (by
the holder executing an assignment in the form attached to the warrant). The
warrants will not be listed on any securities exchange or automated quotation
system and we do not intend to arrange for any exchange or quotation system to
list or quote the warrants. The shares issuable upon exercise of the warrants
will be listed on the NYSE Amex.
In
addition to the warrants described above, we issued warrants to purchase 220,000
shares of common stock to the underwriter of our public
offering. These underwriter warrants will be exercisable for a four
year period commencing on January 26, 2010. These warrants have an
exercise price of $1.80 per share. Our underwriter has been granted
certain demand and piggyback registration rights under these warrants, which
rights will expire on January 26, 2014 and January 26, 2019,
respectively.
Description
of Warrants Issued in The September 2009 Private Placement
Transaction
The
material terms and provisions of the three forms of warrants issued in our
September 2009 private placement transaction are summarized
below. This summary below is subject to, and qualified in its
entirety by, the three forms of warrant filed as exhibits to our current report
on Form 8-K that we filed with the SEC on September 3, 2009.
There
were three forms of warrants exercisable for shares of our common stock issued
in our September 2009 private placement transaction to the
investors: the Series I Warrant, the Series II Warrant and the Series
III Warrant.
Series
I Warrant
|
·
|
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. |
Series
II Warrant and Series III Warrant
|
·
|
On
January 14, 2010 the Series II Warrants expired unexercised and terminated
without any additional shares being issued to the private placement
investors. The Series II Warrants were designed to result in
the automatic issuance of up to 2,419,045 additional shares to the private
placement investors, but only if the trading price our stock fell below a
certain threshold following the closing of the offering. Since
the trading price did not fall below the relevant threshold, the Series II
Warrants expired by their terms and became null and void without issuance
of additional shares. As of February 20, 2010, all Series III
Warrants have been exercised in
full.
|
Protective
Provisions
We have a
number of protective provisions that could delay, discourage or prevent a third
party from acquiring the company without the approval of our Board of Directors.
Our protective provisions include:
|
·
|
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.
|
Transfer
agent and registrar
The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc. of Denver, Colorado.
PLAN
OF DISTRIBUTION
The
shares of common stock issued pursuant to this prospectus (including the shares
underlying the associated warrants) are listed on the NYSE Amex Stock
Exchange. Pursuant to the terms of the three types of warrants issued
pursuant to this prospectus, the shares of common stock will be distributed to
those warrant holders who surrender the certificates representing the warrants
and provide payment of the exercise price through their brokers to our warrant
agent, Corporate Stock Transfer. We do not know if or when the
warrants will be exercised. We also do not know whether any of the
shares acquired upon exercises will be sold.
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our
common stock currently trades under the symbol “VHC” on the NYSE Amex Stock
Exchange. Before the New York Stock Exchange acquired the American Stock
Exchange in 2008, our common stock had traded under the “VHC” symbol on the
American Stock Exchange since December 26, 2007. Before then our
common stock traded in the over-the-counter market on the Nasdaq OTC
Bulletin Board under the symbols “VNXH,” and “PASW.” Those
common stock warrants that we issued in our January 2009 public offering that
are still outstanding trade under the symbols VHCOZ and VHCOL on the
OTC Bulletin Board.
The
following table shows the price range of our common stock, as reported on the
OTC Bulletin Board, the American Stock Exchange or the NYSE Amex Stock Exchange,
as applicable, for each quarter ended during the last two fiscal
years.
Quarter
Ended
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/09 |
|
$ |
3.90 |
|
|
$ |
1.95 |
|
03/31/10 |
|
$ |
7.00 |
|
|
$ |
3.01 |
|
The
closing price of our common stock on the NYSE Amex Stock Exchange on April 15 , 2010 was $ 5.23 per
share.
Holders
As of
March 19, 2010, we had 69 stockholders of record.
Dividends
We have
not paid any cash dividends on our common stock, and do not anticipate paying
cash dividends in the foreseeable future. Our current policy is to
retain earnings, if any, to fund operations, and the development and growth of
our business. Any future determination to pay cash dividends will be
at the discretion of our Board of Directors and will be dependent upon our
financial condition, operation results, capital requirements, applicable
contractual restrictions, restrictions in our organizational documents, and any
other factors that our Board of Directors deems relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
On
April 17, 1998, when we operated under the name PASW, Inc., we adopted an
equity incentive program. Under this program, we may grant incentive stock
options, non-statutory stock options, stock appreciation rights, stock bonuses
and rights to acquire restricted stock to employees, directors and consultants
(except for incentive stock options which may only be granted to employees). The
number of shares of common stock initially reserved for issuance under this
program was 150,580 shares post-split. As of December 31, 2009,
there were no outstanding options or rights under this program and we do
not intend to grant any equity incentives in the future under this
plan.
In
connection with the merger between VirnetX Holding Corporation and VirnetX, our
Board of Directors approved our adoption of the VirnetX 2005 Stock Plan, as
amended, to cover grants of stock options and stock purchase rights to our
employees and consultants. Our Board of Directors renamed this stock plan the
VirnetX Holding Corporation 2007 Stock Plan. The total number of shares of our
common stock reserved for issuance under the VirnetX Holding Corporation 2007
Stock Plan is 11,624,469, of which as of December 31, 2009, there were
1,417,229 shares remaining available for future grants. To the extent
that any award granted under the 2007 Stock Plan should expire, become
unexercisable or is otherwise forfeited, the shares subject to such award will
again become available for issuance under the 2007 Plan.
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
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 24, 2010 the Compensation Committee approved an additional 315,250
options to the employees of VirnetX, Inc. This leaves 1,101,979 shares remaining
available for future grants as of February 24, 2010.
LEGAL
PROCEEDINGS
We
believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft on
February 15, 2007, the February 2007 lawsuit, by filing a complaint in the
United States District Court of the Eastern District of Texas, Tyler
Division. Pursuant to the complaint, we allege that Microsoft
infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1,
entitled “Agile Network Protocol for Secure Communications with Assured System
Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for
Establishing Secure Communication Link Between Computers of Virtual Private
Network Without User Entering Any Cryptographic Information.” On
April 5, 2007, we filed an amended complaint specifying certain accused products
at issue and alleging infringement of a third, recently issued U.S.
patent: U.S. Patent No. 7,188,180 B2, entitled “Method for
Establishing Secure Communication Link Between Computers of Virtual Private
Network.” We are seeking both damages and injunctive
relief. Microsoft answered the amended complaint and asserted
counterclaims against us on May 4, 2007. Microsoft counterclaimed for
declarations that our patents are not infringed, are invalid and are
unenforceable. Microsoft seeks an award of its attorneys’ fees and
costs. We filed a reply to Microsoft’s counterclaims on May 24,
2007. We have served our infringement contentions directed to certain
of Microsoft’s operating system and unified messaging and collaboration
applications. On March 31, 2008, Microsoft filed a motion to dismiss
for lack of standing, which was denied by the court pursuant to an order dated
June 3, 2008. Also pursuant to that court decision, on June 10, 2008,
SAIC joined us in our lawsuit as a plaintiff. On November 19, 2008,
the court granted our motion to amend our infringement contentions, permitting
us to provide increased specificity and citations to Microsoft’s proprietary
documents and source code to support our infringement case against Microsoft’s
accused products, including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication Server and Office
Communicator. A Markman hearing on claim construction was conducted
on February 17, 2009. We then removed one of our patents from the case.
On March
16, 2010, the jury awarded us a $105,750,000 verdict against Microsoft for
infringing two of our patents. The jury also found that Microsoft’s
patent infringement was willful. We will request injunctive relief at
a later date. We expect Microsoft to appeal this decision and will
vigorously defend our rights in any appeal.
In
addition to the February 2007 lawsuit, we filed a new complaint on March 17,
2010, or the March 2010 lawsuit, alleging infringement by Microsoft of U.S.
Patent Nos. 6,502,135 and 7,188,180 by Microsoft's Windows 7 and Windows Server
2008 R2 software products. We refer to the March 2010 lawsuit and the February
2007 lawsuit collectively as the Microsoft litigation, or the litigation against
Microsoft.
Because
we have determined that Microsoft’s alleged unauthorized use of our patents
would cause us severe economic harm and the failure to cause Microsoft to
discontinue its use of such patents could result in the termination of our
business, we have dedicated a significant portion of our economic resources, to
date, to the prosecution of the Microsoft litigation and expect to continue to
do so for the foreseeable future.
Although
we believe Microsoft infringes certain of our patents and have received a
favorable verdict from the jury on March 16, 2010, and we intend to continue to
vigorously prosecute the Microsoft litigation, we cannot predict the final
outcome of the Microsoft litigation with any degree of reasonable certainty.
Additionally, the Microsoft litigation and appeals process will be costly and
time-consuming, and we can provide no assurance that we will ultimately collect
on any judgment against Microsoft for damages and/or obtain injunctive
relief.
In the
near term, we will dedicate significant time and resources to the Microsoft
litigation. The risks associated with such dedication of time and
resources are set forth in the “Risk Factors” section of this
prospectus.
One or
more potential intellectual property infringement claims may also be available
to us against certain other companies who have the resources to defend against
any such claims. Although we believe these potential claims are worth pursuing,
commencing a lawsuit can be expensive and time-consuming, and there is no
assurance that we will prevail on such potential claims. In addition, bringing a
lawsuit may lead to potential counterclaims which may preclude our ability to
commercialize our initial products, which are currently in
development.
Currently,
we are not a party to any other pending legal proceedings, and are not aware of
any proceeding threatened or contemplated against us by any governmental
authority or other party.
In
addition to the legal proceedings discussed above, in December 2009, Microsoft
submitted a reexamination request to the USPTO to challenge the validity of
certain claims on certain of our patents at issue in connection with the
Microsoft litigation. In January 2010, the USPTO confirmed the
validity of certain claims, while taking “non-final action” on other of
Microsoft’s claims. We are in the process of responding to the
non-final action, and the process is ongoing.
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus will be passed upon
for us by Orrick, Herrington & Sutcliffe LLP, Menlo Park, California.
Lowell D. Ness, a partner of Orrick, Herrington & Sutcliffe LLP, is our
Secretary. Orrick, Herrington & Sutcliffe LLP and partners
in that firm beneficially own an aggregate of 41,516 shares of our common
stock.
EXPERTS
The
consolidated financial statements of VirnetX Holding Corporation as of and for
the periods therein indicated included in the prospectus have been audited by
the independent registered public accounting firm of Farber Hass Hurley LLP, to
the extent and for the periods set forth in their report appearing in this
prospectus, and are included in reliance upon such report given upon the
authority of Farber Hass Hurley LLP as experts in auditing and
accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
are subject to the information requirements of the Exchange Act. In
accordance with the Exchange Act, we file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other
information filed by us are available free of charge on our website,
http://www.virnetx.com, and may be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information on the operation of the public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
CERTAIN
DOCUMENTS INCORPORATED BY REFERENCE
We have
“incorporated by reference” into this prospectus certain information that we
file with the SEC. This means that we can disclose important business, financial
and other information in this prospectus by referring you to the documents
containing this information.
We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 (other than information furnished and not filed, pursuant
to Items 2.02 or 7.01 in any Form 8-K filing or any other item that permits us
to furnish, rather than file, information) prior to the sale of all securities
registered hereunder or termination of the offering under this registration
statement:
|
·
|
our
Annual Report on Form 10-K for the year ended December 31,
2009;
|
|
·
|
our
Current Reports on Form 8-K filed with the SEC on January 15, 2010,
February 26, 2010, March 2, 2010 and March 25, 2010;
and
|
|
·
|
the
description of our capital stock contained in the Registration Statement
on Form SB-2 filed with the SEC on March 26, 1999, including any amendment
or reports filed for the purpose of updating that
description.
|
All
information incorporated by reference is deemed to be part of this prospectus
except to the extent that the information is updated or superseded by
information filed with the SEC after the date the incorporated information was
filed (including later-dated reports listed above) or by the information
contained in this prospectus. Any information that we subsequently
file with the SEC that is incorporated by reference, as described above, will
automatically update and supersede as of the date of such filing any previous
information that had been part of this prospectus, or that had been incorporated
herein by reference.
We will
provide without charge to each person, including any beneficial owner of our
indicated securities, to whom this prospectus is delivered, upon written or oral
request, a copy of any and all of the documents that have been incorporated by
reference in the prospectus but not delivered with this prospectus (without
exhibits, unless the exhibits are specifically incorporated by reference but not
delivered with this prospectus). Requests should be directed
to:
VirnetX
Holding Corporation
5615
Scotts Valley Drive, Suite 110
Scotts
Valley, California 95066
(831)
438-8200
Attention: Kendall
Larsen
COMMISSION
POSITION ON INDEMNIFICATION
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and their respective controlling persons,
or otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
PROVISION
FOR INDEMNIFICATION
Delaware
General Corporation Law
Section 145
of the Delaware General Corporation Law provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys’ fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee or agent to the company. The Delaware General Corporation Law
provides that Section 145 is not exclusive of other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 102(b)(7)
of the Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director’s duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payments of dividends or unlawful stock
repurchases, redemptions or other distributions or for any transaction from
which the director derived an improper personal
benefit.
Certificate
of Incorporation
Our
Certificate of Incorporation provides that the personal liability of the
directors of the company shall be eliminated to the fullest extent permitted by
the provisions of Section 102(b)(7) of the Delaware General Corporation
Law, as the same may be amended and supplemented.
Our
Certificate of Incorporation provides that the company shall, to the fullest
extent permitted by the provisions of Section 145 of the Delaware General
Corporation Law, as the same may be amended and supplemented, indemnify any and
all persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section, and the indemnification provided for therein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Indemnification
Agreements
We have
also entered into indemnification agreements with our directors and officers.
The indemnification agreements provide indemnification to our directors and
officers under certain circumstances for acts or omissions which may not be
covered by directors’ and officers’ liability insurance.
Liability
Insurance
We have
also obtained directors’ and officers’ liability insurance, which insures
against liabilities that our directors or officers may incur in such
capacities.
Financial
Statements Index
|
Page
|
Report
of Farber Hass Hurley LLP, Independent Registered Public Accounting
Firm
|
F-2
|
Consolidated
Balance Sheets of VirnetX Holding Corporation for the years ended December
31, 2009 and December 31, 2008
|
F-3
|
Consolidated
Statements of Operations of VirnetX Holding Corporation for the years
ended December 31, 2009 and December 31, 2008 and for the period from
August 2, 2005 (date of inception) to December 31, 2009
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) of VirnetX Holding
Corporation for the years ended December 31, 2009 and December 31, 2008
and for the period from August 2, 2005 (date of inception) to December 31,
2009
|
F-5
|
Consolidated
Statements of Cash Flows of VirnetX Holding Corporation for the years
ended December 31, 2009 and December 31, 2008 and for the period from
August 2, 2005 (date of inception) to December 31, 2009
|
F-6
|
Notes
to Financial Statements of VirnetX Holding Corporation
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
VirnetX
Holding Corporation
We have
audited the accompanying consolidated balance sheets of VirnetX Holding
Corporation (the “Company”; a development stage enterprise) as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the years ended
December 31, 2009 and 2008 and the period from August 2, 2005 (date of
inception) to December 31, 2009. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of VirnetX Holding
Corporation, Inc. as of December 31, 2009 and 2008, and the consolidated results
of their operations, stockholders’ equity (deficit) and cash flows for the years
then ended and the period from August 2, 2005 (date of inception) to December
31, 2009 in conformity with accounting principles generally accepted in the
United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), VirnetX Holding Corporation’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 26, 2010 expressed an
unqualified opinion.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the notes
to the Consolidated Financial Statements, the Company has not been able to
generate significant revenues and has a working capital deficiency of
approximately $2,456,000 at December 31, 2009. These conditions raise
substantial doubt about the Company's ability to continue as a going concern
without raising additional equity, debt or other financing to fund
operations. Management's plans in regard to
these matters are described in the notes to the Consolidated Financial
Statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
|
/s/ Farber
Hass Hurley LLP |
Granada
Hills, California
March 26,
2010
VirnetX
Holding Corporation
(a
development stage enterprise)
CONSOLIDATED
BALANCE SHEETS
|
|
As
of
December 31,
2009
|
|
|
As
of
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,011,470 |
|
|
$ |
457,155 |
|
Accounts
receivable
|
|
|
6,842 |
|
|
|
1,154 |
|
Prepaid
expenses and other current assets
|
|
|
43,863 |
|
|
|
189,847 |
|
Total
current assets
|
|
|
2,062,175 |
|
|
|
648,156 |
|
Property
and equipment, net
|
|
|
23,430 |
|
|
|
32,565 |
|
Intangible
and other assets
|
|
|
156,000 |
|
|
|
204,000 |
|
Deferred
offering costs
|
|
|
— |
|
|
|
94,261 |
|
Total
assets
|
|
$ |
2,241,605 |
|
|
$ |
978,982 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued
liabilities
|
|
$ |
4,478,325 |
|
|
$ |
1,669,333 |
|
Current
portion of long-term
obligation
|
|
|
40,000 |
|
|
|
44,000 |
|
Total
current
liabilities
|
|
|
4,518,325 |
|
|
|
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
at December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 0 shares at December 31, 2009 and
2008, respectively
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.0001 per share
|
|
|
|
|
|
|
|
|
Authorized: 100,000,000 shares
at December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 39,750,927 shares and
34,899,985 shares, at December 31, 2009 and 2008,
respectively
|
|
|
3,975 |
|
|
|
3,489 |
|
Additional
paid-in
capital
|
|
|
33,730,217 |
|
|
|
22,150,321 |
|
Deficit
accumulated during the development
stage
|
|
|
(36,130,912 |
) |
|
|
(23,048,161 |
) |
Total
stockholders’ equity
(deficit)
|
|
|
(2,396,720 |
) |
|
|
(894,351 |
) |
Total
liabilities and stockholders’ equity
(deficit)
|
|
$ |
2,241,605 |
|
|
$ |
978,982 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
VirnetX
Holding Corporation
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
Ended December 31, 2009
|
|
|
Year
Ended December 31, 2008
|
|
|
Cumulative
from August 2, 2005
(Date
of Inception)
to
December 31,
2009
|
|
Revenue —
Royalties
|
|
$ |
26,306 |
|
|
$ |
133,744 |
|
|
$ |
234,916 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
864,058 |
|
|
|
845,324 |
|
|
|
3,003,885 |
|
General
and administrative
|
|
|
12,250,073 |
|
|
|
11,510,008 |
|
|
|
33,480,941 |
|
Total
operating expenses
|
|
|
13,114,131 |
|
|
|
12,355,332 |
|
|
|
36,484,826 |
|
Loss
from operations
|
|
|
(13,087,825 |
) |
|
|
(12,221,588 |
) |
|
|
(36,249,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
5,074 |
|
|
|
149,408 |
|
|
|
118,998 |
|
Net
loss
|
|
$ |
(13,082,751 |
) |
|
$ |
(12,072,180 |
) |
|
$ |
(36,130,912 |
) |
Basic
and diluted loss per share
|
|
$ |
(.35 |
) |
|
$ |
(.35 |
) |
|
|
|
|
Weighted
average shares outstanding
|
|
|
37,911,340 |
|
|
|
34,875,471 |
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
VirnetX
Holding Corporation
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 to employees at $0.0001 per share in
October 2005
|
|
— |
|
|
— |
|
|
3,321,277 |
|
|
332 |
|
|
(252 |
) |
|
— |
|
|
— |
|
|
80 |
|
Stock-based
compensation from restricted stock
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
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 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
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
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 |
) |
Stock
issed for cash at $1.50 per share, net |
|
|
|
|
|
|
|
2,470,000 |
|
|
247 |
|
|
3,273,416 |
|
|
|
|
|
|
|
|
3,273,663 |
|
Stock
issued for cash at $2.52 per share, net |
|
|
|
|
|
|
|
2,380,942 |
|
|
239 |
|
|
5,400,001 |
|
|
|
|
|
|
|
|
5,400,240 |
|
Deferred
offering costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,238 |
) |
|
|
|
|
|
|
|
(125,238 |
) |
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031,717 |
|
|
|
|
|
|
|
|
3,031,717 |
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,082,751 |
) |
|
(13,082,751 |
) |
Balance
at December 31, 2009 |
|
— |
|
|
— |
|
|
39,750,927 |
|
$ |
3,975 |
|
$ |
33,730,218 |
|
|
— |
|
$ |
(36,130,912 |
) |
$ |
(2,396,720 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
VirnetX
Holding Corporation
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31, 2009
|
|
|
Year
Ended December 31, 2008
|
|
|
Cumulative
Period
from
August 2, 2005
(Date
of Inception)
to
December 31,
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(13,082,751 |
) |
|
$ |
(12,072,180 |
) |
|
$ |
(36,130,912 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
3,031,717 |
|
|
|
2,682,431 |
|
|
|
7,544,766 |
|
Depreciation
and amortization
|
|
|
63,113 |
|
|
|
68,623 |
|
|
|
158,034 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
and other current assets
|
|
|
140,296 |
|
|
|
119,799 |
|
|
|
(160,200 |
) |
Other
assets |
|
|
94,263 |
|
|
|
|
|
|
|
94,263 |
|
Accounts
payable and accrued liabilities
|
|
|
2,808,992 |
|
|
|
1,137,751 |
|
|
|
4,478,533 |
|
Net
cash used in operating activities
|
|
|
(6,944,370 |
) |
|
|
(8,063,576 |
) |
|
|
(24,015,516 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(5,980 |
) |
|
|
(20,716 |
) |
|
|
(84,427 |
) |
Cash
acquired in acquisition
|
|
|
— |
|
|
|
— |
|
|
|
14,009 |
|
Net
cash used in investing activities
|
|
|
(5,980 |
) |
|
|
(20,716 |
) |
|
|
(70,418 |
) |
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
|
|
|
— |
|
|
|
— |
|
|
|
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 sales of common stock
|
|
|
8,548,665 |
|
|
|
--- |
|
|
|
23,279,599 |
|
Net
cash provided by (used in) financing activities
|
|
|
8,504,665 |
|
|
|
(48,000 |
) |
|
|
26,097,404 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,554,315 |
|
|
|
(8,132,292 |
) |
|
|
2,011,470 |
|
Cash
and cash equivalents, beginning of period
|
|
|
457,155 |
|
|
|
8,589,447 |
|
|
|
— |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,011,470 |
|
|
$ |
457,155 |
|
|
$ |
2,011,470 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for taxes
|
|
$ |
2,173 |
|
|
$ |
9,201 |
|
|
$ |
12,174 |
|
Cash
paid during the year for interest
|
|
$ |
6,000 |
|
|
$ |
5,622 |
|
|
$ |
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 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
VirnetX
Holding Corporation
(a
development stage enterprise)
NOTES TO
FINANCIAL STATEMENTS
_______________
Note 1 Formation and Business of
the Company
VirnetX
Holding Corporation (“we,” “us,” “our” or the “Company”) are a development stage
company focused on commercializing a patent portfolio for providing solutions
for secure real-time communications such as instant messaging, or “IM,” and
voice over internet protocol, or “VoIP.”
In July
2007 we effected a merger between PASW, Inc., a company which had at the time of
the merger, publicly traded common stock with limited operations, and VirnetX,
Inc., which became our principal operating subsidiary. As a result of this
merger, the former security holders of VirnetX, Inc. came to own a majority of
our outstanding common stock.
Under
generally accepted accounting principles in the United States, the accompanying
financial statements have been prepared as if VirnetX, Inc., a
company whose inception date was August 2, 2005, who is our predecessor for
accounting purposes, had acquired PASW, Inc. on July 5,
2007. Accordingly, the accompanying statement of operations include
the operations of VirnetX, Inc. from August 2, 2005 to December 31,
2009 and the operations of PASW, Inc. from July 5, 2007 to
December 31, 2009. The historical share activity of VirnetX,
Inc. has been retroactively restated to account for the 12.454788 to one
exchange rate which was applicable to certain convertible instruments as
explained in Note 10 and Note 11 and for our one for three reverse
stock split which was implemented on October 29, 2007.
Our
principal business activities to date are our efforts to commercialize our
patent portfolio. We also conduct the remaining activities of PASW,
Inc., which are generally limited to the collection of royalties on certain
internet-based communications by a wholly owned Japanese subsidiary of PASW
pursuant to the terms of a single license agreement. The revenue
generated by this agreement is not significant.
Although
we believe we may derive revenues in the future from our principal patent
portfolio and are currently endeavoring to develop certain of those patents into
marketable products, we have not done so to date. As such, we are in
the development stage and consequently are subject to the risks associated with
development stage companies, including the need for additional financings, the
uncertainty that our licensing program development efforts will produce
revenue-bearing licenses for us, the uncertainty that our development
initiatives will produce successful commercial products as well as the
uncertainty of marketing and customer acceptance of such products.
These
financial statements have been prepared on the basis that the Company will
continue as a going concern. The going concern assumption contemplates the
realization of assets and discharge of liabilities in the normal course of
business. We have incurred net operating losses and negative cash
flows from operations. At December 31, 2009, we had a deficit
accumulated in the development stage of approximately $36,131,000 and a working
capital deficit of approximately $2,456,000. With our 2010 average monthly cash
requirement including the impact of a reduction of our working capital deficit
at December 31, 2009, we expect our cash used in operations in 2010 will be
modestly greater than in 2009. As a result, despite receiving approximately
$7,400,000 from the exercise of warrants in February and March 2010, management
is still anticipating incurring net losses, continued negative cash flows from
operations and a persistence of a working capital deficit during
2010. These conditions and the uncertainty of the Microsoft
litigation raise substantial doubt as to our ability to continue as a going
concern. These consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary if we are
unable to continue as a going concern.
Note 2 Summary of Significant
Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of the VirnetX Holding
Company, a development stage enterprise, and its wholly owned
subsidiaries. All intercompany transactions have been
eliminated.
These
financial statements reflect the historical results of VirnetX, Inc. and
subsequent to the merger date of July 5, 2007, the historical consolidated
results of VirnetX Holding Corporation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Revenue
Recognition
We
recognize revenue in accordance with Staff Accounting
Bulletin 104. We are a licensor of software and generate revenue
primarily from the one-time sales of licensed software. Generally,
revenue is recognized upon shipment of the licensed software. For
multiple element license arrangements, the license fee is allocated to the
various elements based on fair value. When a multiple element
arrangement includes rights to a post-contract customer support, the portion of
the license fee allocated to each function is recognized ratably over the term
of the arrangement.
Cash
and Cash Equivalents
We
consider all highly liquid investments purchased with original maturities of
three months or less at the date of purchase to be cash
equivalents.
Property
and Equipment
Property
and equipment are stated at historical cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the accelerated
and straight line methods over the estimated useful lives of the assets, which
range from five to seven years. Repair and maintenance costs are charged to
expense as incurred.
Concentration
of Credit Risk and Other Risks and Uncertainties
Our cash
and cash equivalents are primarily maintained at one financial institution in
the United States. Deposits held with this financial institution may exceed the
amount of insurance provided on such deposits. The balances are
insured by the Federal Deposit Insurance Corporation as of the date of this
report up to $250,000. During the year ended December 31, 2009
we had, at times, funds that were uninsured. The uninsured balance at
December 31, 2009 was in excess of $1,310,000. We have not
experienced any losses on our deposits of cash and cash
equivalents.
Intangible
Assets
We record
intangible assets at cost, less accumulated
amortization. Amortization of intangible assets is provided over
their estimated useful lives, which can range from 3 to 15 years, on either
a straight line basis or as revenue is generated by the assets.
Impairment
of Long-Lived Assets
We
identify and record impairment losses on intangible and other long-lived assets
used in operations when events and changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. Recoverability
is measured by comparison of the anticipated future net undiscounted cash flows
to the related assets’ carrying value. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the projected discounted future
net cash flows arising from the asset.
Research
and Development
Research
and development costs include expenses paid to outside development consultants
and compensation related expenses for our engineering staff. Research
and development costs are expensed as incurred.
Income
Taxes
We
account for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Effective
January 1, 2007, we have adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes using the prospective method allowed
by FIN 48. The adoption of FIN 48 did not have a material
impact on our financial statements.
Fair
Value of Financial Instruments
Carrying
amounts of our financial instruments, including cash and cash equivalents,
accounts payable, notes payable, and accrued liabilities approximate their fair
values due to their short maturities. The carrying amount of our
minimum royalty payment obligation approximates fair value because it is
recorded at a discounted calculation.
Stock-Based
Compensation
Our
accounting for share-based compensation is in accordance with the fair value
method which requires the measurement and recognition of compensation expense in
the statement of operations for all share-based payment awards made to employees
and directors including employee stock-options based on estimated fair
values. Using the modified retrospective transition method of
adopting this standard, the financial statements presented herein reflect
compensation expense for stock-based awards as if the provisions of this
standard had been applied from the date of inception.
In
addition, as required we record stock and options granted to non-employees at
fair value of the consideration received or the fair value of the equity
instruments issued as they vest over the performance period.
Earnings
Per Share
Basic
earnings per share is computed by dividing earnings available to common
stockholders by the weighted average number of outstanding common shares during
the period. Diluted earnings per share is computed by dividing net
income by the weighted average number of shares outstanding including
potentially dilutive securities such as options, warrants and convertible
debt. Since we incurred a loss for the period, any common stock
equivalents have been excluded because their effect would be
anti-dilutive.
New
Accounting Pronouncements
In July
2006, the Financial Accounting Standards Board (“FASB”) clarified the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
and prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. The minimum threshold is defined as a tax position that is more
likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement. The
guidance must be applied to all existing tax positions upon initial
adoption. The cumulative effect of applying the guidance at adoption
is to be reported as an adjustment to beginning retained earnings for the year
of adoption. The accounting for uncertainty in income taxes was effective
for the first quarter of 2008. The adoption of accounting for uncertainty
in income taxes did not have an impact to the Company’s financial
statements.
In
September 2006, the FASB established a framework for measuring fair value
in accordance with United States Generally Accepted Accounting Principles
(“GAAP”) and expanded disclosure about fair value measurements including valuing
securities in markets that are not active. The Company adopted the
framework for measuring fair value effective January 1, 2009 with the exception
of the application of the framework to non-recurring, non-financial assets and
non-financial liabilities. The adoption of the framework for
measuring fair value did not have a significant impact on the Company’s results
of operations or financial position.
In March
2008, the FASB amended and expanded the disclosure requirements for derivative
instruments and hedging activities by requiring enhanced disclosures about how
and why the Company uses derivative instruments, how derivative instruments and
related hedged items are accounted for, and how derivative instruments and
related hedged items affect the Company’s financial position, financial
performance and cash flows. These requirements were effective for
fiscal years beginning after November 15, 2008. The Company adopted the
amended and expanded disclosure requirements for derivatives instruments and
hedging activities as of January 1, 2009, and adoption did not have a material
effect on the Company’s consolidated financial statements.
In June
2008, the FASB issued guidance requiring that unvested instruments granted in
share-based payment transactions that contain nonforfeitable rights to dividends
or dividend equivalents are participating securities subject to the two-class
method of computing earnings per share. This guidance is effective
for financial statements issued for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The adoption
did not have a material effect on the Company’s consolidated financial
statements.
In April
2009, the FASB required disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements, effective for interim reporting periods ending after June
15, 2009, and required those disclosures in summarized financial information at
interim reporting periods. The Company adopted the new disclosure guidance
over fair value of financial instruments, and adoption did not have a material
effect on the Company’s consolidated financial statements.
In April
2009, the FASB issued guidance which establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued (“subsequent
events”). Under the new guidance, entities are required to disclose
the date through which subsequent events were evaluated, as well as the
rationale for why that date was selected. The guidance is effective
for interim and annual periods ending after June 15, 2009. The
Company adopted the provisions of this new guidance as of June 1, 2009, and
adoption did not have a material effect on our consolidated financial
statements. The Company evaluated subsequent events through March 26,
2010.
In June
2009, the FASB established the Accounting Standards
Codification ("Codification") as the single source of authoritative
GAAP to be applied by nongovernmental entities, except for the rules
and interpretive releases of the Securities and Exchange Commission (“SEC”)
under authority of federal securities laws, which are sources of
authoritative GAAP for SEC registrants. While not intended to change
GAAP, the Codification significantly changes the way in which the accounting
literature is referenced and organized. The Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification was adopted as of August 31,
2009. Adoption did not have a material effect on the Company’s
consolidated financial statements.
Note 3 Property
Our major
classes of property and equipment were as follows:
|
|
December 31
|
|
|
|
|
|
|
|
|
Office
furniture
|
|
$ |
21,810 |
|
|
$ |
17,239 |
|
Computer
Equipment |
|
|
62,616 |
|
|
|
61,209 |
|
Total
|
|
|
84,426 |
|
|
|
78,448 |
|
Less
accumulated depreciation
|
|
|
(60,996 |
) |
|
|
(45,883 |
) |
|
|
$ |
23,430 |
|
|
$ |
32,565 |
|
Depreciation
expense for the years ended December 31, 2009 and 2008 was $15,113 and
$20,623, respectively.
Note 4 Patent
Portfolio
As of
February 22, 2010, we had 12 issued U.S. and eight issued foreign
technology related patents, in addition to pending U.S. and foreign patent
applications. The term of our issued U.S. and foreign patents
runs through the period 2019 to 2024. Most of our issued patents were
acquired by our principal operating subsidiary, VirnetX, Inc., from Science
Applications International Corporation, or SAIC, pursuant to an Assignment
Agreement dated December 21, 2006, and a Patent License and Assignment
Agreement dated August 12, 2005, as amended on November 2, 2006,
including documents prepared pursuant to the November amendment, and as further
amended on March 12, 2008. We are required to make payments to
SAIC based on the revenue generated from our ownership or use of the patents
assigned to us by SAIC. Minimum annual royalty payments of $50,000
are due beginning in 2008. Royalty amounts vary depending upon the
type of revenue generating activities, and certain royalty categories are
subject to maximums and other limitations. SAIC is entitled to
receive a portion of the proceed revenues, monies or any form of consideration
paid for the acquisition of VirnetX or from the settlement of certain patent
infringement claims of ours. We have granted SAIC a security interest
in some of our intellectual property, including the patents and patent
applications we obtained from SAIC, to secure these payment
obligations.
Generally
upon our default of our agreement with SAIC and certain other events, we are
required to convey to SAIC our interests in the patents and patent applications
acquired from SAIC without consideration.
At
December 31, 2007, we recorded the fair value of the $50,000 annual
guaranteed payments we have agreed to pay to SAIC in 2008 through 2012 as a
liability, calculated using a discount rate of 8%. This liability
will accrue interest at the 8% rate during the period it is
outstanding. We recorded a related asset equal in amount to the
liability as an intangible asset which will be amortized over the expected
revenue generating period of our agreement with SAIC. Amortization expense was
$48,000 in 2009 and 2008.
As of
December 31, 2009, the expected amortization of the intangible assets is as
follows:
2010
|
|
$ |
48,000 |
|
2011
|
|
|
48,000 |
|
2012
|
|
|
48,000 |
|
Thereafter
|
|
|
12,000 |
|
Total
|
|
$ |
156,000 |
|
As of
December 31, 2009, the obligation matures as follows:
2010
|
|
$ |
40,000 |
|
2011
|
|
|
36,000 |
|
2012
|
|
|
32,000 |
|
Thereafter
|
|
|
52,000 |
|
Total
|
|
$ |
160,000 |
|
Note 5 Commitments
We lease
our office facility under a non-cancelable operating lease that was amended in
2008 and ends in 2012. We recognize rent expense on a straight-line
basis over the term of the lease. Rent expense for the years ended December 31,
2009 and 2008 was $51,807 and $25,037 respectively.
For the
Year
|
|
Minimum
Required Lease Payments in
Period
|
|
|
|
|
|
2010
|
|
$ |
54,595 |
|
2011
|
|
|
59,242 |
|
2012
|
|
|
30,202 |
|
|
|
$ |
144,039 |
|
Note 6 Stock Plan
In 2005,
VirnetX, Inc. adopted the 2005 Stock Plan (the “Plan”), which was assumed by us
upon the closing of the transaction between VirnetX Holding Corporation and
VirnetX, Inc. on July 5, 2007. Our Board of Directors renamed
this Plan the VirnetX Holding Corporation 2007 Stock Plan and our stockholders
approved the Plan at our 2008 annual stockholders’ meeting. The Plan provides
for the issuance of up to 11,624,469 shares of our common stock. To the
extent that any award should expire, become unexercisable or is otherwise
forfeited, the shares subject to such award will again become available for
issuance under the Plan. The Plan provides for the granting of stock
options and stock purchase rights to our employees and
consultants. Stock options granted under the Plan may be incentive
stock options or nonqualified stock options. Incentive stock options
(“ISO”) may only be granted to our employees (including officers and
directors). Nonqualified stock options (“NSO”) and stock purchase
rights may be granted to our employees and consultants.
The Plan
will expire 10 years after it was approved by our Board of Directors.
Options may be granted under the Plan with an exercise price determined
by our Board of Directors, provided, however, that the exercise price of an
ISO or NSO granted to one of our Named Executive Officers shall not be less
than 100% fair market value of the shares at the date of grant and the exercise
price of an ISO granted to a 10% shareholder shall not be less than 110% of the
fair market value of the shares on the date of grant.
Activity
under the Plan is as follows:
|
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
Available
for
Grant
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
reserved for the Plan at inception
|
|
|
11,624,469 |
|
|
|
— |
|
|
|
— |
|
Restricted
stock granted
|
|
|
(3,321,277 |
) |
|
|
— |
|
|
|
— |
|
Options
granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options
cancelled
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance
at December 31, 2005
|
|
|
8,303,192 |
|
|
|
— |
|
|
|
— |
|
Restricted
stock 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 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 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 |
|
Restricted
stock granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options
granted
|
|
|
(1,317,195 |
) |
|
|
1,317,195 |
|
|
|
1.18 |
|
Options
exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options
cancelled
|
|
|
83,032 |
|
|
|
— |
|
|
|
— |
|
Balance
at December 31, 2009 |
|
|
1,417,229 |
|
|
|
5,785,790 |
|
|
$ |
2.57 |
|
Note 7 Stock-Based
Compensation
We
account for equity instruments issued to employees in accordance with the fair
value method which requires that such issuances be recorded at their fair value
on the grant date. The recognition of the expense is subject to
periodic adjustment as the underlying equity instrument vests.
Stock-based
compensation expense is included in general and administrative expense for each
period as follows:
Stock-Based
Compensation
by Type of Award
|
|
Year
Ended December 31,
2009
|
|
|
Year
Ended December 31,
2008
|
|
|
Cumulative
Period
from
August 2,
2005
(Date
of Inception)
to
December 31,
2009
|
|
Restricted
stock
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
930,310 |
|
Employee
stock options
|
|
|
3,031,717 |
|
|
|
2,682,431 |
|
|
|
6,614,456 |
|
Total
stock-based compensation
|
|
$ |
3,031,717 |
|
|
$ |
2,682,431 |
|
|
$ |
7,544,766 |
|
As of
December 31, 2009, the unrecorded deferred stock-based compensation balance
related to stock options was $5,740,988, which will be amortized as expense over
an estimated weighted average vesting amortization period of approximately
1.6 years.
The fair
value of each option grant was estimated on the date of grant using the
following weighted average assumptions:
|
Year
Ended December 31,
2009
|
|
Year
Ended December 31,
2008
|
Volatility
|
120%
|
|
190%
|
Risk-free
interest rate
|
2.93%
|
|
4.21%
|
Expected
life
|
6.6 years
|
|
6.7 years
|
Expected
dividends
|
0%
|
|
0%
|
Based on
the Black-Scholes option pricing model, the weighted average estimated fair
value of employee stock options granted was $1.06 and $3.09 during the year
ended December 31, 2009 and 2008, respectively.
The
expected life was determined using the simplified method outlined in Staff
Accounting Bulletin 111, taking the average of the vesting term and the
contractual term of the option. Expected volatility of the stock
options was based upon historical data and other relevant factors, such as the
volatility of comparable publicly-traded companies at a similar stage of life
cycle. We have not provided an estimate for forfeitures because we
have no history of forfeited options and believe that all outstanding options at
December 31, 2009 will vest. In the future, the Company may
change this estimate based on actual and expected future forfeiture
rates.
The
following table summarizes activity under the equity incentive plans for the
indicated periods:
|
|
Number
of
Shares
|
|
|
Exercise
Price
|
|
|
Life
(Years)
|
|
|
|
|
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 |
|
|
|
3.80 |
|
|
|
- |
|
|
|
- |
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Options
cancelled
|
|
|
(20,000 |
) |
|
|
4.20 |
|
|
|
- |
|
|
|
- |
|
Outstanding
at December 31, 2008
|
|
|
4,468,595 |
|
|
|
2.98 |
|
|
|
- |
|
|
|
- |
|
Options
granted
|
|
|
1,317,195 |
|
|
|
1.18 |
|
|
|
- |
|
|
|
- |
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Options
cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at December 31, 2009
|
|
|
5,785,790 |
|
|
$ |
2.57 |
|
|
|
7.74 |
|
|
$ |
7,325,272 |
|
Intrinsic
value is calculated at the difference between the market price of the Company’s
stock on the last trading day of the year ($2.94) and the exercise price of the
options. For options exercised, the intrinsic value is the difference
between market price and the exercise price on the date of
exercise.
The
following table summarizes information about stock options outstanding at
December 31, 2009:
|
|
|
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 |
|
|
|
6.38 |
|
|
$ |
0.24 |
|
|
|
1,563,768 |
|
|
|
6.30 |
|
|
$ |
0.24 |
|
4.20 |
|
|
|
1,327,899 |
|
|
|
7.56 |
|
|
|
4.20 |
|
|
|
845,518 |
|
|
|
7.56 |
|
|
|
4.20 |
|
5.88-6.47 |
|
|
|
977,026 |
|
|
|
8.00 |
|
|
|
6.01 |
|
|
|
516,013 |
|
|
|
8.00 |
|
|
|
6.00 |
|
1.74-6.20 |
|
|
|
420,000 |
|
|
|
8.58 |
|
|
|
3.42 |
|
|
|
169,167 |
|
|
|
8.52 |
|
|
|
3.89 |
|
1.15-
1.58 |
|
|
|
1,317,795 |
|
|
|
9.26 |
|
|
|
1.18 |
|
|
|
30,000 |
|
|
|
9.41 |
|
|
|
1.58 |
|
|
|
|
|
|
5,785,790 |
|
|
|
7.74 |
|
|
$ |
2.57 |
|
|
|
3,124,466 |
|
|
|
7.11 |
|
|
$ |
2.47 |
|
Note 8 Warrants
The
material terms and provisions of our warrants are summarized
below. This summary below is subject to, and qualified in its
entirety by, the forms of warrants publicly filed with the Securities and
Exchange Commission on EDGAR.
During
2007, we issued:
·
|
warrants
to purchase 266,667 shares of our common stock at $0.75 per share. The
warrants expire in 2012. In 2008, 232,771 of these warrants were exercised
in cashless exercise transactions, as a result of which a total of 232,771
shares of our common stock were issued and 33,896 of these warrants were
outstanding as of December 31,2009;
and
|
·
|
warrants
to purchase 300,000 shares of our common stock at $4.80 per share to the
underwriter of our December 2007 stock issuance. Those warrants expire in
2012.
|
During
2009, in connection with our public offering, we issued:
·
|
warrants
to purchase up to 1,235,000 shares of our common stock at an exercise
price of $2.00 per share;
|
·
|
warrants
to purchase up to 1,235,000 shares of our common stock at an exercise
price of $3.00 per share;
|
·
|
warrants
to purchase up to 1,235,000 shares of our common stock at an exercise
price of $4.00 per share,
|
·
|
warrants
to purchase 220,000 shares of common stock at an exercise price of $1.80
per share issued to the underwriter of our January 2009
offering.
|
Each
warrant issued to the public pursuant to this offering became exercisable on
January 30, 2009, and, other than the warrants with an exercise price of $2.00
per share, remains exercisable through July 30, 2010. We exercised in
full our rights to call those warrants with an exercise price of $2.00 on
February 24, 2010 and they expired on their terms, if not earlier exercised, on
March 11, 2010. The warrant issued to the underwriter in connection
with this offering is exercisable at any time between January 30, 2010 and
January 30, 2014.
During
2009, in connection with our private placement transaction that closed on
September 11, 2009, we issued:
·
|
Series
I Warrants to purchase up to 2,380,942 shares of our common stock at $3.93
per share subject to adjustment. The Series I Warrants became
exercisable on March 11, 2010, and expire on March
11, 2015;
|
·
|
Series
II Warrants to purchase up to 2,419,023 shares of our common stock at
$0.01 per share. The Series II Warrants were to be exercisable
on a cashless basis but terminated on their terms on January 14,
2010. No shares of common stock were issued pursuant to these
Series II Warrants; and
|
·
|
Series
III Warrants to purchase up to 2,380,942 shares of or common stock at
$2.52 per share. The Series III Warrants expired on their terms
on February 20, 2010 and were exercised in full by the holders of such
warrants. 2,380,942 shares of our common stock were issued pursuant to
such warrants and we received approximately $5,400,000 in net cash
proceeds pursuant to such
exercises.
|
Note 9 Earnings Per
Share
Basic
earnings per share is based on the weighted average number of shares outstanding
for a period. Diluted earnings per share is based upon the weighted
average number of shares and potentially dilutive common shares
outstanding. Potential common shares outstanding principally include
stock options, warrants, restricted stock and other equity awards under our
stock plan. Since the Company has incurred losses, the effect of any
common stock equivalent would be anti-dilutive.
The table
below sets forth the basic loss per share calculations (in 000s, except per
share information). Because we incurred net losses for each period presented, no
diluted per share amounts have been presented.
|
|
Period Ended
December 31,
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(13,083 |
) |
|
$ |
(12,072 |
) |
Weighted
average number of shares outstanding
|
|
|
37,911 |
|
|
|
34,875 |
|
Basic
(loss) per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.35 |
) |
For the
years ended December 31, 2009 and 2008, there were the following stock
equivalents:
|
|
2009 |
|
2008 |
|
Options
|
|
|
5,785,790 |
|
|
|
4,468,595 |
|
Warrants
|
|
|
12,271,946 |
|
|
|
300,000 |
|
Note 10 Preferred
Stock
Our
Amended and Restated Certificate of Incorporation, as amended in October 2007,
authorizes us to issue 10,000,000 shares of $0.0003 par value per
share preferred stock having rights, preferences and privileges to be designated
by our Board of Directors. There were no shares of preferred stock
outstanding at December 31, 2009. All of the VirnetX, Inc.
preferred stock converted into VirnetX, Inc. common stock on a 1-for-1 basis
immediately prior to the merger between us and VirnetX, Inc, so at the date of
the merger in 2007, each preferred share of VirnetX, Inc. converted to
12.454788 shares of our common stock. These shares were
subsequently adjusted for the impact of the one for three reverse split in
October 2007.
At
December 31, 2009, our Series A preferred stock was not mandatorily
redeemable.
Note 11 Common Stock
Each
share of common stock has the right to one vote. The holders of
common stock are entitled to receive dividends whenever funds are legally
available and when declared by our Board of Directors, subject to the prior
rights of holders of all classes of stock outstanding having priority rights as
to dividends. No dividends have been declared from inception through
December 31, 2009. Our restated articles
of incorporation authorizes us to issue up to 100,000,000 shares
of $.0001 par value common stock.
All share
amounts have been retroactively restated to reflect the conversion rate of
12.454788/1 used to effect the merger between VirnetX Inc. and VirnetX Holding
Corporation in 2007 and the one for three reverse stock split effective in
October 2007.
Note 12 Employee Benefit
Plan
We
sponsor a defined contribution, 401k plan, covering substantially all our
employees. The Company’s matching contribution to the plan in 2009
was approximately $36,000 and $34,000 in 2008.
Note 13 Income Taxes
We have
Federal and state net operating loss carryforwards of approximately $9,100,000
available to offset future taxable income. The Federal and state loss
carryforwards expire beginning in 2025 and 2015 respectively. There
are restrictions on our ability to utilize these benefits in any one
year. As a result, we have fully reserved any deferred tax benefit
from these net operating loss carryforwards.
We have
Federal and state tax credit carryforwards of approximately $300,000 to reduce
future income tax expense. The Federal tax credits expire beginning
in 2025. The state tax credits currently do not have an expiration
date.
The
components of the income tax provision are as follows:
|
|
|
|
|
|
|
Provision
for income taxes at the federal & state statutory rate
|
|
$ |
(4,400,000 |
) |
|
$ |
(4,100,000 |
) |
Stock-based
compensation
|
|
|
1,000,000 |
|
|
|
900,000 |
|
Research
and development credits
|
|
|
(100,000 |
) |
|
|
(100,000 |
) |
Valuation
allowance
|
|
|
3,500,000 |
|
|
|
3,300,000 |
|
Tax
provision
|
|
$ |
— |
|
|
$ |
— |
|
The
elements of deferred taxes are as follows:
|
|
|
|
|
|
|
Tax
benefit of net operating loss carryforwards
|
|
$ |
10,500,000 |
|
|
$ |
7,000,000 |
|
Research
and development credits
|
|
|
500,000 |
|
|
|
400,000 |
|
Subtotal
|
|
|
11,000,000 |
|
|
|
7,400,000 |
|
Less
valuation allowance
|
|
|
(11,000,000 |
) |
|
|
(7,400,000 |
) |
|
|
$ |
— |
|
|
$ |
— |
|
The
change in the deferred tax valuation allowance was an increase of $3,600,000 and
$3,700,000 in the periods ended 2009 and 2008, respectively.
Note 14 Merger of VirnetX Inc.
and VirnetX Holding Corporation
In July
2007, VirnetX Holding Corporation consummated a reverse triangular merger in
which the Company’s wholly-owned subsidiary merged with and into VirnetX Inc.
with VirnetX Inc. as the surviving Corporation to the merger. As a
result of the merger VirnetX Inc. became a wholly-owned subsidiary of the
Company, and the pre-merger shareholders of VirnetX Inc. exchanged their shares
in VirnetX Inc. for shares of the common stock of the Company. As a
result, the VirnetX Inc. is considered the acquiror of VirnetX Holding
Corporation for accounting purposes.
The key
terms of the merger include the following:
·
|
Our
officers and directors, except for the chief financial officer, were
replaced upon completion of the transaction so that the officers and
directors of VirnetX Inc. became our officers and
directors.
|
·
|
VirnetX
Inc.’s convertible notes payable for $1,000,000 and $500,000 were
converted into 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.
|
Note
15 Subsequent
Event
On
February 24, 2010, VirnetX Holding Corporation, or VirnetX, announced that, as
of February 20, 2010, all Series III Warrants issued by VirnetX in a private
placement transaction that closed on September 2, 2009, or the Financing, have
been exercised in full. The aggregate cash exercise proceeds from the
Series III Warrants totaled $6,000,000. After payment of fees and
commissions, the Company received a net of $5,400,000.
As
previously announced, the Series II Warrants issued in the Financing as a price
protection feature have already expired unexercised, so there was no downward
adjustment made to the price per share paid by the investors in the
Financing.
On
February 24, 2010, the Company
notified the Depository Trust & Clearing Corporation that the Company
exercised its rights to call those certain warrants to purchase shares of
Company Common Stock with an exercise price of $2.00 per share (the “$2 Warrants”) issued pursuant to the Company’s
underwritten public offering that closed on January 30, 2009. Pursuant
to Section 3 of the $2 Warrants, the $2 Warrants expired in their entirety on
March 11, 2010 unless earlier exercised (the “Termination Date”) subject to a
broker protection on file with Corporate Stock Transfer, the warrant agent. The
aggregate cash exercise proceeds from the $2.00 warrants, if exercised in full,
would total $2,470,000 approximately $2,335,000 after payment of fees and
expenses. As of March 12, 2010 we had received proceeds in the amount of
$2,000,000.
See
additional disclosure in Note 16 below regarding certain recent developments
related to the Microsoft litigation.
Note 16 Litigation
We
believe Microsoft Corporation is infringing certain of our
patents. Accordingly, we commenced a lawsuit against Microsoft on
February 15, 2007, the February 2007 lawsuit, by filing a complaint in
the United States District Court for the Eastern District of Texas, Tyler
Division. Pursuant to the complaint, we allege that Microsoft
infringes two of our U.S. patents: U.S. Patent
No. 6,502,135 B1, entitled “Agile Network Protocol for Secure
Communications with Assured System Availability,” and U.S. Patent
No. 6,839,759 B2, entitled “Method for Establishing Secure Communication
Link Between Computers of Virtual Private Network Without User Entering Any
Cryptographic Information.” On April 5, 2007, we filed an amended complaint
specifying certain accused products at issue and alleging infringement of a
third, recently issued U.S. patent: U.S. Patent
No. 7,188,180 B2, entitled “Method for Establishing Secure Communication
Link Between Computers of Virtual Private Network.” We are seeking both damages
and injunctive relief. Microsoft answered the amended complaint and
asserted counterclaims against us on May 4, 2007. Microsoft
counterclaimed for declarations that our patents are not infringed, are invalid
and are unenforceable. Microsoft seeks an award of its attorneys’
fees and costs. We filed a reply to Microsoft’s counterclaims on
May 24, 2007. We have served our infringement contentions directed to
certain of Microsoft’s operating system and unified messaging and collaboration
applications. On March 31, 2008, Microsoft filed a motion to
dismiss for lack of standing, which was denied by the court pursuant to an order
dated June 3, 2008. Also pursuant to that court decision, on
June 10, 2008, SAIC joined us in our lawsuit as a plaintiff. On
November 19, 2008, the court granted our motion to amend our infringement
contentions, permitting us to provide increased specificity and citations to
Microsoft’s proprietary documents and source code to support our infringement
case against Microsoft’s accused products, including, among other things,
Windows XP, Vista, Server 2003, Server 2008, Live Communication Server, Office
Communication Server and Office Communicator.
On July
30, 2009, the United States District Court for the Eastern District of Texas,
Tyler Division, issued its Markman Order in the Microsoft litigation. We then
removed one of our patents from the case. On March
16, 2010, the jury awarded us a $105,750,000 verdict against Microsoft for
infringing two of our patents. The jury also found that Microsoft’s
patent infringement was willful. We will request injunctive relief at
a later date. We expect Microsoft to appeal this decision and will
vigorously defend our rights in any appeal.
On March
17, 2010, we filed a new complaint against Microsoft, or the March 2010 lawsuit,
alleging infringement by Microsoft of U.S. Patent Nos. 6,502,135 and 7,188,180
by Microsoft's Windows 7 and Windows Server 2008 R2 software products. We refer
to the March 2010 lawsuit and the February 2007 lawsuit collectively as the
Microsoft litigation or the litigation against Microsoft.
Because
we have determined that Microsoft’s alleged unauthorized use of our patents
would cause us severe economic harm and the failure to cause Microsoft to
discontinue its use of such patents could result in the termination of our
business, we have dedicated a significant portion of our economic resources, to
date, to the prosecution of the Microsoft litigation and expect to continue to
do so for the foreseeable future.
Although
we believe Microsoft infringes certain of our patents and we intend to
vigorously prosecute the Microsoft litigation, at this stage of the litigation
the final outcome cannot be predicted in either the February 2007 lawsuit or the
March 2010 lawsuit with any degree of reasonable certainty. Additionally, the
Microsoft litigation and appeals process will be costly and time-consuming, and
we can provide no assurance that we will ultimately collect in any judgment we
may receive against Microsoft for damages and/or obtain injunctive
relief.
Because
the final outcome of this litigation cannot be estimated at this time, we have
made no provision for gain or expenses in the accompanying financial
statements.
Note 17 Quarterly Financial
Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts
in thousands except per share)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3 |
|
|
$ |
7 |
|
|
$ |
3 |
|
|
$ |
13 |
|
Loss
from operations
|
|
|
(3,405 |
) |
|
|
(3,928 |
) |
|
|
(2,624 |
) |
|
|
(3,131 |
) |
Net
loss
|
|
|
(3,403 |
) |
|
|
(3,927 |
) |
|
|
(2,623 |
) |
|
|
(3,130 |
) |
Net
loss per common share
|
|
$ |
(0.09 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.08 |
) |
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 |
) |
|
$ |
(0.9 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and
Stockholders
of VirnetX Holding Corporation
We have
audited VirnetX Holding Corporation’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). VirnetX Holding Corporation’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, VirnetX Holding Corporation maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related
statements of income, stockholders’ equity (deficit), and cash flows of
VirnetX Holding Corporation, and our report dated March 26, 2010 express an
unqualified opinion and included an explanatory paragraph expressing substantial
doubt about the Company’s ability to continue as a going concern.
/s/
Farber Hass Hurley LLP
Granada
Hills, California
March 26, 2010
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 1 4 . Other Expenses of
Issuance and Distribution.
The
following table sets forth all expenses to be paid by us in connection with the
offering based on an assumed public offering price of $1.50 of our securities
being registered hereby. All amounts shown are estimates other than the
registration fee and assume no exercise of warrants.
|
|
Amount to be Paid
|
|
|
|
|
|
|
|
|
|
|
|
Underwriter’s
fees and expenses
|
|
|
|
|
|
|
|
|
|
Accounting
fees and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**Previously
paid.
Item 1 5 . Indemnification
of Directors and Officers.
Delaware
General Corporation Law
Section 145
of the Delaware General Corporation Law provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys’ fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee or agent to the company. The Delaware General Corporation Law
provides that Section 145 is not exclusive of other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 102(b)(7)
of the Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director’s duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payments of dividends or unlawful stock
repurchases, redemptions or other distributions or for any transaction from
which the director derived an improper personal benefit.
Certificate
of Incorporation
Our
Certificate of Incorporation provides that the personal liability of the
directors of the company shall be eliminated to the fullest extent permitted by
the provisions of Section 102(b)(7) of the Delaware General Corporation
Law, as the same may be amended and supplemented.
Our
Certificate of Incorporation provides that the company shall, to the fullest
extent permitted by the provisions of Section 145 of the Delaware General
Corporation Law, as the same may be amended and supplemented, indemnify any and
all persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section, and the indemnification provided for therein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Indemnification
Agreements
We have
also entered into indemnification agreements with our directors and officers.
The indemnification agreements provide indemnification to our directors and
officers under certain circumstances for acts or omissions which may not be
covered by directors’ and officers’ liability insurance.
Liability
Insurance
We have
also obtained directors’ and officers’ liability insurance, which insures
against liabilities that our directors or officers may incur in such
capacities.
Item 16. Exhibits.
A
list of exhibits included as part of this registration statement is set forth in
the Exhibit Index.
Item 17. Undertakings.
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration statement;
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement;
|
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
|
(i)
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant
to Rule 424;
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
(iv)
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
The
undersigned registrant will provide to the underwriter at the closing specified
in the underwriting agreement certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, if the registrant is subject to 430C, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than
prospectuses field in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(b) The
undersigned registrant hereby undertakes that:
(1) For
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a form
of prospectus filed by the undersigned registrant pursuant to
Rule 424(b)(1), or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time the SEC declared
it effective.
(2) For
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona fide offering of those
securities.
(c) The
undersigned registrant hereby undertakes that, insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-3 and has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Scotts Valley, State of California, on April 16, 2010.
|
VIRNETX HOLDING
CORPORATION
|
|
|
|
|
|
|
By:
|
/s/
Kendall Larsen
|
|
|
|
Name: Kendall
Larsen
|
|
|
|
Title: President
and Chief Executive Officer
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates
indicated:
Signature and
Name
|
Capacity
|
Date
|
|
|
|
/s/ Kendall Larsen
Kendall
Larsen
|
|
President,
Chief Executive Officer
(Principal
Executive Officer), Director, and Attorney-in-Fact
|
April
16, 2010
|
|
|
|
|
/s/ William E. Sliney*
William
E. Sliney
|
|
Chief
Financial Officer (Principal
Accounting
and Financial Officer)
|
|
|
|
|
|
/s/ Edmund C. Munger*
Edmund
C. Munger
|
|
Director
|
|
|
|
|
|
/s/ Scott C. Taylor*
Scott
C. Taylor
|
|
Director
|
|
|
|
|
|
/s/ Michael F. Angelo*
Michael
F. Angelo
|
|
Director
|
|
|
|
|
|
/s/ Thomas M. O’Brien*
Thomas
M. O’Brien
|
|
Director
|
|
|
|
|
*By:
/s/ Kendall
Larsen
Attorney-In-Fact
EXHIBIT
INDEX
1.1
|
Form
of Underwriting Agreement between VirnetX Holding Corporation and Gilford
Securities Incorporated. (9)
|
|
|
2.1
|
Agreement
and Plan of Merger of PASW, Inc., a Delaware corporation, and PASW, Inc.,
a California corporation dated May 25, 2007. (1)
|
|
|
2.2
|
Certificate
of Merger filed with the Secretary of State of the State of Delaware on
May 30, 2007. (1)
|
|
|
2.3
|
Agreement
and Plan of Merger and Reorganization among PASW, Inc., VirnetX
Acquisition, Inc. and VirnetX, Inc. dated as of June 12, 2007.
(1)
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company.
(1)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company. (2)
|
|
|
4.1
|
Form
of Warrant Agency Agreement by and between VirnetX Holding Corporation and
Corporate Stock Transfer, Inc. as Warrant Agent. (9)
|
|
|
4.2
|
Form
of Underwriter’s Warrant. (9)
|
|
|
5.1
|
Opinion
of Orrick, Herrington & Sutcliffe LLP. *
|
|
|
10.1
|
Form
of Indemnification Agreement, dated as of July 5, 2007, by and
between the Company and each of Kendall Larsen, Edmund C. Munger, Scott C.
Taylor, Michael F. Angelo, Thomas M. O’Brien and William E.
Sliney.(1)
|
|
|
10.2
|
Patent
License and Assignment Agreement by and between the Company and Science
Applications International Corporation, dated as of August 12,
2005.(1)
|
|
|
10.3
|
Security
Agreement by and between the Company and Science Applications
International Corporation, dated as of August 12,
2005.(1)
|
|
|
10.4
|
Amendment
No. 1 to Patent License and Assignment Agreement by and between the
Company and Science Applications International Corporation, dated as of
November 2, 2006.(1)
|
|
|
10.5
|
Assignment
Agreement between the Company and Science Applications International
Corporation, dated as of December 21, 2006.(1)
|
|
|
10.6
|
Professional
Services Agreement by and between the Company and Science Applications
International Corporation, dated as of August 12,
2005.(1)
|
|
|
10.7
|
Voting
Agreement among the Company and certain of its stockholders, dated as of
December 12, 2007.(4)
|
10.8
|
Amendment
No. 2 to Patent License and Assignment Agreement by and between
VirnetX, Inc. and Science Applications International Corporation, dated as
of March 12, 2008. (5)
|
|
|
10.9
|
IP
Brokerage Agreement by and between ipCapital Group, Inc. and VirnetX,
Inc., effective as of March 13, 2008. (5)
|
|
|
10.10
|
Engagement
Letter by and between VirnetX Holding Corporation and ipCapital Group,
Inc. dated March 12, 2008. (5)
|
|
|
10.11
|
2007
Stock Plan and related agreements. (6)
|
|
|
10.12
|
Lease
Agreement by and between the Company and Granite Creek Business Center,
dated as of March 15, 2006, as amended in April 2007 and April 2008.
(7)
|
|
|
10.13
|
Engagement
Letter dated June 9, 2009, by and between McKool Smith, a professional
corporation, and the Company. (8)
|
|
|
10.14
|
Registration
Rights Agreement dated as of September 2, 2009 by and between VirnetX
Holding Corporation and each of the several purchasers signatory thereto.
(3)
|
|
|
10.15
|
Securities
Purchase Agreement, dated September 2, 2009, by and between VirnetX
Holding Corporation and each purchaser identified on the signature pages
thereto. (3)
|
|
|
21.1
|
Subsidiaries
of VirnetX Holding Corporation. (10)
|
|
|
23.1
|
Consent
of Farber Hass Hurley LLP, Independent Registered Public Accounting
Firm. *
|
|
|
23.2
|
Consent
of Orrick, Herrington & Sutcliffe LLP. (contained in
Exhibit 5.1)
|
|
|
24.1
|
Power
of Attorney.*
|
|
*
|
Previously
filed.
|
|
|
|
|
(1)
|
Incorporated
by reference to the Company’s Form 8-K (Commission File No.
001-33852) filed with the Securities and Exchange Commission on November
1, 2007.
|
|
|
|
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K (Commission File No.
001-33852) filed with the Securities and Exchange Commission on November
1, 2007.
|
|
|
|
|
(3)
|
Incorporated
by reference to the Company’s Form 8-K (Commission File No.
001-33852) filed with the Securities and Exchange Commission on September
3, 2009.
|
|
|
|
|
(4)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form SB-2/A
filed with the Securities and Exchange Commission on December 17,
2007.
|
|
|
|
|
(5)
|
Incorporated
by reference to the Company’s Form 8-K (Commission File No.
001-33852) filed with the Securities and Exchange Commission on
March 18, 2008.
|
|
|
|
|
(6)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form S-8
filed with the Securities and Exchange Commission on March 25,
2008.
|
|
|
|
|
(7)
|
Incorporated
by reference to the Company’s Form 10-K (Commission File No.
001-33852) filed with the Securities and Exchange Commission on March 31,
2009.
|
|
|
|
|
(8)
|
Incorporated
by reference to the Company’s Form 10-Q (Commission File No.
001-33852) filed with the Securities and Exchange Commission on August 10,
2009. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
|
|
|
|
|
(9)
|
Incorporated
by reference to the Company’s Form S-1 (Commission File No. 333-153645)
filed with the Securities and Exchange Commission on January 16,
2009.
|
|
|
|
|
(10) |
Incorporated
by reference to the Company's Form 10-K (Commission File No. 001-33852)
filed with the Security and Exchange Commission on March 31,
2010. |