The VirnetX (NYSEMKT:VHC) story is not one that is easy to understand, but one that offers a defined mix of valuable technology and strong leadership. The company held its annual shareholders' meeting today that offered up valuable insight while also offering the opportunity to meet a fantastic group of people from across the investment spectrum. To get caught up on the VirnetX story, my past articles can be viewed here. This article will be an update article to cover several important items discussed during the ASM.
VirnetX Takes Dead Aim At Manipulators, Reverse Conversions and Naked Shorting:
During the meeting, one of the first items discussed was something many investors are fully aware of - reverse conversions and naked shorting using the market makers exemption to create air shares to control the share price. CEO Kendall Larsen stated that there really are 60M shares outstanding, above the roughly authorized 52M shares currently available. The difference, 8M shares, is being used to manipulate the share price.
VirnetX introduced the Shareholder Intelligence System, which will allow the company to track the manipulation and report directly to the compliance departments of the firms in play. Overall, this system allows for several key features:
- Tracks share movement
- Identifies fails to deliver (often associated with naked short selling)
- Identifies and tracks the parties buying and selling, "Behind The Street Name" or firm name
- Provides analysis of peer group buying and selling
Management stated that they are aware of the firms manipulating the share price, and have taken this action as a step to end the manipulation of its share price - and this illegal activity.
Gabriel Product Suite:
One of the most interesting parts of the ASM, albeit not first, was the technology demonstration by CTO Dr. Robert Short and his technology team. To start, Gabriel is an extremely useful and secure application built off of the company's technology and patents. As an overview, Gabriel allows for:
- Domain name triggered end-to-end secure network connection between any two Gabriel enabled devices.
- Secure domain name lookup services including identity authentication, control, resource allocation and secure IP address translation.
Simply put, the application allows for extremely secure communicators between two devices. Today we live in an era where security is something we all want, and we all really do not have. On every level, our security is compromised and this is because we allow third parties access to our information.
- Product Level: Companies like SnapChat storing your pictures, email servers mining your emails.
- Government Level: NSA listening to every phone call you make - revelations from Snowden.
- Hacker Level: Breaches all the time, granting valuable personal information to hackers. Such as with Target (NYSE:TGT) and eBay (NASDAQ:EBAY).
The point is that we allow third parties access to our information. Gabriel has solved this problem, as the link is between two users, completely avoiding a third party. Think in the future, beyond current applications such as video chats and email - do you want your smart garage door opener or video cameras open to hackers?
Gabriel has ballooned into a full suite of products encompassing chat, web, share, video, voice, mail and sync capabilities. The demonstration that took place between the technology team was very enlightening. The demonstration showed how easy it is to chat with another team member on normal chat, video or voice calls while simultaneously allowing them access to files on your server (more later), restricting access or automatically syncing one person's server to get automatic updates from another person's server - with their permission.
The suite also allows for very specific control of who or what party can access what files and folders, who can read or write on what files or folders and what can be accessed. It sports a home screen much like AIM with your friends and peers who you can interact with. Moreover, it offers beacon, a feature that, if allowed, can show you through GPS where your friends are. The suite also allows for screen shot sharing, and real time video screen sharing across any devices - so a Windows computer can share a screen with a Mac user through Gabriel. The screen sharing application is a transparent box that allows you to share exactly what you want to share, while keeping the rest of your screen a secret.
The suite of products makes working with people who are geographically separated a breeze, while also being very secure.
The business use of the Gabriel product suite is huge. Businesses all around the world will be able to use and enjoy the entire suite of applications that are both easy to use, fully functional and while allowing for 2048-bit encryption and secure communications that are behind the scenes. The one click to initiate a video chat may seem easy, but the encryption going on in the background is where the rest of this iceberg sits.
Gabriel Private Secure Server:
Interestingly, VirnetX released a product that is in the works known as the Gabriel Private Secure Server. It demonstrated the product while showing the full suite of Gabriel applications.
The small 4"x2"x6" private and personal server will come in 500 gigabyte or 1 terabyte sizes, and is your own personal server that can be kept in your house, but accessed worldwide. You control who can sync from the server, who has access to the server and what you want to use it for - all while having the unmatched security that Gabriel offers.
The server works along with the full suite of Gabriel applications that will always be on and is a plug-and-play device. Digital certificates will be used to validate the device as well.
Gabriel Moving Forward:
VirnetX's management team stated that they use Gabriel for their own use all the time. They stated they are looking to do an organizational group study while looking to offer web-based access and also looking to OEMs to include the application within their devices.
4G LTE-A Specifications:
4G LTE-A is in its infancy and will be widely online as the next step in the communications stage. Although some devices claim to be at the speed level, they are generally just HSPA devices or regular LTE.
VirnetX owns the patents that provide for 18 different specifications for 4G LTE-Advanced. VirnetX's management team has stated that several of the OEM providers are waiting and watching the Apple (NASDAQ:AAPL) case closely before signing a license - as shipping these devices without a license would be out of compliance for these companies.
These are standard essential patents, and as per the 4/25 Apple v. Motorola Mobility CAFC ruling, an injunction can be granted based upon standard essential patents. As such, any company looking to ship these devices without a license will have to face the reality of such an event. Motorola did not get an injunction here, but it is allowable over standard essential patents - SEP patents, for example, that VirnetX has for 4G LTE-A.
Targeting The Android World:
Kendall Larsen is targeting the Android world, a world much bigger than Apple's iPhone reach. With over 300M Android devices shipping each quarter (per the ASM), VirnetX is looking to provide its security solutions to this market. The company is also looking to provide its suite of Gabriel solutions to the Android world - a suite that will be discussed later.
More importantly, the technology team at VirnetX was able to overcome a big obstacle with regard to Android. No longer will the company have to go to OEMs to ask them to help provide Gabriel on their devices, as Gabriel has been unrooted. This means the application can be downloaded from the Google Play store, and used with any Android device.
Gabriel is a cross-platform application that can be used on any device with any operating system - a key competitive advantage for the technology in addition to security.
Meeting management is a key item on any investor's checklist. To say the least, I was very pleased with the VirnetX management team - they know exactly where they want to be and how to get there. Interestingly, Mr. Larsen stated that he did not want to dilute shareholders. This is a key item, as he stated that the company was approached several times by banks to finance the buildout of Gabriel - although he did not want to dilute the shareholders. It is nice knowing that VirnetX's key personnel have the shareholders in mind first, especially the key shareholder, Mr. Larsen.
Apple Moving Forward:
Mr. Larsen expressed his belief that the CAFC will affirm the ruling, which Judge Davis has made, and that we can expect a ruling at any time. This would coincide with the normal lengths of time for these types of rulings to come down and Judge Davis's excellent track record. To avoid rehashing old dialogues, JeffsWaterWorks has an excellent set of articles on the topic that explain the technical aspects.
More interestingly, in the case of Apple v. Motorola Mobility, the judge cited VirnetX's case against Apple in that the court upheld the use of similar methods involving comparable benchmark products in the past:
"Contrary to the district court's determination, Napper's methodology is not inherently unsound; rather it is "the product of reliable principles and methods." FED. R. EVID. 702. This court has upheld the use of similar methods involving comparable benchmark products in the past. See, e.g., i4i, 598 F.3d at 853-854; see also VirnetX Inc. v. Apple Inc., 925 F. Supp. 2d 816, 839 (E.D. Tex. 2013). Napper's methodology focused on the claimed technology."
Of course, there are risks involved, but for the judges at the CAFC to issue a ruling with a citation to VirnetX's case against Apple in another case - all while the CAFC hasn't issued a ruling on Apple's appeal with VirnetX - demonstrates to me that the judges believe the judgment in VirnetX's district court case is sound. Especially when some of these CAFC judges are the same ones on the appeal board for Apple's appeal with VirnetX.
Another interesting point to bring to light is the fact that the run rate on VirnetX's 0.98% royalty award is ongoing. I have extrapolated the past and future monetary amounts - but the facts still stand that at a 0.98% rate, the average daily income to VirnetX is just under a million dollars per day.
Some investors were questioning whether or not the company had the funds to continue operating. Mr. Larsen showed how the company has roughly $30M worth of cash in the bank and a $1M monthly burn rate. This equates to 30 months of cash left in the bank, which should be plenty of time to receive money owed from Apple, and others.
As per the last ASM, Mr. Larsen was looking to uplist to the NYSE - a larger exchange that is more shareholder friendly and has more checks for share price manipulation. He stated that the company is only one gate away from entry, and that it has been in talks with the exchange. This is that the company needs $72M in cash - an item it will surely have once it receives the funds it is owed.
Question and Answer Period:
Some of the Q/A items I have already covered, but some are interesting. Mr. Larsen was only able to answer a few questions, but it is clear that he is in favor of a one-time dividend and then ongoing dividends after current events come to a close. He stated that he will first need to analyze the monetary needs of the company's development teams, operations and future needs before issuing any dividends.
As to non-litigant licenses, Kendall Larsen stated that companies are watching the Apple decision closely before coming to the table. As for patent reform, Mr. Larsen explained that Apple is playing both sides of the table by initiating NPE-based lawsuits through its Rockstar consortium while also looking to reform the patent system.
Moreover, some investors had questions regarding whether or not certain avenues taken by companies (such as taking the IPR route through the patent office or re-exams) trumped federal court decisions. Mr. Larsen stated that this is not the case and that federal court decisions trump USPTO ones.
Mr. Larsen stated that they will have to move on from the Cisco (NASDAQ:CSCO) trial, as the company continues to move forward on other grounds.
As for New Bay and RPX - Mr. Larsen stated that the company will prosecute the parties to the fullest extent of the law.
Secure Domain Name Registry
Looking forward, there is another half to VirnetX's business that goes widely undiscussed in the marketplace - its secure domain name registry in the future. VirnetX plans to operate its secure domain name registry to make the internet more secure. Details on this initiative can be found here.
The trip down was fantastic - I met an amazing group of people while also learning more about a company that I am invested in. The technology demonstration was a key item today, filled with key insight into the company's Gabriel platform.
After a travel-intensive trip to arrive here from the east coast, I may have missed an item or two in my notes through basic sleep deprivation. I welcome any and all comments to build upon my article, while also clearing up any loose ends. Best to all investors, and I hope my article helped to offer some insight for those who were unable to attend. I always caution investors to do their own due diligence, make their own decisions and remember that the above content was written solely in my own opinion.
Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Always do your own research and contact an investment professional before making any trades or investments. The following information is in my own personal opinion and may contain errors. Always do your own comprehensive due diligence.