The 4G Upside for VirnetX Holding Corp.

 |  Includes: MSFT, SNE, VHC
by: Todd Johnson

VirnetX Holding Corporation (AMEX: VHC) is an intriquing 4G communication patent holding company. VirnetX's assets are its perceived valuable 4G IT patents and patent applications. VirnetX is currently trading near record highs due to the potential to sign lucrative patent licensing deals with the premiere worldwide companies in the communication arena. VirnetX provides individuals, corporations, and governments the legal authority to implement a secure 4G IT communication infrastructure.

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VirnetX Business Model Summary
Corporate and government communication privacy is vital to the basic needs of a free and lawful society. Alleged criminals, however, see communication privacy through a different prism. G-mail, the White House, and even a non-profit FBI entity - InfraGard - have been recently attacked by malicious intruders.

Sony (NYSE:SNE) cannot accept a business plan that is vulnerable to constant malicious hacking. The first issue to address is internet security for its customers and employees. VirnetX's patent portfolio provides protection against third party attacks. The same group that hacked Sony, known as LulzSec, recently gained private information from an attack on InfraGard for FBI-InfraGard related information. VirnetX provides the IT architecture to prevent malicious compromise on 4G IT networks.

VirnetX owns internet security patents and patent applications. How valuable is the central question in assigning a valuation to the common stock. VirnetX owns patents which will provide end users a means to communicate in a seamless, secure, and efficient process.

  • Company owns 48-patents or pending applications.

  • VirnetX's patents and patent applications issued expire between 2019-2024

  • The patents are considered essential for secure 4G technology usage.

  • Impacted technology companies include 4G smart phone developers, original equipment manufacturers, and communication providers.

  • Apple (NASDAQ:AAPL), Cisco (NASDAQ:CSCO), Google (NASDAQ:GOOG), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK), RIM (RIMM), Siemens (SI), and Sony (SNE) are a few of the companies which are active in the 4G communication space.

  • Licensees will be required to license the VirnetX Security PlatformTM

VirnetX did win a well publicized legal ruling against Microsoft. The lawsuit claimed Microsoft infringed upon VirnetX's patents by utilizing VirnetX technology within Windows and Office's communication server products. A court verdict found Microsoft liable for $105-million. Microsoft settled the legal ruling for $200-million in May 2010.

The Microsoft ruling was crucial as other competing technology companies are now in the radar of VirnetX's legal team.

As recently as April 5th, 2011, VirnetX counsel filed claim against Apple's iPad 2 for patent infringement. Apple is the premiere smart phone company and deep-pocketed potential-licensee which could provide VirnetX with a signfiicant royalty deal.

Law firm Wilson Sonsini Goodrich & Rosati represents VirnetX.

GABRIEL Connection Technology
The GABRIEL connection is focused upon providing a secure communication platform for individuals, management, governments, and employees. VirnetX refers to this virtual private network as a Safe NeighborhoodsTM. GABRIEL has the following attributes:

  • Every communication device (e.g. work computer, smart phone) is registered as a secure domain name.

  • The communication device initially confirms a credential check to establish a virtual private network. Only approved credentials will allow communication with other approved users.

  • The current-DNS registry allows for cyber crimes to occur. GABRIEL's architecture prevents this event from unfolding.

  • The virtual private network allows traditional emails, videos, images to be delivered to the end users.

  • Passwords are not required once the devices are confirmed within the GABRIEL registry.

  • Every registered device can be reached by an approved user. This explicitly allows end users, within the virtual private network, to gain access to files, programs, data on any registrared device within the end users' approved Safe Neighborhoods.

  • VirnetX Security PlatformTM is embedded within the Gabriel architecture.

VirnetX Revenues
The 4G IT market is expected to be a $100-billion plus market per year. The ecosystem within this market will be high growth, and high profit margins. VirnetX is positioned to partake in the U.S., European, and worldwide markets. VirnetX is poised to sign contracts for 1%+ on wholesale product average price on product releases for the 4G rollout.

On May 27th, Cowen became the first prominent brokerage house to come out with a VirnetX buy recommendation. Cowen recognizes VirnetX's patent portfolio, suite of patent applications, and potential domestic and foreign entities.

VirnetX Caveats
I am a VirnetX investor. I have, however, also been a Rambus (NASDAQ:RMBS) shareholder. The promises of gold and glitter are rampant in the licensing arena. Author Geoffrey A. Moore, in his "The Gorilla Game: Picking Winners in High Technology" book, advised how the technology playing field can dramaticallly change with the right assets. Assuming VirnetX owns strategically vital 4G patents, VirnetX's patent royalties can be very impressive. Patent litigation, however, is expensive and time consuming.

I would like to see one of the top tier accounting firms performing auditing duties. Currently Farber Hass Hurley LLP is VirnetX's auditor.

Ideally the company can provide quarterly earning webcasts. This will allow shareholders to hear how the progression is proceeding. Shareholders recognize press releases will update the major licensing terms. A publicly traded company should embrace the opportunity for shareholders to listen to the CEO speak. In addition, analysts will be welcome to ask questions.

VirnetX Management
Ken Larson has been VirnetX's CEO since June 2007. He is recognized as a solid voice for the company. He has not sold a single VirnetX share.

Dr. Robert Dunham Short III is a Director, Chief Technical Officer and the Chief Scientist. Dr. Short is recognized as a co-inventor on the most of VirnetX's patents.

Dr. Victor Larson is VirnetX's Director of Research and Development. In addition, he is the co-inventor of the VirnetX technologies.

VirnetX Stock and Option Trading
VirnetX has 49,461,000 common shares outstanding. VirnetX's market cap is $1.36-billion. The companies revenues were $17,000 for the quarter ending March 31st, 2011. The quarterly net loss was $7,122,000. Clearly the company is priced for signing patent licensing agreements and not based upon current recognized revenues.

As of March 31st, 2011, VirnetX's balance sheet had $43,553,000 in cash and short-term investments equaling $23,286,000. The cash was derived primarly from the Microsoft settlement.

VirnetX has warrants outstanding amounting to 840,079 VHC shares. Thirty thousand shares have a $4.80-exercise price and a December 2012 expiration date. And 810,079 shares have a $3.59-exercise price and a March 2015 expiration date.

VirnetX stock has run up almost 100% since March 2nd's closing price of $11.76. The short interest is approximately 15-20% of the float. There are a significant number of call options, expiring June 17th, at the $25/$26/$27-strike prices. The calls could reflect protection against a short VirnetX common position.

The world will be utilizing 4G for all levels of communication. VirnetX's success is based upon its ability to a) sign significant legal settlements for past patent infringement, and b) sign, going forward, 4G patent royalty deals. Assuming the patent portfolio is required within a secure 4G virtual private network, VirnetX is likely to sign significant 4G licensing agreements with major communication entities. VirnetX is blinders-on focused upon licensing patents and licensing technology.

Disclosure: I am long VHC.