VirnetX And A Trial That Investors Should Be Watching

| About: VirnetX Holding (VHC)

Summary

VirnetX is suing Apple for over $500 million, and a jury verdict could happen at any time this week.

Apple previously lost a case to VirnetX at a jury trial, and the case was sent back down on a technicality.

With even more alleged infringing features this time around, the verdict for VirnetX could be even higher.

High short interest creates the possibility of a short squeeze on the stock.

VirnetX Holding (NYSEMKT:VHC) has been an interesting ride for investors. They have seen ups and downs and are now holding their breaths to see what a jury will decide in VirnetX's litigation with Apple (NASDAQ:AAPL). The company is seeking up to a half a billion dollars in damages from Apple, and should VirnetX be awarded that amount from the jury, it is likely that the share price will rise significantly. For investors who are interested in catalyst stocks, VirnetX may be a stock to look at very closely ahead of its jury verdict catalyst.

Basis for Litigation

This jury trial is a result of litigation filed by VirnetX in 2010, where VirnetX claims that Apple's Facetime technology, as well as some of its VPN technology, infringe upon Virnet X's patents. This case went to trial once before where a jury found in favor of Virnet X, awarding $362.8 million. This sounds promising for VirnetX, however, an appeals court threw out the verdict on the basis that some of the jury instructions may have influenced the findings of the jury. This is a technicality but an important one as it has prolonged the litigation between both sides and has led them to where they are currently. The appeals court did rule, however, that VirnetX's patents were valid and infringed. This helps to remove a significant overhang for investors as one of the primary concerns in a jury trial is whether or not the patents will be found to be valid, and with this decision investors have the confidence that the patents in question as they relate to VPNs are valid.

For Apple and VirnetX, the stakes are very high. VirnetX is asking for over $500 million in damages, or $1.67 per iPhone device. VirnetX will have damages experts that will address how VirnetX is able to come to this number in terms of damages. It should be noted that the original lawsuit which was overturned on appeal was consolidated with a lawsuit that was filed in 2012 by VirnetX which alleged infringement of various Facetime and iMessaging products and features. Therefore, we are entering a jury trial where the stakes are even higher for both parties. The jury is able to give VirnetX a portion of what it is asking for, the full amount, or any other damages that it deems to be just and proper. This creates a situation where there is a high amount of unpredictability for investors.

Any large verdict in favor of VirnetX should help to induce Apple to come to the settlement table. While Apple and VirnetX did not agree on a number last time and Apple won in the appeals court, it would be unlikely that Apple would be able to win again on appeal and have the trial moved back down. One of the typical benefits of an appeal is to try to drain the other side of cash and then try to get a better deal from a settlement. In the case of VirnetX, however, this would not be a concern after a positive jury verdict. The company has a large enough shareholder base that it would be able to dilute in order to be able to obtain the money that it needs in order to see the appeal through, and the company was currently sitting on cash of over $9.9 million. This should give the company more than enough liquidity to see the verdict through an appeals process if needed.

Why Does This Present an Investment Opportunity?

This trial could represent a substantial investment opportunity. Quite simply, VirnetX has a rather low market cap of just over $200 million. Any verdict close to $500 million would substantially improve the company's market cap as the company valued on a cash basis alone would be worth more than its current market cap. VirnetX also has a history of delivering for investors in high stakes litigation. VirnetX previously won a $200 million settlement from Microsoft (NASDAQ:MSFT) over Microsoft's Skype Technology. Any verdict in favor of VirnetX, especially over the amount of the previous verdict, would be a positive upside for VirnetX shareholders.

With the case now sitting with a jury, it is likely that investors could receive a decision at anytime. There is a very high likelihood of a verdict higher than the original verdict. The original verdict covered only VPN implementation for Facetime (it is important for investors to understand that while the appeals court did send back the damages calculation they found that VirnetX's patents were valid and infringed upon by Apple). This new trial includes not only the VPNs but also iMessaging and Facetime capabilities. This would suggest that damages could be much higher than the previous trial. Any damages in excess of the previous verdict, or even if the previous verdict amount stands, would likely cause a massive increase in the share price of VirnetX.

There also is the potential for a large short squeeze upon approval. There are over 11.7 million shares short of VirnetX. Any positive news or large jury verdict should send the stock much higher and could trigger a short squeeze as short sellers rush to cover. This would only help to further drive up the share price of the stock and could result in significant gains for investors. Under the current volume, the 11.7 million shares would take over eight days to cover. This would suggest that the stock may have been over-shorted and that now short sellers will find themselves stretched if they all need to buy back the stock quickly.

Conclusion

Investors should be watching for any movement in the VirnetX case. A jury verdict in favor of VirnetX could send shares moving sharply higher which could be compounded by the fact that VirnetX has a high short interest. With even more at stake for both parties, I would expect for there to be a higher incentive for Apple to settle should the jury come back in favor of VirnetX. VirnetX also has sufficient resources to be able to withstand any threat of an appeal, which should help make investors confident that VirnetX is able to see the prosecution of its patents through to the end. Investors need to watch VirnetX as it could be a very compelling momentum play.

Disclosure: I am/we are 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.