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VirnetX Holding Corporation: Wireless Security Giant or Mere Troll?

|Includes:VirnetX Holding Corporation (VHC)

VirnetX Holding Corporation (NYSEMKT:VHC) has had some good news to report lately that has many investors interested in the future of wireless salivating at the prospect of having discovered an "under the radar" gem that claims--and for sure hopes--to have cornered the technology market for 4G wireless network security.

First, they have battled Goliath and, according to the company, Goliath blinked.  That is to say the company had sued Micrsoft alleging that the software giant was infringing upon VirnetX's patents in multiple security applications in Microsoft products with wireless components.  The case recently settled with Microsoft agreeing to pay VHC $200 million and enter into an agreement for future licensing of its security technology.

VirnetX CEO Kendall Larsen said that the agreement highlighted the need for the company's Secure Domain Name Initiative and would allow it to focus on an upcoming pilot of the system.

In March, a jury had awarded VirnetX nearly $106 million after determining Microsoft violated two of its patents.

The patents cover ways to establish virtual private network, or VPN, connections.

The connections are used to protect Internet and other data traffic from hackers and thieves.

Next, the company's patents were validated in a review by the US patent office.

After the settlement with Microsoft, the company declared a special dividend and presented each shareholder as of the July 1 record date with 50 cents per share.

The company touts its technology as imperative for the success and safety of the soon to arrive 4G network that, according to wireless experts, will render the current 3G standard a fossil--in terms of speed and capacity.  Its software and technology solutions are claimed to provide the security platform required by next-generation Internet-based applications, such as instant messaging, voice over Internet protocol (VoIP), mobile services, streaming video, file transfer, and remote desktop. The company offers  what it has named  "GABRIEL Connection Technology" that encrypts data allowing organizations and individuals to establish communities of registered users and transmit information between various devices, networks, and operating systems. It focuses on licensing its products and services to original equipment manufacturers within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets; communication service providers; and system integrators.

Congress is also weighing in in a manner that the company asserts will render it the premier security provider of 4G: 

“The Cybersecurity Act calls for the use of a secure domain name system, which is what VirnetX’s technology provides. VirnetX and our SDNI [Secure Domain Name Initiative] partners can deliver what the government is mandating for a secure Internet using secure domain names. Existing domain names will be able to move to a new secure domain name and devices will have their own secure domain name so owners and operators can transmit data securely and in real time – safe from hackers and thieves,” says CEO Larsen.

So what's not to like?

Don't know the answer yet, and the means to get the answers are not immediately readily available--but the due diligence questions one would want answered before diving in with both feet are apparent (with grateful acknowledgement of poster StevieRayJon on the VHC IV message board for his gracious permission to share from his list):

1. Reverse merger to obtain an Amex listing. (usually a red flag)
2. No real Venture Capital money obtained to be able to launch their products, even though they reside in the Venture Capital capital of the world (Scotts Valley, California).
3. No revenues or contracts (except MSFT now-- a big plus) in over 4 years.
4. Gigantic competitors for everything they plan on doing in the future.
5. Nothing but the CEO's word that "they own the technology" and have "no competition".
6. The only analyst who seems to be covering the company is an unknown whom they had to pay to publish a report. The report basically just regurgitates their annual report and contains no real analysis.
7. No employees other than the engineers. No sales support. 12 employees far as can be discerned from public documents.
8. Hundreds of thousands (or maybe even millions) of 4G devices already sold, with no apparent need for their technology?
9. They are Beta testing their Gabriel product with a tiny .OB company. If the technology is so promising, why no bigger players? 
10. SAIC, the company from whom they licensed their patents, seemingly gave away the patents for next to nothing. If this technology is so important, why did they do this?
11. In spite of the recently trumpeted good news the share price is lower than it was 2 years ago.

The Next Big Thing for 4G, or irritating internet troll whose first Billy Goat Gruff was Microsoft?

$200 million is a mighty steep toll to cross the bridge--and it's hard to imagine Microsoft not fighting further tooth and nail to not license into the future--unless the patent infringement threat is the real thing.

Without the answers to the above questions and more, it is definitely a speculative play--but one that could provide spectacular returns if the story plays out positively.

I plan to dig deeper and report what I find in a future piece.



Disclosure: No position
Stocks: VHC