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Saul Kerpelman
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I am an attorney in Baltimore, Md., representing children with lead poisoning. I have been investing in biotech for over a decade. I have an A.B. from Vassar College '76, Phi Beta Kappa; J.D. from Duke Law School '79; M.S. from Johns Hopkins University '08.
  • VirnetX Holding Corporation: Wireless Security Giant or Mere Troll? 11 comments
    Jul 19, 2010 4:38 PM | about stocks: 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
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Comments (11)
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  • plotinus4me
    , contributor
    Comments (3) | Send Message


    It would have been helpful if you had asked those questions of Greg Wood (IR for VHC) prior to writing your article. I am confident you would have found the answers to your questions and you could have written a more objective and complete post.


    I think you will find that prior to the MSFT settlement and the Patent Office ruling that no companies really took VHC seriously. Further, there were several times when funds were raised which were mostly used to pay the legal costs and employee salaries. Now VHC has no need for "venture capital".


    There is no need for salesmen as they are outsourcing everything by getting companies to license and pay royalties (see IPCapital Group) plus VHC's own internal team. It is my understanding that the outsourcing company will get a % on the size of the contract. They have a great legal firm (for which services they will pay 8% of whatever the lawyers can get so there will be very limited cash outlays in this area).


    There should be an announcement in this quarter (before 9/30)
    of the chip and service provider that will be in the "pilot" program or as also known as the SDNI (Strategic Domain Name Initiative).
    Additionally there will be Data Management companies like Symantec (whose CFO is on the BOD of VHC). This program will take about 6 months to be implemented.


    It is expected that there will be other companies who will license and pay royalties who are already violating VHC's patents or they will be sued. VHC would prefer to have partners who are interested in a proactive security system (VHC) vs a reactive security system (everyone else who is not infringing on VHC's patents) rather than going the legal route (ie., not to be an "internet troll" as you have suggested) . As the CEO said at the ASM, there is "no competition" to VHC's product. I doubt he could say that if he didn't know it to be true.


    All of those 4G devices which have already been sold had better have VHC's security or they are at great risk for hacking. If they have a system that is VHC's then they will need to pay for that (see MSFT).


    SAIC did not "give away the patents for next to nothing". VHC will pay @$35 million from the MSFT settlement to pay off their obligation to SAIC. The people who invented the security system being used by VHC are the key people at VHC- particularly Munger (who just retired with over a million VHC shares and Scott the new Chief Technical Officer who took over for Munger).


    It is doubtful that SAIC had any idea of whether there would be a value in those patents nor whether they could get them instituted without a lot of litigation. Obviously the former SAIC engineers and Kendall Larson had a different vision and despite the odds, prevailed.


    It is ironic that the price is not much lower at $5.69 than it was about a year ago at a high of $7.06. Indeed, after the MSFT win, the stock went to $7.99 and has fallen back, partly because of overall market conditions but more likely because the market is still waiting for the pilot partner announcement. It is a bit ironic that a year ago, the company was fighting for its life and had the uphill battle against MSFT. Now that VHC won and has a whole lot of cash (and virtually no debt), with patent confirmation, and the likelihood of the partnership being announced within the next month or two and the stock is slightly below the high points.


    I haven't checked on this, but just because they are using a small company for their beta testing doesn't mean that the testing will not be validated. You have to remember, this company had very little money when that testing started and they likely could not afford a bigger company. Sometimes small is just fine. You may recall DNDN had nothing for years and all of a sudden they have a whole lot.


    I would suggest strongly for you to contact IR or Larson at VHC to discuss your issues. I would like to see your report when you get what you need. I would hope that you are more positive and less disparaging than the above posting of yours.


    20 Jul 2010, 01:35 AM Reply Like
  • plotinus4me
    , contributor
    Comments (3) | Send Message


    It is Robert Short who is the new Chief Technical Officer,
    not Scott.
    20 Jul 2010, 02:42 AM Reply Like
  • ocyan
    , contributor
    Comments (18) | Send Message
    Be careful and make sure that the MSFT settlement is truly a patent fence instead of just being a patent trap.


    Application ideas in software are often not deep and get reinvented all the time. Software implementation is also often not deep but can be labor intensive because many parts have to fit. Once a large application is done, tested and on the market, it is extremely expensive to redo because the parts that were fitted would take far too much work to untangle and redo.


    It is possible that the MSFT developers inadvertently tripped the VHC patents in their early development days and it now cost too much to redo an application worth billions so MSFT just settled. That does not mean that those patents form a hard fence, not circumventable.


    Note that I am not saying that the VHC patents do not form a fence - just pointing out a possibility that many seem to have not considered, one that I have seen often enough.
    21 Jul 2010, 06:01 PM Reply Like
  • dkitt
    , contributor
    Comments (14) | Send Message
    My comments on SaulK’s instablog critique:


    1. “Reverse merger”: don’t see that as a negative. VHC cut a deal with a shell company to get listed and it allowed them to raise capital. An IPO was out of the question for a company battling for IP and patent rights.


    2. “No real Venture Capital”: they avoided stockholder dilution and loss of control that would have entailed.


    3. “No revenues or contracts (except MSFT now-- a big plus) in over 4 years”: well SaulK
    overlooks the fact it took VHC that long to prove in court that its patents are valid. No infringing companies were willing to start paying for what they were already using until the patents were confirmed.


    4. “Gigantic competitors”: true, but I see that as a positive. When VirnetX get bought out it is going to take someone with really deep pockets.


    5. “Nothing but the CEO's word that "they own the technology" and have "no competition": If anyone knows of a competing set of products or patents I would like to see them.


    6. “ The only analyst who seems to be covering the company is an unknown whom they had to pay”: I intend to call the company to confirm that statement.


    7. “12 employees total”: add to that those under contract or on retainer: IP Capital; and the Mc Kool Smith legal team (the number one rated IP litigators in the country).


    8.“Hundreds of thousands (or maybe even millions) of 4G devices already sold, with no apparent need for their technology?”: SaulK already answered that when he quoted Kendall Larsen: “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.


    9. “They are Beta testing their Gabriel product with a tiny .OB company”: not sure that is still the case. The
    collaboration SaulK is referring to was announced last year. There very well could be others.


    10. “SAIC, the company from whom they licensed their patents, seemingly gave away the patents for next to nothing”: SAIC made tens of millions on the MSFT settlement.


    11. “share price is lower than it was 2 years”: that will take care of itself with the next licensing agreement


    Sentiment : Strong Buy
    20 Jul 2010, 01:36 AM Reply Like
  • exnurse
    , contributor
    Comments (6) | Send Message
    good start, saulk - please move forward on the questions you have identified. your column is a terrific addition to SA!
    21 Jul 2010, 10:43 AM Reply Like
  • some day
    , contributor
    Comments (5) | Send Message
    It is the responsibility of each individual to do there due diligence, thanks once again for pointing out the down side for the experienced and novice traders. The stock is speculative at best and we should never get caught up with the pump. thanks.
    21 Jul 2010, 11:14 AM Reply Like
  • Alii Kai
    , contributor
    Comments (2) | Send Message
    Saul, Thank you for shedding light on the company and posing the questions. I would be interested in any answers you might find.


    Alii Kai
    21 Jul 2010, 11:14 AM Reply Like
  • bbunker17
    , contributor
    Comment (1) | Send Message
    Great report
    21 Jul 2010, 11:17 AM Reply Like
  • Kuato
    , contributor
    Comments (2) | Send Message
    Interesting article Saul. You have brought up great questions and sparked a debate I will be following closely. I think you're on to something big here and I'll be looking forward to your next post. Thank you!
    21 Jul 2010, 11:35 AM Reply Like
  • dkitt
    , contributor
    Comments (14) | Send Message
    I would not wait for Saul's next article on VirnetX.


    Buy the stock now, this company has a lot of irons in the fire and I expect some interesting developments in the near future that will further validate VHC's business model.


    This stock should be one of the top tech gainers this year.
    12 Aug 2010, 01:32 PM Reply Like
  • dkitt
    , contributor
    Comments (14) | Send Message
    VirnetX is the best performing Russell 3000 year to date.


    Too bad Saul did not follow-up on this company...he missed a real winner.


    You have not missed the boat it is still a buy. The stock has still not met my short term target of $25.00. Should happen by the end of the year.


    One year target $50.00 share.

    1 Oct 2010, 01:33 PM Reply Like
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