As filed with the Securities and Exchange Commission on September 9, 2008August 20, 2015
Registration No. 333-
Registration Statement No. 333-149884
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
Amendment No. 3
to
FORM S-3
REGISTRATION STATEMENT
UNDERUnder
THE SECURITIES ACT OF 1933
VirnetX Holding Corporation
(Exact Namename of Registrant as Specifiedspecified in Its Charter)its charter)
| | | | |
| Delaware | | 5615 Scotts Valley Drive, Suite 110 | | 77-0390628 |
(State or Other Jurisdictionother jurisdiction of
Incorporation incorporation or Organization)organization) | | Scotts Valley, California 95066
(831) 438-8200 | | (I.R.S. Employer
Identification Number) |
308 Dorla Court, Suite 206
Zephyr Cove, NV 89448
775-548-1785
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
Kendall Larsen
Chief Executive Officer
VirnetX Inc.Holding Corporation
5615 Scotts Valley Drive,308 Dorla Court, Suite 110206
Scotts Valley, California 95066Zephyr Cove, NV 89448
(831) 438-8200(775) 548-1785
(Name, Address, Including Zip Code,address, including zip code, and Telephone Number,telephone number, including area code, of agent for service)
Including Area Code, of Agent for Service)
Copies to:
Katharine A. Martin, Esq.
Bradley L. Finkelstein, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
Approximate date of commencement of proposed sale to the public:
From time to time, after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: obox. ☐
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: þbox. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box. o☐
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box. o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):☐
| | | | | | |
Large accelerated filer o | | Accelerated filer o☒ | Accelerated filer ☐ |
Non-accelerated filer o
(Do(Do not check if a smaller reporting company) | ☐ | Smaller reporting company þ☐ |
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to be Registered | | Amount To Be Registered(1) | | | Proposed Maximum Offering Price per Unit or Share (1)(2) | | | Proposed Maximum Aggregate Offering Price(1)(2) | | | Amount of Registration Fee (3) | |
| Common Stock, $0.0001 par value per share (“Common Stock”)(4) | | $ | — | | | | — | | | | — | | | | — | |
| Preferred Stock, $0.0001 par value per share | | | — | | | | — | | | | — | | | | — | |
| Depositary Shares | | | — | | | | — | | | | — | | | | — | |
| Warrants | | | — | | | | — | | | | — | | | | — | |
| Debt Securities | | | — | | | | — | | | | — | | | | — | |
| Units | | | — | | | | — | | | | — | | | | — | |
| Total(4) | | $ | 100,000,000 | | | | — | | | $ | 100,000,000 | | | $ | 11,620 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Proposed Maximum
| | | Proposed Maximum
| | | Amount of
|
Title of Each Class of
| | | Amount to be
| | | Offering Price
| | | Aggregate
| | | Registration
|
| Securities to be Registered | | | Registered | | | per Unit(1) | | | Offering Price(1) | | | Fee(1) |
| Common Stock, $0.001 par value | | | | 21,377,363 | | | | $ | 2.63 | | | | $ | 56,222,464 | | | | $ | 2,209.54* | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | | |
* | | Already deemed paid. Pursuant to Rule 429457(i) under the Securities Act of 1933 as amended (the “Securities Act”), the prospectus in this registration statement relates entirely to shares for which filing fees were previously paid to the Commission based upon the bona fide estimatesecurities registered hereunder include such indeterminate number of the maximum offering price; pursuant to Rule 457(a), no additional fee is required to be paid. The registration fees were originally based upon 34,927,736 shares of common stock, plus commonpreferred stock underlyingor depositary shares, number of warrants and units and principal amount of debt securities as may be issued upon conversion or exchange of any preferred stock, warrants or debt securities registered hereunder that provide for conversion or exchange, upon exercise of warrants or pursuant to purchase 33,333 sharesthe anti-dilution provisions of common stock, registered on two separate registration statements onForm S-1. Filing fees associatedany such securities. |
| (2) | The proposed maximum per unit and aggregate offering prices per class of securities will be determined from time to time by the registrant in connection with the shares included inissuance by the registrant of the securities registered under this registration statement were previously paid uponand is not specified as to each class of security pursuant to General Instruction II.D of Form S-3 under the filingSecurities Act. |
| (3) | Calculated pursuant to Rule 457(o) under the Securities Act. |
| (4) | Any securities registered hereunder may be sold separately or as units with other securities registered hereunder. The proposed maximum offering price per unit will be determined by us in connection with the issuance of the securities. In no event will the aggregate offering price of all securities issued by the registrant from time to time pursuant to this Registration StatementNo. 333-149884, as well as upon exceed $100,000,000 or the filing of Registration StatementNo. 333-145765.equivalent thereof in one or more foreign currencies, foreign currency units or composite currencies. |
| | |
(1) | | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) under the Securities Act, based on the average of the high and low per share sale prices of the common stock on September 3, 2008, as reported by the American Stock Exchange. In accordance with Rule 457(a) under the Securities Act, no additional fee is required in connection with this registration statement. |
This registration statement, which is Amendment No. 3 to Registration StatementNo. 333-149884, also constitutes Post-Effective Amendment No. 4 to Registration StatementNo. 333-145765, which was declared effective on May 4, 2008. Such Post-Effective Amendment shall hereafter become effective concurrently with the effectiveness ofThe registrant hereby amends this Registration Statement andon such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance withSection 8(c)8(a) of the Securities Act of 1933. Pursuant to Rule 429 under the Securities Act of 1933 the prospectus filed as part ofor until this Registration Statement also constitutes shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This registration statement contains:
| ● | a base prospectus which covers the offering, issuance and sale by the registrant of up to a maximum aggregate offering price of $100,000,000 of the registrant’s common stock, preferred stock, depositary shares, warrants, debt securities and/or units; and |
| ● | a sales agreement prospectus supplement covering the offering, issuance and sale by the registrant of up to a maximum aggregate offering price of $35,000,000 of the registrant’s common stock that may be issued and sold from time to time under a sales agreement with Cowen and Company, LLC. |
The base prospectus for Registration StatementNo. 333-149884immediately follows this explanatory note. The sales agreement prospectus supplement immediately follows the base prospectus. The $35,000,000 of common stock that may be offered, issued and Registration StatementNo. 333-145765;sold by the 5,366,666 shares of Common Stockregistrant under the sales agreement prospectus supplement is included in Registration StatementNo. 333-145765 willthe $100,000,000 of securities that may be combined withoffered, issued and sold by the 16,010,697 sharesregistrant under the base prospectus. Any portion of Common Stock to be registered pursuant to this Registration Statement to enablethe $35,000,000 included in the sales agreement prospectus supplement that is not previously sold or included in an aggregate of 21,377,363 shares of Common Stock to be soldactive placement notice pursuant to the combined prospectus.sales agreement is available for sale in other offerings pursuant to the base prospectus, and if no shares are sold under the sales agreement, the full $100,000,000 of securities may be sold in other offerings pursuant to the base prospectus and a corresponding prospectus supplement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
|
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 2008.
PRELIMINARY PROSPECTUS
VIRNETX HOLDING CORPORATION
21,377,363 Shares
Common Stock
The security holders namedinformation in this prospectus supplement is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell for their accounts 21,377,363nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated August 20, 2015.
PROSPECTUS SUPPLEMENT
Up to $35,000,000 of Shares
Common Stock
We have entered into a sales agreement with Cowen and Company, LLC, or Cowen, dated August 20, 2015, relating to shares of our common stock.
The securities described instock offered by this prospectus are not being sold by any underwriter. VirnetX Holding Corporation will not receive any proceedssupplement. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to $35,000,000 from the sale of these securities.
time to time through Cowen acting as our agent.
Our common stock is listed on the American Stock ExchangeNYSE MKT LLC under the symbol “VHC.” On September 3, 2008,August 18, 2015, the last reported salessale price of our common stock as reported on the American Stock ExchangeNYSE MKT LLC was $2.63$3.91 per share.
This registration statement, which is Amendment No. 3 to Registration StatementNo. 333-149884, also constitutes Post-Effective Amendment No. 4 to Registration StatementNo. 333-145765, which was declared effective on May 9, 2008. The 21,377,363 shares covered by this prospectus include both the 16,010,697 shares previously included in this Registration Statement No.333-149884, as well as the 5,366,666 shares previously included in Registration StatementNo. 333-145765
Investing inSales of our common stock, involvesif any, under this prospectus supplement may be made in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, or the Securities Act, including sales made directly on or through the NYSE MKT LLC, the existing trading market for our common stock, sales made to or through a high degreemarket maker other than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of risk. Please carefully considersale or at prices related to such prevailing market prices, and/or any other method permitted by law, including in privately negotiated transactions. Cowen is not required to sell any specific number or dollar amount of securities, but will act as sales agent and use commercially reasonable efforts to sell on our behalf all of the “Risk Factors” beginningshares of common stock requested to be sold by us, consistent with its normal trading and sales practices, on page 4 of this prospectus.mutually agreed terms between Cowen and us. There is no arrangement for funds to be received in any escrow, trust or similar arrangement.
Cowen will be entitled to compensation at a fixed commission rate of up to 3.0% of the gross sales price per share sold. In connection with the sale of our common stock on our behalf, Cowen will be deemed to be an “underwriter” within the meaning of the Securities Act and the compensation of Cowen will be deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to Cowen with respect to certain liabilities, including liabilities under the Securities Act.
NEITHER
INVESTING IN OUR SECURITIES INVOLVES RISKS. SEE THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF COMMON STOCK OR PASSED“RISK FACTORS” ON THE ADEQUACY OR ACCURACYPAGE S-6 OF THIS PROSPECTUS. ANY REPRESENTATION TOPROSPECTUS SUPPLEMENT AND IN THE CONTRARY IS A CRIMINAL OFFENSE.DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT CONCERNING FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
Cowen and Company
The date of this prospectus supplement is , 2008
TABLE OF CONTENTS2015.
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement is part of a registration statement that we have filed with the U.S. Securities and Exchange Commission, or the SEC,Commission, utilizing a “shelf” registration process. By using a shelf registration process. Under this shelf registration process, the selling stockholdersstatement, we may offer shares of our common stock having an aggregate offering price of up to $35,000,000 from time to time sell an indeterminate numberunder this prospectus supplement at prices and on terms to be determined by market conditions at the time of offering.
We provide information to you about this offering of shares of our common stock in one or more offerings.
Thistwo separate documents that are bound together: (1) this prospectus does not contain all ofsupplement, which describes the specific details regarding this offering; and (2) the accompanying base prospectus, which provides general information, set forth in the registration statementsome of which may not apply to this offering. Generally, when we refer to this “prospectus,” we are referring to both documents combined. If information in this sales agreement prospectus supplement is inconsistent with the accompanying base prospectus, you should rely on this prospectus supplement. However, if any statement in one of these documents is inconsistent with a part, as permittedstatement in another document having a later date‒for example, a document incorporated by the rules and regulations of the SEC. For additional information regarding us and the offered shares, please refer to the registration statement of which this prospectus is a part. Before purchasing any common stock, you should carefully read this prospectus, together with the additional information described under the section of this prospectus titled “Where You Can Find More Information.” In particular, you should carefully consider the risks and uncertainties described under the section titled “Risk Factors”reference in this prospectus before you decide whether to purchase any common stock. These risks and uncertainties, together with those not known to ussupplement‒the statement in the document having the later date modifies or those that we may deem immaterial, could impairsupersedes the earlier statement as our business, financial condition, results of operations and ultimately affectprospects may have changed since the price of our common stock.earlier dates.
You should rely only on the information contained in, or incorporated by reference into, this prospectus.prospectus and in any free writing prospectus that we may authorize for use in connection with this offering. We have not, and Cowen has not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. No offersWe are being made herebynot, and Cowen is not, making an offer to sell or soliciting an offer to buy our securities in any jurisdiction where thean offer or salesolicitation is not permitted.authorized or in which the person making that offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make an offer or solicitation. You should assume that the information appearing in this prospectus supplement, the accompanying base prospectus, the documents incorporated by reference into this prospectus, and in any free writing prospectus that we may authorize for use in connection with this offering, is accurate only as of the date on the cover.of those respective documents. Our business, financial condition, results of operations and prospects may have changed since those dates. You should read this prospectus supplement, the accompanying base prospectus, the documents incorporated by reference into this prospectus, and any free writing prospectus that date.
i
SUMMARY
The following summary provideswe may authorize for use in connection with this offering, in their entirety before making an overview of certain information about our companyinvestment decision. You should also read and the offering and may not contain allconsider the information that may be importantin the documents to you. This summary is qualifiedwhich we have referred you in its entirety by and should be read together with the information contained in other partssections of this prospectus.prospectus entitled “Where You should carefully read this entire prospectus before making a decision about whether to invest in our common stock.
Our Company
From inception in 1992 until January 2003, VirnetX Holding Corporation (through its predecessor corporation) was engaged in the business of developingCan Find More Information” and licensing software that enabled internet and web-based communications. As of January 31, 2003, we had sold all of our operating assets, and since such time our only source of revenue has been derived from nominal royalties payable to our wholly-owned Japan subsidiary, Network Research Corp. Japan, Ltd. pursuant to the terms of a single license agreement. We acquired VirnetX as a wholly-owned subsidiary on July 5, 2007 and ceased being a shell company (the “Merger”). Additionally, pursuant to the merger with VirnetX, we experienced a change in control, with the former securityholders of VirnetX acquiring control of VirnetX Holding Corporation.
Our wholly-owned subsidiary, VirnetX, was incorporated in the State of Delaware in August 2005. It is a development stage company that was formed to commercialize a patent portfolio for providing solutions for secure real-time communications such as instant messaging, or “IM,” and voice over internet protocol, or “VoIP.” VirnetX has acquired certain patents from Science Applications International Corporation, a systems, solutions and technical services company based in San Diego, California (better known as “SAIC”).
Principal Products and Services
Technology and Solutions Business
Our primary strategy for our technology and solutions business is to commercialize our patented technology in the area of secure real-time communication. We are developing technology for:
| | |
| • | “single-click” and “zero-click” security solutions for real-time communications; and |
|
| • | “end-to-end” security for VoIP, video conferencing and other types of peer-to-peer collaboration without degradation in quality of service. |
In addition, we expect to continue to generate nominal royalties payable to our Japan subsidiary pursuant to the terms of a single license agreement.
Contract Services Business
Our primary strategy for our contract services business is to leverage our research and development group to provide contract research, prototyping, systems integration and technical services to numerous branches of the U.S. Federal government, network service providers and other OEM partners. Our team is staffed with nationally accredited scientists who have experience with research and development projects concerning industry-wide security solutions as well as national security. We intend to provide these contract services to assist the research and development efforts of our corporate and OEM developers“Incorporation by providing outsourced research, deployment and testing services designed to secure and simplify networks.Reference.”
We believeare offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where such offers and sales are permitted. The distribution of this prospectus supplement, the accompanying base prospectus, any free writing prospectus that the revenue generated by our contract services business will eventually partially offset the costs of our technology and solutions business and will provide us with the opportunity to generate future strategic relationships and licensing opportunities. We also anticipate that future contract services projects will enable us to develop promising new technologies that can be commercialized through our technology and solutions business.
Microsoft Litigation
We believe Microsoft Corporation is infringing certain of our patents. Accordingly, we commenced a lawsuit against Microsoft on February 15, 2007 by filing a complaintmay authorize for use in the United States District Court of the Eastern
1
District of Texas, Tyler Division. Pursuant to the complaint, we allege that Microsoft infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1, entitled “Agile Network Protocol for Secure Communications with Assured System Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network Without User Entering Any Cryptographic Information.” On April 5, 2007, we filed an amended complaint specifying certain accused products at issue and alleging infringement of a third, recently issued U.S. patent: U.S. Patent No. 7,188,180 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network.” We are seeking both damages, in an amount subject to proof at trial, and injunctive relief. Microsoft answered the amended complaint and asserted counterclaims against us on May 4, 2007. Microsoft counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. Microsoft seeks an award of its attorneys’ fees and costs. We filed a reply to Microsoft’s counterclaims on May 24, 2007. Discovery has begun, a Markman hearing on claim construction is scheduled for February 2009,this offering and the trial is scheduled to begin on October 12, 2009. We have served our infringement contentions directed to certain of Microsoft’s operating system and unified messaging and collaboration applications. On March 31, 2008, Microsoft filed a Motion to Dismiss for lack of standing, which was denied by the court pursuant to an order dated June 3, 2008. Also pursuant to that court decision, on June 10, 2008, SAIC joined us in our lawsuit.
Summary Financial Data
The summary financial data set forth below is derived from our financial statements and notes thereto, and should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and notes thereto and the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus.
For accounting purposes, VirnetX Holding Corporation was a publicly-held shell company prior to the merger with VirnetX.
In light of the fact that VirnetX was deemed to be the acquiror in the Merger, the historical financial information of VirnetX has been presented as the historical financial information of the Company throughout this prospectus.
Statement of Operations Data
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | For the Period
| | | | | | | |
| | | Six Months
| | | Six Months
| | | August 2, 2005
| | | | | | | |
| | | Ended
| | | Ended
| | | (Date of Inception)
| | | Year Ended
| | | Year Ended
| |
| | | June 30,
| | | June 30,
| | | to December 31,
| | | December 31,
| | | December 31,
| |
| | | 2008 | | | 2007 | | | 2005 | | | 2006 | | | 2007 | |
| |
| Revenue | | $ | 84,050 | | | | — | | | | — | | | | — | | | $ | 74,866 | |
| Total operating expenses: | | | 6,282,530 | | | $ | 1,966,425 | | | $ | 882,478 | | | $ | 1,407,675 | | | | 8,725,210 | |
| Total other income (expenses), net: | | | 118,153 | | | | (45,488 | ) | | | — | | | | 6,336 | | | | (41,820 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss: | | $ | (6,080,327 | ) | | $ | (2,011,913 | ) | | $ | (882,478 | ) | | $ | (1,401,339 | ) | | $ | (8,692,164 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet and Other Data
| | | | | | | | | | | | | | | | | |
| | | Six Months
| | | | | | | | | | |
| | | Ended
| | | As of
| | | As of
| | | Year Ended
| |
| | | June 30,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | | 2008 | | | 2005 | | | 2006 | | | 2007 | |
| |
| Cash and cash equivalents: | | $ | 4,208,722 | | | $ | 86,552 | | | $ | 139,997 | | | $ | 8,589,447 | |
| Total assets: | | $ | 4,967,641 | | | $ | 147,722 | | | $ | 195,123 | | | $ | 9,279,166 | |
| Accounts payable and accrued expenses: | | $ | 1,079,565 | | | $ | — | | | $ | 87,386 | | | $ | 531,790 | |
| Total stockholders’ equity (deficit): | | $ | 3,684,076 | | | $ | (82,278 | ) | | $ | 107,737 | | | $ | 8,495,376 | |
2
SALE OF SECURITIES DESCRIBED IN THIS PROSPECTUS
The sale of the securities described in this prospectus may be made from time to time in transactions, which may include block transactions by or for the account of the holders, in the over-the-counter market or in negotiated transactions through a combination of these methods of sale or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices.
Unless such sales are made pursuant to Rule 144, a post-effective amendment to the registration statement that includes this prospectus must be filed and declared effective by the Securities and Exchange Commission before a holder may:
| | |
| • | sell any securities described in this prospectus according to the terms of this prospectus either at a fixed price or a negotiated price, either of which is not the prevailing market price; |
|
| • | sell securities described in this prospectus in a block transaction to a purchaser who resells; |
|
| • | pay compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions; or |
|
| • | make any arrangements, either individually or in the aggregate, that would constitute a distribution of the securities described in this prospectus. |
All of the securities described in this prospectus may also be sold pursuant to Rule 144, so long as the requirements of such rule continue to be met. Sales of these securities may depress the priceoffering of the common stock in certain jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus supplement, the accompanying base prospectus must inform themselves about, and observe any marketrestrictions relating to, the offering of the common stock and the distribution of this prospectus supplement, the accompanying base prospectus and any free writing prospectus that we may developuse in connection with this offering outside the United States. This prospectus supplement, the accompanying base prospectus does not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this prospectus by any person in any jurisdiction in which it is unlawful for these securities.
such person to make such an offer or solicitation.
When we refer to “VirnetX,” “we,” “our,” “us” and the “Company” in this prospectus, we mean VirnetX Holding Corporation and our consolidated subsidiaries unless otherwise specified. When we refer to “you,” we mean the holders of common stock of the Company.
Our principal executive officesVirnetXTM and GABRIEL Connection TechnologyTM are located at 5615 Scotts Valley Drive, Suite 110, Scotts Valley, California 95066, and our phone number is(831) 438-8200. We maintain a website at www.virnetx.com. Information contained on our website does not comprise a part of this prospectus.
VirnetX is a trademarktrademarks in the United States. This prospectus includes product names, trade names and trademarks of other companies. All other product names, trade names and trademarks appearing in this prospectus are the property of their respective holders.
As used in this prospectus:S-2
SALES AGREEMENT PROSPECTUS SUPPLEMENT SUMMARY
This summary provides a general overview of selected information and does not contain all of the information you should consider before buying our common stock. Therefore, you should read the entire prospectus supplement, accompanying base prospectus and any free writing prospectus that we have authorized for use in connection with this offering carefully, including the information incorporated by reference, before deciding to invest in our common stock. Investors should carefully consider the information set forth under “Risk Factors” beginning on page S-6 and incorporated by reference to our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and our other filings with the Commission.
We develop software and technology solutions for securing real-time communications over the Internet. Our patented GABRIEL Connection TechnologyTM combines industry standard encryption protocols with our patented techniques for automated domain name system, or DNS, lookup mechanisms, and enables users to create a secure communication link using secure domain names over wired or wireless (4G/LTE) networks. We are currently beta testing our GABRIEL Connection TechnologyTM as part of our Secure Domain Name Initiative, or (SDNI), on various platforms including PCs, smart phones and tablets. We also intend to establish the exclusive secure domain name registry in the United States and other key markets around the world.
Our portfolio of intellectual property is the foundation of our business model. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, Mobile-to-Mobile (M2M) communications in areas of Smart City, Connected Car and Connected Home.
We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into 4G.
We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and Mobile-to-Mobile (M2M) communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.
We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL Connection TechnologyTM to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE. We have published our royalty rates and guidelines on our website. All forward moving licenses have adhered to these guidelines and have met or exceeded these rates and we will use these rates and guidelines in all future license negotiations.
Our software and technology solutions provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and Mobile-to-Mobile (M2M) communications in areas including Smart City, Connected Car and Connected Home. Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information.
Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the same team that invented and developed this technology while working at Leidos, Inc. Leidos, Inc. is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos, Inc. and expanded the set of patents we acquired in 2006 from Leidos, Inc. into a larger portfolio with over 112 U.S. and international patents with over 75 pending applications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio. See Management’s Discussion and Analysis of Financial Condition and Results of Operations–Operations–Research and Development Expenses in our Annual Report on Form 10-K for the fiscal year ending December 31, 2014, filed with the Securities and Exchange Commission on March 2, 2015.
VirnetX, Inc., was incorporated in the State of Delaware in August 2005. In November 2006, VirnetX acquired certain patents from Leidos, Inc. In July 2007, we effected a reverse merger between PASW, Inc. and VirnetX, which became our principal operating subsidiary. As a result of this merger, the former security holders of VirnetX came to own a majority of our outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetX Holding Corporation. Our principal executive offices are located at 308 Dorla Ct., Zephyr Cove, Nevada 89448, and our telephone number is (775) 548-1785.
| Common stock offered by us | | Shares of our common stock having an aggregate offering price of up to $35,000,000. |
| | • | “VirnetX” refers to VirnetX, Inc., a Delaware corporation; |
Common stock to be outstanding after this offering | Up to 8,951,406 shares, assuming sales at a price of $3.91 per share, which was the closing price which was the last reported sale price of our common stock on the NYSE MKT LLC on August 18, 2015. Actual number of shares issued will vary depending on the price at which shares may be sold from time to time under this offering. |
| | • | “VirnetX Holding Corporation” refers to VirnetX Holding Corporation, a Delaware corporation, formerly PASW, Inc., on and after our reincorporation which became effective on May 30, 2007 and name change which became effective on October 29, 2007, and refers to PASW, Inc., a California corporation, prior to that date; |
| Manner of offering | “At-the-market” offering that may be made from time to time through our sales agent, Cowen and Company, LLC. See “Plan of Distribution” on page S-10. |
| | • | “the merger” refers to the merger which became effective on July 5, 2007, by and among VirnetX, VirnetX Holding Corporation and a wholly-owned subsidiary of VirnetX Holding Corporation, whereby VirnetX merged with, and became, a wholly-owned subsidiary of VirnetX Holding Corporation and VirnetX Holding Corporation issued shares of its common stock to the stockholders of VirnetX as consideration for the merger; |
| Use of Proceeds | We intend to use the net proceeds, if any, from this offering for Gabriel product development and marketing, and working capital and general corporate purposes. See “Use of Proceeds” on page S-8. |
| | • | “the Gilford Offering” and “the public offering” refers to a public offering of 3,450,000 shares of the Company’s common stock, which closed on December 31, 2007; and |
|
| Risk Factors | • | “we,” “our,” “us”You should read the “Risk Factors��� section of this prospectus supplement and “the company” referin the documents incorporated by reference in this prospectus supplement for a discussion of factors to VirnetX Holding Corporation and its wholly-owned subsidiaries, including VirnetX, collectively, on a consolidated basis after giving effectconsider before deciding to the merger. |
Unless otherwise noted in this prospectus, all information in this prospectus assumes:
| | |
| • | no exercise of outstanding options and warrants exercisable forpurchase shares of our common stock consisting of the following: |
| | stock. |
| | • |
| Symbol on the NYSE MKT LLC | 300,000“VHC.” |
The number of shares of common stock to be outstanding after this offering is based on 52,363,585 shares of common stock outstanding as of August 4, 2015 and excludes the following:
| · | 4,599,928 shares of our common stock issuable upon exercise of the warrant issued to the underwriter in connection with the Gilford Offering; andstock options outstanding as of August 4, 2015 at a weighted-average exercise price of $9.22 per share; |
| · | |
| • | 4,068,595359,956 shares of our common stock issuable upon exercisevesting of our optionsrestricted stock units outstanding as of June 30, 2008.August 4, 2015; |
3
RISK FACTORS
You should carefully consider the following material risks in addition to the other | · | 1,469,552 shares of common stock reserved for issuance pursuant to future awards under our 2013 Equity Incentive Award Plan; and |
| · | 25,000 shares of common stock issuable upon the exercise of warrants outstanding as of August 4, 2015 at a weighted-average exercise price of $7.00 per share. |
Unless otherwise stated, all information set forthcontained in this prospectus supplement reflects an assumed public offering price of $3.91 per share, which was the last reported sale price of our common stock on the NYSE MKT LLC on August 18, 2015.
You should consider carefully the risks described below and discussed under the section captioned “Risk Factors” contained in our most recent annual report on Form 10-K, as updated by our subsequent filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act, each of which is incorporated by reference in this prospectus supplement in their entirety, together with other information in this prospectus supplement, and the information and documents incorporated by reference in this prospectus supplement, and any free writing prospectus that we have authorized for use in connection with this offering before making any investmentyou make a decision to invest in our common stock. If any of the following events actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. This could cause the trading price of our common stock to decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently believe to bedeem immaterial may also adversely affect our business. If any of these risk factors occurs, you could lose substantial value or your entire investment in our stock.
Risks related to existing and future litigation
We have commenced legal proceedings against Microsoft, and we expect such litigation to be time-consuming and costly, which may adversely affect our financial condition and our ability to operate our business.
On February 15, 2007, we initiated a lawsuit by filing a complaint against Microsoft in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we allege that Microsoft infringes two of our patents regarding the creation of VPNs. We seek damages and injunctive relief. On April 5, 2007, we filed an amended complaint, pursuant to which we allege that Microsoft infringes a third patent. We anticipate that these legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. The time and effort of our management to effectively pursue the Microsoft lawsuit may adversely affect our ability to operate our business since time spent on matters related to the lawsuit will take away from the time spent on managing and operating our business. Microsoft has counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. If Microsoft’s counterclaims are successful, they may preclude our ability to commercialize our initial products. Additionally, we anticipate that our legal fees will be material and will negatively impact our financial condition and results of operations and may result in our inability to continue our business.
While we believe Microsoft infringes our patents, we can provide no assurance that we will be successful in our lawsuit.
We believe that Microsoft infringes on three of our patents, but obtaining and collecting a judgment against Microsoft may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Microsoft is a large, well-financed company with substantially greater resources than us. We believe that Microsoft will devote a substantial amount of resources in an attempt to prove that either their products do not infringe our patents or that our patents are not valid and are unenforceable. At this time, we cannot predict the outcome of this litigation.
We are devoting a substantial amount of our financial and management resources to the Microsoft litigation, and if we are unsuccessful in this lawsuit, our financial condition may be so adversely affected, we may not survive.
Currently, we are devoting substantial time, effort and financial resources to our lawsuit against Microsoft. We are a development stage company with no finished product, and our business strategy depends greatly on obtaining a judgment in our favor from the courts and collecting such judgment before our financial resources are depleted. In the event we are not awarded and do not subsequently obtain monetary and injunctive relief, we may not have enough financial resources to continue our operations.
The burdens of being a public company may adversely affect our abilityRisks Relating to pursue the Microsoft litigation.this Offering
AsOur management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a public company,significant return.
Our management will have broad discretion over the use of proceeds from this offering. We intend to use the net proceeds, if any, from this offering to fund our planned registration program for working capital and general corporate purposes. Our management must devotewill have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or enhance the value of our common stock.
You may experience immediate and substantial time, attention and financial resourcesdilution in the net tangible book value per share of the common stock you purchase.
The price per share of our common stock being offered may be higher than the net tangible book value per share of our common stock outstanding prior to comply with U.S. securities laws. This may have a material adverse affect on management’s ability to effectively pursue the Microsoft litigation as well as our other business initiatives. In addition, our disclosure obligations under U.S. securities laws require us to disclose information publicly thatthis offering. The shares sold in this offering, if any, will be available to Microsoft as well as any other future litigation opponents. We may,sold from time to time be requiredat various prices. After giving effect to disclose information that will have a
4
material adverse affect on our litigation strategies. This information may enable our litigation opponents to develop effective litigation strategies that are contrary to our interests.
We may commence additional legal proceedings against third parties who we believe are infringing on our intellectual property rights, and such legal proceedings may be costly and time-consuming.
We may have intellectual property infringement claims against other parties in addition to our claims against Microsoft. If we decide to commence actions against any additional parties, doing so may be expensive and time-consuming, which may adversely affect our financial condition and results of operations. Moreover, there can be no assurance that we would be successful in these additional legal proceedings. Commencing lawsuits may lead to potential counterclaims which may preclude our ability to develop and commercialize our initial products.
Risks related to our business and our industry
We anticipate incurring operating losses and negative cash flows in the foreseeable future resulting in uncertainty of future profitability and limitations on our operations.
We anticipate that we will incur operating losses and negative cash flows in the foreseeable future, and we will accumulate increasing deficits as we increase our expenditures for:
| | |
| • | our lawsuit against Microsoft; |
|
| • | infrastructure; |
|
| • | sales and marketing; |
|
| • | research and development; |
|
| • | personnel; and |
|
| • | general business enhancements. |
We need to significantly increase our revenue if we are to attain profitability. In the event that we are unable to achieve profitability or raise sufficient funding to cover our losses, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern.
We will need additional capital to pursue our litigation strategy, conduct our operations and develop our products, and our ability to obtain the necessary funding is uncertain.
We will require significant additional capital from sources including equityand/or debt financings, license arrangements, grants, collaborative research arrangementsand/or other sources in order to develop and commercialize our products and continue operations. If we are not able to raise additional capital when needed, our business will fail.
We are a development stage company with virtually no revenues.
We are a development stage company with a very small amount of revenue and do not expect to generate additional revenues unless and until after our patent portfolio, or part of it, is commercialized. We will need to raise additional capital to fund our operations and our litigation against Microsoft and there can be no assurance that we will be successful in doing so on acceptable terms or at all.
If we fail to meet our obligations to SAIC, we may lose our rights to key technologies on which our business depends.
Our business depends on our rights to and under the patents we obtained from SAIC. Our agreements with SAIC impose various obligations on us, including payment obligations and minimum royalties that we must pay to SAIC. If SAIC believes that we have failed to meet these obligations, SAIC could seek to limit or reacquire the assigned patent rights, which could lead to costly and time-consuming litigation and, potentially, a loss of our rights in these patents. During the period of any such litigation, our ability to carry out the development and
5
commercialization of potential products could be significantly and negatively affected. The loss or restriction of our rights in our patents would result in our inability to continue our business.
Our business model is new and unproven, and therefore we can provide no assurance that we will be successful in pursuing it.
We intend to develop products to provide secure communication for IM and VoIP; however, this is not a defined market. Rather, it represents a new business model, for which there are no assurances that we will succeed in building a profitable business. We expect to depend on our intellectual property licensing fees for the majority of our revenues. Our ability to generate licensing fees is highly dependent on mainstream market adoption of real-time messaging and collaboration solutions based on SIP. There can be no assurance that such adoption will occur. If we are unable to attract significant licensing fees, our operations and financial condition will be adversely affected.
We may or may not be able to capitalize on potential market opportunities related to our licensing strategy or our patent portfolio.
We have engaged ipCapital Group to help develop our licensing strategy and to introduce the Company to five strategic licensees of the Company’s technology. In connection with this engagement, we agreed to grant ipCapital Group 10% of the royalties of each resulting licensing arrangement, up to an aggregate maximum of $2,000,000 per licensee, or $10,000,000 in the aggregate. Also in connection with this engagement, ipCapital Group evaluated the Company’s patent and know-how portfolio, business model and technology and has indicated that the estimated potential commercialization of these items presents the Company with a multi-billion dollar market opportunity. There can be no assurance that we will be able to capitalize on this potential market opportunity. Our inability to generate licensing revenues associated with the potential market opportunity identified by ipCapital Group could result from a number of factors, including, but not limited to:
| | |
| • | our capital resources may be insufficient; |
|
| • | our management team may not have sufficient bandwidth to successfully capitalize on all of the opportunities identified by ipCapital Group; |
|
| • | our licensing program may not be adopted by potential licensing partners; and |
|
| • | the validity of our patents underlying the licensing opportunity is currently being challenged in our litigation against Microsoft. |
We will rely on third parties for software and hardware development, manufacturing content and technology services.
We expect to rely on third party developers to provide software and hardware. If we experience problems with any of our third party technology or products, our customers’ satisfaction could be reduced, and our business could be adversely affected. In addition, we expect to rely on third parties to provide content through strategic relationships and other arrangements. If we experience difficulties in maintaining these relationships or developing new relationships on a timely basis and on terms favorable to us, our business and financial condition could be adversely affected.
Malfunctions of third party hosting services could adversely affect their business, which may impede our ability to attract and retain strategic partners and customers.
The products we are developing will be highly dependent on internet traffic and reliability. To the extent the number of users of networks utilizing our future products suddenly increases, the technology platform and hosting services which will be required to accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. In addition, users depend on real time communication: outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users to perceive that our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners and customers.
6
There has been increased competition in the “real-time” communications industry, as more companies seek to provide products and services similar to our proposed products and services, and because larger and better-financed competitors may affect our ability to operate our business and achieve profitability, our business may fail.
Competition for securing IM and VoIP services is intense. We are aware of similar products and services that will compete directly with our proposed products and services, and some of the companies developing these similar products and services are larger, better-financed companies that may develop products superior to our proposed products, which could create significant competitive advantages for those companies. Our future success depends on our ability to compete effectively with our competitors. As a result, we may have difficulty competing with larger, established competitor companies. Generally, these competitors have:
| | |
| • | substantially greater financial, technical and marketing resources; |
|
| • | a larger customer base; |
|
| • | better name recognition; and |
|
| • | more expansive product offerings. |
These competitors are likely to command a larger market share than us, which may enable them to establish a stronger competitive position, in part, through greater marketing opportunities. Further, our competitors may be able to respond more quickly to new or emerging technologies and changes in user preferences and to devote greater resources to developing and operating networks of affinity websites. These competitors may develop products or services that are comparable or superior. If we fail to address competitive developments quickly and effectively, we may not be able to remain a viable entity.
Our business model depends on our ability to successfully develop and operate our networks and deploy new offerings and technology.
If we successfully develop and commercialize products, there can be no assurances that we will not experience reliability problems in the future. Any reliability problems that adversely affect our ability to operate our networks would likely reduce revenues and restrict the growth of our business. Our future success will also depend in part on other factors, including, but not limited to, our ability to:
| | |
| • | find secure hosting; |
|
| • | enhance our offerings; |
|
| • | address the needs of our prospective users; |
|
| • | respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis; and |
|
| • | develop, enhance, and improve the responsiveness, functionality and features of our infrastructure services and networks. |
If we are unable to integrate and capitalize on new technologies and standards effectively, our business could be adversely affected.
Growth of internal operations and business may strain our financial resources.
We intend to significantly expand the scope of our operating and financial systems in order to build our business. Our growth rate may place a significant strain on our financial resources for a number of reasons, including, but not limited to, the following:
| | |
| • | the need for continued development of the financial and information management systems; |
|
| • | the need to manage relationships with future licensees, resellers, distributors and strategic partners; |
7
| | |
| • | the need to hire and retain skilled management, technical and other personnel necessary to support and manage our business; and |
|
| • | the need to train and manage our employee base. |
The addition of new infrastructure services, networks, vertical categories and affinity websites and the attention they demand, on top of the attention demanded by our pending litigation with Microsoft, may also strain our management resources. We cannot give you any assurance that we will adequately address these risks and, if we do not, our ability to successfully expand our business could be adversely affected.
If we do not successfully develop our planned products and services in a cost-effective manner to customer demand in the rapidly evolving market for internet andIP-based communications services, our business may fail.
The market for communications services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs and frequent new service and product introductions. We are currently focused on developing products to provide security solutions for real-time communications. Our future success will depend, in part, on our ability to use new technologies effectively, to continue to develop our technical expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards. If we fail to use new technologies effectively, to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings may fail to meet customer needs, which would adversely affect our revenues and prospects for growth.
In addition, if we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose customers, strategic alliances and market share. Sudden changes in user and customer requirements and preferences, the frequent introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products, services and systems obsolete. The emerging nature of products and services in the technology and communications industry and their rapid evolution will require that we continually improve the performance, features and reliability of our products and services. Our success will depend, in part, on our ability to:
| | |
| • | design, develop, launchand/or license our planned products, services and technologies that address the increasingly sophisticated and varied needs of our prospective customers; and |
|
| • | respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. |
The development of our planned products and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively. Updating our technology internally and licensing new technology from third-parties may also require us to incur significant additional expenditures.
Our business greatly depends on the development and growth of IM and VoIP.
The use of the internet for communications utilizing IM and VoIP is a recent development, and the continued demand and growth of a market for IM and VoIP services and products is uncertain. The internet may ultimately prove not to be a viable commercial marketplace for IM and VoIP services for a number of reasons, including:
| | |
| • | unwillingness of consumers to shift to VoIP; |
|
| • | refusal to purchase security products; |
|
| • | perception by the licensees of unsecure communication and data transfer; |
|
| • | lack of concern for privacy by licensees and users; |
|
| • | limitations on access and ease of use; |
8
| | |
| • | congestion leading to delayed or extended response times; |
|
| • | inadequate development of internet infrastructure to keep pace with increased levels of use; and |
|
| • | increased government regulations. |
While the use of IM has grown rapidly in personal and professional use, there can be no assurance that users will pay to secure their IM services.
Many services such as Microsoft, Yahoo! and AOL offer IM free of charge. However, security solutions for these services are not free, and users of IM may not want to pay for such security solutions. If users do not want to pay for the security solutions, we will have difficulty marketing and selling our products and technologies.
If the market for VoIP service does not develop as anticipated, our business would be adversely affected.
The success of our products that secure enterprise VoIP service depends on the growth in the number of VoIP users, which in turn depends on wider public acceptance of VoIP telephony. The VoIP communications medium is in its early stages and may not develop a broad audience. Potential new users may view VoIP as unattractive relative to traditional telephone services for a number of reasons, including the need to purchase computer headsets or the perception that the price advantage for VoIP is insufficient to justify the perceived convenience. Potential users may also view more familiar online communication methods, such ase-mail or IM, as sufficient for their communications needs. There is no assurance that VoIP will ever achieve broad public acceptance.
If our products do not gain market acceptance, we may not be able to fund future operations.
A number of factors may affect the market acceptance of our planned products or any other products we develop or acquire, including, among others:
| | |
| • | the price of our products relative to other products that seek to secure real-time communication; |
|
| • | the perception by users of the effectiveness of our products; |
|
| • | our ability to fund our sales and marketing efforts; and |
|
| • | the effectiveness of our sales and marketing efforts. |
If our products do not gain market acceptance, we may not be able to fund future operations, including the development of new productsand/or our sales and marketing efforts for our current products, which inability would have a material adverse effect on our business, financial condition and operating results.
If we are not able to adequately protect our proprietary rights, our operations would be negatively impacted.
Our ability to compete largely depends on the superiority, uniqueness and value of our technology and intellectual property. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Further, we can give no assurances that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or that any such assertions or prosecutions will not materially adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending against such claims could cause us to incur significant costs and could divert resources away from our other activities. In addition, assertion of infringement claims could result in injunctions that prevent us from distributing our products. Despite these efforts, any of the following may reduce the value of our intellectual property:
| | |
| • | our applications for patents, trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated; |
|
| • | issued trademarks, copyrights, or patents may not provide us with any competitive advantages; |
9
| | |
| • | our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or |
|
| • | our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop. |
In addition, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business in the future or from which competitors may operate. While we have numerous pending international patents, obtaining such patents will not necessarily protect our technology or prevent our international competitors from developing similar products or technologies. Our inability to adequately protect our proprietary rights would have a negative impact on our operations and revenues.
If we are forced to litigate to defend our intellectual property rights, or to defend claims by third parties against us relating to intellectual property rights, legal fees and court injunctions could adversely affect our financial condition or end our business.
Disputes regarding the ownership of technologies and intellectual property rights are common and likely to arise in the future. We have already begun legal proceedings against Microsoft to defend our intellectual property rights, and we may be forced to litigate against others to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation is likely to be very costly and distract our management from focusing on operating our business. The existence and outcome of any such litigation could harm our business. Additionally, any such costs we incur to defend or protect our intellectual property rights could greatly impact our financial condition.
The laws governing online secure communications are largely unsettled, and if we become subject to various government regulations, costs associated with those regulations may materially adversely affect our business.
The current regulatory environment for our services remains unclear. We can give no assurance that our planned product offerings will be in compliance with local, stateand/or U.S. Federal laws or other laws. Further, we can give no assurance that we will not unintentionally violate such laws or that such laws will not be modified, or that new laws will be enacted in the future which would cause us to be in violation of such laws.
VoIP services are not currently subject to all of the same regulations that apply to traditional telephony. It is possible that federal and state legislatures may seek to impose increased fees and administrative burdens on VoIP, data and video providers. The U.S. Federal Communications Commission may seek to impose traditional telephony requirements such as disability access requirements, consumer protection requirements, number assignment and portability requirements and other obligations. Such regulations could result in substantial costs depending on the technical changes required to accommodate the requirements, and any increased costs could erode the pricing advantage over competing forms of communication and adversely affect consumer adoption of VoIP products generally.
The use of the internet and private IP networks to provide voice, video and other forms of real-time, two-way communications services is a relatively recent development. Although the provisioning of such services is currently permitted by U.S. law and is largely unregulated within the United States, several foreign governments have adopted lawsand/or regulations that could restrict or prohibit the provisioning of voice communications services over the internet or private IP networks. More aggressive domestic or international regulation of the internet in general, and internet telephony providers and services specifically, may materially and adversely affect our business, financial condition, operating results and future prospects, particularly if increased numbers of governments impose regulations restricting the use and sale of IP telephony services.
In addition to regulations addressing internet telephony and broadband services, other regulatory issues relating to the internet in general could affect our ability to provide our planned security solutions. Congress has adopted legislation that regulates certain aspects of the internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in Congress and state
10
legislatures would prohibit or restrict advertising or sale of certain products and services on the internet, which may have the effect of raising the cost of doing business on the internet generally.
Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of online communication, and such increase in cost may impede the growth of online communication and adversely affect our business.
The growing popularity and use of secure communications has burdened the existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on IP telephony traffic that crosses over the traditional telephone networks. If any of these petitions or the relief that they seek is granted, the costs of communicating via online could increase substantially, potentially adversely affecting the growth in the use of online secure communications. Any of these developments could have an adverse effect on our business.
If we expand into international markets, our inexperience outside the United States would increase the risk that our international expansion efforts will not be successful, which would in turn limit our prospects for growth.
We may explore expanding our business to outside the United States. Expansion into international markets requires significant management attention and financial resources. In addition, we may face the following risks associated with any expansion outside the United States:
| | |
| • | challenges caused by distance, language and cultural differences; |
|
| • | legal, legislative and regulatory restrictions; |
|
| • | currency exchange rate fluctuations; |
|
| • | economic instability; |
|
| • | longer payment cycles in some countries; |
|
| • | credit risk and higher levels of payment fraud; |
|
| • | potentially adverse tax consequences; and |
|
| • | other higher costs associated with doing business internationally. |
These risks could harm our international expansion efforts, which would in turn harm our business prospects.
The departure of Kendall Larsen, our Chief Executive Officer and President, and/or other key personnel could compromise our ability to execute our strategic plan and may result in additional severance costs to us.
Our success largely depends on the skills, experience and efforts of our key personnel, including Kendall Larsen, our Chief Executive Officer and President. The loss of Mr. Larsen, or our failure to retain other key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.
We will need to recruit and retain additional qualified personnel to successfully grow our business.
Our future success will depend in part on our ability to attract and retain qualified operations, marketing and sales personnel as well as engineers. Inability to attract and retain such personnel could adversely affect our business. We expect to face competition in the recruitment of qualified personnel, and we can provide no assurance that we will attract or retain such personnel.
We will incur significant costs as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses that VirnetX, Inc. did not incur as a private company. We expect the laws, rules and regulations governing public companies to increase our
11
legal and financial compliance costs and to make some activities more time-consuming and costly, and these costs could be material to us.
In connection with audits of our financial statements, our independent auditors identified material weaknesses in our internal controls over financial reporting.
During the course of their audit of our 2007 financial statements, our independent auditors concluded that our internal controls over financial reporting suffered from certain “material weaknesses” as defined in standards established by the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants.
Farber Hass Hurley LLP noted the following matters involving our internal control over financial reporting that are considered to be material weaknesses in connection with their audit of our 2007 financial statements:
| | |
| • | Farber Hass Hurley LLP proposed, and we recorded, adjustments to our accounting for equity transactions during 2007. |
|
| • | Farber Hass Hurley LLP noted that our controls over financial disclosures need to be improved. |
|
| • | Farber Hass Hurley LLP noted that certain expenses within 2007 were not timely accrued prior to receipt of billing statements. |
Prior to becoming our subsidiary, VirnetX, Inc. was a development stage, privately held company that historically did not formalize or document internal controls over financial reporting, utilized the cash basis of accounting and was not required to have its financial statements audited or reviewed. Prior to becoming our subsidiary, VirnetX, Inc. engaged independent auditors to audit its financial statements for certain prior periods. During the course of that audit, VirnetX, Inc.’s independent auditors concluded that VirnetX, Inc.’s internal controls over financial reporting suffered from certain “material weaknesses” and “significant deficiencies” over its internal controls over financial reporting as defined in standards established by the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants. Because VirnetX, Inc. is now our wholly-owned subsidiary, the material weaknesses in VirnetX, Inc.’s internal controls over financial reporting have resulted in our having material weaknesses and significant deficiencies in our internal controls over financial reporting. We have commenced a process of developing, adopting and implementing policies and procedures to address such material weaknesses. However, that process has been and may continue to be time consuming and costly and there is no assurance as to when we will effectively address such material weaknesses and significant deficiencies.
Our inability to become compliant with the internal controls requirements of Section 404 of the Sarbanes Oxley Act could negatively affect our stock price and limit our ability to raise additional financing.
Burr, Pilger & Mayer LLP, the independent audit firm retained to audit the 2005 and 2006 financial statements for our principal operating subsidiary resigned on October 26, 2007. The reason for the resignation was concern that we would not become compliant with the internal controls requirements of Section 404 of the Sarbanes Oxley Act by December 31, 2007 and due to an insufficient quantity of experienced resources involved with the financial reporting and period closing process. Our management has concluded that, as of December 31, 2007, we were not compliant with these internal control requirements and, although we are pursuing compliance, there can be no assurance we will be successful in becoming compliant in future periods. Our lack of compliance with internal controls requirements of Section 404 of the Sarbanes Oxley Act could negatively affect our stock price, make us less attractive to our stockholders, jeopardize our listing status and limit our ability to raise additional financing.
Risks related to our stock
Trading in our common stock is limited and the price of our common stock may be subject to substantial volatility.
Our common stock is listed on the American Stock Exchange, or AMEX, but its daily trading volume has been limited and sporadic. Also, there can be no assurance that we will remain listed on the AMEX. Additionally, the
12
price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:
| | |
| • | developments in our pending litigation against Microsoft; |
|
| • | quarterly variations in our operating results; |
|
| • | large purchases or sales of common stock; |
|
| • | actual or anticipated announcements of new products or services by us or competitors; |
|
| • | general conditions in the markets in which we compete; and |
|
| • | economic and financial conditions. |
Because ownership of our common shares is concentrated, you and other investors will have minimal influence on stockholder decisions.
As of June 30, 2008, our officers and directors owned an aggregate of 9,028,979 shares, or 25.87% of our outstanding common stock. In addition, a group of stockholders that, as of December 31, 2007, held 4,766,666 shares, or 13.7% of our outstanding common stock, have entered into a voting agreement with us that requires them to vote all of their shares of our voting stock in favor of the director nominees approved by our Board of Directors at each director election going forward, and in a manner that is proportional to the votes cast by all other voting shares as to any other matters submitted to the stockholders for a vote. As a result, our existing officers and directors could significantly influence shareholder actions of which you disapprove or that are contrary to your interests. This ability to exercise significant influence could prevent or significantly delay another company from acquiring or merging with us.
Large portions of our outstanding common shares have been released from contractual restrictions on July 5, 2008 and additional shares will be released on December 31, 2008, and sales of those shares may drive down the price of our stock.
Stockholders who received our common shares as a result of the merger between PASW, Inc. and VirnetX, Inc. entered into a CompanyLock-Up Agreement restricting sales of their shares until July 5, 2008. Subsequently, certain of our stockholders signed aLock-Up Agreement with our underwriter in connection with our recent public offering, which restricts sales of their shares until December 31, 2008. Only shares held by our directors and officers currently remain subject to alock-up agreement and these shares will be released from thelock-up on December 31, 2008. Sales of recently released shares may drive down the price of our stock. The 15,796,786 shares that became eligible for trading on July 5, 2008 represent 45.3% of our outstanding common stock as of May 4, 2008. The 8,489,545 shares that will subsequently become eligible for trading on December 31, 2008 represent 24.3% of our outstanding common stock as of May 4, 2008.
Our protective provisions could make it more difficult for a third party to successfully acquire us even if you would like to sell your shares to them.
We have a number of protective provisions that could delay, discourage or prevent a third party from acquiring control of us without the approval of our Board of Directors. Our protective provisions include:
| | |
| • | A staggered Board of Directors: this means that only one or two directors (since we have a five-person Board of Directors) will be up for election at any given annual meeting. This has the effect of delaying the ability of stockholders to effect a change in control of us since it would take two annual meetings to effectively replace at least three directors which represents a majority of the Board of Directors. |
|
| • | Blank check preferred stock: our Board of Directors has the authority to establish the rights, preferences and privileges of our 10,000,000 authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at the discretion of our Board of Directors with preferences over your shares of our common stock in a manner that is materially dilutive to existing stockholders. In addition, blank check preferred stock |
13
| | |
| | can be used to create a “poison pill” which is designed to deter a hostile bidder from buying a controlling interest in our stock without the approval of our Board of Directors. We have not adopted such a “poison pill;” but our Board of Directors has the ability to do so in the future, very rapidly and without stockholder approval. |
| | |
| • | Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings: stockholders wishing to submit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows and in very specific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting to the extent such proposal is not raised properly. |
|
| • | No stockholder actions by written consent: no stockholder or group of stockholders may take actions rapidly and without prior notice to our Board of Directors and management or to the minority stockholders. Along with the advance notice requirements described above, this provision also gives our Board of Directors and management more time to react to proposed stockholder actions. |
|
| • | Super majority requirement for stockholder amendments to the By-laws:stockholder proposals to alter or amend our By-laws or to adopt new By-laws can only be approved by the affirmative vote of at least 662/3% of the outstanding shares. |
|
| • | Elimination of the ability of stockholders to call a special meeting of the stockholders: only the Board of Directors or management can call special meetings of the stockholders. This could mean that stockholders, even those who represent a significant block of our shares, may need to wait for the annual meeting before nominating directors or raising other business proposals to be voted on by the stockholders. |
Securities analysts may not cover our common stock and this may have a negative impact on our common stock’s market price.
The trading market for our common stock may depend on the research and reports that securities analysts publish about us or our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our common stock’s market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regularly reports on us, we could lose or fail to gain visibility in the financial markets, which could cause our stock price or trading volume to decline.
We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing capital stock that would dilute your ownership.
We have financed our operations, and we expect to continue to finance our operations, acquisitions and develop strategic relationships, by issuing equity or convertible debt securities, which could significantly reduce the percentage ownership of our existing stockholders. Furthermore, any newly issued securities could have rights, preferences and privileges senior to those of our existing stock. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our common shares.
14
The holders of any debt securities or instruments we may issue would have rights superior to the rights of our common stockholders.
We have no current intention of declaring or paying any cash dividends on our common stock.
We do not plan to declare or pay any cash dividends on our common stock. Our current policy is to use all funds and any earnings in the operation and expansion of our business.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of our common stock in the aggregate amount of $35,000,000 at an assumed offering price of $3.91 per share, the last reported sale price of our common stock on August 18, 2015 on the NYSE MKT LLC, and after deducting commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2015 would have been approximately $55,607,000 or approximately $0.91 per share. This represents an immediate increase in net tangible book value of approximately $0.50 per share to our existing stockholders and an immediate dilution in as adjusted net tangible book value of approximately $3.00 per share to purchasers of our common stock in this offering. See the section entitled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.
You may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. We cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share in this offering. As of August 4, 2015, approximately 6,454,436 shares of common stock that are either subject to outstanding options, issuable upon vesting of outstanding restricted stock units, reserved for future issuance under our equity incentive plans or subject to outstanding warrants are eligible for sale in the public market to the extent permitted by the selling stockholders. We will bear all costs, expensesprovisions of various vesting schedules and feesRule 144 and Rule 701 under the Securities Act.
If we sell additional equity or debt securities to fund our operations, it may impose restrictions on our business.
In order to raise additional funds to support our operations, we may sell additional equity or debt securities, which may impose restrictive covenants that adversely impact our business. The incurrence of indebtedness would result in connection withincreased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to expand our operations or otherwise capitalize on o business opportunities due to such restrictions, our business, financial condition and results of operations could be materially adversely affected.
Future sales of our common stock in the registrationpublic market or other financings could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market, the perception that these sales might occur or other financings, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. A substantial majority of the outstanding shares of our common stock are, all of the shares sold in this offering upon issuance will be, soldfreely tradable without restriction or further registration under the Securities Act unless these shares are owned or purchased by "affiliates" as that term is defined in Rule 144 under the selling stockholders. The selling stockholders will bear all commissions and discounts, if any, attributable to their respective sales of shares.Securities Act.
DIVIDEND POLICYBecause we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, stockholders must rely on appreciation of the value of our common stock for any return on their investment.
We havedo not anticipate declaring or paying any cash dividends in the past paid,foreseeable future. In addition, the terms of our existing debt agreements preclude us from paying dividends. As a result, we expect that only appreciation of the price of our common stock, if any, will provide a return to investors in the offering for the foreseeable future.
The common stock offered hereby will be sold in "at-the-market" offerings, and investors who buy shares at different times will likely pay different prices.
Investors who purchase shares in this offering at different times will likely pay different prices, and so may experience different outcomes in their investment results. We will have discretion, subject to market demand, to vary the timing, prices, and numbers of shares sold, and there is no minimum or maximum sales price. Investors may experience a decline in the value of their shares as a result of share sales made at prices lower than the prices they paid.
The actual number of shares we will issue under the sales agreement, at any one time or in total, is uncertain.
Subject to certain limitations in the sales agreement and compliance with applicable law, we have the discretion to deliver a sales notice to Cowen at any time throughout the term of the sales agreement. The number of shares that are sold by Cowen after delivering a sales notice will fluctuate based on the market price of the common shares during the sales period and limits we set with Cowen. Because the price per share of each share sold will fluctuate based on the market price of our common stock during the sales period, it is not possible at this stage to predict the number of shares that will be ultimately issued.
We expect to use the net proceeds from the sale of securities for Gabriel product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Our management team will have broad discretion to allocate the net proceeds of the offering. Pending their ultimate use, we intend to invest the net proceeds in short-term investment-grade, interest-bearing instruments.
We do not expect for the foreseeable future to pay dividends on our common stock. Instead, we anticipate that all of our earnings, if any, in the foreseeable future will be used for working capital and other general corporate purposes. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.
15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSS-8
If you invest in our common stock, your interest will be diluted to the extent of the difference between the price per share of our common stock you pay in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering.
Our net tangible book value as of June 30, 2015 was approximately $21,657,000, or $0.41 per share. Net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the number of shares of our common stock outstanding as of June 30, 2015. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the as adjusted net tangible book value per share of our common stock immediately after giving effect to this offering.
After giving effect to the sale of our common stock in the aggregate amount of $35,000,000 in this offering at an assumed offering price of $3.91, the last reported sale price of our common stock on the NYSE MKT LLC on August 18, 2015, and after deducting commissions and estimated aggregate offering expenses payable by us, our as adjusted net tangible book value as of August 18, 2015 would have been approximately $55,607,000, or $0.91 per share. This report,represents an immediate increase in net tangible book value of $0.50 per share to existing stockholders and immediate dilution in net tangible book value of $3.00 per share to new investors purchasing our common stock in this offering.
The following table illustrates this dilution on a per share basis. The as adjusted information is illustrative only and will adjust based on the actual price to the public, the actual number of shares sold and other terms of the offering determined at the time shares of our common stock are sold pursuant to this prospectus. The shares sold in this offering, if any, will be sold from time to time at various prices.
| Assumed public offering price per share | | | | | $ | 3.91 | |
| Net tangible book value per share as of June 30, 2015 | | $ | 0.41 | | | | | |
| Increase per share attributable to new investors | | | 0.50 | | | | | |
| As adjusted net tangible book value per share after this offering | | | | | | | 0.91 | |
| Dilution per share to new investors | | | | | | | 3.00 | |
A $1.00 increase (decrease) in the assumed offering price of $3.91 per share, which was the last reported sale price of our common stock on the NYSE MKT LLC on August 18, 2015, would increase (decrease) dilution per share to purchasers by approximately $0.97 ($0.96), after deducting commissions and estimated offering expenses payable by us.
To the extent that outstanding options or warrants are exercised or outstanding restricted stock units vest, investors purchasing our common stock in this offering will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
We have entered into a sales agreement with Cowen under which we may issue and sell shares of our common stock having an aggregate gross sales price of up to $35,000,000 from time to time through Cowen acting as agent. The sales agreement has been filed as an exhibit to our registration statement on Form S-3 of which this prospectus supplement forms a part.
Upon delivery of a placement notice and subject to the terms and conditions of the sales agreement, Cowen may sell our common stock by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, including sales made directly on the NYSE MKT LLC on any other existing trading market for our common stock or to or through a market maker. Cowen may also sell our common stock by any other method permitted by law, including in privately negotiated transactions. We may instruct Cowen not to sell common stock if the sales cannot be effected at or above the price designated by us from time to time. We or Cowen may suspend the offering of common stock upon notice and subject to other conditions.
Each time we wish to issue and sell common stock under the sales agreement, we will notify Cowen of the number of shares to be issued, the dates on which such sales are anticipated to be made, any minimum price below which sales may not be made and other sales parameters as we deem appropriate. Once we have so instructed Cowen, unless Cowen declines to accept the terms of the notice, Cowen has agreed to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell such shares up to the amount specified on such terms. The obligations of Cowen under the sales agreement to sell our common stock are subject to a number of conditions that we must meet.
We will pay Cowen commissions, in cash, for its services in acting as agent in the sale of our common stock. Cowen will be entitled to compensation at a fixed commission rate of up to 3.0% of the gross sales price per share sold. Because there is no minimum offering amount required as a condition to close this Management’s Discussionoffering, the actual total public offering amount, commissions and Analysisproceeds to us, if any, are not determinable at this time. We have also agreed to reimburse Cowen for certain specified expenses, including the fees and disbursements of Financial Conditionits legal counsel, in an amount not to exceed $125,000. We estimate that the total expenses for the offering, excluding discounts and Resultscommissions payable to Cowen under the terms of Operations contains “forward-looking” statementsthe sales agreement, will be approximately $606,000.
Settlement for sales of common stock will generally occur on the third business day following the date on which any sales are made, or on some other date that is agreed upon by us and Cowen in connection with a particular transaction, in return for payment of the net proceeds to us. Sales of our common stock as contemplated in this prospectus supplement will be settled through the facilities of The Depository Trust Company or by such other means as we and Cowen may agree upon. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
Cowen will use its commercially reasonable efforts, consistent with its sales and trading practices, to solicit offers to purchase the common stock shares under the terms and subject to the conditions set forth in the sales agreement. In connection with the sale of the common stock on our behalf, Cowen may, and will with respect to sales effected in an “at the market” offering, be deemed to be an “underwriter” within the meaning of the Private Securities Litigation Reform Act and the compensation of 1995, which provides a “safe harbor” for statements about future events, productsCowen will be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and future financial performance that are based oncontribution to Cowen against certain civil liabilities, including liabilities under the beliefsSecurities Act.
The offering of our common stock pursuant to the sales agreement will terminate upon the earlier of (1) the sale of all shares of our management. Except forcommon stock subject to the historical information contained herein, the outcomesales agreement, or (2) termination of the events describedsales agreement as permitted therein. We and Cowen may each terminate the sales agreement at any time upon 10 days’ prior notice.
Cowen and its affiliates may in these forward-looking statementsthe future provide various investment banking, commercial banking and other financial services for us and our affiliates, for which services they may in the future receive customary fees. To the extent required by Regulation M, Cowen will not engage in any market making activities involving our common stock while the offering is subject to risks and uncertainties. See “Risk Factors” for a discussionongoing under this prospectus supplement.
The following discussion shouldvalidity of the securities offered by this prospectus will be readpassed upon by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Cowen is being represented in conjunctionconnection with and is qualified in its entiretythis offering by reference to ourProskauer Rose LLP, New York, New York.
Our consolidated financial statements appearing in the VirnetX Holding Corporation Annual Report on Form 10-K for the year ended December 31, 2014 (including the schedule appearing therein), and the effectiveness of our internal control over financial reporting as of December 31, 2014 have been audited by Farber Hass Hurley LLP, independent registered public accounting firm, as set forth in their reports thereon, included elsewheretherein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and other reports, proxy statements and other information with the Commission. Our Commission filings are available to the public over the Internet at the Commission’s website at http://www.sec.gov. You may also read and copy any document we file at the Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other information that we file with or furnish to the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act can also be accessed free of charge through the Internet. These filings will be available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission.
We have filed with the Commission a registration statement under the Securities Act relating to the offering of these securities. The registration statement, including the attached exhibits, contains additional relevant information about us and the securities. This prospectus does not contain all of the information set forth in the registration statement. You can obtain a copy of the registration statement, at prescribed rates, from the Commission at the address listed above.
INFORMATION INCORPORATED BY REFERENCE The Commission allows us to incorporate by reference into this prospectus certain information we file with it, which means that we can disclose important information by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the Commission will automatically update and supersede information contained in this report. Actual resultsprospectus and any accompanying prospectus supplement. We incorporate by reference the outcome or timingdocuments listed below that we have previously filed with the Commission (excluding any portions of certain events may differ significantly from those stated or implied by these forward-looking statements dueany Form 8-K that are not deemed “filed” pursuant to the factors listedGeneral Instructions of Form 8-K):
| · | our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on March 2, 2015; |
| · | our Quarterly Reports on Form 10-Q, filed on May 11, 2015 and August 10, 2015; |
| · | our Current Reports on Form 8-K, filed on January 2, 2015 and May 20, 2015 (excluding any information furnished in such reports under Item 2.02, Item 7.01 or Item 9.01); and |
| · | the description of our common stock contained in our Registration Statement filed with the Commission on Form 8-A on November 21, 2007, together with Amendment No. 1 on Form 8-A filed with the Commission on December 21, 2007, and including any other amendments or reports filed for the purpose of updating such description. |
We also incorporate by reference into this prospectus additional documents that we may file with the Commission under “Risk Factors,”Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the completion or termination of the offering, including all such documents we may file with the Commission after the date of the initial registration statement and from timeprior to timethe effectiveness of the registration statement, but excluding any information deemed furnished and not filed with the Commission. Any statements contained in oura previously filed document incorporated by reference into this prospectus is deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in this prospectus, or in a subsequently filed document also incorporated by reference herein, modifies or supersedes that statement.
This prospectus may contain information that updates, modifies or is contrary to information in one or more of the documents incorporated by reference in this prospectus. You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus is accurate as of any date other filingsthan the date of this prospectus or the date of the documents incorporated by reference in this prospectus.
We will provide to each person, including any beneficial owner, to whom this prospectus is delivered, upon written or oral request, at no cost to the requester, a copy of any and all of the information that is incorporated by reference in this prospectus.
Requests for such documents should be directed to:
VirnetX Holding Corporation Attn:
Investor Relations
308 Dorla Ct.
Zephyr Cove, NV 89448
(775) 548-1785
The information in this prospectus is not complete and may be changed. We may not sell the securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or SEC. For this purpose, using the terms “believe,” “expect,” “expectation,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “appear,” “based on,” “may,” “intended,” “potential,” “indicate,” “are emerging” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those stated or implied by these forward-looking statements. By making forward-looking statements, we havesale is not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.permitted.
SUBJECT TO COMPLETION, DATED August 20, 2015
PROSPECTUS
As used herein, “we,” “us,” “our,” or the “Company” means$100,000,000
VirnetX Holding Corporation
By this prospectus, VirnetX Holding Corporation together with its consolidated subsidiaries where applicable.may offer, from time to time:
VirnetX Holding Corporation (“VirnetX”) may offer and sell from time to time, in one or more series or issuances and on terms that VirnetX will determine at the time of the offering, any combination of the securities described in this prospectus, up to an aggregate amount of $100,000,000.
We arewill provide specific terms of any offering in a development stage company focused on commercializing a patent portfolio for providing solutions for secure real-time communications suchsupplement to this prospectus. Any prospectus supplement may also add, update, or change information contained in this prospectus. You should carefully read this prospectus and the applicable prospectus supplement as instant messaging,well as the documents incorporated or IM, and voice over internet protocol, or VoIP. These patents were acquireddeemed to be incorporated by our principal operating subsidiary from Science Applications International Corporation, or SAIC, a systems, solutions and technical services company basedreference in San Diego, California.this prospectus before you purchase any of the securities offered hereby.
In December 2007, we closed an underwritten publicThese securities may be offered and sold in the same offering or in separate offerings; to or through underwriters, dealers, and agents; or directly to purchasers. The names of 3,450,000any underwriters, dealers, or agents involved in the sale of our securities, their compensation and any over-allotment options held by them will be described in the applicable prospectus supplement. See “Plan of Distribution.”
Our common stock is listed on the NYSE MKT LLC under the symbol “VHC.” We will provide information in any applicable prospectus supplement regarding any listing of securities other than shares of our common stock raising gross proceedson any securities exchange.
INVESTING IN OUR SECURITIES INVOLVES SIGNIFICANT RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 7 OF THIS PROSPECTUS AND IN THE APPLICABLE PROSPECTUS SUPPLEMENT BEFORE INVESTING IN ANY SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of $13,800,000 before underwriting discountsthis prospectus is , 2015
This prospectus is part of a registration statement on Form S‑3 that we filed with the United States Securities and commissionsExchange Commission, or the Commission, using a “shelf” registration process. Under this shelf registration statement, we may, from time to time, offer or sell any combination of the securities described in this prospectus in one or more offerings up to a total aggregate amount of $100,000,000.
This prospectus provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add to, update or change information contained in the prospectus and, accordingly, to the extent inconsistent, information in this prospectus is superseded by the information in the prospectus supplement.
The prospectus supplement will describe, as applicable: the terms of the securities offered; the initial price to the public; the price paid for the securities; net proceeds; and the other specific terms related to the offering expenses. Inof the securities.
We have not authorized any person to provide you with different information. No person has been authorized to give any information or make any representations in connection with this offering our common shares began trading onother than those contained or incorporated by reference in this prospectus, any accompanying prospectus supplement and any related issuer free writing prospectus in connection with the American Stock Exchange underoffering described herein and therein, and, if given or made, such information or representations must not be relied upon as having been authorized by us. Neither this prospectus nor any prospectus supplement nor any related issuer free writing prospectus shall constitute an offer to sell or a solicitation of an offer to buy offered securities in any jurisdiction in which it is unlawful for such person to make such an offering or solicitation. This prospectus does not contain all of the ticker symbol “VHC.” Our principal business activities to date are our efforts to commercialize our patent portfolio. We also conductinformation included in the remaining activitiesregistration statement. For a more complete understanding of PASW, Inc., which are generally limitedthe offering of the securities, you should refer to the collection of royalties on certain internet-based communications by a wholly-owned Japanese subsidiary of ours pursuant to the terms of a single license agreement. The revenue generated by this agreement is not significant.registration statement, including its exhibits.
Although we believe we may derive revenues inYou should read the future from our principal patent portfolioentire prospectus, the applicable prospectus supplement and are currently endeavoring to develop certain of those patents into marketable products, we have not done so to date. Because we have limited capital resources, our revenues are insignificant and our expenses, including but not limited to those we expect to incur in our patent infringement case against Microsoft, are substantial, we may be unable to successfully complete our business plans, our business may fail and your investment in our securities may become worthless. See“Risk Factors”for additional information.
We are in the development stage and consequently we are subject to the risks associated with development stage companies including: the need for additional financings; the uncertainty that our licensing program development efforts will produce revenue bearing licenses for us; the uncertainty that our development initiatives will produce successful commercial productsany related issuer free writing prospectus, as well as the marketinginformation and customer acceptancedocuments incorporated by reference into this prospectus and the additional information under the heading "where you can find more information." before making an investment decision. We do not imply or represent by delivering this prospectus that VirnetX, or our business, is unchanged after the date on the front of this prospectus or any prospectus supplement or any issuer free writing prospectus nor any sale made hereunder shall under any circumstances imply that the information contained or incorporated by reference herein or in any prospectus supplement or issuer free writing prospectus is correct as of any date subsequent to the date hereof or of such products; competition from larger organizations; dependence on key personnel; uncertain patent protection;prospectus supplement or issuer free writing prospectus, as applicable. You should assume that the information appearing in this prospectus, any prospectus supplement, any issuer free writing prospectus or any document incorporated by reference is accurate only as of the date of the applicable documents, regardless of the time of delivery of this prospectus or any sale of securities. Our business, financial condition, results of operations and dependence on corporate partners and collaborators. To achieve successful operations, we will require additional capital to continue research and development and marketing efforts. No assurance can be given as to the timing or ultimate success of obtaining future funding.
16
prospects may have changed since that date.
Recent Developments
In this prospectus, unless otherwise indicated or unless the context otherwise requires, all references to:
We announced GABRIEL Connection TechnologyTM (“GABRIEL”) for securing private data and content shared across next-generation networks, such as Web 2.0, peer-to-peer (P2P) networks, VoIP, unified communications and collaboration software applications on April 1, 2008. GABRIEL allows for secure across-the-network verification using its unique combination of cryptographic certified domain names, computer network addresses and public keys; for the creation of hardware or software solutions based on a foundational security platform with automatic link initiations and seamless management of new registration services, so that GABRIEL enables ubiquitous, secure unified communications between any combination of devices, operating systems, software applications and even connecting sensors. We possess broad and basic patents which cover the inventions underlying the GABRIEL technology.
| · | “we,” “us,” “company,” “VirnetX,” or “our” are to VirnetX Holding Corporation, a Delaware corporation; |
On May 14, 2008, we announced jointly with ipCapital Group the completion | · | “Exchange Act” are to the Securities Exchange Act of 1934, as amended; |
| · | “Securities Act” are to the Securities Act of 1933, as amended; |
| · | “$” are to the legal currency of the United States. |
This summary description about us and results of ipCapital Group’s evaluation of our business model, product, technology and patent portfolio. The goalhighlights selected information contained elsewhere in this prospectus or incorporated in this prospectus by reference. This summary does not contain all of the evaluation was to determineinformation you should consider before buying securities in this offering. You should carefully read this entire prospectus and any applicable prospectus supplement, including each of the potential commercialization value range to potential licensing partners in IP telephony, mobility, fixed-mobile convergence and unified communications markets. Based on ipCapital Group’s proprietary ipValue Model, the estimated potential commercialization value range of our business model, product, technology and patent portfolio indicates a multi-billion-dollar market opportunity. We are now in active discussions with a number of potential partners regarding potential commercialization opportunities.
documents incorporated herein or therein by reference, before making an investment decision.
On March 31, 2008, Microsoft filed a Motion to Dismiss our patent infringement case against it. On June 3, 2008, the court denied Microsoft’s Motion to Dismiss. The court’s order denying Microsoft’s motion expressly confirmed our constitutional standing to sue for patent infringement. Also pursuant to the court decision, on June 10, 2008, San Diego-based SAIC (NYSE:SAI) joined us in our lawsuit as a plaintiff.VirnetX Holding Corporation
Overview
On August 26, 2008, we were awarded another U.S. patent, number 7,418,504, by the U.S. PatentWe are an Internet security software and Trademark Office. The new patent, titled “Agile network protocoltechnology company with patented technology for secure communications using secure domain names” describes a system for establishing a secure communication link using secure domain names. In conjunction with the issuance of this patent we will seek to commercialize these exclusive rights in the United States by establishing the4G LTE security. Our software and technology solutions, including our secure domain name registry serviceand Gabriel Connection Technology™, are designed to facilitate secure communications and to create a secure environment for the Internet. Additional information about thereal-time communication applications such as instant messaging, VoIP, smart phones, eReaders and video conferencing. Our patent can be found onwww.uspto.gov
portfolio includes over 112 U.S. and international patents with over 75 pending applications.
Application of Critical Accounting Policies
There were no material changes in the application of the Company’s critical accounting policies since the end of the most recent fiscal year. For further information, see the “Critical Accounting Policies” section of Item 7 in the Company’s Annual Report onForm 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008.
Recent Accounting Pronouncements
There were no material updates to recent accounting pronouncements since the end of the most recent fiscal year. For further information, see the “Recent Accounting Pronouncements” section of Item 7 in the Company’s Annual Report onForm 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008.
Six Months Ended June 30, 2008
Compared with Six Months Ended June 30, 2007
Revenue — Royalties
Revenue generated increased to $50,744 for the three months ended June 30, 2008 from zero for the three months ended June 30, 2007. Revenue generated increased to $84,050 for the six months ended June 30, 2008 from zero for the six months ended June 30, 2007. Our revenue in 2007 was solely limited to the royalties earned under our single license agreement through our Japan subsidiary. We expect the revenue from this license to decrease substantially in the future. We do not intend to seek additional licenses or other revenue through our Japan subsidiary.
17
Research and Development Expenses
Research and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff. Research and development costs are expensed as incurred.
Corporate Information
Our researchexecutive offices are located at 308 Dorla Court, Suite 206, Zephyr Cove, Nevada 89448, and development expenses increased by $149,645 to $417,823 forour telephone number at that address is (775) 548-1785. We maintain a website on the six months ended June 30, 2008, from $268,178 for the six months ended June 30, 2007. This increase is primarily due to increased engineering activities for product developmentInternet at www.virnetx.com. Our website, and the additioninformation contained therein, is not a part of three engineers. We expect research and development expenses to increase as employees are hired to provide in-house research and development. While we expect to use outside contractors for additional product development on a limited basis, we expect those costs to remain level or decline.this prospectus.
General and Administrative Expenses
General and administrative expenses include management and administrative personnel, as well as outside legal, accounting, and consulting services.
Our general and administrative expenses increased by $4,264,025, to $5,962,272 for the six months ended June 30, 2008 from $1,698,247 for the six month period ended June 30, 2007.
Within general and administrative expenses, legal fees increased by $2,008,585 to $3,263,306 for the six months ended June 30, 2008, from $1,254,721 for the six months ended June 30, 2007. The increase in fees incurred was due primarily to our patent infringement litigation against Microsoft.
Also within general and administrative expenses, stock-based compensation expense increased by $1,103,607 to $1,145,322 for the six months ended June 30, 2008, from $41,715 for the six month period ended June 30, 2007. The increase was due principally to expenses related to stock options granted to our employees and directors, an increased number of employees and resources we added to comply with the requirements associated with being an SEC reporting company.
Fiscal Year Ended December 31, 2007 Compared to the Fiscal Year Ended
December 31, 2006 and Inception Through December 31, 2005
Results of Operations
Revenue — Royalties
We generated only nominal revenue of $74,866 during the period from July 5, 2007 (the closing date of the merger between us and VirnetX, Inc.) to December 31, 2007. We generated no revenue prior to July 5, 2007. Our revenue in 2007, was solely limited to the royalties earned under our single license agreement through our Japan subsidiary. We expect the revenue from this license to decrease substantially in the future. We do not intend to seek additional licenses or other revenue through our Japan subsidiary.
Research and Development Expenses
Research and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff. Research and development costs are expensed as incurred.
Our research and development expenses increased from $56,000 for the period from August 2, 2005 (date of inception) to December 31, 2005 to $554,187 for 2006 and to $684,316 for 2007, primarily as a result of increased engineering activities for product development. We expect research and development expenses to increase as employees are hired to provide in-house research and development. While we expect to use outside contractors for additional product development on a limited basis, we expect those costs to remain level or decline.
General and Administrative Expenses
General and administrative expenses include management and administrative personnel, as well as outside legal, accounting, and consulting services.
Our general and administrative expenses increased from $826,478 for the period from August 2, 2005 (date of inception) to December 31, 2005, to $853,488 for 2006 and to $8,040,894 for 2007.
Within general and administrative expenses, professional fees, primarily legal fees, increased from $12,481 in the period from August 2, 2005 (date of inception) to December 31, 2005 to $133,199 in 2006 and to $5,286,525 in
18
2007. The fees were incurred to pursue the litigation with Microsoft, assist in the merger between VirnetX, Inc. and VirnetX Holding Corporation, audit the financial statements, assist in obtaining financing and to assist in contract negotiations and in general corporate matters. Legal fees may continue to increase as our patent infringement litigation moves forward and we incur the costs associated with being an SEC reporting company.
Also within general and administrative expenses, compensation expenses changed from $799,920 in the period from August 2, 2005 (date of inception) to December 31, 2005 to $613,757 in 2006 and to $2,152,000 in 2007. The compensation expense was higher in 2005 than 2006 due to the higher proportion of stock based compensation expense in 2005. The increase from 2006 to 2007 is due principally to stock-based compensation expense related to stock options granted to our employees and directors and an increase in the number of our employees as we added resources to comply with reporting requirements.
Other general and administrative expenses increased from $14,077 in the period from August 2, 2005 (date of inception) to December 31, 2005 to $106,532 in 2006 and to $602,639 in 2007 as we incurred costs related to building our infrastructure, litigation support and completing the merger.
Liquidity and Capital Resources
We are in the development stage and have raised capital since our inception through the issuance of our equity securities. As of June 30, 2008, we had approximately $4,208,722 in cash. We expect to finance future cash needs primarily through proceeds from equity or debt financings, loans,and/or collaborative agreements with corporate partners. We have used the net proceeds from the sale of common and preferred stock for general corporate purposes, which have included funding research and development, litigation efforts and working capital needs.
We anticipate that our existing cash and cash equivalents will be sufficient to fund operations for at least the next 6 months. We believe that our 2008 cash requirement to fund our operations will average approximately $660,000 per month and, in 2009 we expect to increase to approximately $850,000 per month. We anticipate our projected monthly cash requirements will increase significantly as we increase our expenditures for:
| | |
| • | our lawsuit against Microsoft; |
|
| • | infrastructure; |
|
| • | sales and marketing; |
|
| • | research and development; |
|
| • | personnel; and |
|
| • | general business enhancements. |
The process of developing new security solutions is inherently complex, time-consuming, expensive and uncertain. We must make long-term investments and commit significant resources before knowing whether our development programs will result in products that will achieve market acceptance. Product candidates that may appear to be promising at all stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or may take longer to progress through the beta trials than had been anticipated, may not be able to achieve the pre-defined endpoint due to changes in the environment, may fail to receive necessary approvals, may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality, or may fail to achieve market acceptance. For these reasons, we are unable to predict the period in which material net cash inflows will commence with respect to our licensing program under development and our software products under development.
To obtain additional capital when needed, we expect to evaluate alternative financing sources, including, but not limited to, the issuance of equity or debt securities, corporate alliances, joint ventures and licensing agreements; however, there can be no assurance that funding will be available on favorable terms, if at all. We cannot assure you that we will successfully commercialize our products under development or that our products, if successfully developed, will generate revenues sufficient to enable us to earn a profit. If we are unable to obtain additional capital, we may be required to cease operations or to reduce cash used in our business, including the termination of development efforts that may appear to be promising, the sale of our patent portfolio or other assets, the abandonment of our litigation with Microsoft or others and the reduction in overall operating activities.
Off-Balance Sheet Arrangements
There have been no material changes to the information provided in our Annual Report onForm 10-K for the fiscal year ended December 31, 2007 regarding off-balance sheet arrangements.
19
BUSINESS
Corporate Overview and History
Our predecessor corporation was incorporated in the State of California in November 1992. We were incorporated in the State of Delaware in April 2007 and on May 30,August 2005. In November 2006, VirnetX acquired certain patents from Leidos, Inc. In July 2007, we filedeffected a certificatereverse merger between PASW, Inc. and VirnetX, which became our principal operating subsidiary. As a result of this merger, in Delaware pursuantthe former security holders of VirnetX came to which we changedown a majority of our domicile from California to Delaware.outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetX Holding Corporation. From
VirnetXtm and GABRIEL Connection Technologytm are our inception until January 2003, we were engagedtrademarks in the businessUnited States. This prospectus includes product names, trade names and trademarks of developingother companies. All other product names, trade names and licensing software that enabled internet and web based communications. Astrademarks appearing in this prospectus are the property of January 31, 2003, we sold all of our operating assets, and since such time our only source of revenue has been derived from nominal royalties payable to our wholly-owned Japan subsidiary, Network Research Corp. Japan, Ltd. pursuant to the terms of a single license agreement. In addition to our Japan subsidiary, we have three other wholly-owned subsidiaries, two of which are California corporations and the other of which is incorporated under the laws of the United Kingdom. These other subsidiaries are currently inactive.their respective holders.
The Securities We have had substantially no day to day operations since we sold all of our operating assets on January 31, 2003. We acquired VirnetX as a wholly-owned subsidiary on July 5, 2007 and ceased being a shell company. Additionally, pursuant to the merger with VirnetX, we experienced a change in control, with the former securityholders of VirnetX acquiring control of VirnetX Holding Corporation.
VirnetX was incorporated in the State of Delaware in August 2005. It is a development stage company that was formed to commercialize a patent portfolio for providing solutions for secure real-time communications such as instant messaging, or “IM,” and voice over internet protocol, or “VoIP.” VirnetX acquired certain patents from Science Applications International Corporation, a systems, solutions and technical services company based in San Diego, California (better known as “SAIC”) and in February 2007 commenced a lawsuit against Microsoft Corporation alleging infringement of three of our patents.
Principal Products and Services
Technology and Solutions Business
Our primary strategy for our technology and solutions business is to commercialize our patented technology in the area of secure real-time communication. We are developing technology for:
| | |
| • | “single-click” and “zero-click” security solutions for real-time communications; and |
|
| • | “end-to-end” security for VoIP, video conferencing and other types ofpeer-to-peer collaboration without degradation in quality of service. |
In addition, we expect to continue to generate nominal royalties payable to our Japan subsidiary pursuant to the terms of a single license agreement. This license agreement was entered into in 1994 and, pursuant to its terms, it automatically renews on an annual basis unless either party terminates as a result of a breach by the other party or the licensee going out of business.
Contract Services Business
Our primary strategy for our contract services business is to leverage our research and development group to provide contract research, prototyping, systems integration and technical services to numerous branches of the U.S. Federal government, network service providers and other OEM partners. Our team is staffed with nationally accredited scientists who have experience with research and development projects concerning industry-wide security solutions as well as national security. We intend to provide these contract services to assist the research and development efforts of our corporate and OEM developers by providing outsourced research, deployment and testing services designed to secure and simplify networks.May Offer
We believe thatmay offer up to $100,000,000 of common stock, preferred stock, depositary shares, warrants, debt securities and units in one or more offerings and in any combination. This prospectus provides you with a general description of the revenue generated by our contract services business will eventually partially offset the costs of our technology and solutions business andsecurities we may offer. A prospectus supplement, which we will provide us witheach time we offer securities, will describe the opportunity to generate future strategic relationshipsspecific amounts, prices and licensing opportunities. We also anticipate that future contract services projects will enable us to develop promising new technologies that can be commercialized through our technology and solutions business.
20
Marketing and Salesterms of these securities.
We do not anticipate launching any new products inmay sell the marketplace until the First Quarter of 2009 at the earliest. We intendsecurities to partner with hardware and software manufacturers and network operatorsor through underwriters, dealers or agents or directly to operationalize and commercialize our products.
Our contract services business expects to generate new customers primarily through professional relationships and referrals.
Customers and Distribution
We are a development stage company with significant investments in research and development, and we currently do not sellpurchasers or distribute any of our products. We expect that our contract services customers will consist primarily of the U.S. Federal government, network service providers and other OEM companies. Our contract services business has targeted five customers who we expect will represent more than 80% of our future contract services revenue for the foreseeable future.
We have made a strategic decision to selectively limit new customers in our contract services business in order to focus on the development of new products in our technology and solutions business.
Competition
The enterprise telephony market has transitioned from being circuit-switched to packet-switched in large part to eliminate the requirement of running separate voice and data networks. The IP telephony industry conceived session initiation protocol (better known as “SIP”) to improve the setup and handling of telephone calls, and computer technologists have quickly adopted SIP as a protocol to simplify all forms of real-time communications. The rapid market adoption of SIP has created the need to secure SIP before it can reach the global mainstream.
SIP is a growing protocol used for real-time communication, and we anticipate that SIP will represent a significant portion of the worldwide IP telephony market over the next five years. It has become the basis for “next generation networks” for unified messaging and communication. SIP uses existing protocols and services, including domain name system, or “DNS,” real-time transport protocol, or “RTP,” the session description protocol, or “SDP,” and transport layer security, or “TLS.”
A number of vendors are providing solutions for secure real-time communications. These solutions can be grouped under three main categories:
| | |
| • | A session border controller, or “SBC,” is a device used in some VoIP networks to exert control over the signaling and media streams involved in setting up, conducting, and tearing down calls. SBCs are put into the signalingand/or media path between the calling and called party. In some cases, the SBC acts as the called VoIP phone and places a second call to the called party. The effect is that the signaling traffic not only crosses the SBC but the media traffic (voice, video etc.) crosses as well. We believe the security provided by SBC is limited because the SBC can extend the length of the media path (the path of media packets through the network) significantly and may break theend-to-end transparency. |
|
| • | SIP firewalls (or SIP-aware firewalls) and application layer gateways manage and protect the traffic, flow and quality of VoIP and other SIP-related communications. They perform real-time network address translation (better known as “NAT”) and dynamic firewall functions and support multiple signaling protocols and media transcoding functionality, allowing secure traversal and interconnection of IP media streams across multiple networks. |
|
| • | VPN technologies provide secure communications over unsecured networks. |
We believe our technology and solutions business will compete primarily against these disparate add-on security solution providers. We believe our products will allow our OEM partners to integrate transparent and always on,end-to-end security directly into their unified messaging and communications solutions.
Our contract services business competes primarily against in-house research and development departments of network service providers and other OEM vendors.
21
Intellectual Property and Patent Rights
Our intellectual property is primarily comprised of trade secrets, proprietary know-how, issued and pending patents and technological innovation.
We have 11 issued U.S. and 8 issued foreign patents, and pending U.S. and foreign patent applications including certain patent applications which VirnetX originally acquired from SAIC. The term of the issued U.S. and foreign patents runs through 2019. Our patents embrace a unique set of functions relating to domain name system, or “DNS,”-based security mechanisms for real-time communication. If we believe that a third party is infringing on our intellectual property rights, we may negotiate with it in an attempt to terminate its infringement. If negotiation is unsuccessful or if we believe that legal action is more appropriate, we may bring a legal action against any party we believe to be infringing on our intellectual property rights so that we may properly protect our rights.
Assignment of Patents
Most of our issued patents were originally acquired from SAIC pursuant to the Assignment Agreement by and between VirnetX and SAIC dated December 21, 2006, and the Patent License and Assignment Agreement by and between VirnetX and SAIC dated August 12, 2005, as amended on November 2, 2006, including documents prepared pursuant to the November amendment, and as further amended on March 12, 2008. VirnetX recorded the assignment from SAIC with the U.S. Patent Office on December 21, 2006.
Key terms of these agreements are as follows:
Patent Assignment. SAIC unconditionally and irrevocably conveyed, transferred, assigned and quitclaimed all its right, title and interest in and to the patents and patent applications, as specificallyotherwise set forth on Exhibit A to the assignment document recorded with the U.S. Patent Office, including, without limitation, the right to sue for past infringement.
License to SAIC Outside the Fieldbelow under “Plan of Use. On November 2, 2006, we granted to SAIC an exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sublicensable and transferable right and license permitting SAIC and its assignees to make, have made, import, use, offer for sale, and sell products and services covered by, and to make improvements to, the patents and patent applications we acquired from SAIC, solely outside our field of use.Distribution.” We, have, and retain, all right, title and interest to all our patents within our field of use. Our field of use is defined as the field of secure communications in the following areas: virtual private networks (or “VPNs”); secure voice over internet protocol (or “VoIP”); electronic mail (or“e-mail”); video conferencing; communications logging; dynamic uniform resource locators (or “URLs”); denial of service; prevention of functional intrusions; IP hopping; voice messaging and unified messaging; live voice and IP PBXs; voice web video conferencing and collaboration; instant messaging (or “IM”); minimized impact of viruses; and secure session initiation protocol (or “SIP”). Our field of use is not limited by any predefined transport mode or medium of communication (e.g., wire, fiber, wireless, or mixed medium). On March 12, 2008, SAIC relinquished the November 2, 2006, exclusive grant back license outside our field of use, as well as any agents acting on our or their behalf, reserve the sole right to obtain such exclusive license in the future. Effective March 12, 2008, we granted to SAIC a non- exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sublicensable and transferable right and license permitting SAIC and its assignees to make, have made, import, use, offer for sale, and sell products and services covered by,accept and to make improvements to, the patents and patent applications we acquired from SAIC, solely outside our fieldreject in whole or in part any proposed purchase of use.
Compensation Obligations. As consideration for the assignment of the patents and for the rights we obtained from SAIC as a result of the March 12, 2008 amendment, we are required to make payments to SAIC based on the revenue generated from our ownership or use of the patents assigned to us by SAIC.
| | |
| • | Our compensation obligation includes payment of royalties, in an amount equal to (a) 15% of all gross revenues generated by us in our field of use less (i) trade, quantity and cash discounts allowed, (ii) commercially reasonable commissions, discounts, refunds, rebates, chargebacks, retroactive price adjustments and other allowances which effectively reduce the net selling price, and which are based on arms length terms and are customary and standard in VirnetX’s industry, and (iii) actual product returns and allowances; (b) 15% of all non-license gross revenues generated by us outside our field of use less |
22
| | |
| | (i) trade, quantity and cash discounts allowed, (ii) commercially reasonable commissions, discounts, refunds, rebates, chargebacks, retroactive price adjustments and other allowances which effectively reduce the net selling price, and which are based on arms length terms and are customary and standard in VirnetX’s industry, and (iii) actual product returns and allowances; and (c) 50% of all license revenues generated by us outside our field of use less (i) trade, quantity and cash discounts allowed, (ii) commercially reasonable commissions, discounts, refunds, rebates, chargebacks, retroactive price adjustments and other allowances which effectively reduce the net selling price, and which are based on arms length terms and are customary and standard in VirnetX’s industry, and (iii) actual product returns and allowances. |
| | |
| • | Royalty payments are calculated based on each quarter and payment is due within 30 days following the end of each quarter. |
|
| • | Beginning 18 months after January 1, 2007, we must make a minimum guaranteed annual royalty payment of $50,000. |
|
| • | The maximum cumulative royalty paid in respect to our revenue-generating activities in our field of use shall be no more than $35,000,000. |
|
| • | In addition to the royalties, in the circumstances and subject to the limitations specified in the November amendment, SAIC shall be entitled to receive 10% of any proceeds, revenues, monies or any other form of consideration paid for the acquisition of VirnetX by Microsoft or any other party alleged to be infringing the patents or patent applications we acquired from SAIC, up to a maximum amount of $35,000,000. Any such acquisition proceeds shall be credited against the $35,000,000 maximum cumulative royalty payable with respect to our revenue-generating activities in our field of use. |
|
| • | In the event that VirnetX receives any proceeds, recovery or other form of compensation (other than acquisition proceeds) as a result of any action or proceeding brought by VirnetX against Microsoft or certain other alleged infringing companies to resolve a claim of infringement or enforcement relating to the patents and patent applications we acquired from SAIC, or as a result of negotiations with such entities, as further consideration for the assignment of the patents, in lieu of any amounts otherwise owing to SAIC we must pay to SAIC 35% of the excess of such proceeds over all costs incurred in connection with any such litigation, without a cap. Any payment to SAIC of amounts with respect to such proceeds shall be credited against the $35,000,000 maximum cumulative royalty payable with respect to our revenue-generating activities in our field of use. |
|
| • | In the event that VirnetX receives any proceeds, recovery or other form of compensation as a result of any action or proceeding brought by VirnetX against parties other than Microsoft and certain other alleged infringing companies, with respect to which VirnetX is required to notify SAIC of infringement under the terms of the November amendment to resolve a claim of infringement or enforcement relating to the patents and patent applications we acquired from SAIC, or as a result of negotiations with such entities (other than acquisition proceeds) as further consideration for the assignment of the patents, in lieu of any amounts otherwise owing to SAIC we must pay to SAIC 25% of the excess of such proceeds over all costs incurred in connection with any such litigation, without a cap. Any payment to SAIC of amounts with respect to such proceeds shall be credited against the $35,000,000 maximum cumulative royalty payable with respect to our revenue-generating activities in our field of use. |
Reversion to SAIC Upon Breach or Default. We must convey, transfer, assign and quitclaim to SAIC all of our right, title and interest in and to the patents or patent applications we acquired from SAIC, upon the first occurrence of the following reversion events:
| | |
| • | our failure to pay SAIC an aggregate cumulative amount of at least $7,500,000 within seven years after January 1, 2007; |
|
| • | our failure to pay the $50,000 minimum annual royalty that has not been cured within 90 days after our receipt of written notice of such failure; or |
|
| • | for the period prior to the date of our full payment of the $35,000,000 maximum cumulative royalty, any termination of the August 2005 agreement with SAIC, as amended. |
23
If a reversion event occurs due to our failure to pay SAIC an aggregate cumulative amount of at least $7,500,000 within seven years after January 1, 2007, then wesecurities. Each prospectus supplement will receive from SAIC a non-exclusive license to the reverting patents in our field of use.
Rights to Bring and Control Actions for Infringement and Enforcement. In addition to the exclusive right to bring and control any action or proceeding with respect to infringement or enforcement of our patents, and to collect damages and fees for past, present and future infringement, both in and outside of our field of use, we also have the first right to negotiate with or bring a lawsuit against any and all third parties for purposes of enforcing our patents, regardless of the field of use.
Security Agreement. We granted SAIC a security interest in some of our intellectual property, including the patents and patent applications we obtained from SAIC, to secure our payment obligations to SAIC described above.
Litigation
We believe Microsoft Corporation is infringing certain of our patents. Accordingly, we commenced a lawsuit against Microsoft on February 15, 2007 by filing a complaint in the United States District Court of the Eastern District of Texas, Tyler Division. Pursuant to the complaint, we allege that Microsoft infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1, entitled “Agile Network Protocol for Secure Communications with Assured System Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network Without User Entering Any Cryptographic Information.” On April 5, 2007, we filed an amended complaint specifying certain accused products at issue and alleging infringement of a third, recently issued U.S. patent: U.S. Patent No. 7,188,180 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network.” We are seeking both damages, in an amount subject to proof at trial, and injunctive relief. Microsoft answered the amended complaint and asserted counterclaims against us on May 4, 2007. Microsoft counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. Microsoft seeks an award of its attorneys’ fees and costs. We filed a reply to Microsoft’s counterclaims on May 24, 2007. Discovery has begun, a Markman hearing on claim construction is scheduled for February 2009, and the trial is scheduled to begin on October 12, 2009. We have served our infringement contentions directed to certain of Microsoft’s operating system and unified messaging and collaboration applications. On March 31, 2008, Microsoft filed a Motion to Dismiss for lack of standing, which was denied by the court pursuant to an order dated June 3, 2008. Also pursuant to that court decision, on June 10, 2008, SAIC joined us in our lawsuit.
Because we have determined that Microsoft’s alleged unauthorized use of our patents would cause us severe economic harm and the failure to cause Microsoft to discontinue its use of such patents could result in the termination of our business, we have dedicated a significant portion of our economic resources, to date, to the prosecution of the Microsoft litigation and expect to continue to do so for the foreseeable future.
Although we believe Microsoft infringes three of our patents and we intend to vigorously prosecute this case, at this stage of the litigation the outcome cannot be predicted with any degree of reasonable certainty. Additionally, the Microsoft litigation will be costly and time-consuming, and we can provide no assurance that we will obtain a judgment against Microsoft for damages and/or injunctive relief. Should the District Court issue a judgment in favor of Microsoft, and in connection with such judgment determine that we had acted in bad faith or with fraudulent intent, or we were otherwise found to have exhibited inequitable conduct, the Court could award attorney fees to Microsoft, which would be payable by us.
In the near term, we will dedicate significant time and resources to the Microsoft litigation. The risks associated with such dedication of time and resources are set forth in theRisk Factorssection of this report.
One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development.
Currently, we are not a party to any other pending legal proceedings, and are not awarenames of any proceeding threatened or contemplated against us by any governmental authorityunderwriters, dealers, agents or other party.
24
Research and Development
We are currentlyentities involved in basic research at our office located in Scotts Valley, California and through personnel based in Sterling, Virginia. We are focused on developing new techniques for automatic and transparent real-time communication security. We have invested approximately $56,000 in 2005, $554,187 in 2006, $684,316 in 2007 and $417,823 for the six-month period ended June 30, 2008 on research and development relating to our proposed products.
Additionally, we conduct some of our product development through the use of outsourced development partners. Our current development projects are derived from strategic relationships with other companies. We anticipate developing other new products through a combination of licensing, acquisitions and our discovery research activities.
Products in Development
We intend for our products to be available as object libraries for easy integration into enterprise VoIP, conference calling, IM, file transfer, application sharing, whiteboard, video conference and other real-time collaboration systems solutions.
We currently have two principal products in development:
| | |
| • | The VirnetX Edge Toolkit, which will be designed to allow OEM partners to integrate our proprietary technology into their private branch exchanges (better known as PBXs), call managers and client solutions. We anticipate releasing the first version of the Toolkit product in 2008. |
|
| • | The VirnetX Secure Directory Service, which will be designed to provide secure presence and directory services to certified individual domain names based on identity verification and will be designed to enable automatic domain name system, or “DNS,” -triggered certified encrypted connections. We anticipate providing this service to initial customers in 2008. |
We intend to commercialize our existing technology by designing, manufacturing and marketing products incorporating our technology and by partnering with other companies whose products incorporate our technology. In addition, we intend to leverage our outstanding team of scientists to continue to develop promising new technologies.
Government Regulation
The laws governing online secure communications remain largely unsettled, even in areas where there has been legislative action. It may take years to determine whether and how existing laws governing intellectual property, privacy and libel apply to online media. Such legislation may interfere with the growth in use of online secure communications and decrease the acceptance of online secure communications as a viable solution, which could adversely affect our business.
Due to the internet’s popularity and increasing use, new laws regulating secure communications may be adopted. These laws and regulations may cover, among other things, issues relating to privacy, pricing, taxation, telecommunications over the internet, content, copyrights, distribution and quality of products and services. We intend to comply with all new laws and regulations as they are adopted.
Employees
As of August 31, 2008 we had twelve full-time employees.
Facilities
Our principal executive offices are located at 5615 Scotts Valley Drive, Suite 110, Scotts Valley, California 95066. Between July 1, 2008 and August 31, 2009, we will lease this property for approximately $3,150 per month. We have no other properties.
25
MANAGEMENT
The following table sets forth the respective names, ages and positions of each of our directors, and executive officers as of June 30, 2008. There are no family relationships between any of the persons named below. All of our directors were elected to the Board of Directors on July 5, 2007.
| | | | | | |
Name
| | Age | | Position
|
|
Executive Officers and Directors
| | | | | | |
Kendall Larsen | | | 57 | | | President, Chief Executive Officer and Director |
William E. Sliney | | | 69 | | | Chief Financial Officer (Interim) |
Edmund C. Munger | | | 64 | | | Director |
Scott C. Taylor | | | 47 | | | Director |
Michael F. Angelo | | | 48 | | | Director |
Thomas M. O’Brien | | | 42 | | | Director |
Kendall Larsen. Mr. Larsen has been our President, Chief Executive Officer and a director since July 5, 2007 and has held the same positions with VirnetX since its inception in August 2005. From April 2003 to July 2005, Mr. Larsen focused on pre-incorporation activities related to VirnetX. From April 2002 to April 2003, Mr. Larsen was a Limited Partner at Osprey Ventures, L.P., a venture fund that makes investments primarily in business and consumer technology companies. From October 2000 to April 2002, he was Senior Vice President and General Manager of the Security Products Division of Phoenix Technologies Ltd., a software and firmware developer. Prior to March 2003, and for a period of over 20 years, Mr. Larsen has held senior executive positions at various leading technology companies, including RSA Security, Inc., Xerox Corporation, Rolm/International Business Machines Corporation, Novell, Inc., General Magic, Inc., and Ramp Networks. Mr. Larsen holds a B.S. in Economics from the University of Utah.
William E. Sliney. Mr. Sliney has been our Chief Financial Officer on an interim and part-time basis since July 5, 2007. Prior to that time, Mr. Sliney served as our President from August 2001, Chief Financial Officer from April 1999 and Secretary from December 2001. He also served as our Chairman of the Board from October 2000 to August 2001 and was a member of our Board of Directors from October 2000 to July 5, 2007. He was also a director of Enterra Energy Trust (NYSE: ENT), an oil and gas trust based in Calgary, Alberta that acquires, operates, and exploits petroleum and natural gas assets in Canada and in the United States, from January 2002 to March 2006. Before joining us, Mr. Sliney was the Chief Financial Officer of Legacy Software Inc. from 1995 to 1998. From 1993 to 1994, Mr. Sliney was Chief Executive Officer of Gump’s, a high end department store retailer based in San Francisco. Mr. Sliney received an M.B.A. from the Anderson School at UCLA.
Edmund C. Munger. Mr. Munger has been a director since July 5, 2007. He has been the Chief Technology Officer of VirnetX since July 2006 and a director of VirnetX since July 2006. From July 1987 to June 2006, Mr. Munger held various positions including Associate Division Manager, Division Manager, Chief System Architect and Assistant Vice President at Science Applications International Corporation (“SAIC”) (NYSE: SAI), a leading provider of services and solutions to all branches of the U.S. military, agencies of the Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. government civil agencies, as well as to customers in selected commercial markets. Mr. Munger is named as a co-inventor on all patents in the VirnetX patent portfolio. Mr. Munger received a M.S. in Naval Architecture and Marine Engineering from MIT and a B.S. in Naval Science from the United States Naval Academy.
Thomas M. O’Brien. Mr. O’Brien has been a director since July 5, 2007. He has been Senior Vice President of Reit Management & Research LLC, an institutional manager of real estate, public real estate investment trusts (“REITs”) and other public companies, since May 2006 and served as a Vice President of that company from May 1996 to April 2006. During the last five years, Mr. O’Brien has held various positions with public entities managed by Reit Management or its affiliates, including serving as: (i) Chief Executive Officer and President of TravelCenters of America LLC (AMEX: TA), since February 2007 and a Managing Director since October 2006; (ii) Chief Executive Officer and President of RMR Funds, a group of publicly traded closed-end investment management companies which invest in equity and fixed income securities in the U.S. and international real estate, hospitality and finance sectors, from 2003 to May 2007; and (iii) Executive Vice President of Hospitality Properties Trust (NYSE: HPT), a REIT that invests in hotels and travel centers, from 2002 to 2003 and Chief Financial Officer
26
from 1996 to 2002. From 1988 to 1996, Mr. O’Brien was a senior manager with Arthur Andersen LLP where he served a number of public company clients. Mr. O’Brien graduated cum laude from the University of Pennsylvania, Wharton School of Business, with a B.S. in Economics.
Michael F. Angelo. Mr. Angelo has been a director since July 5, 2007. He has been a Senior Architect at NetIQ Corporation since August 2005. From October 2003 to August 2005, Mr. Angelo was a Security Architect and Manager, Government Engagements SBU with Microsoft Corporation. From July 1989 to October 2003, Mr. Angelo was a Staff Fellow at both Hewlett Packard Company and Compaq Computer Corp. Mr. Angelo also served as Senior Systems Programmer at the John von Neumann National Supercomputer Center from September 1985 to July 1989. He was aSub-Chairman of the National Institute of Standards and Technology Board of Assessment for Programs/National Research Council responsible for the CISD review, for fiscal years2000-2001 and2001-2002, and a technology contributor and participant on the U.S. Commerce Department’s Information Systems Technical Advisory Council (ISTAC), from 1999 to the present. Mr. Angelo was named a distinguished lecturer for 2004 and 2005 by Sigma XI, the Scientific Research Society. He currently holds 49 patents, most in the area of security and authentication, and was also named the 2003 Inventor of the Year for the City of Houston by the Houston Intellectual Property Lawyers Association.
Scott C. Taylor. Mr. Taylor has been a director since July 5, 2007. Mr. Taylor has been the Vice President, Corporate Legal Services for Symantec Corporation (NASDAQ: SYMC), the global leader in consumer and enterprise security and availability software solutions, since February 2007. From January 2002 to February 2007, Mr. Taylor worked for Phoenix Technologies Ltd, a public (NASDAQ: PTEC) software and firmware company. Prior to 2002, Mr. Taylor has worked at Narus Inc, Symantec Corporation, Pillsbury Madison & Sutro LLP (now Pillsbury Winthrop Shaw Pittman LLP), ICF Incorporated (now ICF Consulting) and the U.S. Securities and Exchange Commission in various roles. Mr. Taylor has been admitted to practice law in the State of California since 1993 and is an advisory Board Member at Langtech (IT infrastructure consulting and outsourced management). He is the Co-chair of General Counsel Committee (and former board member) of the Silicon Valley Campaign for Legal Services and maintains a Top Secret security clearance with the U.S. government. Mr. Taylor has a B.A. in International Relations from Stanford University and a J.D. from George Washington University.
Significant Employees
Robert Dunham Short III. Mr. Short has been the Chief Scientist for VirnetX since May 2007. From February 2000 to April 2007, Mr. Short was Assistant Vice President and Division Manager at Science Applications International Corporation (“SAIC”) (NYSE: SAI), a leading provider of services and solutions to all branches of the U.S. military, agencies of the Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. government civil agencies, as well as to customers in selected commercial markets. From 1994 to February 2000, he also held various other positions at SAIC. Prior to SAIC, he has also worked at ARCO Power Technologies, Inc. (Atlantic Richfield Petroleum), Sperry Corporate Technology Center and Sperry Research Center. Mr. Short is named as a co-inventor on all the patents in the VirnetX patent portfolio. He holds a TS/SCI security clearance. He has a Ph.D in Electrical Engineering from Purdue University along with a M.S. in Mathematics and a B.S. in Electrical Engineering from Virginia Tech.
Kathleen Sheehan. Ms. Sheehan is the Chief Administration Officer and prior to that she was the Vice President, Administration and Human Resources for VirnetX since December 2005. Ms. Sheehan was also the Treasurer and Chief Financial Officer of VirnetX from March 2006 until July 5, 2007. From September 2004 to July 2005, Ms. Sheehan focused on equity raise and pre-incorporation activities related to VirnetX. From September 2002 to September 2004, Ms. Sheehan was a Commercial Property Manager for JBD Properties, a real estate developer. Prior to September 2002, she worked for Armen and Associates as an Executive Recruiter. She has also worked at CHW Advertising (Senior Director of Human Resources), Modis/SAP (Human Resources and Office Manager) and as an executive recruiter for top level executives in thee-commerce & advertising industry.
27
Sameer Mathur. Mr. Mathur has been the Vice President, Corporate Development and Marketing for VirnetX since July 5, 2007. Prior to that date, Mr. Mathur was the Vice President, Business Development of VirnetX since April 2006. From March 2004 to April 2006, Mr. Mathur was Product Line Manager for SonicWALL Inc (NASDAQ: SNWL), a leading provider of Internet security solutions. From April 2003 to March 2004, Mr. Mathur was Senior Product Manager for Zone Labs Inc, a leading provider of Internet security software. From June 1996 to April 2003, he was Senior Product Marketing Manager of Phoenix Technologies Ltd, a public (NASDAQ: PTEC) software and firmware company. Prior to June 1996, Mr. Mathur has worked in various engineering and marketing roles for OEC Japan, IBM Japan, and Pertech Computers Ltd. Mr. Mathur has a B.S. in Engineering from Gujarat University, India.
28
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Objectives and Philosophy of Executive Compensation
We maintain a peer-based executive compensation program comprised of multiple elements. We conducted our benchmarking analysis by evaluating:
| | |
| • | early and late stage private companies using a semi-annual survey of private, venture-backed companies that have received at least one (1) round of financing from a professionalU.S.-based venture capital firm. This semi-annual survey was prepared by CompensationPro (a Dow Jones company). Of the companies in this survey, over one-half are in the information technology business and the remainder are divided between healthcare, products and services and other companies; |
|
| • | a key comparable company, Medivation, Inc., which also completed a reverse merger followed by an underwritten direct primary public offering. This company had similar market capitalization compared to us and was similarly early stage and pre-revenue at the time of their reverse merger, although this company is a medical device company; and |
|
| • | public company peers using data we gathered from the SEC filings of ten (10) public companies with the same industry code as us and otherwise in a comparable industry, having a market capitalization of between $25 million and $500 million, and in a similar geographic region. |
The primary objectives of our peer-based executive compensation program are:
| | |
| • | attracting and retaining the most talented and dedicated executives possible; |
|
| • | correlating annual and long-term cash and stock incentives to achievement of measurable performance objectives; and |
|
| • | aligning executives’ incentives with stockholder value creation. |
To achieve these objectives, we implement and maintain compensation plans that tie a substantial portion of each executive’s overall compensation to key strategic financial and operational goals such as the establishment and maintenance of key strategic relationships, the development of our product candidates, the identification and advancement of additional product candidates, and the performance of our common stock price. Our compensation committee’s approach emphasizes the setting of compensation at levels the committee believes are competitive with executives in other companies of similar size and stage of development operating in the information technology industry while taking into account our relative performance and our own strategic goals.
Tax Deductibility of Executive Compensation
Our compensation committee and our Board have considered the potential future effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our executive officers. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for any of our executive officers, unless compensation is performance based. In approving the amount and form of compensation for our executive officers, our compensation committee will continue to consider all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m).
Role of Executive Officers
Our compensation committee exclusively makes all compensation decisions with regard to our chief executive officer and it approves recommendations regarding compensation for our other employees. Our president and chief executive officer generally attends compensation committee meetings and sometimes makes recommendations to our compensation committee regarding the amount and form of the compensation of the other executive officers and key employees. He is not present for any of the executive sessions or for any discussion of his own compensation.
29
Elements of Executive Compensation
Executive compensation consists of the following elements:
| | |
| • | Base Salary. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, the program is designed to deliver executive base salaries within the range of salaries for executives with the requisite skills in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Executives with more experience, critical skills,and/or considered key performers may be compensated above the range as part of our strategy for attracting, motivating and retaining highly experienced and high performing employees. Base salaries are reviewed annually and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, and experience. This review occurs each year in the fourth quarter and adjustments are made from time to time to ensure market competitiveness. |
|
| • | Discretionary Annual Incentive Bonus. Each year, our compensation committee establishes a target discretionary annual incentive bonus pool based on a percentage of an executive’s base salary and the achievement of corporate and individual objectives. Our compensation committee has the sole authority to award discretionary annual incentive bonuses to our chief executive officer and has authority along with our Board to award discretionary annual incentive bonuses to other employees. Our compensation committee utilizes annual incentive bonuses to compensate officers for achieving financial and operational goals and for achieving individual annual performance objectives. These objectives vary depending on the individual executive, but relate generally to strategic factors such as establishment and maintenance of key strategic relationships, development and implementation of our licensing strategy, development of our product, identification and advancement of additional products, and to financial factors such as raising capital, improving our results of operations, and increasing the price per share of our common stock. |
|
| • | Long-Term Incentive Program. We believe that long-term performance is achieved through an ownership culture that encourages high performance by our executive officers through the use of stock and stock-based awards. Our 2007 Stock Plan was established to provide our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders. Our compensation committee believes that the use of stock and stock-based awards offers the best approach to achieving our compensation goals. We have historically elected to use stock options as the primary long-term equity incentive vehicle. |
|
| • | Stock Option Grants. Stock option grants are made at the commencement of employment, may be made annually based upon performance and, occasionally, following a significant change in job responsibilities or to meet other special retention objectives. Our compensation committee reviews and approves stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. In determining the number of stock options to be granted to executives, we take into account the individual’s position, scope of responsibility, ability to affect profits and stockholder value, the individual’s historic and recent performance, and the value of stock options in relation to other elements of the individual executive’s total compensation. We expect to continue to use stock options as a long-term incentive vehicle because: |
|
| • | stock options align the interests of executives with those of the stockholders, support a pay-for-performance culture, foster employee stock ownership, and focus the management team on increasing value for the stockholders; |
|
| • | stock options are performance based and all the value received by the recipient of a stock option is based on the growth of the stock price; |
|
| • | stock options help to provide a balance to the overall executive compensation program as base salary and our discretionary annual bonus program focus on short-term compensation, while the vesting of stock options increases stockholder value over the longer term; and |
|
| • | the vesting period of stock options encourages executive retention and the preservation of stockholder value. |
30
Stock Ownership Guidelines
We have not adopted stock ownership guidelines and our 2007 Stock Plan has provided the principal method for our executive officers to acquire equity in the Company. We currently do not require our directors or executive officers to own a particular amount of our common stock. Our compensation committee is satisfied that stock and option holdings among our directors and executive officers are sufficient at this time to provide motivation and to align this group’s interests with those of our stockholders.
Perquisites
Our executive officers participate in the same group insurance and employee benefit plans as our other salaried employees. At this time we do not provide special benefits or other perquisites to our executive officers.
Change of Control Arrangements
Our 2007 Stock Plan allows our Board to determine the terms and condition of awards issued thereunder. Our Board has made the determination that all options issued under our 2007 Stock Plan will include the provision that in the event of a “Change of Control” (as defined in our 2007 Stock Plan), all unvested shares underlying the option will vest and become exercisable immediately prior to the consummation of such Change of Control transaction.
Named Executive Officers’ Compensation
Base Salary
Mr. Larsen is our president and chief executive officer, as well as a director. Relative to the benchmarking surveys described above, his base salary is above the 75th percentile for early and late stage private companies, below our key comparable company and between the median and the 75th percentile of our public company peers. Mr. Larsen, a founder of VirnetX, Inc., has driven the organization’s performance, leading it from inception, through the earlystart-up phase and through several rounds of financing. Mr. Larsen will be critical to our ability to pursue our licensing strategy going forward. On December 31, 2007, in an executive session including only the independent directors, our compensation committee assessed Mr. Larsen’s 2007 performance, considering our and Mr. Larsen’s accomplishments and the committee’s own subjective assessment of his performance.
Mr. Sliney is our chief financial officer and his base salary is below the median of early stage private companies, below the median for late stage private companies and our public company peers, and below our key comparable company. In establishing Mr. Sliney’s base salary, our compensation committee primarily considered Mr. Sliney’s experience in public company work, his transactional and strategic skills, his level of responsibility, past contributions to our performance and expected contributions to our further success.
Discretionary Annual Incentive Bonus
Actual bonus awards for each Named Executive Officer are listed in “Executive Compensation — Summary Compensation Table” on page 32 of this report. On December 31, 2007, after assessing performance and after taking into account the fact that no bonuses had been paid to our executive officers to date, our compensation committee awarded discretionary annual bonuses to Mr. Larsen and Mr. Sliney.
Long-Term Incentive Program
In determining the amount of the stock option grants made to Mr. Larsen and to Mr. Sliney in 2007, our compensation committee evaluated data derived from the same benchmarking analysis described above that was used to establish cash compensation amounts.
In 2007, Mr. Larsen was granted a number of options such that the aggregate of all of his equity incentive shares outstanding under our 2007 Stock Plan represents a fully diluted percentage ownership of the Company that was below the median for early stage private companies, and between the median and the 75th percentile for late stage private companies. In addition, the Black-Scholes option value of all of his equity incentive shares outstanding
31
under our 2007 Stock Plan is higher than our key comparable company and between the median and 75th percentile of our public company peers.
In 2007, Mr. Sliney was granted a number of options such that the aggregate of all of his equity incentive shares outstanding under our 2007 Stock Plan represents a fully diluted percentage ownership of the Company that was below the median for early stage private companies, and at the median for late stage private companies. In addition, the Black-Scholes option value of all of his equity incentive shares outstanding under our 2007 Stock Plan is below our key comparable company and between the median and 75th percentile of our public company peers.
Summary Compensation Table
The table that follows shows the compensation earned for the last three (3) fiscal years by our “Named Executive Officers,” as defined in Item 407(m) ofRegulation S-K:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Change in
| | | | |
| | | | | | | | | | | | | | | Pension Value
| | | | |
| | | | | | | | | | | | | Non-
| | and
| | | | |
| | | | | | | | | | | | | Equity
| | Nonqualified
| | | | |
| | | | | | | | | | | | | Incentive
| | Deferred
| | All Other
| | |
Name & Principal
| | | | | | | | Stock
| | Option
| | Plan
| | Compensation
| | Compensation
| | |
Position | | Year | | Salary ($) | | Bonus ($) | | Awards ($) | | Awards ($)(1) | | Compensation ($) | | Earnings ($) | | ($)(2) | | Total ($) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Kendall Larsen | | | 2007 | | | | 245,000 | | | | 244,211 | | | | | | | | 1,015,612 | | | | | | | | | | | | — | | | | 1,504,823 | |
| Chief Executive Officer, | | | 2006 | | | | 237,039 | | | | | | | | — | | | | 7,665 | | | | | | | | | | | | — | | | | 244,704 | |
| President and Director | | | 2005 | (2) | | | — | | | | — | | | | 399,960 | | | | | | | | | | | | | | | | | | | | 399,960 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
William E. Sliney | | | 2007 | | | | 36,460 | | | | 15,313 | | | | | | | | 1,882,146 | | | | | | | | | | | | | | | | 1,933,919 | |
| Chief Financial Officer | | | 2006 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | 30,000 | | | | 30,000 | |
| | | | 2005 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | 30,000 | | | | 30,000 | |
| | |
(1) | | The amounts in this column reflect the estimated grant date present value of (i) $4.761 for the stock options granted to Kendall Larsen during fiscal year 2007, and (ii) $4.913 for the stock options granted to William E. Sliney during fiscal year 2007, which have been calculated using the Black-Scholes stock option pricing model. Reference Note 6 “Stock Plan” in ourForm 10-K for the period ended December 31, 2007, filed with the SEC on March 31, 2008 and attached hereto, which identifies the assumptions made in the valuation of option awards in accordance with SFAS 123(R). |
|
(2) | | The amounts in this column reflect compensation earned by the Named Executive Officer for consulting services he provided to the Company. |
|
(3) | | These amounts represent compensation paid from the incorporation of VirnetX, Inc. on August 2,2005 until December 31,2005. |
2007 Grants of Plan-Based Awards
The following table sets forth grants of stock options made during the fiscal year ended December 31, 2007 to each Named Executive Officer:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | All Other
| | | | Grant
|
| | | | | | | | | | | | | | | | | | | | | Stock
| | Exercise
| | Date
|
| | | | | | | Estimated Future Payouts
| | Estimated Future Payouts
| | All Other
| | Awards:
| | or Base
| | Fair
|
| | | | | | | under Non-Equity Incentive
| | under Equity Incentive
| | Stock
| | Number of
| | Price of
| | Value of
|
| | | | | | | Plan Awards | | Plan Awards | | Awards:
| | Securities
| | Option
| | Stock or
|
| | | | | Approval
| | Threshold
| | Target
| | Maximum
| | Threshold
| | Target
| | Maximum
| | Number of
| | Underlying
| | Awards
| | Option
|
Name | | Grant Date | | Date | | ($) | | ($) | | ($) | | (#)(1) | | (#) | | (#)(1) | | Shares | | Options | | ($/share) | | Awards($)(2) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Kendall Larsen | | | 12/31/2007 | | | | 12/31/2007 | | | | n/a | | | | n/a | | | | n/a | | | | — | | | | 213,319 | | | | — | | | | n/a | | | | n/a | | | | 6.468 | (3) | | | 1,015,612 | |
| Chief Executive Officer, President and Director | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
William E. Sliney | | | 12/31/2007 | | | | 12/31/2007 | | | | n/a | | | | n/a | | | | n/a | | | | — | | | | 383,095 | | | | — | | | | n/a | | | | n/a | | | | 5.88 | | | | 1,882,146 | |
| Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Our equity incentive plan does not include thresholds or maximums as defined in Item 402(d) ofRegulation S-K. |
|
(2) | | The amounts in this column reflect the estimated grant date present value of (i) $4.761 for the stock options granted to Kendall Larsen during fiscal year 2007, and (ii) $4.913 for the stock options granted to William E. Sliney during fiscal year 2007, which have been calculated using the Black-Scholes stock option pricing model. Reference Note 6 “Stock Plan” in ourForm 10-K for the period ended December 31, 2007, filed with the SEC |
32
| | |
| | on March 31, 2008 and attached hereto, which identifies the assumptions made in the valuation of option awards in accordance with SFAS 123(R). |
|
(3) | | As Mr. Larsen is a holder of more than 10% of the Company’s outstanding equity, per our equity incentive plan, his options were granted at 110% of the fair market value of Common Stock on the date of grant. |
Outstanding Equity Awards at 2007 Fiscal Year-End
The following table sets forth, for each of our Named Executive Officers, the number and exercise price of unexercised options, and the number and market value of stock awards that have not vested as of the end of fiscal year 2007:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Equity Incentive
| | | | |
| | | | | | | Plan Awards
| | | | |
| | | Number of
| | | | Number of
| | | | |
| | | Securities
| | | | Securities
| | | | |
| | | Underlying
| | Number of
| | Underlying
| | | | |
| | | Unexercised
| | Securities Underlying
| | Unexercised
| | | | |
| | | Options
| | Unexercised Options
| | Unearned
| | Option Exercise
| | Option Expiration
|
Name | | Exercisable (#) | | Unexercisable (#) | | Options (#) | | Price ($) | | Date |
| |
Kendall Larsen | | | 41,516 | | | | 213,319 | | | | — | | | | 6.468 | | | | 12/31/2012 | (1) |
| Chief Executive Officer, President and Director | | | | | | | | | | | | | | | | | | | | |
William E. Sliney | | | — | | | | 383,095 | | | | — | | | | 5.88 | | | | 12/30/2017 | |
| Chief Financial Officer | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | As Mr. Larsen is a holder of more than 10% of the Company’s equity, per our equity incentive plan, his options expire five (5) years from grant. |
Option Exercises and Stock Vested in Fiscal Year 2007
The following table shows the options exercised and stock vested held by our Named Executive Officers in the fiscal year 2007:
| | | | | | | | | | | | | | | | |
| | Options Awards | | Stock Awards |
| | Number of
| | | | Number of
| | |
| | Shares
| | | | Shares
| | |
| | Acquired on
| | Value Realized
| | Acquired on
| | Value Realized
|
Name
| | Exercise (#) | | on Exercise ($) | | Vesting (#) | | on Vesting ($) |
|
Kendall Larsen
Chief Executive Officer, President and Director
| | | — | | | | — | | | | n/a | | | | n/a | |
William E. Sliney
Chief Financial Officer
| | | — | | | | — | | | | n/a | | | | n/a | |
Pension Benefits for Fiscal Year 2007
None.
We do not maintain a pension plan as such term is described in Item 402(h) ofRegulation S-K.
Nonqualified Deferred Compensation for Fiscal Year 2007
None.
We do not maintain a nonqualified defined contribution or other nonqualified deferred compensation plan as such term is described in Item 402(i) ofRegulation S-K.
Transactions with Related Persons
Our Code of Ethics requires each of our directors, employees, officers, and consultants to disclose any significant interest in any related party transaction and that interest must be approved in writing by our legal
33
department. If it is determined that the transaction is required to be reported under SEC rules, then the transaction will be subject to the review and approval by our audit committee of our Board. A copy of our Code of Ethics is available on our website athttp://www.virnetx.com/in the “Corporate Governance” link under the “Investors” tab.
The charter of our audit committee affirms that one of our audit committee’s responsibilities is to review and approve material related party transactions and related party transactions that are required to be disclosed in our public filings. We annually require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions as such term is defined by SEC rules and regulations. These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee, or officer.
The following is a description of each transaction in the last fiscal year and each currently proposed transaction in which:
| | |
| • | we have been or are to be a participant; |
|
| • | the amount involved exceeds $120,000; and |
|
| • | any of our directors, executive officers, holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest. |
Stock Option Grants
We have granted stock options to our executive officers and certain of our directors under our 2007 Stock Plan.
In connection with the consummation of the merger between VirnetX Holding Corporation and VirnetX, we assumed certain obligations under an Advisory Service Agreement dated November 6, 2006 by and between VirnetX and MDB Capital Group LLC, as amended by the terms of that certain Release Agreement between the same parties, which was executed on July 5, 2007. MDB Capital Group was a stockholder of VirnetX prior to the merger and Christopher Marlett, a principal at MDB Capital Group, is currently one of our stockholders as a result of the merger. Christopher Marlett, as of July 5, 2007, beneficially owned approximately 6.7% of our issued and outstanding shares of common stock. MDB Capital Group’s affiliates include Anthony DiGiandomenico and Robert Levande, each of whom is one of our existing stockholders as a result of the merger.
Additionally, in connection with the consummation of the merger, we entered into the following agreements and transactions with certain of our directors, executive officers and 5% stockholders:
Indemnification Agreements
We entered into Indemnification Agreements with each person who became one of VirnetX Holding Corporation’s directors or officers in connection with the consummation of the merger, pursuant to which, among other things, we will indemnify such directors and officers to the fullest extent permitted by Delaware law, and provide for advancement of legal expenses under certain circumstances.
Registration Rights Agreement
Effective as of July 5, 2007, we entered into a Registration Rights Agreement with all of the persons who were issued shares of our common stock and securities convertible into shares of our common stock in the merger.
Pursuant to the Registration Rights Agreement, commencing six months after the closing of the merger, the securityholders have a right to request that we register for resale (a) the shares of common stock issued to such persons in the merger and (b) the shares of common stock underlying convertible notes, options and warrants issued to such persons in the merger. We are required to cause each such registration statement filed as a result of such requests to be declared effective under the Securities Act as promptly as possible after the filing thereof and to keep such registration statement continuously effective under the Securities Act until the earlier of (i) the date when all shares included in the registration statement have been sold; (ii) the date that all shares can be sold pursuant to Rule 144; and (iii) one year from the effective date of such registration statement.
34
Additionally, the Registration Rights Agreement provides the securityholders with “piggyback” registration rights such that at any time there is not an effective registration statement covering the common stock described above and we file a registration statement relating to an offering for our own account or the account of others under the Securities Act, other than in connection with any acquisition of any entity or business or equity securities issuable in connection with stock options or other employee benefit plans and other than in connection with this offering, then we are required to send notice to the securityholders of such intended filing at least 20 days prior to filing such registration statement and we are required to automatically include in such registration statement all shares of common stock issued in the merger and all shares of common stock underlying convertible notes, options and warrants issued in the merger.
Each securityholder also has indemnified us, our directors, officers, agents, and certain other control persons against damages arising out of or based upon: (i) such securityholder’s failure to comply with the prospectus delivery requirements of the Securities Act or (ii) such securityholder’s provision of any untrue or alleged untrue statement of a material fact to be contained in any registration statement or prospectus, or arising out of or relating to any such securityholder’s omission or alleged omission of a material fact required to be stated therein or necessary to make the statements contained in such registration statement or prospectus not misleading.
Lock-Up Agreements
Effective as of July 5, 2007, we entered into aLock-Up Agreement with certain of the persons who were issued shares of our common stock in the merger and all persons who exchanged VirnetX options for VirnetX Holding Corporation options in the merger, pursuant to which we imposed certain restrictions on the sale of our common stocksecurities described in that prospectus supplement and any applicable fee, commission or any securities convertible into or which may be exercised to purchase any shares of our common stock acquired in connectiondiscount arrangement with the merger for a period of at least 12 months after the consummation of the merger; provided that the lockup period may be extended under certain circumstances. In addition, all of our officers and directors, as well as those stockholders listed in the resale prospectus filed with this registration statement have entered into aLock-Up Agreement with the underwriter for a period commencing on the date hereof and ending 12 months from the effective date of the registration statement; provided, however, that if the average closing price per share of the Company’s common stock exceeds 150% of the public offering price of the shares to be offered for 15 consecutive trading days during thelock-up period, the shares of common stock held by the San Gabriel group of investors shall be released from thelock-up by our underwriter. During the first quarter of 2008 the market price early release provision was triggered such that all 5,333,333 shares of our common stock held by the San Gabriel group of investors covered by this prospectus are now no longer subject to the transfer restrictions of the underwriter’s lockup agreement.them.
Transactions Between the Company and William E. Sliney
From March 2002 until July 5, 2007, the Company utilized the office space and equipment of its then officer, William E. Sliney, at no cost. Management estimates the value thereof to be immaterial.
Promoters and Control Persons
Glenn Russell was a founder and owned approximately 60% of the outstanding shares of VirnetX Holding Corporation immediately prior to the merger between VirnetX Holding Corporation and VirnetX. Mr. Russell received no compensation in connection with the merger between VirnetX and VirnetX Holding Corporation. Mr. Russell’s historical compensation from VirnetX Holding Corporation in his capacity as its Chief Executive Officer prior to the merger has been disclosed in VirnetX Holding Corporation’s reports filed with the SEC under the Securities Exchange Act of 1934, as amended.
On December 12, 2007, we entered into a Voting Agreement with the following stockholders that collectively own 4,766,666 shares of our common stock, representing approximately 13.66% of our 34,899,985 shares outstanding as of June 30, 2008.
| | |
| • | San Gabriel Fund, LLC |
|
| • | JMW Fund, LLC |
35
| | |
| • | John P. McGrain |
|
| • | The John P. McGrain Grantor Retained Annuity Trust u/t/d/ June 25, 2007 |
|
| • | John P. McGrain, SEP IRA |
|
| • | John P. McGrain, 401K |
|
| • | The Westhampton Special Situations Fund, LLC |
|
| • | The Kirby Enterprise Fund, LLC |
|
| • | Kearney Properties, LLC |
|
| • | Kearney Holdings, LLC |
|
| • | Charles F. Kirby, Roth IRA |
|
| • | Charles F. Kirby |
The Voting Agreement requires each of the above stockholders to vote all of the shares of our voting stock held by them from time to time in favor of the directors nominated by our Board of Directors and in a manner proportional to all the other votes cast by shares present and voting with respect to any other matter brought to the stockholders for a vote. This voting arrangement is an initial and continuing listing requirement for our common stock to be and remain listed on the American Stock Exchange.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Such officers, directors, and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms we received, we believe that during the 2007 fiscal year all Section 16(a) filing requirements applicable to our officers, directors, and 10% stockholders were satisfied.
Voting Securities and Principal Holders
The following table sets forth the beneficial ownership of our common stock as of June 30, 2008 by:
| | |
| • | all persons known to us, based on statements filed by such persons pursuant to Section 13(d) or 13(g) of the Exchange Act, to be the beneficial owners of more than 5% of our common stock and based on the records of U.S. Stock Transfer Corporation, our transfer agent; |
|
| • | each director; |
|
| • | each of our Named Executive Officers in the table under “Executive Compensation — Summary Compensation Table”; and |
|
| • | all current directors and executive officers as a group. |
Except as otherwise noted and subject to applicable community property laws, the persons named in this table have, to our knowledge, sole voting and investing power for all of the shares of common stock held by them.
This table lists applicable percentage ownership based on 34,899,985 shares of common stock outstanding as of June 30, 2008. Options to purchase shares of our common stock that are exercisable within 60 days of June 30, 2008 are deemed to be beneficially owned by the persons holding these options for the purpose of computing the number of shares owned by, and percentage ownership of, that person, but are not treated as outstanding for the purpose of computing any other person’s number of shares owned or ownership percentage.
Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all capital stock shown to be held by that
36
person. The address of each executive officer and director, unless indicated otherwise, is c/o VirnetX Holding Corporation, 5615 Scotts Valley Drive, Suite 110, Scotts Valley, California 95066.
| | | | | | | | | |
| | | Number of
| | |
| | | Shares
| | Percent
|
| | | Beneficially
| | of
|
Name and Address of Beneficial Owner | | Owned(l) | | Class(2) |
| |
5% or Greater Stockholders: | | | | | | | | |
| Gregory Hugh Bailey | | | 2,343,342 | (9) | | | 6.71 | % |
15 Barbery Place, Suite 809
Toronto, Canada | | | | | | | | |
| Kendall Larsen | | | 8,344,708 | (3) | | | 23.88 | % |
| Robert M. Levande | | | 2,084,101 | (4) | | | 5.97 | % |
8 East 67 Street
New York, New York 10021 | | | | | | | | |
| Blue Screen LLC | | | 1,764,428 | (5) | | | 5.06 | % |
7663 Fisher Island Drive
Miami, Florida 33109 | | | | | | | | |
| Christopher A. Marlett Living Trust | | | 1,792,766 | (6) | | | 5.13 | % |
420 Wilshire Boulevard,
Suite 1020
Santa Monica, California 90401 | | | | | | | | |
Directors and Executive Officers: | | | | | | | | |
| Kendall Larsen | | | 8,344,708 | (3) | | | 23.88 | % |
| Edmund C. Munger | | | 608,839 | (7) | | | 1.72 | % |
| William E. Sliney | | | 166 | | | | | * |
| Thomas M. O’Brien | | | 11,250 | (8) | | | | * |
| Michael F. Angelo | | | 52,766 | (8) | | | | * |
| Scott C. Taylor | | | 11,250 | (8) | | | | * |
All directors and executive officers as a group (6 persons): | | | 9,028,979 | (3)(7)(8) | | | 25.87 | % |
| | |
(1) | | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options and warrants which are exercisable or convertible at or within 60 days of June 30, 2008 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. The indication herein that shares are beneficially owned is not an admission on the part of the listed stockholder that he, she or it is or will be a direct or indirect beneficial owner of those shares. |
| | |
(2) | | Based upon 34,899,985 shares of common stock issued and outstanding on June 30, 2008. |
| | |
(3) | | Includes 41,516 shares issuable pursuant to options exercisable within 60 days. |
|
(4) | | Includes 1,876,521 shares held by Robert M. Levande, who has voting and investment power with respect to the 207,580 shares held by the Arthur Brown Trust FBO Carolyn Brown Levande, also included. |
|
(5) | | Includes 103,790 shares held by Nicholas Lewin directly who has voting and investment power with respect to the 1,660,638 shares held by Blue Screen LLC. |
| | |
(6) | | Christopher A. Marlett has voting and investment power with respect to the 1,792,766 shares held by the Christopher A. Marlett Living Trust. |
| | |
(7) | | Includes 540,572 shares issuable pursuant to options exercisable within 60 days. |
| | |
(8) | | Includes 11,250 shares issuable pursuant to options exercisable within 60 days. |
| | |
(9) | | Includes 2,275,075 shares directly held by Gregory H. Bailey who has voting and investment power with respect to the 68,267 shares held by Palantir Group, Inc. |
|
(*) | | Less than 1%. |
37
SELLING SECURITY HOLDERS
This prospectus relates to the sale of 21,377,363 shares of common stock of VirnetX Holding Corporation by the security holders named below, including 33,333 shares of common stock underlying warrants held by the selling stockholders. VirnetX Holding Corporation will not receive any of the proceeds of the sale of the securities by the selling security holders, except in connection with the exercise of warrants, in which case we will receive the exercise price thereof. The selling security holders are not required, and may choose not, to sell any of their shares of common stock.
The following table sets forth information regarding the shares of common stock owned beneficially as of June 30, 2008 on a post-split basis by each selling security holder. None of the selling security holders is an officer, director or 10% or more stockholder of VirnetX Holding Corporation.
| | | | | | | | | | | | | |
| | | Shares
| | | Shares
| | | Shares
| |
| | | Owned Prior
| | | Being
| | | Owned After
| |
Name of Selling Securityholder | | to Offering | | | Offered | | | Offering | |
| |
| Aaron A. Grunfeld(1)(2) | | | 86,667 | | | | 86,667 | | | | — | |
| Amy Atkinson(1) | | | 3,333 | | | | 3,333 | | | | — | |
| Anthony DiGiandomenico(3) | | | 791,763 | | | | 791,763 | | | | — | |
| Arthur Brown Irrevocable Trust FBO Carolyn Brown Levande(4) | | | 207,580 | | | | 207,580 | | | | — | |
| Arthur Kassoff(1) | | | 23,333 | | | | 23,333 | | | | — | |
| Benjamin Lewin(5) | | | 130,893 | | | | 130,893 | | | | — | |
| Blue Screen LLC(6) | | | 1,660,638 | | | | 1,660,638 | | | | — | |
| Braxton Eric Schmid Trust(7) | | | 49,819 | | | | 49,819 | | | | — | |
| Britta A.C. Nosbaum(8) | | | 49,819 | | | | 49,819 | | | | — | |
| Caelinn Eileen Leahy Trust(9) | | | 49,819 | | | | 49,819 | | | | — | |
| Chad K. Kirby(1) | | | 44,445 | | | | 44,445 | | | | — | |
| Charles F. Kirby, Roth IRA(1) | | | 26,667 | | | | 26,667 | | | | — | |
| Christopher A. Marlett Living Trust(10) | | | 1,792,766 | | | | 1,792,766 | | | | — | |
| Claire Lorraine Schmid Trust(7) | | | 49,819 | | | | 49,819 | | | | — | |
| Dyana Marlett(11) | | | 758,912 | | | | 758,912 | | | | — | |
| Eric G. Schmid(7) | | | 49,819 | | | | 49,819 | | | | — | |
| Eric Maximillian Schmid Trust(7) | | | 49,819 | | | | 49,819 | | | | — | |
| Eric Schmid and Susan Schmid(7) | | | 62,274 | | | | 62,274 | | | | — | |
| Finn Gustav Nosbaum Trust(8) | | | 49,819 | | | | 49,819 | | | | — | |
| Gregory Hugh Bailey(12) | | | 2,275,075 | | | | 2,275,075 | | | | — | |
| Gus Blass III(13) | | | 25,000 | | | | 25,000 | | | | — | |
| Heidi L. Schmid-Leahy(9) | | | 49,819 | | | | 49,819 | | | | — | |
| JMW Fund LLC(1)(14) | | | 1,273,911 | | | | 1,273,911 | | | | — | |
| Joe Robinson(15) | | | 103,790 | | | | 103,790 | | | | — | |
| John P. McGrain Grantor Trust(1) | | | 300,000 | | | | 300,000 | | | | — | |
| John P. McGrain(1) | | | 820,000 | | | | 820,000 | | | | — | |
| John P. McGrain, 401K(1) | | | 26,667 | | | | 26,667 | | | | — | |
| John P. McGrain, SEP IRA(1) | | | 26,666 | | | | 26,666 | | | | — | |
| Karl J. Feitelberg(16) | | | 231,891 | | | | 231,891 | | | | — | |
| Kathleen Sheehan(17) | | | 608,530 | | | | 608,530 | | | | — | |
| Kearney Holdings, LLC(1) | | | 333,333 | | | | 333,333 | | | | — | |
| Kearney Properties, LLC(1) | | | 100,000 | | | | 100,000 | | | | — | |
| Kingsford Capital Partners, L.P.(18) | | | 11,597 | | | | 11,597 | | | | — | |
| Kingsford International(18) | | | 65,304 | | | | 65,304 | | | | — | |
| Lillian Rose Lorraine Nosbaum Trust(8) | | | 49,819 | | | | 49,819 | | | | — | |
| Linda McGrain(19) | | | 10,000 | | | | 10,000 | | | | — | |
38
| | | | | | | | | | | | | |
| | | Shares
| | | Shares
| | | Shares
| |
| | | Owned Prior
| | | Being
| | | Owned After
| |
Name of Selling Securityholder | | to Offering | | | Offered | | | Offering | |
| |
| Lisa Kirby, custodian for Charles Kirby(1) | | | 44,444 | | | | 44,444 | | | | — | |
| Lisa Kirby, custodian for Kelsey Kirby(1) | | | 44,444 | | | | 44,444 | | | | — | |
| Michael B. Nosbaum(20) | | | 12,455 | | | | 12,455 | | | | — | |
| Michael Tiedemann(21) | | | 231,891 | | | | 231,891 | | | | — | |
| Nancy L. Schmid(22) | | | 429,374 | | | | 429,374 | | | | — | |
| Nicaragua Initiative for Community Advancement(23) | | | 583,969 | | | | 583,969 | | | | — | |
| Nicholas S. Lewin(6) | | | 103,790 | | | | 103,790 | | | | — | |
| Orrick Investments 2006 LLC(24) | | | 33,213 | | | | 33,213 | | | | — | |
| Palantir Group, Inc.(12) | | | 68,267 | | | | 68,267 | | | | — | |
| Patrick Leahy and Heidi Leahy(9) | | | 62,274 | | | | 62,274 | | | | — | |
| Patrick Reidy(1) | | | 53,333 | | | | 53,333 | | | | — | |
| Randall J. Parker(25) | | | 83,032 | | | | 83,032 | | | | — | |
| REI Capital Canada, Ltd.(26) | | | 232,864 | | | | 232,864 | | | | — | |
| Richard A. Danzig, Trustee of the Richard A. Danzig Defined Benefit Pension Trust(27) | | | 691,006 | | | | 691,006 | | | | — | |
| Richard M. Schmid(28) | | | 174,367 | | | | 174,367 | | | | — | |
| RiverBend Fund, LLC(29) | | | 25,000 | | | | 25,000 | | | | — | |
| Robert M. Levande(4) | | | 1,876,521 | | | | 1,876,521 | | | | — | |
| Ronald Nesson, Trustee of the Ronald and Darlene Nesson Family Trust dated October 16, 2002(30) | | | 207,580 | | | | 207,580 | | | | — | |
| Sameer Mathur, Trustee of the Mathur Family Trust, Dated March 12, 2007(31) | | | 622,739 | | | | 622,739 | | | | — | |
| San Gabriel Fund, LLC(1) | | | 1,600,000 | | | | 1,600,000 | | | | — | |
| The Elevation Fund, LLC(1) | | | 266,667 | | | | 266,667 | | | | — | |
| The Gregory J. Wood Revocable Trust(32) | | | 1,186,413 | | | | 1,186,413 | | | | — | |
| The Kirby Enterprise Fund, LLC(1) | | | 133,333 | | | | 133,333 | | | | — | |
| The West Hampton Special Situations Fund, LLC(1) | | | 200,000 | | | | 200,000 | | | | — | |
| Thomas E. Manoogian(1) | | | 16,667 | | | | 16,667 | | | | — | |
| Underwood Family Partners, LTD(1) | | | 16,667 | | | | 16,667 | | | | — | |
| Wilson Power of Appointment Trust(33) | | | 124,548 | | | | 124,548 | | | | — | |
| Y2K Partners L.P.(18) | | | 3,099 | | | | 3,099 | | | | — | |
| TOTAL | | | 21,377,363 | | | | 21,377,363 | | | | | |
| | |
(1) | | Indicates a member of the San Gabriel group of investors. The members of the San Gabriel group of investors received their shares of common stock of VirnetX Holding Corporation pursuant to the conversion of convertible bridge notes upon consummation of the merger between VirnetX, Inc. and VirnetX Holding Corporation. The shares of common stock held by the San Gabriel group of investors have been released from the 12 monthlock-up by Gilford Securities Incorporated because the average closing price per share of the Company’s common stock exceeded 150% of the public offering price of the shares to be offered for 15 consecutive trading days during thelock-up period. |
With respect to the members of San Gabriel group of investors that are entities:
| | |
| • | Justin Yorke has sole voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by San Gabriel Fund, LLC and JMW Fund, LLC; |
| | |
| • | John P. McGrain has sole voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by the John P. McGrain Grantor Trust, the John P. McGrain, SEP IRA and the John P. McGrain, 401K; |
39
| | |
| • | Michael Underwood has sole voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by Underwood Family Partners; |
| | |
| • | the voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by The Elevation Fund, LLC are shared by the following individual partners: Lance J. Baller, Dr. Paul Dragul, Paulette Dragul, Stephen D. Garland, Arthur Kassoff, Charles F. Kirby (indirectly, through Kearney Holdings, LLC), Cynthia Kirby, Justin Yorke (indirectly, through JMW Fund, LLC), Barbara Ann Bobbi Norris, Jeffrey P. Ploen, Patrick Reidy, LA Walker and Linda Walker; |
| | |
| • | the voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by The West Hampton Special Situations Fund, LLC are shared by the following individual partners: Amy Atkinson, Lance J. Baller, Lisa Bingaman Kirby, Robert Burg, Stephen Case, Dr. Paul Dragul, Paulette Dragul, Stephen D. Garland, Arthur Kassoff, Gary Keogh, Charles Kirby (indirectly, through Kearney Holdings, LLC), Cynthia Kirby, Heather Evans, Deborah Lombardi, Thomas Manoogian, Gary McAdam, Douglas Moreland, Barbara Ann Bobbi Norris, Clarence Osborn, John Paulson, John Paulson Jr., Jeff Ploen, Patrick Reidy, Daniel Rudden; Gerald Rudden, Meredith Rudden, L. Michael Underwood, Frank Visciano, Lorraine Visciano, LA Walker, Linda Walker, Justin Yorke (indirectly, through San Gabriel Fund, LLC), Robin Young and Stewart Young; |
| | |
| • | the voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by The Kirby Enterprise Fund, LLC are shared by the following individual partners: Robert Burg, David Culberson, William Gordica, Arthur Kassoff, Gary Keogh, Charles Kirby (indirectly, through Kearney Holdings, LLC), Earnest Mathis, Gary McAdam, Justin Yorke (indirectly, through JMW Fund, LLC), W. Douglas Moreland, Barbara Ann Bobbi Norris, Clarence Osborn, Jeff Ploen, Gail Ploen, Frank Visciano, Lorraine Visciano, LA Walker, Linda Walker, Jim Waters and Cora Waters; and |
| | |
| • | Charles Kirby III has sole voting and investment power with respect to the shares of common stock of VirnetX Holding Corporation held by Kearney Properties, LLC and Kearny Holdings, LLC. |
| | |
(2) | | 33,333 of this holder’s shares are shares of common stock underlying a warrant. |
| | |
(3) | | Of the 791,763 shares of common stock being registered in this offering, Mr. DiGiandomenico acquired (i) 132,851 shares of common stock at a purchase price of $0.000015 per share on October 15, 2005; and (ii) 758,912 shares of common stock from common stock transfers for no value on July 10, 2007 from certain stockholders. |
| | |
(4) | | Robert M. Levande has voting power with respect to the 207,580 shares of common stock of VirnetX Holding Corporation held by the Arthur Brown Irrevocable Trust FBO Carolyn Brown Levande. These shares were acquired prior to the merger in a transfer for no value from Robert M. Levande on December 14, 2006. |
Of the 1,876,521 shares of common stock being registered in this offering, together with the 207,580 shares he transferred to the family trust described above, Mr. Levande: (i) acquired 1,594,213 shares of common stock of VirnetX, Inc. on September 21, 2005 for a purchase price of $0.000015 per share, (ii) acquired 664,255 shares of common stock on October 15, 2005 for a purchase price of $0.000024 per share (423,463 of which were subsequently transferred); and (iii) acquired 41,516 shares of common stock pursuant to an option exercise with an exercise price of $0.240871 per share on April 23, 2007.
| | |
(5) | | Benjamin Lewin acquired 130,893 shares of common stock in VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(6) | | Nicholas Sheridan Lewin has voting power with respect to the 1,660,638 shares of common stock of VirnetX Holding Corporation held by Blue Screen LLC and 103,790 shares of common stock of VirnetX Holding Corporation held in his own name. |
Of the 103,790 shares of common stock being registered in this offering, Mr. Lewin acquired (i) 62,274 shares of common stock pursuant to an exercise of a stock option at an exercise price of $0.240871 per share on July 5, 2007, and (ii) 41,516 shares of common stock for a purchase price of $0.002409 per share on August 9, 2006. Blue Screen, LLC purchased 1,660,638 shares of Series A Preferred Stock of VirnetX, Inc. at a purchase price of $0.240871 per share on March 7, 2006.
| | |
(7) | | Eric G. Schmid has voting power with respect to the 62,274 shares of common stock of VirnetX Holding Corporation held by Eric Schmid and Susan Schmid, the 49,819 shares of common stock of VirnetX Holding Corporation held by Eric G. Schmid, the 49,819 shares of common stock of VirnetX Holding Corporation held |
40
| | |
| | by the Eric Maximillian Schmid Trust, the 49,819 shares of common stock of VirnetX Holding Corporation held by the Claire Lorraine Schmid Trust, and the 49,819 shares of common stock of VirnetX Holding Corporation held by the Braxton Eric Schmid Trust. |
Eric Schmid and Susan Schmid purchased 62,274 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006.
Eric Schmid acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
Eric Maximillian Schmid Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
The Claire Lorraine Schmid Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
The Braxton Eric Schmid Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
The Caelinn Eileen Leahy Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
| | |
(8) | | Britta A.C. Nosbaum has voting power with respect to the 49,819 shares of common stock of VirnetX Holding Corporation held by the Finn Gustav Nosbaum Trust, the 49,819 shares of common stock of VirnetX Holding Corporation held by Lillian Rose Nosbaum, and the 49,819 shares of common stock of VirnetX Holding Corporation held in her own name. |
Ms. Nosbaum purchased 49,819 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on May 1, 2007.
The Finn Gustav Nosbaum Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid acquired these shares on March 7, 2006 for a purchase price of $0.240871 per share.
The Lillian Rose Nosbaum Trust acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid acquired these shares on March 7, 2006 for a purchase price of $0.240871 per share.
| | |
(9) | | Heidi Schmid-Leahy has voting power with respect to the 62,274 shares of common stock of VirnetX Holding Corporation held by Patrick Leahy and Heidi Leahy, the 49,819 shares of common stock of VirnetX Holding Corporation held by the Caelinn Eileen Leahy Trust, and the 49,819 shares of common stock of VirnetX Holding Corporation held in her own name. |
Patrick Leahy and Heidi Leahy acquired 62,274 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
Heidi Schmid acquired 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share.
| | |
(10) | | Christopher A. Marlett has voting power with respect to the 1,792,766 shares of common stock of VirnetX Holding Corporation held by the Christopher A. Marlett Living Trust. The Christopher A. Marlett Living Trust acquired its shares from a common stock transfer for no value on or about April 2008 from Christopher A. Marlett. Mr. Marlett acquired 1,992,766 shares from a common stock transfer for no value on July 10, 2007 from MDB Capital Group, LLC (“MDB Group”), which had purchased a total of 3,321,277 shares with a purchase price of $0.000015 per share on October 14, 2005, and subsequently transferred 200,000 shares of common stock. |
41
| | |
(11) | | Dyana Marlett acquired 664,256 and 94,656 shares pursuant to common stock transfers on July 10, 2007 from MDB Group and Robert Levande, respectively. |
| | |
(12) | | Gregory H. Bailey has voting power with respect to the 68,267 shares of common stock of VirnetX Holding Corporation held by the Palantir Group, Inc., and 2,275,075 shares of common stock held in his own name. |
| | |
| | Of the 2,275,075 shares of common stock being registered in this offering, Mr. Bailey acquired: (i) 41,516 shares of common stock pursuant to an option exercise for $0.240871 per share on April 26, 2007; (ii) 664,255 shares of common stock for $0.000024 per share on October 15, 2005 (of which 257,399 shares were subsequently transferred); and (ii) 1,594,212 shares of common stock for $0.000015 per share on October 15, 2006; and (iii) 83,031 shares of common stock for a purchase price of $0.002409 per share on 149,457 shares of Series A Preferred Stock in VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006. |
The Palantir Group acquired 68,257 shares of common stock in VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger.
| | |
(13) | | Mr. Blass received his shares pursuant to a common stock purchase from Christopher A. Marlett in April 2008. |
| | |
(14) | | Justin Yorke has voting power with respect to the 1,273,911 shares of common stock of VirnetX Holding Corporation held by the JMW Fund, LLC. Of the 1,273,911 shares being registered in this offering, the JMW Fund, LLC acquired 73,911 shares as a result of purchases from (i) Christopher A. Marlett of 24,159 shares; (ii) Dyana Marlett of 18,938 shares; (iii) David Byrne of 14,531 shares; and (iv) Anthony DiGiandomenico of 16,283 shares in April 2008. The JMW Fund acquired 1,200,000 of the shares registered in this offering as a member of the San Gabriel group of investors. |
| | |
(15) | | Mr. Robinson purchased 103,780 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006. |
| | |
(16) | | Mr. Feitelberg acquired (i) 207,580 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006; and (ii) 24,311 shares of common stock in VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(17) | | Of the 608,530 shares of common stock being registered by this offering, Ms. Sheehan: (i) purchased 332,128 shares of common stock of VirnetX, Inc. with a purchase price of $0.000024 per share on October 15, 2005; (ii) purchased 83,032 shares of common stock with a purchase price of $0.002409 per share on August 9, 2006; (iii) purchased 166,064 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006; and (iv) received 27,306 shares of common stock pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(18) | | David Scially holds voting power with respect to (i) the 11,597 shares of common stock of VirnetX Holding Corporation held by Kingsford Capital Partners, L.P.; (ii) the 65,304 shares of common stock of VirnetX Holding Corporation held by Kingsford International; and (iii) the 3,099 shares of common stock of VirnetX Holding Corporation held by Y2K Partners, L.P. The aforementioned entities acquired their shares pursuant to common stock purchases from Christopher Marlett in April 2008. |
| | |
(19) | | Ms. McGrain acquired all of her shares from a common stock transfer from John McGrain in December 2007. Mr. McGrain acquired his shares of common stock in VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(20) | | Mr. Nosbaum purchased 12,455 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006. |
| | |
(21) | | Of the 231,891 shares of common stock being registered in this offering, Mr. Tiedemann: (i) purchased 207,580 shares of Series A Preferred Stock of VirnetX, Inc. at a purchase price of $0.240871 per share on March 7, 2006; and (ii) received 24,311 shares of common stock pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(22) | | Ms. N. Schmid purchased 830,320 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006 and March 27, 2006, 83,032 of which were subsequently transferred; and (ii) 97,246 shares of common stock in VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
42
| | |
(23) | | Terri Jean Marlett has voting power with respect to the 583,969 shares of common stock of VirnetX Holding Corporation held by the Nicaragua Initiative for Community Advancement. The Nicaragua Initiative for Community Advancement acquired its shares from common stock transfers for no value of 483,969 shares, on July 10, 2007 and 100,000 shares on February 28, 2008. |
| | |
(24) | | Peter Lillevand has voting power with respect to the 33,213 shares of common stock of VirnetX Holding Corporation held by Orrick Investments 2006 LLC. |
| | |
| | Orrick Investments 2006 LLC purchased 33,213 shares of common stock for a purchase price of $0.002409 per share on August 9, 2006. |
| | |
(25) | | Mr. Parker purchased 83,032 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 27, 2006. |
| | |
(26) | | Steven Mintz has voting power with respect to the 232,864 shares of common stock of VirnetX Holding Corporation held by REI Capital Canada, Ltd. REI Capital Canada, Ltd. acquired its shares from a common stock transfer for no value made by Steven Mintz in February 2008. |
Steven Mintz acquired (i) 207,580 shares of Series A Preferred Stock of VirnetX, Inc. for a purchase price of $0.240871 per share on March 7, 2006; and (ii) 25,284 shares of common stock of VirnetX, Inc. pursuant to a conversion of bridge notes on February 9, 2007, at $0.75 per share immediately after the merger.
| | |
(27) | | Mr. Danzig has voting power with respect to the 691,006 shares of common stock of VirnetX Holding Corporation held by the Richard A. Danzig Defined Benefit Pension Trust. The Trust acquired (i) 622,740 shares of Series A Preferred Stock transferred for no value on February 20, 2007 from Richard A. Danzig, who had purchased 1,662,740 shares of Series A Preferred Stock for a purchase price of $0.240871 per share on March 7, 2006; and (ii) 68,266 shares of common stock of VirnetX, Inc. pursuant to a conversion of bridge notes issued on February 9, 2007, that were converted at $0.75 per share immediately after the merger. |
| | |
(28) | | Mr. R. Schmid purchased 124,580 shares of Series A Preferred Stock of VirnetX, Inc. at a purchase price of $0.240871 per share on March 7, 2006 and received 49,819 shares of Series A Preferred Stock pursuant to a transfer for no value on May 1, 2007 from Nancy Schmid. Nancy Schmid purchased these shares on March 7, 2006 for a purchase price of $0.240871 per share. |
| | |
(29) | | Steve Garland has voting power with respect to the 25,000 shares of common stock of VirnetX Holding Corporation held by RiverBend Fund, LLC. RiverBend Fund, LLC acquired its shares pursuant to a common stock transfer purchase from Anthony DiGiandomenico in April 2008. |
| | |
(30) | | Mr. Nesson purchased 207,580 shares of Series A Preferred Stock of VirnetX, Inc. at a purchase price of $0.240871 per share on March 7, 2006. |
| | |
(31) | | The Mathur Family Trust received its shares from transfers by Mr. Mathur for no value on March 15, 2007 of (i) 539,707 shares of common stock; and (ii) 83,032 shares of Series A Preferred Stock. |
Of the 622,739 shares of common stock being registered in this offering, (i) Mr. Mathur purchased 103,790 shares on April 10, 2006 and 435,917 shares on August 24, 2006 with purchase prices of $0.002409 per share, and (ii) Mr. Mathur purchased 83,032 shares of Series A Preferred Stock of VirnetX, Inc. for $0.240871 per share on March 7, 2006, all of which were transferred to the family trust described above.
| | |
(32) | | Gregory Joseph Wood has voting power with respect to the 1,186,413 shares of common stock of VirnetX Holding Corporation held by The Gregory. J. Wood Revocable Trust. The Gregory J. Wood Revocable Trust acquired its shares from a common stock transfer for no value from Gregory Joseph Wood on or about February 2008. |
Of the 1,186,413 shares of common stock being registered in this offering, Mr. Wood: (i) received 148,514 shares of common stock pursuant to a conversion of bridge notes issuedon February 9, 2007, that were converted at $0.75 per share immediately after the merger; and (ii) purchased 1,037,899 shares of Series A Preferred Stock at $0.240871 per share on March 27, 2006.
| | |
(33) | | Anne C. Wilson has voting power with respect to the 124,548 shares of common stock of VirnetX Holding Corporation held by the Wilson Power of Appointment Trust. The Wilson Power of Appointment Trust acquired its shares from a common stock transfer for no value in February 2008 from the Baldwin-Wilson Revocable Trust. The Baldwin-Wilson Revocable Trust acquired its shares in connection with Bob Wilson’s purchase of 124,548 shares of common stock on February 13, 2007 for $0.002409 per share. |
43
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and successors-in interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares:
| | |
| • | ordinary brokerage transactions and transactions in which the broker/dealer solicits purchasers; |
|
| • | block trades in which the broker/dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
|
| • | purchases by a broker/dealer as principal and resale by the broker/dealer for its account; |
|
| • | an exchange distribution in accordance with the Rules of the applicable exchange; |
|
| • | privately negotiated transactions; |
|
| • | settlement of short sales; |
|
| • | broker/dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; |
|
| • | a combination of any such methods of sale; and |
|
| • | any other method permitted pursuant to applicable law. |
The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker/dealers engaged by the Selling Stockholders may arrange for other brokers/dealers to participate in sales. Broker/dealers may receive commissions from the Selling Stockholders (or, if any broker/dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this prospectus.
The Selling Stockholders and any broker/dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker/dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions under the Securities Act. The Selling Stockholders have informed VirnetX Holding Corporation that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. Upon being advised of any underwriting arrangements that may be entered into by a Selling Stockholder after the date of this prospectus, the Company will prepare a supplement to this prospectus to disclose those arrangements. We anticipate that the selling price for the common stock and warrants will be at or between the “bid” and “asked” prices for these securities, as quoted in the over-the-counter market immediately preceding the sale.
The Company is required to pay all fees and expenses incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
44
To the extent that the Selling Stockholders intend to sell their securities directly, through agents, dealers, or through Gilford Securities Incorporated, in the over-the-counter market or otherwise, on terms and conditions that they determine at the time of the sale or that they determine in private negotiations between buyer and seller, their sales of the shares of common stock may be made in accordance with this prospectus and under the provisions of Rule 144 adopted under the Securities Act.
DESCRIPTION OF SECURITIES
On a post-split basis, we are authorized to issue an aggregate of 110,000,000 shares of capital stock, 100,000,000 of which are shares of common stock, par value $0.0001 per share, and 10,000,000 of which are shares of preferred stock, par value $0.0001 per share. As of June 30, 2008, on a post-split basis, 34,899,985 shares of our common stock were issued and outstanding and no shares of our preferred stock were issued and outstanding.
Common Stock
All outstanding shares of our common stock are of the same class and have equal rights and attributes.
Voting.The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Our common stock does not have cumulative voting rights. Persons who hold a majority of the outstanding shares of our common stock entitled to vote on the election of directors can elect all of the directors who are eligible for election.
Dividends.Subject to the preferential dividend rights and consent rights of any series of preferred stock that we may from time to time designate, holders of our common stock are entitled to share equally in dividends, if any, as may be declared from time to time by our Board of Directors out of funds legally available.
Liquidation and Dissolution.In the event of our liquidation, dissolution or winding up, subject to the preferential liquidation rights of any series of preferred stock that we may from time to time designate, the holders of our common stock are entitled to share ratably in all of our assets remaining after payment of all liabilities and preferential liquidation rights.
Preferred Stock and Depositary Shares
OurUnder the terms of our Amended and Restated Certificate of Incorporation, authorizes the issuanceour board of directors is authorized to issue shares of preferred stock with designations, rights and preferences determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered,in one or more series without stockholder approval,approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
We may also issue fractional shares of preferred stock with dividend, liquidation, conversion, voting,that will be represented by depositary shares and depositary receipts.
Each series of preferred stock, depositary shares or otherdepositary receipts, if issued, will be more fully described in the particular prospectus supplement that will accompany this prospectus, including redemption provisions, rights which could adversely affect the voting power or other rights of the holders of the common stock. Inin the event of issuance, the our liquidation, dissolution or winding up, voting rights and rights to convert into common stock. We have no present plans to issue any shares of preferred stock, coulddepositary shares or depositary receipts nor are any shares of our preferred stock, depositary shares or depositary receipts presently outstanding.
Warrants
We may issue warrants for the purchase of common stock, preferred stock or debt securities. We may issue warrants independently or together with other securities.
Debt Securities
We may offer secured or unsecured obligations in the form of one or more series of senior or subordinated debt. The senior debt securities and the subordinated debt securities are together referred to in this prospectus as the “debt securities.” The subordinated debt securities generally will be utilized, under certain circumstances,entitled to payment only after payment of our senior debt. Senior debt generally includes all debt for money borrowed by us, except debt that is stated in the instrument governing the terms of that debt to be not senior to, or to have the same rank in right of payment as, a methodor to be expressly junior to, the subordinated debt securities. We may issue debt securities that are convertible into shares of discouraging, delaying or preventing a change in control of the Company.our common stock.
The descriptionssenior and subordinated debt securities will be issued under separate indentures between us and a trustee. We have summarized the general features of our common stock and preferred stock above are only summaries and are qualified in their entiretythe debt securities to be governed by the provisions of the Company’s Certificate of Incorporation and By-Laws, copies of which are attached or referencedindentures. These indentures have been filed as exhibits to the registration statement of which this prospectus forms a part. We encourage you to read these indentures. Instructions on how you can get copies of these documents are provided under the heading “Where You Can Find More Information.”
Warrants
Units
OnWe may issue units comprised of one or more of the other classes of securities issued by us as described in this prospectus in any combination. Each unit will be issued so that the holder of the unit is also the holder of each security included in the unit.
This prospectus may not be used to consummate a post-splitsale of any securities unless it is accompanied by a prospectus supplement.
An investment in our securities involves a high degree of risk. The prospectus supplement applicable to each offering of our securities will contain a discussion of the risks applicable to an investment in our securities. Prior to making a decision about investing in our securities, you should carefully consider the specific factors discussed under the heading “Risk Factors” in the applicable prospectus supplement, together with all of the other information contained or incorporated by reference in the prospectus supplement or appearing or incorporated by reference in this prospectus. You should also consider the risks, uncertainties and assumptions discussed under Item 1A, “Risk Factors,” in our most recent Annual Report on Form 10-K and all amendments thereto, and any updates described in our subsequent Quarterly Reports on Form 10-Q, each of which is incorporated herein by reference, and may be amended, supplemented or superseded from time to time by other reports we file with the Commission in the future and any prospectus supplement related to a particular offering. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. The occurrence of any of these known or unknown risk might cause you to lose all or part of your investment in the offered securities.
FORWARD-LOOKING STATEMENTS This prospectus, each prospectus supplement and the information incorporated by reference in this prospectus and each prospectus supplement contain certain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “anticipate,” “expect,” “believe,” “goal,” “plan,” “intend,” “estimate,” “may,” “will,” and similar expressions and variations thereof are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Those statements appear in this prospectus, any accompanying prospectus supplement and the documents incorporated herein and therein by reference, particularly in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and include statements regarding the intent, belief or current expectations of our Company and management that are subject to known and unknown risks, uncertainties and assumptions, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed in the documents incorporated by reference under the caption “Risk Factors.”
This prospectus, the applicable prospectus supplement and any related issuer free writing prospectus, as well as the information and documents incorporated by reference into this prospectus, contain statements that are based on management’s current expectations and believes, including estimates and projections about of our Company, industry, financial condition, results of operations and other matters. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Commission, we do not plan to publicly update or revise any forward-looking statements contained herein after we distribute this prospectus, whether as a result of any new information, future events or otherwise.
RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our ratio of earnings to fixed charges on a historical basis warrants for the periods indicated. The following should be read in conjunction with our consolidated financial statements, including the notes thereto, and the other financial information included or incorporated by reference herein. For purposes of determining the ratios, earnings consist of the total of the following: (i) pre-tax income from continuing operations before adjustment for income or loss from equity investees, (ii) fixed charges, (iii) amortization of capitalized interest, and (iv) distributed income of equity investees. Fixed charges are defined as the sum of the following: (a) interest expensed and capitalized and (b) amortization of debt issuance costs and discounts.
| | Year ended December 31, | Six months ended June 30, |
| | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Ratio of earnings to fixed charges | 9,909% | N/A (1) | N/A (1) | N/A (1) | N/A (1) | N/A (1) |
| (1) | Ratio of earnings to fixed charges could not be calculated because the Company did not have any fixed charges during the period. |
Unless otherwise indicated in the prospectus supplement, we expect to use the net proceeds from the sale of 266,667 sharessecurities offered by us pursuant to this prospectus for Gabriel product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. As a result, unless otherwise indicated in the prospectus supplement, our management will have broad discretion to allocate the net proceeds of the offerings. Pending their ultimate use, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing instruments.
The specific allocations of the proceeds we receive from the sale of our securities will be described in the applicable prospectus supplement.
DESCRIPTION OF CAPITAL STOCK The following information describes our common stock were issued and exercisable at $0.75 per share, all of which are subject to the Lock-Up Agreement described above. All of these warrants were net exercised by the warrant holders on January 21, 2008 and March 26, 2008. The net aggregate shares issued in the amount of 232,771 are issued and outstanding.
45
In addition, we issued warrants to purchase 300,000 sharespreferred stock, as well as certain provisions of our common stock at $4.80 per shareAmended and Restated Certificate of Incorporation and Bylaws. This description is only a summary. You should also refer to our Amended and Restated Certificate of Incorporation and Bylaws, which have been filed with the underwriter ofCommission as exhibits to our December 2007 stock issuance. Those warrants are first exercisable in 2008 and expire in 2012. These warrants provide for anti-dilution protection in the event of stock splits and dividends. The shares of common stock underlying these warrants are being registered in the registration statement, of which this prospectus forms a part.
The descriptionsGeneral
Our authorized capital stock consists of 100,000,000 shares of common stock with a $0.0001 par value per share, and 10,000,000 shares of preferred stock with a $0.0001 par value per share, all of which shares of preferred stock are undesignated. Our board of directors may establish the rights and preferences of the warrants are onlypreferred stock from time to time. As of August 4, 2015 there were 52,363,585 shares of common stock issued and outstanding, held of record by 103 stockholders, although we believe that there may be a significantly larger number of beneficial owners of our common stock. We derived the number of stockholders by reviewing the listing of outstanding common stock recorded by our transfer agent as of August 4, 2015.
The following is a summary of the material provisions of the common stock and preferred stock provided for in our certificate of incorporation and Bylaws. For additional detail about our capital stock, please refer to our certificate of incorporation and Bylaws, each as amended.
Common Stock
Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative rights. Subject to any preferential rights of any outstanding preferred stock, holders of our common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. If there is a liquidation, dissolution or winding up of our company, holders of our common stock would be entitled to share in our assets remaining after the payment of liabilities and any preferential rights of any outstanding preferred stock.
Holders of our common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of common stock are fully paid and non-assessable. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Our common stock is listed on the NYSE MKT LLC under the symbol “VHC.” The transfer agent and registrar for the common stock is Corporate Stock Transfer, Inc. Its address is 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado 80209, and its telephone number is (303) 282-4800.
Preferred stock
The following description of preferred stock and the description of the terms of any particular series of preferred stock that we choose to issue hereunder and that will be set forth in the related prospectus supplement are not complete. These descriptions are qualified in their entirety by reference to our Amended and Restated Certificate of Incorporation and the provisionscertificate of designation relating to any series. The rights, preferences, privileges and restrictions of the formspreferred stock of warrant, which are attached or referenced as exhibitseach series will be fixed by the certificate of designation relating to that series. The applicable prospectus supplement also will contain a description of certain United States federal income tax consequences relating to the registration statementpurchase and ownership of which thisthe series of preferred stock that is described in the prospectus forms a part.supplement.
Under the terms of our Amended and Restated Certificate of Incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. There are no restrictions presently on the repurchase or redemption of any shares of our preferred stock.
The prospectus supplement for a series of preferred stock will specify:
| · | the maximum number of shares; |
| · | the designation of the shares; |
| · | the annual dividend rate, if any, whether the dividend rate is fixed or variable, the date or dates on which dividends will accrue, the dividend payment dates, and whether dividends will be cumulative; |
| · | the price and the terms and conditions for redemption, if any, including redemption at our option or at the option of the holders, including the time period for redemption, and any accumulated dividends or premiums; |
| · | the liquidation preference, if any, and any accumulated dividends upon the liquidation, dissolution or winding up of our affairs; |
| · | any sinking fund or similar provision, and, if so, the terms and provisions relating to the purpose and operation of the fund; |
| · | the terms and conditions, if any, for conversion or exchange of shares of any other class or classes of our capital stock or any series of any other class or classes, or of any other series of the same class, or any other securities or assets, including the price or the rate of conversion or exchange and the method, if any, of adjustment; |
| · | any or all other preferences and relative, participating, optional or other special rights, privileges or qualifications, limitations or restrictions. |
The issuance of preferred stock will affect, and may adversely affect, the rights of holders of common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the board of directors determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:
| · | restricting dividends on the common stock; |
| · | diluting the voting power of the common stock; |
| · | impairing the liquidation rights of the common stock; or |
| · | delaying or preventing changes in control or management of our company. |
We have a numberno present plans to issue any shares of protective provisions that could delay, discourage or prevent a third party from acquiring the company without the approvalpreferred stock nor are any shares of our Board of Directors. Our protective provisions include:preferred stock presently outstanding. Preferred stock will be fully paid and nonassessable upon issuance.
Anti-Takeover Effects of Some Provisions of Delaware Law
Provisions of Delaware law and our Amended and Restated Certificate of Incorporation and Bylaws could make the acquisition of our company through tender offer, a proxy context or other means more difficult and could make the removal of incumbent officers and directors more difficult. We expect these provisions to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to first negotiate with our board of directors. We believe that the benefits provided by our ability to negotiate with the proponent of an unfriendly or unsolicited proposal outweigh the disadvantages of discouraging these proposals. We believe the negotiation of an unfriendly or unsolicited proposal could result in an improvement of its terms.
Amended and Restated Certificate of Incorporation and Bylaws
Our Amended and Restated Certificate of Incorporation and our Bylaws provide for the following:
| · | |
| • | A staggered BoardUndesignated Preferred Stock. The ability to authorize undesignated preferred stock makes it possible for our board of Directors: this means that onlydirectors to issue one or two directors (since wemore series of preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of VirnetX. These and other provisions may have afive-person Board of Directors) will be up for election at any given annual meeting. This has the effect of deferring hostile takeovers or delaying the abilitychanges in control or management of our company. |
| · | Stockholder Meetings. Our charter documents provide that a special meeting of stockholders may be called only by resolution adopted by the board of directors. |
| · | Requirements for Advance Notification of Stockholder Nominations and Proposals. Our Bylaws establish advance notice procedures with respect to effectstockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a changecommittee of the board of directors. |
| · | Board Classification. Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Board of Directors sinceus, because it will take two annual meetingsgenerally makes it more difficult for stockholders to effectively replace at least three directors which represents a majority of the Boarddirectors. |
| · | Limits on Ability of Directors. |
|
| • | Blank check preferred stock: our Board of Directors has the authorityStockholders to establish the rights, preferences and privileges of our 10,000,000 authorized but unissued shares of preferred stock. Therefore, this stock may be issued at the discretion of our Board of Directors with preferences over your shares of common stock in a manner that is materially dilutive to existing stockholders. In addition, blank check preferred stock can be used to create a “poison pill” which is designed to deter a hostile bidder from buying a controlling interestAct by Written Consent. We have provided in our stock without the approvalcertificate of incorporation that our Board of Directors. We havestockholders may not adopted such a “poison pill,” but our Board of Directors will have the ability to do so in the future very rapidly and without stockholder approval. |
|
| • | Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings: stockholders wishing to submit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows in order to have the matter voted on at the meeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposals generally and could also have the effect of delaying a stockholder proposal to a subsequent meeting to the extent such proposal is not raised in a timely manner for an upcoming meeting. |
|
| • | Elimination of stockholder actionsact by written consent: this has the effect of eliminatingconsent. This limit on the ability of our stockholders to act by written consent may lengthen the amount of time required to take stockholder actions. As a stockholder orresult, a group of stockholders representingholder controlling a majority of our capital stock would not be able to amend our Bylaws or remove directors without holding a meeting of our stockholders called in accordance with our Bylaws. |
| · | Amendment of Bylaws. Any amendment of our Bylaws requires approval by holders of at least two-thirds of our outstanding capital stock entitled to vote generally in the outstanding shares to take actions rapidly and without prior notice to our Boardelection of Directors and management ordirectors. |
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless:
| · | prior to the minority stockholders. Along withdate of the advance notice requirements described above, this provisiontransaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| · | the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also gives our Board of Directorsofficers, and management more time(b) shares owned by employee stock plans in which employee participants do not have the right to react to proposed stockholder actions. |
|
| • | Super majority requirement for stockholder amendmentsdetermine confidentially whether shares held subject to the By-laws: our By-laws mayplan will be alteredtendered in a tender or amendedexchange offer; or new By-laws adopted |
| · | on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662/3%two-thirds of the outstanding shares. This has the effect of requiring a substantially greater vote of the stockholders to approve any changes to our By-laws. |
|
| • | Elimination of the ability of stockholders to call a special meeting of the stockholders: only the Board of Directors or management can call special meetings of the stockholders. This could meanvoting stock that stockholders, even those who represent a significant block of shares, may need to wait for the annual meeting before nominating directors or raising other business proposals to be voted onis not owned by the stockholders.interested stockholder. |
Transfer AgentGenerally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and Registrarassociates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting securities. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
DESCRIPTION OF THE DEPOSITARY SHARES General
At our option, we may elect to offer fractional shares of preferred stock, rather than full shares of preferred stock. If we do elect to offer fractional shares of preferred stock, we will issue receipts for depositary shares and each of these depositary shares will represent a fraction of a share of a particular series of preferred stock, as specified in the applicable prospectus supplement. Each owner of a depositary share will be entitled, in proportion to the applicable fractional interest in shares of preferred stock underlying that depositary share, to all rights and preferences of the preferred stock underlying that depositary share. These rights may include dividend, voting, redemption and liquidation rights.
The shares of preferred stock underlying the depositary shares will be deposited with a bank or trust company selected by us to act as depositary, under a deposit agreement by and among us, the depositary and the holders of the depositary receipts. The depositary will be the transfer agent, registrar and registrardividend disbursing agent for the depositary shares.
The depositary shares will be evidenced by depositary receipts issued pursuant to the depositary agreement. Holders of depositary receipts agree to be bound by the deposit agreement, which requires holders to take certain actions such as filing proof of residence and paying certain charges.
The summary of terms of the depositary shares contained in this prospectus is not complete, and is subject to modification in any prospectus supplement for any issuance of depositary shares. You should refer to the forms of the deposit agreement, our certificate of incorporation and the certificate of designation that are, or will be, filed with the Commission for the applicable series of preferred stock.
Dividends
The depositary will distribute cash dividends or other cash distributions, if any, received in respect of the series of preferred stock underlying the depositary shares to the record holders of depositary receipts in proportion to the number of depositary shares owned by those holders on the relevant record date. The relevant record date for depositary shares will be the same date as the record date for the preferred stock.
In the event of a distribution other than in cash, the depositary will distribute property received by it to the record holders of depositary receipts that are entitled to receive the distribution, unless the depositary determines that it is not feasible to make the distribution. If this occurs, the depositary, with our approval, may adopt another method for the distribution, including selling the property and distributing the net proceeds to the holders.
Liquidation preference
If a series of preferred stock underlying the depositary shares has a liquidation preference, in the event of our voluntary or involuntary liquidation, dissolution or winding up, holders of depositary shares will be entitled to receive the fraction of the liquidation preference accorded each share of the applicable series of preferred stock, as set forth in the applicable prospectus supplement.
Redemption
If a series of preferred stock underlying the depositary shares is subject to redemption, the depositary shares will be redeemed from the proceeds received by the depositary resulting from the redemption, in whole or in part, of the preferred stock held by the depositary. Whenever we redeem any preferred stock held by the depositary, the depositary will redeem, as of the same redemption date, the number of depositary shares representing the preferred stock so redeemed. The depositary will mail the notice of redemption to the record holders of the depositary receipts promptly upon receiving the notice from us and not fewer than 20 or more than 60 days, unless otherwise provided in the applicable prospectus supplement, prior to the date fixed for redemption of the preferred stock.
Voting
Upon receipt of notice of any meeting at which the holders of preferred stock are entitled to vote, the depositary will mail the information contained in the notice of meeting to the record holders of the depositary receipts underlying the preferred stock. Each record holder of those depositary receipts on the record date will be entitled to instruct the depositary as to the exercise of the voting rights pertaining to the amount of preferred stock underlying that holder’s depositary shares. The record date for the depositary will be the same date as the record date for the preferred stock. The depositary will, to the extent practicable, vote the preferred stock underlying the depositary shares in accordance with these instructions. We will agree to take all action that may be deemed necessary by the depositary in order to enable the depositary to vote the preferred stock in accordance with these instructions. The depositary will not vote the preferred stock to the extent that it does not receive specific instructions from the holders of depositary receipts.
Withdrawal of preferred stock
Owners of depositary shares will be entitled to receive upon surrender of depositary receipts at the principal office of the depositary and payment of any unpaid amount due to the depositary, the number of whole shares of preferred stock underlying their depositary shares.
Partial shares of preferred stock will not be issued. Holders of preferred stock will not be entitled to deposit the shares under the deposit agreement or to receive depositary receipts evidencing depositary shares for the preferred stock.
Amendment and termination of the deposit agreement
The form of depositary receipt evidencing the depositary shares and any provision of the deposit agreement may be amended by agreement between the depositary and us. However, any amendment which materially and adversely alters the rights of the holders of depositary shares, other than fee changes, will not be effective unless the amendment has been approved by at least a majority of the outstanding depositary shares. The deposit agreement may be terminated by the depositary or us only if:
| · | all outstanding depositary shares have been redeemed; or |
| · | there has been a final distribution of the preferred stock in connection with our dissolution and such distribution has been made to all the holders of depositary shares. |
Charges of depositary
We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangement. We will also pay charges of the depositary in connection with:
| · | the initial deposit of the preferred stock; |
| · | the initial issuance of the depositary shares; |
| · | any redemption of the preferred stock; and |
| · | all withdrawals of preferred stock by owners of depositary shares. |
Holders of depositary receipts will pay transfer, income and other taxes and governmental charges and other specified charges as provided in the deposit agreement for their accounts. If these charges have not been paid, the depositary may:
| · | refuse to transfer depositary shares; |
| · | withhold dividends and distributions; and |
| · | sell the depositary shares evidenced by the depositary receipt. |
Miscellaneous
The depositary will forward to the holders of depositary receipts all reports and communications we deliver to the depositary that we are required to furnish to the holders of the preferred stock. In addition, the depositary will make available for inspection by holders of depositary receipts at the principal office of the depositary, and at such other places as it may from time to time deem advisable, any reports and communications we deliver to the depositary as the holder of preferred stock.
Neither the depositary nor we will be liable if either the depositary or we are prevented or delayed by law or any circumstance beyond the control of either the depositary or us in performing our respective obligations under the deposit agreement. Our obligations and the depositary’s obligations will be limited to the performance in good faith of our or the depositary’s respective duties under the deposit agreement. Neither the depositary nor we will be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or preferred stock unless satisfactory indemnity is furnished. The depositary and we may rely on:
| · | written advice of counsel or accountants; |
| · | information provided by holders of depositary receipts or other persons believed in good faith to be competent to give such information; and |
| · | documents believed to be genuine and to have been signed or presented by the proper party or parties. |
Resignation and removal of depositary
The depositary may resign at any time by delivering a notice to us. We may remove the depositary at any time. Any such resignation or removal will take effect upon the appointment of a successor depositary and its acceptance of such appointment. The successor depositary must be appointed within 60 days after delivery of the notice for resignation or removal. The successor depositary must be a bank and trust company having its principal office in the United States of America and having a combined capital and surplus of at least $50,000,000.
Federal income tax consequences
Owners of the depositary shares will be treated for U.S. federal income tax purposes as if they were owners of the preferred stock underlying the depositary shares. As a result, owners will be entitled to take into account for U.S. federal income tax purposes and deductions to which they would be entitled if they were holders of such preferred stock. No gain or loss will be recognized for U.S. federal income tax purposes upon the withdrawal of preferred stock in exchange for depositary shares. The tax basis of each share of preferred stock to an exchanging owner of depositary shares will, upon such exchange, be the same as the aggregate tax basis of the depositary shares exchanged. The holding period for preferred stock in the hands of an exchanging owner of depositary shares will include the period during which such person owned such depositary shares.
DESCRIPTION OF THE WARRANTS General
We may issue warrants for the purchase of our debt securities, preferred stock or common stock, or any combination thereof. Warrants may be issued independently or together with our debt securities, preferred stock or common stock and may be attached to or separate from any offered securities. Each series of warrants will be issued under a separate warrant agreement to be entered into between us and a bank or trust company, as warrant agent. The warrant agent will act solely as our agent in connection with the warrants. The warrant agent will not have any obligation or relationship of agency or trust for or with any holders or beneficial owners of warrants. This summary of certain provisions of the warrants is not complete. For the terms of a particular series of warrants, you should refer to the prospectus supplement for that series of warrants and the warrant agreement for that particular series.
Debt warrants
The prospectus supplement relating to a particular issue of warrants to purchase debt securities will describe the terms of the debt warrants, including the following:
| · | the title of the debt warrants; |
| · | the offering price for the debt warrants, if any; |
| · | the aggregate number of the debt warrants; |
| · | the designation and terms of the debt securities, including any conversion rights, purchasable upon exercise of the debt warrants; |
| · | if applicable, the date from and after which the debt warrants and any debt securities issued with them will be separately transferable; |
| · | the principal amount of debt securities that may be purchased upon exercise of a debt warrant and the exercise price for the warrants, which may be payable in cash, securities or other property; |
| · | the dates on which the right to exercise the debt warrants will commence and expire; |
| · | if applicable, the minimum or maximum amount of the debt warrants that may be exercised at any one time; |
| · | whether the debt warrants represented by the debt warrant certificates or debt securities that may be issued upon exercise of the debt warrants will be issued in registered or bearer form; |
| · | information with respect to book-entry procedures, if any; the currency or currency units in which the offering price, if any, and the exercise price are payable; |
| · | if applicable, a discussion of material U.S. federal income tax considerations; |
| · | the anti-dilution provisions of the debt warrants, if any; |
| · | the redemption or call provisions, if any, applicable to the debt warrants; |
| · | any provisions with respect to the holder’s right to require us to repurchase the warrants upon a change in control or similar event; and |
| · | any additional terms of the debt warrants, including procedures, and limitations relating to the exchange, exercise and settlement of the debt warrants. |
Debt warrant certificates will be exchangeable for new debt warrant certificates of different denominations. Debt warrants may be exercised at the corporate trust office of the warrant agent or any other office indicated in the prospectus supplement. Prior to the exercise of their debt warrants, holders of debt warrants will not have any of the rights of holders of the debt securities purchasable upon exercise and will not be entitled to payment of principal or any premium, if any, or interest on the debt securities purchasable upon exercise.
Equity warrants
The prospectus supplement relating to a particular series of warrants to purchase our common stock is Corporate Stock Transfer, Inc.or preferred stock will describe the terms of Denver, Colorado.
46
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERSthe warrants, including the following:
| · | the title of the warrants; |
| · | the offering price for the warrants, if any; |
| · | the aggregate number of warrants; |
| · | the designation and terms of the common stock or preferred stock that may be purchased upon exercise of the warrants; |
| · | if applicable, the designation and terms of the securities with which the warrants are issued and the number of warrants issued with each security; |
| · | if applicable, the date from and after which the warrants and any securities issued with the warrants will be separately transferable; |
| · | the number of shares of common stock or preferred stock that may be purchased upon exercise of a warrant and the exercise price for the warrants; |
| · | the dates on which the right to exercise the warrants shall commence and expire; |
| · | if applicable, the minimum or maximum amount of the warrants that may be exercised at any one time; |
| · | the currency or currency units in which the offering price, if any, and the exercise price are payable; |
| · | if applicable, a discussion of material U.S. federal income tax considerations; |
| · | the antidilution provisions of the warrants, if any; |
| · | the redemption or call provisions, if any, applicable to the warrants; |
| · | any provisions with respect to the holder’s right to require us to repurchase the warrants upon a change in control or similar event; and |
| · | any additional terms of the warrants, including procedures, and limitations relating to the exchange, exercise and settlement of the warrants. |
Holders of equity warrants will not be entitled:
| · | to vote, consent or receive dividends; |
| · | receive notice as stockholders with respect to any meeting of stockholders for the election of our directors or any other matter; or |
| · | exercise any rights as stockholders of us. |
This summary of certain provisions of the warrants is not complete. For the terms of a particular series of warrants, you should refer to the prospectus supplement for that series of warrants and the warrant agreement for that particular series.
DESCRIPTION OF THE DEBT SECURITIES The debt securities may be either secured or unsecured and will either be our senior debt securities or our subordinated debt securities. The debt securities will be issued under one or more separate indentures between us and a trustee to be specified in an accompanying prospectus supplement. Senior debt securities will be issued under a senior indenture and subordinated debt securities will be issued under a subordinated indenture. Together, the senior indenture and the subordinated indenture are called indentures in this description. This prospectus, together with the applicable prospectus supplement, will describe the terms of a particular series of debt securities.
The following is a summary of selected provisions and definitions of the indentures and debt securities to which any prospectus supplement may relate. The summary of selected provisions of the indentures and the debt securities appearing below is not complete and is subject to, and qualified entirely by reference to, all of the provisions of the applicable indenture and certificates evidencing the applicable debt securities. For additional information, you should look at the applicable indenture and the certificate evidencing the applicable debt security that is filed as an exhibit to the registration statement that includes the prospectus. In this description of the debt securities, the words “we,” “us,” or “our” refer only to VirnetX Holding Corporation and not to any of our subsidiaries, unless we expressly state or the context otherwise requires.
The following description sets forth selected general terms and provisions of the applicable indenture and debt securities to which any prospectus supplement may relate. Other specific terms of the applicable indenture and debt securities will be described in the applicable prospectus supplement. If any particular terms of the indenture or debt securities described in a prospectus supplement differ from any of the terms described below, then the terms described below will be deemed to have been superseded by that prospectus supplement.
General
Debt securities may be issued in separate series without limitation as to aggregate principal amount. We may specify a maximum aggregate principal amount for the debt securities of any series.
We are not limited as to the amount of debt securities we may issue under the indentures. Unless otherwise provided in a prospectus supplement, a series of debt securities may be reopened to issue additional debt securities of such series.
The prospectus supplement relating to a particular series of debt securities will set forth:
| · | whether the debt securities are senior or subordinated; |
| · | any limit on the aggregate principal amount; |
| · | the person who shall be entitled to receive interest, if other than the record holder on the record date; |
| · | the date or dates the principal will be payable; |
| · | the interest rate or rates, which may be fixed or variable, if any, the date from which interest will accrue, the interest payment dates and the regular record dates, or the method for calculating the dates and rates; |
| · | the place where payments may be made; |
| · | any mandatory or optional redemption provisions or sinking fund provisions and any applicable redemption or purchase prices associated with these provisions; |
| · | if issued other than in denominations of U.S. $1,000 or any multiple of U.S. $1,000, the denominations in which the debt securities shall be issuable; |
| · | if applicable, the method for determining how the principal, premium, if any, or interest will be calculated by reference to an index or formula; |
| · | if other than U.S. currency, the currency or currency units in which principal, premium, if any, or interest will be payable and whether we or a holder may elect payment to be made in a different currency; |
| · | the portion of the principal amount that will be payable upon acceleration of maturity, if other than the entire principal amount; |
| · | if the principal amount payable at stated maturity will not be determinable as of any date prior to stated maturity, the amount or method for determining the amount which will be deemed to be the principal amount; |
| · | if applicable, whether the debt securities shall be subject to the defeasance provisions described below under “Satisfaction and discharge; defeasance” or such other defeasance provisions specified in the applicable prospectus supplement for the debt securities; |
| · | any conversion or exchange provisions; |
| · | whether the debt securities will be issuable in the form of a global security; |
| · | the deletion, addition or change in any event of default; |
| · | any change or modification to the subordination provisions applicable to the subordinated debt securities if different from those described below under “Subordinated debt securities;” |
| · | any deletion, addition or change in the covenants set forth in Article 10 of the indenture; |
| · | any paying agents, authenticating agents, security registrars or other agents for the debt securities, if other than the trustee; |
| · | any provisions relating to any security provided for the debt securities, including any provisions regarding the circumstances under which collateral may be released or substituted; |
| · | any provisions relating to guaranties for the securities and any circumstances under which there may be additional obligors; |
| · | any provisions granting special rights to holders when a specified event occurs; |
| · | any special tax provisions that apply to the debt securities; |
| · | with respect to the debt securities that do not bear interest, the dates for certain required reports to the applicable trustee; |
| · | any and all additional, eliminated or changed terms that will apply to the debt securities; and |
| · | any other terms of such debt securities. |
Unless otherwise specified in the prospectus supplement, the debt securities will be registered debt securities. Debt securities may be sold at a substantial discount below their stated principal amount, bearing no interest or interest at a rate which at time of issuance is below market rates. The U.S. federal income tax considerations applicable to debt securities sold at a discount will be described in the applicable prospectus supplement.
Exchange and transfer
Debt securities may be transferred or exchanged at the office of the security registrar or at the office of any transfer agent designated by us.
We will not impose a service charge for any transfer or exchange, but we may require holders to pay any tax or other governmental charges associated with any transfer or exchange.
In the event of any partial redemption of debt securities of any series, we will not be required to:
| · | issue, register the transfer of, or exchange, any debt security of that series during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption and ending at the close of business on the day of the mailing; or |
| · | register the transfer of or exchange any debt security of that series selected for redemption, in whole or in part, except the unredeemed portion being redeemed in part. |
We will appoint the trustee as the initial security registrar. Any transfer agent, in addition to the security registrar initially designated by us, will be named in the prospectus supplement. We may designate additional transfer agents or change transfer agents or change the office of the transfer agent. However, we will be required to maintain a transfer agent in each place of payment for the debt securities of each series.
Global securities
The debt securities of any series may be represented, in whole or in part, by one or more global securities. Each global security will:
| · | be registered in the name of a depositary, or its nominee, that we will identify in a prospectus supplement; |
| · | be deposited with the depositary or nominee or custodian; and |
| · | bear any required legends. |
No global security may be exchanged in whole or in part for debt securities registered in the name of any person other than the depositary or any nominee unless:
| · | the depositary has notified us that it is unwilling or unable to continue as depositary or has ceased to be qualified to act as depositary; |
| · | an event of default is continuing with respect to the debt securities of the applicable series; or |
| · | any other circumstance described in a prospectus supplement has occurred permitting or requiring the issuance of any such security. |
As long as the depositary, or its nominee, is the registered owner of a global security, the depositary or nominee will be considered the sole owner and holder of the debt securities represented by the global security for all purposes under the indentures. Except in the above limited circumstances, owners of beneficial interests in a global security will not be:
| · | entitled to have the debt securities registered in their names; |
| · | entitled to physical delivery of certificated debt securities; or |
| · | considered to be holders of those debt securities under the indenture. |
Payments on a global security will be made to the depositary or its nominee as the holder of the global security. Some jurisdictions have laws that require that certain purchasers of securities take physical delivery of such securities in definitive form. These laws may impair the ability to transfer beneficial interests in a global security.
Institutions that have accounts with the depositary or its nominee are referred to as “participants.” Ownership of beneficial interests in a global security will be limited to participants and to persons that may hold beneficial interests through participants. The depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of debt securities represented by the global security to the accounts of its participants.
Ownership of beneficial interests in a global security will be shown on and effected through records maintained by the depositary, with respect to participants’ interests, or any participant, with respect to interests of persons held by participants on their behalf.
Payments, transfers and exchanges relating to beneficial interests in a global security will be subject to policies and procedures of the depositary. The depositary policies and procedures may change from time to time. Neither any trustee nor we will have any responsibility or liability for the depositary’s or any participant’s records with respect to beneficial interests in a global security.
Payment and paying agents
Unless otherwise indicated in a prospectus supplement, the provisions described in this paragraph will apply to the debt securities. Payment of interest on a debt security on any interest payment date will be made to the person in whose name the debt security is registered at the close of business on the regular record date. Payment on debt securities of a particular series will be payable at the office of a paying agent or paying agents designated by us. However, at our option, we may pay interest by mailing a check to the record holder. The trustee will be designated as our initial paying agent.
We may also name any other paying agents in a prospectus supplement. We may designate additional paying agents, change paying agents or change the office of any paying agent. However, we will be required to maintain a paying agent in each place of payment for the debt securities of a particular series.
All moneys paid by us to a paying agent for payment on any debt security that remain unclaimed for a period ending the earlier of:
| · | 10 business days prior to the date the money would be turned over to the applicable state; or |
| · | at the end of two years after such payment was due, |
will be repaid to us thereafter. The holder may look only to us for such payment.
No protection in the event of a change of control
Unless otherwise indicated in a prospectus supplement with respect to a particular series of debt securities, the debt securities will not contain any provisions that may afford holders of the debt securities protection in the event we have a change in control or in the event of a highly leveraged transaction, whether or not such transaction results in a change in control.
Covenants
Unless otherwise indicated in a prospectus supplement with respect to a particular series of debt securities, the debt securities will not contain any financial or restrictive covenants.
Consolidation, merger and sale of assets
Unless we indicate otherwise in a prospectus supplement with respect to a particular series of debt securities, we may not consolidate with or merge into any other person (other than one of our subsidiaries), in a transaction in which we are not the surviving corporation, or convey, transfer or lease our properties and assets substantially as an entirety to, any person (other one of our subsidiaries), unless:
| · | the successor entity, if any, is a U.S. corporation, limited liability company, partnership, trust or other business entity; |
| · | the successor entity assumes our obligations on the debt securities and under the indentures; |
| · | immediately after giving effect to the transaction, no default or event of default shall have occurred and be continuing; and |
| · | certain other conditions specified in the indenture are met. |
Events of default
Unless we indicate otherwise in a prospectus supplement, the following will be events of default for any series of debt securities under the indentures:
| (1) | we fail to pay principal of or any premium on any debt security of that series when due; |
| (2) | we fail to pay any interest on any debt security of that series for 30 days after it becomes due; |
| (3) | we fail to deposit any sinking fund payment when due; |
| (4) | we fail to perform any other covenant in the indenture and such failure continues for 90 days after we are given the notice required in the indentures; and |
| (5) | certain events involving our bankruptcy, insolvency or reorganization. |
Additional or different events of default applicable to a series of debt securities may be described in a prospectus supplement. An event of default of one series of debt securities is not necessarily an event of default for any other series of debt securities.
The trustee may withhold notice to the holders of any default, except defaults in the payment of principal, premium, if any, interest, any sinking fund installment on, or with respect to any conversion right of, the debt securities of such series. However, the trustee must consider it to be in the interest of the holders of the debt securities of such series to withhold this notice.
Unless we indicate otherwise in a prospectus supplement, if an event of default, other than an event of default described in clause (5) above, shall occur and be continuing with respect to any series of debt securities, either the trustee or the holders of at least 25 percent in aggregate principal amount of the outstanding securities of that series may declare the principal amount and premium, if any, of the debt securities of that series, or if any debt securities of that series are original issue discount securities, such other amount as may be specified in the applicable prospectus supplement, in each case together with accrued and unpaid interest, if any, thereon, to be due and payable immediately.
Unless we indicate otherwise in a prospectus supplement, if an event of default described in clause (5) above shall occur, the principal amount and premium, if any, of all the debt securities of that series, or if any debt securities of that series are original issue discount securities, such other amount as may be specified in the applicable prospectus supplement, in each case together with accrued and unpaid interest, if any, thereon, will automatically become immediately due and payable. Any payment by us on the subordinated debt securities following any such acceleration will be subject to the subordination provisions described below under “Subordinated debt securities.”
Notwithstanding the foregoing, each indenture will provide that we may, at our option, elect that the sole remedy for an event of default relating to our failure to comply with our obligations described under the section entitled “Reports” below or our failure to comply with the requirements of Section 314(a)(1) of the Trust Indenture Act will for the first 360 days after the occurrence of such an event of default consist exclusively of the right to receive additional interest on the relevant series of debt securities at an annual rate equal to (i) 0.25% of the principal amount of such series of debt securities for the first 180 days after the occurrence of such event of default and (ii) 0.50% of the principal amount of such series of debt securities from the 181st day to, and including, the 360th day after the occurrence of such event of default, which we call “additional interest.” If we so elect, the additional interest will accrue on all outstanding debt securities from and including the date on which such event of default first occurs until such violation is cured or waived and shall be payable on each relevant interest payment date to holders of record on the regular record date immediately preceding the interest payment date. On the 361st day after such event of default (if such violation is not cured or waived prior to such 361st day), the debt securities will be subject to acceleration as provided above. In the event we do not elect to pay additional interest upon any such event of default in accordance with this paragraph, the debt securities will be subject to acceleration as provided above.
In order to elect to pay the additional interest as the sole remedy during the first 360 days after the occurrence of any event of default relating to the failure to comply with the reporting obligations in accordance with the preceding paragraph, we must notify all holders of debt securities and the trustee and paying agent of such election prior to the close of business on the first business day following the date on which such event of default occurs. Upon our failure to timely give such notice or pay the additional interest, the debt securities will be immediately subject to acceleration as provided above.
After acceleration, the holders of a majority in aggregate principal amount of the outstanding securities of that series may, under certain circumstances, rescind and annul such acceleration if all events of default, other than the non-payment of accelerated principal, or other specified amounts or interest, have been cured or waived.
Other than the duty to act with the required care during an event of default, the trustee will not be obligated to exercise any of its rights or powers at the request of the holders unless the holders shall have offered to the trustee reasonable indemnity. Generally, the holders of a majority in aggregate principal amount of the outstanding debt securities of any series will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee.
A holder of debt securities of any series will not have any right to institute any proceeding under the indentures, or for the appointment of a receiver or a trustee, or for any other remedy under the indentures, unless:
| (1) | the holder has previously given to the trustee written notice of a continuing event of default with respect to the debt securities of that series; |
| (2) | the holders of at least 25 percent in aggregate principal amount of the outstanding debt securities of that series have made a written request and have offered reasonable indemnity to the trustee to institute the proceeding; and |
| (3) | the trustee has failed to institute the proceeding and has not received direction inconsistent with the original request from the holders of a majority in aggregate principal amount of the outstanding debt securities of that series within 60 days after the original request. |
Holders may, however, sue to enforce the payment of principal, premium or interest on any debt security on or after the due date or to enforce the right, if any, to convert any debt security (if the debt security is convertible) without following the procedures listed in (1) through (3) above.
We will furnish the trustee an annual statement from our officers as to whether or not we are in default in the performance of the conditions and covenants under the indenture and, if so, specifying all known defaults.
Modification and waiver
Unless we indicate otherwise in a prospectus supplement, the applicable trustee and we may make modifications and amendments to an indenture with the consent of the holders of a majority in aggregate principal amount of the outstanding securities of each series affected by the modification or amendment.
We may also make modifications and amendments to the indentures for the benefit of holders without their consent, for certain purposes including, but not limited to:
| · | to evidence the succession of another person to VirnetX, or successive successions, and the assumption by any such successor of the covenants of VirnetX in the indentures in compliance with Article 8 of the indentures; |
| · | adding events of default; |
| · | making certain changes to facilitate the issuance of the debt securities; |
| · | to add to, change or eliminate any of the provisions of the indentures or more series of securities, provided that any such addition, change or elimination (A) shall neither (i) apply to any security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the holder of any such security with respect to such provision or (B) shall become effective only when there is no such security outstanding; |
| · | securing the debt securities; |
| · | providing for guaranties of, or additional obligors on, the debt securities; |
| · | to establish the form or term of debt securities as permitted by Sections 2.1 and 3.1 of the indenture; |
| · | providing for a successor trustee or additional trustees; |
| · | conforming the indenture to the description of the securities set forth in this prospectus or the accompanying prospectus supplement; |
| · | curing any ambiguity, defect or inconsistency; provided that such action shall not adversely affect the interest of the holders in any material respect; |
| · | permitting or facilitating the defeasance and discharge of the debt securities; |
| · | make such other provisions in regard to matters or questions arising under the indentures or under any supplemental indentures as our board of directors may deem necessary or desirable, and which does not in each case adversely affect the interests of the holders of the debt securities of a series; and |
| · | comply with requirements of the U.S. Securities and Exchange Commission in order to effect or maintain the qualifications of the indentures under the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). |
However, neither the trustee nor we may make any modification or amendment without the consent of the holder of each outstanding security of that series affected by the modification or amendment if such modification or amendment would:
| · | change the stated maturity of the principal of, or any installment of principal or interest on, any debt security; |
| · | reduce the principal, premium, if any, or interest on any debt security or any amount payable upon redemption or repurchase, whether at our option or the option of any holder, or reduce the amount of any sinking fund payments; |
| · | reduce the principal of an original issue discount security or any other debt security payable on acceleration of maturity; |
| · | change the place of payment or the currency in which any debt security is payable; |
| · | impair the right to enforce any payment after the stated maturity or redemption date; |
| · | if subordinated debt securities, modify the subordination provisions in a materially adverse manner to the holders; |
| · | adversely affect the right to convert any debt security if the debt security is a convertible debt security; or |
| · | change the provisions in the indenture that relate to modifying or amending the indenture. |
Satisfaction and discharge; defeasance
We may be discharged from our obligations on the debt securities, subject to limited exceptions, of any series that have matured or will mature or be redeemed within one year if we deposit enough money with the trustee to pay all the principal, interest and any premium due to the stated maturity date or redemption date of the debt securities.
Each indenture contains a provision that permits us to elect either or both of the following:
| · | we may elect to be discharged from all of our obligations, subject to limited exceptions, with respect to any series of debt securities then outstanding. If we make this election, the holders of the debt securities of the series will not be entitled to the benefits of the indenture, except for the rights of holders to receive payments on debt securities or the registration of transfer and exchange of debt securities and replacement of lost, stolen or mutilated debt securities. |
| · | we may elect to be released from our obligations under some or all of any financial or restrictive covenants applicable to the series of debt securities to which the election relates and from the consequences of an event of default resulting from a breach of those covenants. |
To make either of the above elections, we must irrevocably deposit in trust with the trustee enough money to pay in full the principal, interest and premium on the debt securities. This amount may be made in cash and/or U.S. government obligations or, in the case of debt securities denominated in a currency other than U.S. dollars, cash in the currency in which such series of securities is denominated and/or foreign government obligations. As a condition to either of the above elections, for debt securities denominated in U.S. dollars we must deliver to the trustee an opinion of counsel that the holders of the debt securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the action.
With respect to debt securities of any series that are denominated in a currency other than United States dollars, “foreign government obligations” means:
| · | direct obligations of the government that issued or caused to be issued the currency in which such securities are denominated and for the payment of which obligations its full faith and credit is pledged, or, with respect to debt securities of any series which are denominated in Euros, direct obligations of certain members of the European Union for the payment of which obligations the full faith and credit of such members is pledged, which in each case are not callable or redeemable at the option of the issuer thereof; or |
| · | obligations of a person controlled or supervised by or acting as an agency or instrumentality of a government described in the bullet above the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by such government, which are not callable or redeemable at the option of the issuer thereof. |
Notices
Notices to holders will be given by mail to the addresses of the holders in the security register.
Governing law
The indentures and the debt securities will be governed by, and construed under, the laws of the State of New York.
No personal liability of directors, officers, employees and stockholders
No incorporator, stockholder, employee, agent, officer, director or subsidiary of ours will have any liability for any obligations of ours, or because of the creation of any indebtedness under the debt securities, the indentures or supplemental indentures. The indentures provide that all such liability is expressly waived and released as a condition of, and as a consideration for, the execution of such indentures and the issuance of the debt securities.
Regarding the trustee
The indentures limit the right of the trustee, should it become our creditor, to obtain payment of claims or secure its claims.
The trustee will be permitted to engage in certain other transactions with us. However, if the trustee acquires any conflicting interest, and there is a default under the debt securities of any series for which it is trustee, the trustee must eliminate the conflict or resign.
Subordinated debt securities
The following provisions will be applicable with respect to each series of subordinated debt securities, unless otherwise stated in the prospectus supplement relating to that series of subordinated debt securities.
The indebtedness evidenced by the subordinated debt securities of any series is subordinated, to the extent provided in the subordinated indenture and the applicable prospectus supplement, to the prior payment in full, in cash or other payment satisfactory to the holders of senior debt, of all senior debt, including any senior debt securities.
Upon any distribution of our assets upon any dissolution, winding up, liquidation or reorganization, whether voluntary or involuntary, marshalling of assets, assignment for the benefit of creditors, or in bankruptcy, insolvency, receivership or other similar proceedings, payments on the subordinated debt securities will be subordinated in right of payment to the prior payment in full in cash or other payment satisfactory to holders of senior debt of all senior debt.
In the event of any acceleration of the subordinated debt securities of any series because of an event of default with respect to the subordinated debt securities of that series, holders of any senior debt would be entitled to payment in full in cash or other payment satisfactory to holders of senior debt of all senior debt before the holders of subordinated debt securities are entitled to receive any payment or distribution.
In addition, the subordinated debt securities will be structurally subordinated to all indebtedness and other liabilities of our subsidiaries, including trade payables and lease obligations. This occurs because our right to receive any assets of our subsidiaries upon their liquidation or reorganization, and your right to participate in those assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors, except to the extent that we are recognized as a creditor of such subsidiary. If we are recognized as a creditor of that subsidiary, our claims would still be subordinate to any security interest in the assets of the subsidiary and any indebtedness of the subsidiary senior to us.
We are required to promptly notify holders of senior debt or their representatives under the subordinated indenture if payment of the subordinated debt securities is accelerated because of an event of default.
Under the subordinated indenture, we may also not make payment on the subordinated debt securities if:
| · | a default in our obligations to pay principal, premium, if any, interest or other amounts on our senior debt occurs and the default continues beyond any applicable grace period, which we refer to as a payment default; or |
| · | any other default occurs and is continuing with respect to designated senior debt that permits holders of designated senior debt to accelerate its maturity, which we refer to as a non-payment default, and the trustee receives a payment blockage notice from us or some other person permitted to give the notice under the subordinated indenture. |
We will resume payments on the subordinated debt securities:
| · | in case of a payment default, when the default is cured or waived or ceases to exist, and |
| · | in case of a nonpayment default, the earlier of when the default is cured or waived or ceases to exist or 179 days after the receipt of the payment blockage notice. |
No new payment blockage period may commence on the basis of a nonpayment default unless 365 days have elapsed from the effectiveness of the immediately prior payment blockage notice. No nonpayment default that existed or was continuing on the date of delivery of any payment blockage notice to the trustee shall be the basis for a subsequent payment blockage notice.
As a result of these subordination provisions, in the event of our bankruptcy, dissolution or reorganization, holders of senior debt may receive more, ratably, and holders of the subordinated debt securities may receive less, ratably, than our other creditors. The subordination provisions will not prevent the occurrence of any event of default under the subordinated indenture.
The subordination provisions will not apply to payments from money or government obligations held in trust by the trustee for the payment of principal, interest and premium, if any, on subordinated debt securities pursuant to the provisions described under the section entitled “Satisfaction and discharge; defeasance,” if the subordination provisions were not violated at the time the money or government obligations were deposited into trust.
If the trustee or any holder receives any payment that should not have been made to them in contravention of subordination provisions before all senior debt is paid in full in cash or other payment satisfactory to holders of senior debt, then such payment will be held in trust for the holders of senior debt.
Senior debt securities will constitute senior debt under the subordinated indenture.
Additional or different subordination provisions may be described in a prospectus supplement relating to a particular series of debt securities.
Definitions
“Designated senior debt” means our obligations under any particular senior debt in which the instrument creating or evidencing the same or the assumption or guarantee thereof, or related agreements or documents to which we are a party, expressly provides that such indebtedness shall be designated senior debt for purposes of the subordinated indenture. The instrument, agreement or other document evidencing any designated senior debt may place limitations and conditions on the right of such senior debt to exercise the rights of designated senior debt.
“Indebtedness” means the following, whether absolute or contingent, secured or unsecured, due or to become due, outstanding on the date of the indenture for such series of securities or thereafter created, incurred or assumed:
| · | our indebtedness evidenced by a credit or loan agreement, note, bond, debenture or other written obligation; |
| · | all of our obligations for money borrowed; |
| · | all of our obligations evidenced by a note or similar instrument given in connection with the acquisition of any businesses, properties or assets of any kind, |
as lessee under leases required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles, or
as lessee under leases for facilities, capital equipment or related assets, whether or not capitalized, entered into or leased for financing purposes;
| · | all of our obligations under interest rate and currency swaps, caps, floors, collars, hedge agreements, forward contracts or similar agreements or arrangements; |
| · | all of our obligations with respect to letters of credit, bankers’ acceptances and similar facilities, including reimbursement obligations with respect to the foregoing; |
| · | all of our obligations issued or assumed as the deferred purchase price of property or services, but excluding trade accounts payable and accrued liabilities arising in the ordinary course of business; |
| · | all obligations of the type referred to in the above clauses of another person, the payment of which, in either case, we have assumed or guaranteed, for which we are responsible or liable, directly or indirectly, jointly or severally, as obligor, guarantor or otherwise, or which are secured by a lien on our property; and |
| · | renewals, extensions, modifications, replacements, restatements and refundings of, or any indebtedness or obligation issued in exchange for, any such indebtedness or obligation described in the above clauses of this definition. |
“Senior debt” means the principal of, premium, if any, and interest, including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding, and rent payable on or in connection with, and all fees and other amounts payable in connection with, our indebtedness. However, senior debt shall not include:
| · | any debt or obligation if its terms or the terms of the instrument under which or pursuant to which it is issued expressly provide that it shall not be senior in right of payment to the subordinated debt securities or expressly provide that such indebtedness is on the same basis or “junior” to the subordinated debt securities; or |
| · | debt to any of our subsidiaries, a majority of the voting stock of which is owned, directly or indirectly, by us. |
“Subsidiary” means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by us or by one or more of our other subsidiaries or by a combination of us and our other subsidiaries. For purposes of this definition, “voting stock” means stock or other similar interests which ordinarily has or have voting power for the election of directors, or persons performing similar functions, whether at all times or only so long as no senior class of stock or other interests has or have such voting power by reason of any contingency.
We may issue units comprised of one or more of the other classes of securities described in this prospectus in any combination. Each unit will be issued so that the holder of the unit is also the holder of each security included in the unit. Thus, the holder of a unit will have the rights and obligations of a holder of each included security. The units may be issued under unit agreements to be entered into between us and a unit agent, as detailed in the prospectus supplement relating to the units being offered. The prospectus supplement will describe:
| · | the designation and terms of the units and of the securities comprising the units, including whether and under what circumstances the securities comprising the units may be held or transferred separately; |
| · | a description of the terms of any unit agreement governing the units; |
| · | a description of the provisions for the payment, settlement, transfer or exchange of the units; |
| · | a discussion of material federal income tax considerations, if applicable; and |
| · | whether the units if issued as a separate security will be issued in fully registered or global form. |
The descriptions of the units in this prospectus and in any prospectus supplement are summaries of the material provisions of the applicable agreements. These descriptions do not restate those agreements in their entirety and may not contain all the information that you may find useful. We urge you to read the applicable agreements because they, and not the summaries, define your rights as holders of the units. For more information, please review the forms of the relevant agreements, which will be filed with the Commission promptly after the offering of units and will be available as described in the section titled “Where You Can Find More Information.”
We may sell the securities offered through this prospectus (1) to or through underwriters or dealers, (2) directly to purchasers, including our affiliates, (3) through agents, or (4) through a combination of any these methods. The securities may be distributed at a fixed price or prices, which may be changed, market prices prevailing at the time of sale, prices related to the prevailing market prices, or negotiated prices. The prospectus supplement will include the following information, if applicable:
| · | the terms of the offering; |
| · | the names of any underwriters, dealers or agents; |
| · | the name or names of any managing underwriter or underwriters; |
| · | the purchase price of the securities; |
| · | the net proceeds from the sale of the securities; |
| · | any delayed delivery arrangements; |
| · | any underwriting discounts, commissions and other items constituting underwriters’ compensation; |
| · | any offering price to the public; |
| · | any discounts or concessions allowed or reallowed or paid to dealers; and |
| · | any commissions paid to agents. |
We may engage in at-the-market offerings into an existing trading market in accordance with Rule 415(a)(4). Any at-the-market offering will be through an underwriter or underwriters acting as principal or agent for us.
Sale through underwriters or dealers
If underwriters are used in the sale, the underwriters will acquire the securities for their own account, including through underwriting, purchase, security lending or repurchase agreements. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions. Underwriters may sell the securities in order to facilitate transactions in any of our other securities (described in this prospectus or otherwise), including other public or private transactions and short sales. Underwriters may offer securities to the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters. Unless otherwise indicated in a prospectus supplement, the obligations of the underwriters to purchase the securities will be subject to certain conditions, and the underwriters will be obligated to purchase all the offered securities if they purchase any of them. The underwriters may change from time to time any public offering price and any discounts or concessions allowed or reallowed or paid to dealers. The applicable prospectus supplement will include the names of the principal underwriters the respective amount of securities underwritten, the nature of the obligation of the underwriters to take the securities and the nature of any material relationship between an underwriter and us.
Some or all of the securities that we offer through this prospectus may be new issues of securities with no established trading market. Any underwriters to whom we sell securities for public offering and sale may make a market in those securities, but they will not be obligated to do so and they may discontinue any market making at any time without notice. Accordingly, we cannot assure you of the liquidity of, or continued trading markets for, any securities offered pursuant to this prospectus.
If dealers are used in the sale of securities offered through this prospectus, we will sell the securities to them as principals. They may then resell those securities to the public at varying prices determined by the dealers at the time of resale. The applicable prospectus supplement will include the names of the dealers and the terms of the transaction.
Direct sales and sales through agents
We may sell the securities offered through this prospectus directly. In this case, no underwriters or agents would be involved. Such securities may also be sold through agents designated from time to time. The applicable prospectus supplement will name any agent involved in the offer or sale of the offered securities and will describe any commissions payable to the agent by us. Unless otherwise indicated in the applicable prospectus supplement, any agent will agree to use its reasonable best efforts to solicit purchases for the period of its appointment.
We may sell the securities directly to institutional investors or others who may be deemed to be underwriters within the meaning of the Securities Act with respect to any sale of those securities. The terms of any such sales will be described in the applicable prospectus supplement.
Delayed delivery contracts
If the applicable prospectus supplement indicates, we may authorize agents, underwriters or dealers to solicit offers from certain types of institutions to purchase securities at the public offering price under delayed delivery contracts. These contracts would provide for payment and delivery on a specified date in the future. The contracts would be subject only to those conditions described in the applicable prospectus supplement. The applicable prospectus supplement will describe the commission payable for solicitation of those contracts.
Market Informationmaking, stabilization and other transactions
Unless the applicable prospectus supplement states otherwise, each series of offered securities will be a new issue and will have no established trading market. We may elect to list any series of offered securities on an exchange. Any underwriters that we use in the sale of offered securities may make a market in such securities, but may discontinue such market making at any time without notice. Therefore, we cannot assure you that the securities will have a liquid trading market.
Any underwriter may also engage in stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Rule 104 under the Exchange Act, as amended. Stabilizing transactions involve bids to purchase the underlying security in the open market for the purpose of pegging, fixing or maintaining the price of the securities. Syndicate covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the securities to be higher than it would be in the absence of the transactions. The underwriters may, if they commence these transactions, discontinue them at any time.
Derivative transactions and hedging
We, the underwriters or other agents may engage in derivative transactions involving the securities. These derivatives may consist of short sale transactions and other hedging activities. The underwriters or agents may acquire a long or short position in the securities, hold or resell securities acquired and purchase options or futures on the securities and other derivative instruments with returns linked to or related to changes in the price of the securities. In order to facilitate these derivative transactions, we may enter into security lending or repurchase agreements with the underwriters or agents. The underwriters or agents may effect the derivative transactions through sales of the securities to the public, including short sales, or by lending the securities in order to facilitate short sale transactions by others. The underwriters or agents may also use the securities purchased or borrowed from us, or others (or, in the case of derivatives, securities received from us in settlement of those derivatives) to directly or indirectly settle sales of the securities or close out any related open borrowings of the securities.
Electronic auctions
We may also make sales through the Internet or through other electronic means. Since we may from time to time elect to offer securities directly to the public, with or without the involvement of agents, underwriters or dealers, utilizing the Internet or other forms of electronic bidding or ordering systems for the pricing and allocation of such securities, you should pay particular attention to the description of that system we will provide in a prospectus supplement.
Such electronic system may allow bidders to directly participate, through electronic access to an auction site, by submitting conditional offers to buy that are subject to acceptance by us, and which may directly affect the price or other terms and conditions at which such securities are sold. These bidding or ordering systems may present to each bidder, on a so-called “real-time” basis, relevant information to assist in making a bid, such as the clearing spread at which the offering would be sold, based on the bids submitted, and whether a bidder’s individual bids would be accepted, prorated or rejected. Of course, many pricing methods can and may also be used.
Upon completion of such an electronic auction process, securities will be allocated based on prices bid, terms of bid or other factors. The final offering price at which securities would be sold and the allocation of securities among bidders would be based in whole or in part on the results of the Internet or other electronic bidding process or auction.
General information
Agents, underwriters, and dealers may be entitled, under agreements entered into with us, to indemnification by us against certain liabilities, including liabilities under the Securities Act.
Agents, underwriters and dealers may engage in transactions with or perform services for us in the ordinary course of their businesses.
The validity of the securities offered by this prospectus will be passed upon by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
Our common stock was previously tradedconsolidated financial statements appearing in the over-the-counter marketVirnetX Holding Corporation Annual Report on Form 10-K for the year ended December 31, 2014 (including the schedule appearing therein), and the effectiveness of our internal control over financial reporting as of December 31, 2014 have been audited by Farber Hass Hurley LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given on the Nasdaq OTC Bulletin Board underauthority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and other reports, proxy statements and other information with the symbols “VNXH”Commission. Our Commission filings are available to the public over the Internet at the Commission’s website at http://www.sec.gov. You may also read and prior to that “PASW.” On December 26, 2007, our common stock began tradingcopy any document we file at the Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the AMEX underPublic Reference Room. Our Annual Report on Form 10‑K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other information that we file with or furnish to the symbol “VHC.” The following table showsCommission pursuant to Section 13(a) or 15(d) of the price rangeExchange Act can also be accessed free of our common stock,charge through the Internet. These filings will be available as reported onsoon as reasonably practicable after we electronically file such material with, or furnish it to, the OTC Bulletin Board and on the American Stock Exchange for each quarter ended during the last two fiscal years and the first two quarters of fiscal 2008 on a post-split basis.
| | | | | | | | | |
Quarter Ended | | High | | | Low | |
| |
| 3/31/06 | | $ | 0.60 | | | $ | 0.36 | |
| 6/30/06 | | $ | 0.53 | | | $ | 0.21 | |
| 9/30/06 | | $ | 0.50 | | | $ | 0.30 | |
| 12/31/06 | | $ | 0.90 | | | $ | 0.36 | |
| 3/31/07 | | $ | 5.97 | | | $ | 0.63 | |
| 6/30/07 | | $ | 5.10 | | | $ | 3.36 | |
| 9/30/07 | | $ | 5.10 | | | $ | 3.96 | |
| 12/31/07 | | $ | 6.75 | | | $ | 4.08 | |
| 3/31/08 | | $ | 6.95 | | | $ | 4.26 | |
| 6/30/08 | | $ | 7.06 | | | $ | 3.50 | |
Holders
As of July 8, 2008, there were 96 holders of record of our common stock.
DividendsCommission.
We have filed with the Commission a registration statement under the Securities Act relating to the offering of these securities. The registration statement, including the attached exhibits and any prospectus supplement, contains additional relevant information about us and the securities. This prospectus does not paid any cash dividends on our common stock, and do not anticipate paying cash dividendscontain all of the information set forth in the foreseeable future. Our current policy is to retain earnings, if any, to fund operations, andregistration statement. You can obtain a copy of the development and growth of our business. Any future determination to pay cash dividends will beregistration statement, at prescribed rates, from the Commission at the discretionaddress listed above.
INFORMATION INCORPORATED BY REFERENCE The Commission allows us to incorporate by reference into this prospectus certain information we file with it, which means that we can disclose important information by referring you to those documents. The information incorporated by reference is considered to be a part of Directorsthis prospectus, and information that we file later with the Commission will be dependent upon our financial condition, operation results, capital requirements, applicable contractual restrictions, restrictionsautomatically update and supersede information contained in our organizational documents,this prospectus and any other factorsaccompanying prospectus supplement. We incorporate by reference the documents listed below that our Boardwe have previously filed with the Commission (excluding any portions of Directors deems relevant.any Form 8-K that are not deemed “filed” pursuant to the General Instructions of Form 8-K):
Securities Authorized for Issuance Under Equity Compensation Plans | · | our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on March 2, 2015; |
On April 17, 1998, we adopted an equity incentive program. Under | · | our Quarterly Reports on Form 10-Q, filed on May 11, 2015 and August 10, 2015; |
| · | our Current Reports on Form 8-K, filed on January 2, 2015 and May 20, 2015 (excluding any information furnished in such reports under Item 2.02, Item 7.01 or Item 9.01); and |
| · | the description of our common stock contained in our Registration Statement filed with the Commission on Form 8-A on November 21, 2007, together with Amendment No. 1 on Form 8-A filed with the Commission on December 21, 2007, and including any other amendments or reports filed for the purpose of updating such description. |
We also incorporate by reference into this program,prospectus additional documents that we may grant incentive stock options, non-statutory stock options, stock appreciation rights, stock bonusesfile with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the completion or termination of the offering, including all such documents we may (other than current reports furnished under Item 2.02 or 7.01 of Form 8-K and rightsexhibits on such form that are related to acquire restricted stocksuch items) file with the Commission after the date of the initial registration statement and prior to employees, directorsthe effectiveness of the registration statement, but excluding any information deemed furnished and consultants (exceptnot filed with the Commission. Any statements contained in a previously filed document incorporated by reference into this prospectus is deemed to be modified or superseded for incentive stock options whichpurposes of this prospectus to the extent that a statement contained in this prospectus, or in a subsequently filed document also incorporated by reference herein, modifies or supersedes that statement.
This prospectus may contain information that updates, modifies or is contrary to information in one or more of the documents incorporated by reference in this prospectus. You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus is accurate as of any date other than the date of this prospectus or the date of the documents incorporated by reference in this prospectus.
We will provide to each person, including any beneficial owner, to whom this prospectus is delivered, upon written or oral request, at no cost to the requester, a copy of any and all of the information that is incorporated by reference in this prospectus.
Requests for such documents should be granteddirected to:
VirnetX Holding Corporation
Attn: Investor Relations
308 Dorla Ct.
Zephyr Cove, NV 89448
(775) 548-1785
Up to employees). $35,000,000 of Shares
Common Stock
PROSPECTUS SUPPLEMENT
Cowen and Company
, 2015
Part II
Information Not Required in the Prospectus
| Item 14. | Other Expenses of Issuance and Distribution |
The number of shares of common stock reserved for issuance under this program is 150,580 shares post-split. As of December 31, 2006, there were no outstanding options or rights under this program. Infollowing table sets forth the estimated costs and expenses (other than the actual registration fee), other than underwriting discounts and commissions, payable by the registrant in connection with the merger between VirnetX Holding Corporation and VirnetX, we assumed and our Board of Directors has adopted the VirnetX 2005 Stock Plan as amended to cover awards of shares of our common stock. The total number of shares of our common stock reserved for issuance under the VirnetX Plan is 11,624,469, of which as of October 31, 2007, there were 4,028,418 shares remaining available for future grants. Our stockholders approved the VirnetX Plan at our 2008 annual meeting.
47
LEGAL PROCEEDINGS
We believe Microsoft Corporation is infringing certain of our patents. Accordingly, we commenced a lawsuit against Microsoft on February 15, 2007 by filing a complaint in the United States District Courtsale of the Eastern District of Texas, Tyler Division. Pursuant to the complaint, we allege that Microsoft infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1, entitled “Agile Network Protocol for Secure Communications with Assured System Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network Without User Entering Any Cryptographic Information.” On April 5, 2007, we filed an amended complaint specifying certain accused products at issue and alleging infringement of a third, recently issued U.S. patent: U.S. Patent No. 7,188,180 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network.” We are seeking both damages, in an amount subject to proof at trial, and injunctive relief. Microsoft answered the amended complaint and asserted counterclaims against us on May 4, 2007. Microsoft counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. Microsoft seeks an award of its attorneys’ fees and costs. We filed a reply to Microsoft’s counterclaims on May 24, 2007. Discovery has begun, a Markman hearing on claim construction is scheduled for February 2009, and the trial is scheduled to begin on October 12, 2009. We have served our infringement contentions directed to certain of Microsoft’s operating system and unified messaging and collaboration applications. On March 31, 2008, Microsoft filed a Motion to Dismiss for lack of standing, which was denied by the court pursuant to an order dated June 3, 2008. Also pursuant to that court decision, on June 10, 2008, SAIC joined us in our lawsuit.securities being registered
| Securities and Exchange Commission registration fee | | $ | 11,620 | |
| NYSE MKT LLC Listing Fee | | 45,000 | |
| Accounting fees and expenses | | | 200,000 | |
| Legal fees and expenses | | | 250,000 | |
| Printing and engraving | | | 50,000 | |
| Transfer agent fees and expenses | | | 15,000 | |
| Miscellaneous | | | 35,000 | |
| Total | | $ | 606,620 | |
Because we have determined that Microsoft’s alleged unauthorized use of our patents would cause us severe economic harm and the failure to cause Microsoft to discontinue its use of such patents could result in the termination of our business, we have dedicated a significant portion of our economic resources, to date, to the prosecution of the Microsoft litigation and expect to continue to do so for the foreseeable future.
Although we believe Microsoft infringes three of our patents and we intend to vigorously prosecute this case, at this stage of the litigation the outcome cannot be predicted with any degree of reasonable certainty. Additionally, the Microsoft litigation will be costly and time-consuming, and we can provide no assurance that we will obtain a judgment against Microsoft for damages and/or injunctive relief. Should the District Court issue a judgment in favor of Microsoft, and in connection with such judgment determine that we had acted in bad faith or with fraudulent intent, or we were otherwise found to have exhibited inequitable conduct, the Court could award attorney fees to Microsoft, which would be payable by us.
In the near term, we will dedicate significant time and resources to the Microsoft litigation. The risks associated with such dedication of time and resources are set forth in theRisk Factorssection of this report.
One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development.
Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
INDEMNIFICATION OF OFFICERS AND DIRECTORS| Item 15. | Indemnification of Directors and Officers |
Section 145145(a) of the Delaware General Corporation Law provides that a Delaware corporation may indemnify directors and officers as well as other employees and individuals against expenses including attorneys’ fees, judgments, fines and amounts paid in settlement in connection with various actions, suitsany person who was or proceedings,is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative other(other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a derivativedirector, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if theyhe or she acted in good faith and in a manner theyhe or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe theirhis or her conduct was unlawful. A similar standard
Section 145(b) of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person who was or is applicablea party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the caseright of derivative actions, exceptthe corporation to procure a judgment in its favor by reason of the fact that indemnification only extends tosuch person acted in any of the capacities set forth above, against expenses including(including attorneys’ feesfees) actually and reasonably incurred by such person in connection with the defense or settlement of such
48
actions, and the statute requires court approval before there can be any action or suit if he or she acted under similar standards, except that no indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s certificatemade in respect of incorporation, bylaws, agreement, a vote of stockholdersany claim, issue or disinterested directors or otherwise.
Our Certificate of Incorporation provides that we will indemnify and hold harmless,matter as to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from timewhich such person shall have been adjudged to time, each person that such section grants us the power to indemnify.
The Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:
| | |
| • | any breach of the director’s duty of loyalty to the corporation or its stockholders; |
|
| • | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
|
| • | payments of unlawful dividends or unlawful stock repurchases or redemptions; or |
|
| • | any transaction from which the director derived an improper personal benefit. |
Our Certificate of Incorporation provides that, to the fullest extent permitted by applicable law, none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this provision will be prospectiveunless and only and will not adversely affect any limitation, right or protection of a director of our company existing at the time of such repeal or modification.
49
LEGAL MATTERS
The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Orrick, Herrington & Sutcliffe LLP, Menlo Park, California. Lowell Ness, a partner of Orrick, Herrington & Sutcliffe LLP is our Secretary. As of the completion of this offering, Orrick, Herrington & Sutcliffe LLP and partners in that firm beneficially own an aggregate of 124,548 shares of our common stock.
50
EXPERTS
The financial statements of VirnetX, Inc. as of December 31, 2006 and for the periods then ended included in the prospectus have been audited by the independent registered public accounting firm of Burr, Pilger & Mayer LLP, to the extent and forthat the period ended December 31, 2006, and are includedcourt in reliance uponwhich such report given uponaction or suit was brought shall determine that, despite the authorityadjudication of Burr, Pilger & Mayer LLP as expertsliability but in auditing and accounting. The consolidated financial statementsview of VirnetX Holding Corporation as of and forall the periods therein indicated included in the prospectus have been audited by the independent registered public accounting firm of Farber Hass Hurley LLP, to the extent and for the periods set forth in their report appearing in this prospectus, and are included in reliance upon such report given upon the authority of Farber Hass Hurley LLP as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement onForm S-3 with the SEC of which this prospectus is a part under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain allcircumstances of the information included incase, such person is fairly and reasonably entitled to be indemnified for such expenses which the registration statement, and statements contained in this prospectus concerning the provisions of any document are not necessarily complete. For further information about us and the shares of common stock covered by this prospectus, you should read the registration statement including its exhibits.
We file annual reports onForm 10-K, quarterly reports ofForm 10-Q, current reports onForm 8-K, proxy statements and other information with the SEC under the Exchange Act. You may read and copy this information at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at(800) 732-0330 for further information on the operation of the SEC’s Public Reference Room. The SEC also maintains an internet site that contains reports, proxy statements and other information about issuers, like us, who file electronically with the SEC. The address of the SEC’s web site is www.sec.gov.
We intend to furnish our holders of common stock with annual reports containing financial statements audited by an independent accounting firm and to make available quarterly reports containing unaudited financial information for the first three quarters of each year.
51
Commission Position on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and their respective controlling persons, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
PROVISION FOR INDEMNIFICATION
Delaware General Corporation Lawcourt shall deem proper.
Section 145 of the Delaware General Corporation Law further provides that: (i) to the extent that a present or former or director or officer of a corporation may indemnify directorshas been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and officers as well as other employees and individuals(b) or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such personhim or her in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the company. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director’s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions or for any transaction from which the director derived an improper personal benefit.
Certificate of Incorporation
Our Certificate of Incorporation provides that the personal liability of the directors of the company shall be eliminated to the fullest extent permitted by the provisions of Section 102(b)(7) of the Delaware General Corporation Law, as the same may be amended and supplemented.
Our Certificate of Incorporation provides that the company shall, to the fullest extent permitted by the provisions of Section 145 of the Delaware General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and thetherewith; (ii) indemnification provided for thereinby Section 145 shall not be deemed exclusive of any other rights to which thosethe indemnified party may be entitled underentitled; and (iii) the corporation may purchase and maintain insurance on behalf of any bylaw, agreement, vote of stockholderspresent or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be aformer director, officer, employee or agent of the corporation or any person who at the request of the corporation was serving in such capacity for another entity against any liability asserted against such person and shall inureincurred by him or her in any such capacity or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liabilities under Section 145.
Article XV of our Amended and Restated Certificate of Incorporation authorizes us to provide for the indemnification of directors to the benefitfullest extent permissible under Delaware law.
Article VI of our Bylaws provides for the indemnification of officers, directors and employees and agents of the heirs, executorscorporation against expenses (including attorneys’ fees), judgments, fines, settlements and administratorsother amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such a person.
Indemnification Agreementsperson is or was an agent of the Corporation.
We have also entered into indemnification agreements with our directors, executive officers and officers. Theothers, in addition to indemnification provided for in our Bylaws, and intend to enter into indemnification agreements provide indemnification to ourwith any new directors and executive officers under certain circumstances for acts or omissions which may not be covered by directors’ and officers’ liability insurance.
Liability Insurancein the future.
We have also obtained directors’purchased and officers’ liabilityintend to maintain insurance which insures against liabilities that our directors or officers may incur in such capacities.
52
FINANCIAL STATEMENTS
Financial Statements Index
| | | | |
| | Page |
|
| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | F-8 | |
| | | F-21 | |
| | | F-23 | |
| | | F-24 | |
| | | F-25 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Boardon behalf of Directors and Shareholders
VirnetX Holding Corporation
We have audited the accompanying consolidated balance sheet of VirnetX Holding Corporation (the “Company”; a development stage enterprise) as of December 31, 2007, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2007 and the period from August 2, 2005 (date of inception) to December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007, and the results of their operations and their cash flows for the year ended December 31, 2007 and the period from August 2, 2005 (date of inception) to December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Farber Hass Hurley LLP
Granada Hills, California
March 31, 2008
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
VirnetX, Inc.
We have audited the accompanying balance sheet of VirnetX, Inc., (a development stage enterprise) as of December 31, 2006 and the related statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2006 and the period from August 2, 2005 (date of inception) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VirnetX, Inc., as of December 31, 2006, and the results of its operations and cash flows for the year ended December 31, 2006 and for the period from August 2, 2005 (date of inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Burr, Pilger & Mayer LLP
Palo Alto, CA
April 30, 2007, except for the
effects of the1-for-3 reverse
stock split discussed in Note 1
as to which the date is March 31, 2008.
F-3
VirnetX Holding Corporation
(a development stage enterprise)
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | As of
| | | As of
| |
| | | December 31,
| | | December 31,
| |
| | | 2007 | | | 2006 | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 8,589,447 | | | $ | 139,997 | |
| Accounts receivable | | | 5,860 | | | | — | |
| Prepaid expenses and other current assets | | | 399,201 | | | | 26,945 | |
| | | | | | | | | |
| Total current assets | | | 8,994,508 | | | | 166,942 | |
| Property and equipment, net | | | 32,658 | | | | 27,087 | |
| Intangible and other assets | | | 252,000 | | | | 1,094 | |
| | | | | | | | | |
| Total assets | | $ | 9,279,166 | | | $ | 195,123 | |
| | | | | | | | | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 531,790 | | | $ | 87,386 | |
| Current portion of long-term obligation | | | 48,000 | | | | — | |
| | | | | | | | | |
| Total current liabilities | | | 579,790 | | | | 87,386 | |
| | | | | | | | | |
| Long-term obligation, net of current portion | | | 204,000 | | | | — | |
| Commitments and contingencies: | | | — | | | | — | |
| Stockholders’ equity (deficit): | | | | | | | | |
| Preferred stock, par value $0.0001 per share | | | | | | | | |
| Authorized: 10,000,000 shares and 12,285,715, shares at December 31, 2007 and December 31, 2006, respectively | | | | | | | | |
| Issued and outstanding: 0 shares and 1,404,000 shares, at December 31, 2007 and December 31, 2006, respectively Liquidation preference: $0 and $1,404,000, at December 31, 2007 and December 31, 2006, respectively | | | | | | | 1,377,625 | |
| Common stock, par value $0.0001 per share | | | | | | | | |
| Authorized: 100,000,000 shares and 20,000,000 shares, at December 31, 2007 and December 31, 2006, respectively | | | | | | | | |
| Issued and outstanding: 34,667,214 shares and 17,582,009 shares, at December 31, 2007 and December 31, 2006, respectively | | | 3,467 | | | | 1,758 | |
| Additional paid-in capital | | | 19,467,890 | | | | 1,012,321 | |
| Due from stockholder | | | — | | | | (150 | ) |
| Deficit accumulated during the development stage | | | (10,975,981 | ) | | | (2,283,817 | ) |
| | | | | | | | | |
| Total stockholders’ equity (deficit) | | | 8,495,376 | | | | 107,737 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity (deficit) | | $ | 9,279,166 | | | $ | 195,123 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VirnetX Holding Corporation
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Period from
| | | Cumulative from
| |
| | | | | | | | | August 2, 2005
| | | August 2, 2005
| |
| | | Year Ended
| | | Year Ended
| | | (Date of Inception) to
| | | (Date of Inception) to
| |
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | | 2007 | | | 2006 | | | 2005 | | | 2007 | |
| |
| Revenue — Royalties | | $ | 74,866 | | | $ | — | | | $ | — | | | $ | 74,866 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research and development | | | 684,316 | | | | 554,187 | | | | 56,000 | | | | 1,294,503 | |
| General and administrative | | | 8,040,894 | | | | 853,488 | | | | 826,478 | | | | 9,818,282 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 8,725,210 | | | | 1,407,675 | | | | 882,478 | | | | 11,015,363 | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (8,650,344 | ) | | | (1,407,675 | ) | | | (882,478 | ) | | | (10,940,497 | ) |
| Interest and other income (expense), net | | | (41,820 | ) | | | 6,336 | | | | — | | | | (35,484 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (8,692,164 | ) | | $ | (1,401,339 | ) | | $ | (882,478 | ) | | $ | (10,975,981 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (.36 | ) | | $ | (.08 | ) | | $ | (.06 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 24,312,287 | | | | 17,087,462 | | | | 15,217,092 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VirnetX Holding Corporation
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Deficit
| | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | Total
| |
| | | | | | | | | | | | | | | Additional
| | | | | | During
| | | Stockholders’
| |
| | | Series A Preferred Stock | | | Common Stock | | | Paid-in
| | | Due from
| | | Development
| | | Equity
| |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Stockholder | | | Stage | | | (Deficit) | |
| |
Balance at inception (August 2, 2005) | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Common stock issued to founders | | | — | | | | — | | | | 13,285,107 | | | | 1,329 | | | | (1,129 | ) | | | — | | | | — | | | | 200 | |
| Proceeds from issuance of restricted stock units to employees at $0.0001 per share in October 2005 | | | — | | | | — | | | | 3,321,277 | | | | 332 | | | | (252 | ) | | | — | | | | — | | | | 80 | |
| Stock-based compensation from restricted stock units | | | — | | | | — | | | | — | | | | — | | | | 799,920 | | | | — | | | | — | | | | 799,920 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (882,478 | ) | | | (882,478 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | | — | | | | — | | | | 16,606,384 | | | | 1,661 | | | | 798,539 | | | | — | | | | (882,478 | ) | | | (82,278 | ) |
| Proceeds from issuance of preferred stock at $1.00 per share in February 2006, net of issuance cost of $26,375 | | | 1,404,000 | | | | 1,377,625 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,377,625 | |
| Proceeds from issuance of restricted stock units to employees at $0.01 per share in March and October 2006 | | | — | | | | — | | | | 975,625 | | | | 97 | | | | 1,953 | | | | (150 | ) | | | — | | | | 1,900 | |
| Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| restricted stock units | | | — | | | | — | | | | — | | | | — | | | | 130,210 | | | | — | | | | — | | | | 130,210 | |
| Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee stock options | | | — | | | | — | | | | — | | | | — | | | | 81,619 | | | | — | | | | — | | | | 81,619 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,401,339 | ) | | | (1,401,339 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 1,404,000 | | | | 1,377,625 | | | | 17,582,009 | | | | 1,758 | | | | 1,012,321 | | | | (150 | ) | | | (2,283,817 | ) | | | 107,737 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from exercise of options | | | | | | | | | | | 124,548 | | | | 12 | | | | 29,988 | | | | | | | | | | | | 30,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for merger | | | | | | | | | | | 1,665,800 | | | | 167 | | | | — | | | | | | | | | | | | 167 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt converted to stock, net | | | | | | | | | | | 2,016,016 | | | | 202 | | | | 1,499,648 | | | | 150 | | | | | | | | 1,500,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued for cash at $.75 per share, net | | | | | | | | | | | 4,000,000 | | | | 400 | | | | 2,953,249 | | | | | | | | | | | | 2,953,649 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued for cash at $4.00 per share, net | | | | | | | | | | | 3,450,000 | | | | 345 | | | | 11,776,773 | | | | | | | | | | | | 11,777,118 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation | | | | | | | | | | | | | | | | | | | 818,869 | | | | | | | | | | | | 818,869 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock converted to common stock | | | (1,404,000 | ) | | | (1,377,625 | ) | | | 5,828,841 | | | | 583 | | | | 1,377,042 | | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,692,164 | ) | | | (8,692,164 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | — | | | $ | — | | | | 34,667,214 | | | $ | 3,467 | | | $ | 19,467,890 | | | $ | — | | | $ | (10,975,981 | ) | | $ | 8,495,376 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VirnetX Holding Corporation
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Cumulative Period
| |
| | | | | | | | | Period from
| | | from
| |
| | | | | | | | | August 2, 2005
| | | August 2, 2005
| |
| | | Year Ended
| | | Year Ended
| | | (Date of Inception) to
| | | (Date of Inception) to
| |
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | | 2007 | | | 2006 | | | 2005 | | | 2007 | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Net loss | | $ | (8,692,164 | ) | | $ | (1,401,339 | ) | | $ | (882,478 | ) | | $ | (10,975,981 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | 818,869 | | | | 211,829 | | | | 799,920 | | | | 1,830,618 | |
| Depreciation and amortization | | | 18,609 | | | | 7,689 | | | | — | | | | 26,298 | |
| Changes in assets and liabilities: | | | | | | | | | | | | | | | | |
| Prepaid expenses and other current assets | | | (392,256 | ) | | | 34,225 | | | | (61,170 | ) | | | (419,201 | ) |
| Other assets | | | — | | | | (1,094 | ) | | | — | | | | (1,094 | ) |
| Accounts payable | | | 444,404 | | | | 87,386 | | | | — | | | | 531,790 | |
| | | | | | | | | | | | | | | | | |
| Net cash used in operating activities | | | (7,802,538 | ) | | | (1,061,304 | ) | | | (143,728 | ) | | | (9,007,570 | ) |
| | | | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | (22,955 | ) | | | (34,776 | ) | | | — | | | | (57,731 | ) |
| Cash acquired in acquisition | | | 14,009 | | | | | | | | | | | | 14,009 | |
| | | | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (8,946 | ) | | | (34,776 | ) | | | — | | | | (43,722 | ) |
| | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Issuance of notes payable | | | 250,000 | | | | | | | | | | | | 250,000 | |
| Repayment of notes payable | | | (250,000 | ) | | | | | | | | | | | (250,000 | ) |
| Proceeds from issuance of preferred stock, net of issuance costs | | | | | | | 1,147,625 | | | | — | | | | 1,147,625 | |
| Proceeds from issuance of restricted stock units | | | | | | | 1,900 | | | | 280 | | | | 2,180 | |
| Proceeds from advance from preferred stockolders | | | | | | | — | | | | 230,000 | | | | 230,000 | |
| Proceeds from exercise of options | | | 30,000 | | | | | | | | | | | | 30,000 | |
| Proceeds from convertible debt | | | 1,500,000 | | | | | | | | | | | | 1,500,000 | |
| Proceeds from sale of common stock | | | 14,730,934 | | | | | | | | | | | | 14,730,934 | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 16,260,934 | | | | 1,149,525 | | | | 230,280 | | | | 17,640,739 | |
| | | | | | | | | | | | | | | | | |
| Net increase in cash and cash equivalents | | | 8,449,450 | | | | 53,445 | | | | 86,552 | | | | 8,589,447 | |
| Cash and cash equivalents, beginning of period | | | 139,997 | | | | 86,552 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 8,589,447 | | | $ | 139,997 | | | $ | 86,552 | | | $ | 8,589,447 | |
| | | | | | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | |
| Cash paid during the year for taxes | | $ | 800 | | | $ | 800 | | | $ | — | | | $ | 1,600 | |
| | | | | | | | | | | | | | | | | |
| Cash paid during the year for interest | | | 41,630 | | | | — | | | | — | | | | 41,630 | |
| | | | | | | | | | | | | | | | | |
| Supplemental disclosure of noncash investing and financing activities: | | | | | | | | | | | | | | | | |
| Conversion of advance into preferred stock | | $ | | | | $ | 230,000 | | | $ | — | | | $ | 230,000 | |
| Royalty obligation assumed to obtain intangible assets | | $ | 252,000 | | | | | | | | | | | $ | 252,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
| |
Note 1 | Formation and Business of the Company |
VirnetX Holding Corporation (“we,” “us,” “our” or the “Company”) are a development stage company focused on commercializing a patent portfolio for providing solutions for secure real-time communications such as instant messaging, or “IM,” and voice over internet protocol, or “VoIP.”
In July 2007 we effected a merger between PASW, Inc., a company which had at the time of the merger, publicly traded common stock with limited operations, and VirnetX, Inc., which became our principal operating subsidiary. As a result of this merger, the former securityholders of VirnetX, Inc. came to own a majority of our outstanding common stock.
Under generally accepted accounting principles in the United States, the accompanying financial statements have been prepared as if VirnetX, Inc., a company whose inception date was August 2, 2005,any person who is our predecessor for accounting purposes, had acquired PASW, Inc. on July 5, 2007. Accordingly, the accompanying statement of operations include the operations of VirnetX, Inc.or was a director or officer against any loss arising from August 2, 2005 to December 31, 2007any claim asserted against him or her and the operations of PASW, Inc. from July 5, 2007 to December 31, 2007. The historical share activity of VirnetX, Inc. has been retroactively restated to account for the 12.454788 to one exchange rate which was applicableincurred by him or her in any such capacity, subject to certain convertible instruments as explained in Note 10 and Note 11 and for our one for three reverse stock split which was implemented on October 29, 2007.
Our principal business activities to date are our efforts to commercialize our patent portfolio. We also conduct the remaining activities of PASW, Inc., which are generally limited to the collection of royalties on certain internet-based communications by a wholly owned Japanese subsidiary of PASW pursuant to the terms of a single license agreement. The revenue generated by this agreement is not significant.
Although we believe we may derive revenues in the future from our principal patent portfolio and are currently endeavoring to develop certain of those patents into marketable products, we have not done so to date. As such, we are in the development stage and consequently are subject to the risks associated with development stage companies, including the need for additional financings, the uncertainty that our licensing program development efforts will produce revenue-bearing licenses for us, the uncertainty that our development initiatives will produce successful commercial products as well as the uncertainty of marketing and customer acceptance of such products.
These financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. We have incurred net operating losses and negative cash flows from operations. At December 31, 2007, we had a deficit accumulated in the development stage of $10,975,891. However, management believes the $8,589,000 cash on hand at December 31, 2007 is sufficient to meet our working capital needs for 2008 or until significant revenue is generated from operations.
| |
Note 2 | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of the VirnetX Holding Company, a development stage enterprise, and its wholly owned subsidiaries. All intercompany transactions have been eliminated.
These financial statements reflect the historical results of VirnetX, Inc. and subsequent to the merger date of July 5, 2007, the historical consolidated results of VirnetX Holding Corporation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
F-8
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin 104. We are a licensor of software and generate revenue primarily from the one-time sales of licensed software. Generally, revenue is recognized upon shipment of the licensed software. For multiple element license arrangements, the license fee is allocated to the various elements based on fair value. When a multiple element arrangement includes rights to a post-contract customer support, the portion of the license fee allocated to each function is recognized ratably over the term of the arrangement.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the accelerated and straight line methods over the estimated useful lives of the assets, which range from five to seven years. Repair and maintenance costs are charged to expense as incurred.
Concentration of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are primarily maintained at one financial institution in the United States. Deposits held with this financial institution may exceed the amount of insurance provided on such deposits. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. During the year ended December 31, 2007 we had, at times, funds that were uninsured. The uninsured balance at December 31, 2007 was in excess of $8,000,000. We have not experienced any losses on our deposits of cash and cash equivalents.
Intangible Assets
We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years, on either a straight line basis or as revenue is generated by the assets.
Impairment of Long-Lived Assets
We identify and record impairment losses on intangible and other long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.
Research and Development
Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred. Acquired
F-9
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
research and development costs are expensed upon acquisition and are part of total research and development expense.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Effective January 1, 2007, we have adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes using the prospective method allowed by FIN 48. The adoption of FIN 48 did not have a material impact on our financial statements.
Fair Value of Financial Instruments
Carrying amounts of our financial instruments, including cash and cash equivalents, accounts payable, notes payable, and accrued liabilities approximate their fair values due to their short maturities. The carrying amount of our minimum royalty payment obligation approximates fair value because it is recorded at a discounted calculation.
Stock-Based Compensation
Our accounting for share-based compensation is in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock-options based on estimated fair values. Using the modified retrospective transition method of adopting SFAS 123(R), the herein financial statements presented reflect compensation expense for stock-based awards as if the provisions of SFAS 123(R) had been applied from the date of inception.
In addition, as required by Emerging Issues Task Force ConsensusNo. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,”we record stock and options granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued as they vest over the performance period.
Earnings Per Share
SFAS No. 128,“Earnings Per Share” requires presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of share outstanding including potentially dilutive securities such as options, warrants and convertible debt. Since we incurred a loss for the period, any common stock equivalents have been excluded because their effect would be anti-dilutive.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R),“Business Combinations” and SFAS No. 160,“Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51.”These Standards will significantly change the accounting and reporting for business combination transactions and noncontrolling (minority) interests in consolidated financial statements, including capitalizing at the acquisition date the fair value of acquired in-process research
F-10
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
and development, and, remeasuring and writing down these assets, if necessary, in subsequent periods during their development. These new standards will be applied prospectively for business combinations that occur on or after January 1, 2009, except that presentation and disclosure requirements of SFAS 160 regarding noncontrolling interests shall be applied retroactively. The implementation of these standards is not expected to have a material impact on the consolidated statements of operations or financial position.
In December 2007, the FASB ratified EITFNo. 07-1, “Accounting for Collaborative Agreements.”This standard provides guidance regarding financial statement presentation and disclosure of collaborative agreements, as defined, which includes arrangements regarding the developing and commercialization of products and product candidates.EITF 07-01 is effective as of January 1, 2009. Implementation of this standard is not expected to have a material impact on the consolidated statements of operations or financial position.
In June 2007, the FASB ratifiedEITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to be used in Future Research and Development Activities.”This standard requires that nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities pursuant to executory contractual arrangements be deferred and recognized as an expense in the period the related goods are delivered or services are performed. EITFNo. 07-3 became effective as of January 1, 2008 and it did not have a material impact on the consolidated statements of operations or financial position upon adoption.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair valued measurements on earnings. SFAS No. 157 applies whenever standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted, except for the impact of FASB Staff Position (FSP)157-2.FSP 157-2 deferred the adoption of SFAS 157 for non financial assets and liabilities until years ended after November 15, 2008. The Company must adopt these requirements no later than the first quarter of 2008.
On March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We have not determined the impact, if any SFAS No. 161 will have on our consolidated financial statements.
Our major classes of property and equipment were as follows:
| | | | | | | | | |
| | | December 31 | |
| | | 2007 | | | 2006 | |
| |
| Office furniture | | $ | 10,129 | | | $ | 9,150 | |
| Computer equipment | | | 48,827 | | | | 25,626 | |
| | | | | | | | | |
| Total | | | 58,956 | | | | 34,776 | |
| Less accumulated depreciation | | | (26,298 | ) | | | (7,689 | ) |
| | | | | | | | | |
| �� | | $ | 32,658 | | | $ | 27,087 | |
| | | | | | | | | |
F-11
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Depreciation expense for the years ended December 31, 2007 and 2006 was $18,609 and $7,689, respectively. There was no depreciation expense for the period from August 2, 2005 (date of inception) to December 31, 2005.
As of December 31 2007, we had 10 issued U.S. and 8 issued foreign technology related patents, in addition to pending U.S. and foreign patent applications. The term of each issued U.S. and foreign patent runs through 2019. Most of our issued patents were acquired by our principal operating subsidiary, VirnetX, Inc., from Science Applications International Corporation, or SAIC, pursuant to an Assignment Agreement dated December 21, 2006, and a Patent License and Assignment Agreement dated August 12, 2005, as amended on November 2, 2006, including documents prepared pursuant to the November amendment, and as further amended on March 12, 2008. We are required to make payments to SAIC based on the revenue generated from our ownership or use of the patents assigned to us by SAIC. Minimum annual royalty payments of $50,000 are due beginning in 2008. Royalty amounts vary depending upon the type of revenue generating activities, and certain royalty categories are subject to maximums and other limitations. We are also generally required to pay SAIC a portion of proceeds, if any, we receive from the sale of VirnetX, Inc., or from the settlement of certain patent infringement claims of ours. We have granted SAIC a security interest in some of our intellectual property, including the patents and patent applications we obtained from SAIC, to secure these payment obligations.
Generally upon our default of our agreement with SAIC and certain other events, we are required to convey to SAIC our interests in the patents and patent applications acquired from SAIC without consideration.
At December 31, 2007, in accordance with SFAS 142, “Accounting for Goodwill and Other Intangible Assets”, we recorded the fair value of the $50,000 annual guaranteed payments we have agreed to pay to SAIC in 2008 through 2012 as a liability, calculated using a discount rate of 8%. This liability will accrete interest at the 8% rate during the period it is outstanding. We recorded a related asset equal in amount to the liability as an intangible asset which will be amortized over the expected revenue generating period of our agreement with SAIC.
As of December 31, 2007, the expected amortization of the intangible assets is as follows:
| | | | | |
| 2008 | | $ | 48,000 | |
| 2009 | | | 48,000 | |
| 2010 | | | 48,000 | |
| 2011 | | | 48,000 | |
| 2012 | | | 48,000 | |
| Thereafter | | | 12,000 | |
| | | | | |
| Total | | $ | 252,000 | |
| | | | | |
As of December 31, 2007, the obligation matures as follows:
| | | | | |
| 2008 | | $ | 48,000 | |
| 2009 | | | 44,000 | |
| 2010 | | | 40,000 | |
| 2011 | | | 36,000 | |
| 2012 | | | 32,000 | |
| Thereafter | | | 52,000 | |
| | | | | |
| Total | | $ | 252,000 | |
| | | | | |
F-12
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
We lease our office facility under a non-cancelable operating lease that expires in March 2008.
Rent expense for the years ended December 31, 2007 and 2006 was $14,925 and $8,209 respectively. For the period from August 2, 2005 (date of inception) to December 31, 2005, there was no rent expense.
In 2005, VirnetX, Inc. adopted the 2005 Stock Plan (the “Plan”), which was assumed by us upon the closing of the transaction between VirnetX Holding Corporation and VirnetX, Inc. on July 5, 2007. The Plan provides for the granting of stock options and restricted stock units to employees and consultants of ours. Stock options granted under the Plan may be incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may only be granted to our employees (including officers and directors). Nonqualified stock options (“NSO”) may be granted to our employees and consultants.
Options under the Plan may be granted for period up to ten years and at prices no less than 85% of the estimated fair market value of the shares on the date of grant as determined by the board of directors, provided, however, that the exercise price of an ISO and NSO shall not be less than 100% or 85% of the estimated fair market value of the shares at the date of grant, respectively, and the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant.
Activity under the Plan is as follows:
| | | | | | | | | | | | | |
| | | | | | Options Outstanding | |
| | | Shares Available
| | | Number of
| | | Weighted Average
| |
| | | for Grant | | | Shares | | | Exercise Price | |
| |
| Shares reserved for the Plan at inception | | | 11,624,469 | | | | — | | | | — | |
| Restricted stock units granted | | | (3,321,277 | ) | | | — | | | | — | |
| Options granted | | | — | | | | — | | | | — | |
| Options exercised | | | — | | | | — | | | | — | |
| Options cancelled | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
Balance at December 31, 2005 | | | 8,303,192 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Restricted stock units granted | | | (1,058,657 | ) | | | — | | | | — | |
| Options granted | | | (1,868,218 | ) | | | 1,868,218 | | | $ | .24 | |
| Options exercised | | | — | | | | — | | | | — | |
| Options cancelled | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 5,376,317 | | | | 1,868,218 | | | $ | .24 | |
| | | | | | | | | | | | | |
| Restricted stock units granted | | | — | | | | — | | | | — | |
| Options granted | | | (2,324,925 | ) | | | 2,324,925 | | | | 4.96 | |
| Options exercised | | | | | | | (124,548 | ) | | | .24 | |
| Options cancelled | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
Balance at December 31, 2007 | | | 3,051,392 | | | | 4,068,595 | | | $ | 2.94 | |
| | | | | | | | | | | | | |
F-13
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
Note 7 | Stock-Based Compensation |
We account for equity instruments issued to employees in accordance with the provision of SFAS 123(R) which requires that such issuances be recorded at their fair value on the grant date. The recognition of the expense is subject to periodic adjustment as the underlying equity instrument vests.
We have elected to adopt the modified retrospective application method as provided by SFAS 123(R) and, accordingly, financial statement amounts for the periods presented herein reflect results as if the fair value method of expensing equity awards had been applied from inception.
Stock-based compensation expense is included in general and administrative expense for each period as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Cumulative Period
| |
| | | | | | | | | | | | from August 2,
| |
| | | | | | | | | | | | 2005
| |
Stock-Based
| | Year Ended
| | | Year Ended
| | | Year Ended
| | | (Date of Inception)
| |
Compensation by Type
| | December 31,
| | | December 31,
| | | December 31,
| | | to December 31,
| |
of Award | | 2007 | | | 2006 | | | 2005 | | | 2007 | |
| |
| Restricted stock units | | $ | 0 | | | $ | 130,210 | | | $ | 799,920 | | | $ | 930,130 | |
| Employee stock options | | | 818,869 | | | | 81,619 | | | | 0 | | | | 900,488 | |
| | | | | | | | | | | | | | | | | |
| Total stock-based compensation | | $ | 818,869 | | | $ | 211,829 | | | $ | 799,920 | | | $ | 1,830,618 | |
| | | | | | | | | | | | | | | | | |
As of December 31, 2007, the unrecorded deferred stock-based compensation balance related to stock options was $8,806,496, which will be amortized as expense over an estimate weighted average vesting amortization period of approximately 3.1 years.
The fair value of each option grant was estimated on the date of grant using the following assumptions:
| | | | | |
| | | Year Ended
| | Year Ended
|
| | | December 31,
| | December 31,
|
| | | 2007 | | 2006 |
| |
| Volatility | | 100% | | 100% |
| Risk-free interest rate | | 3.32% | | 4.77% |
| Expected life | | 6.5 years | | 6 years |
| Expected dividends | | 0% | | 0% |
Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock option grants was $4.96 and $.19 for the years ended December 31, 2007 and 2006, respectively.
The expected life was determined using the simplified method outlined in Staff Accounting Bulletin No. 107 (“SAB 107”), taking the average of the vesting term and the contractual term of the option. Expected volatility of the stock options was based upon historical data and other relevant factors, such as the volatility of comparable publicly-traded companies at a similar stage of life cycle. The Company has not provided an estimate for forfeitures because the Company has no history of forfeited options and believes that all outstanding options at December 31, 2007 will vest. In the future, the Company may change this estimate based on actual and expected future forfeiture rates.
F-14
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table summarizes activity under the equity incentive plans for the indicated periods:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted Average
| | | | |
| | | | | | Weighted
| | | Remaining
| | | | |
| | | Number of
| | | Average
| | | Contractual Term
| | | Aggregate
| |
| | | Shares | | | Exercise Price | | | (Years) | | | Intrinsic Value | |
| |
| Outstanding at December 31, 2005 | | | — | | | $ | — | | | | — | | | $ | — | |
| Options granted | | | 1,868,218 | | | | 0.24 | | | | — | | | | — | |
| Options exercised | | | — | | | | — | | | | — | | | | — | |
| Options cancelled | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2006 | | | 1,868,218 | | | | 0.24 | | | | — | | | | — | |
| Options granted | | | 2,324,925 | | | | 4.96 | | | | 9.7 | | | | — | |
| Options exercised | | | (124,548 | ) | | | 0.24 | | | | — | | | $ | 468,300 | |
| Options cancelled | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 4,068,595 | | | $ | 2.94 | | | | 9.1 | | | $ | 12,083,727 | |
| | | | | | | | | | | | | | | | | |
Intrinsic value is calculated at the difference between the market price of the Company’s stock on the last trading day of the year ($6.50) and the exercise price of the options. For options exercised, the intrinsic value is the difference between market price and the exercise price on the date of exercise.
The following table summarizes information about stock options at December 31, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | | Options Vested and Exerciseable | |
| | | | | | Weighted
| | | | | | | | | | | | Weighted
| |
| | | | | | Average
| | | Weighted
| | | | | | Weighted
| | | Average
| |
Range of
| | | | | Remaining
| | | Average
| | | | | | Average
| | | Remaining
| |
Exercise
| | Number
| | | Contractual Life
| | | Exercise
| | | Number
| | | Exercise
| | | Contractual Life
| |
Price | | Outstanding | | | (Years) | | | Price | | | Exerciseable | | | Price | | | (Years) | |
| |
| $0.24 | | | 1,743,690 | | | | 8.4 | | | $ | 0.24 | | | | 560,669 | | | $ | 0.24 | | | | 8.4 | |
| 4.20 | | | 1,347,899 | | | | 9.5 | | | | 4.20 | | | | 572,925 | | | | 4.20 | | | | 9.5 | |
| 5.88-6.47 | | | 977,026 | | | | 9.9 | | | | 6.00 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 4,068,595 | | | | 9.1 | | | $ | 2.94 | | | | 1,133,594 | | | $ | 2.24 | | | | 8.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
During 2007, we issued warrants to purchase 266,667 of our common shares at $.75 per share in conjunction with the July stock issuance. The warrants expire in 2012. We issued warrants to purchase 300,000 of our common shares at $4.80 per share to the underwriter of our December 2007 stock issuance. Those warrants are first exercisable in 2008 and expire in 2012.
| |
Note 9 | Earnings Per Share |
Basic earnings per share is based on the weighted average number of shares outstanding for a period . Diluted earnings per share is based upon the weighted average number of shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options, warrants, restricted stock units and other equity awards under our stock plan. Since the Company has incurred losses, the effect of any common stock equivalent would be anti-dilutive.
F-15
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table sets forth the basic and diluted earnings per share calculations (in 000s, except per share information):
| | | | | | | | | | | | | |
| | | Period Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Net loss | | $ | (8,692 | ) | | $ | (1,401 | ) | | $ | (882 | ) |
| Weighted average number of shares outstanding | | | 24,312 | | | | 17,087 | | | | 15,217 | |
| Basic earnings (loss) per share | | $ | (0.36 | ) | | $ | (0.08 | ) | | $ | (0.06 | ) |
For the years ended December 31, 2007 and 2006, there were the following stock equivalents:
| | | | | | | | | |
| | | 2007 | | 2006 |
| |
| Options | | | 4,068,595 | | | | 1,868,218 | |
| Warrants | | | 566,667 | | | | — | |
Our Amended and Restated Certificate of Incorporation, as amended in October 2007, authorizes us to issue 10,000,000 shares of $0.0003 par value per share preferred stock having rights, preferences and privileges to be designated by our Board of Directors. There were no shares of preferred stock outstanding at December 31, 2007. All of the VirnetX, Inc. preferred stock converted into VirnetX, Inc. common stock on a1-for-1 basis immediately prior to the merger between us and VirnetX, Inc., so at the date of the merger, each preferred share of VirnetX, Inc. converted to 12.454788 shares of our common stock. These shares were subsequently adjusted for the impact of the one for three reverse split in October 2007. The VirnetX, Inc. preferred stock outstanding at December 31, 2006 consisted of the following:
| | | | | | | | | | | | | | | | | |
Series | | Date Issued | | Original Issue Price | | Shares Authorized | | Shares Outstanding |
| |
| Series A Preferred | | | March 27, 2006 | | | $ | 1.00 | | | | 2,000,000 | | | | 1,404,000 | |
| | | | | | | | | | | | | | | | | |
The preferred stock at December 31, 2006 had voting rights equal to an equivalent number of the common stock into which it was convertible, and voted together as one class with the common stock.
The preferred stock at December 31, 2006 were entitled to receive dividends prior to and in preference to any declaration or payment of dividends on the common stock, at the rate of $0.08 per share per annum on each outstanding share of Series A preferred stock, payable quarterly. Such dividends were payable only when and if declared by the Board of Directors and are not cumulative. No such dividends were ever declared or paid. After payment of such dividends, any additional dividends would be distributed among Series A preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A preferred stock into common stock.)
The preferred stock at December 31, 2006 had a preference in liquidation of $1,404,000 or $1.00 per share. In the event of liquidation, the holders of Series A preferred shares were entitled to receive preference on any distribution of any assets equal to $1.00 per share, plus any declared but unpaid dividends. The remaining assets, if any, would then be distributed among the holders of common stock and preferred stock, pro rata based on the number of shares of common stock held by each holder, assuming the conversion of all such redeemable convertible preferred stock. If VirnetX, Inc.’s legally available assets were insufficient to satisfy the liquidation preferences, the assets would be distributed ratably among the holders of the Series A preferred stock, in proportion to the amounts each holder would receive if VirnetX, Inc. had sufficient assets and funds to pay the full preferential amount.
The preferred stock at December 31, 2006 had conversion rights, at the option of the holder, into a number of fully paid and non assessable shares of common stock as is determined by dividing $1.00 by the conversion price applicable to such share, determined as hereafter provided, in effect on the due date the certificate is surrendered for
F-16
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
conversion. The initial conversion price per share of Series A preferred stock shall be $1.00 and is subject to adjustments in accordance with antidilution provisions, including stock splits and stock dividends, contained in VirnetX, Inc.’s certificate of incorporation. Each share of Series A preferred stock automatically converts into shares of common stock at the conversion price at the time in effect for such share immediately upon the earlier of (1) VirnetX, Inc.’s sale of its common stock in a firm commitment underwritten public offering which results in aggregate cash proceeds to VirnetX, Inc. of not less than $8,000,000, (2) any reverse merger that yields working capital to VirnetX, Inc. of at least $8,000,000 and which results in VirnetX, Inc.’s shares being registered under Securities Exchange Act of 1934, (3) the date specified by the written consent or agreement of the holders of a majority of the then outstanding shares of Series A preferred stock.
At December 31, 2006, VirnetX, Inc. had reserved sufficient shares of common stock for issuance upon conversion of the convertible preferred stock.
At December 31, 2006 and 2007, the Series A preferred stock was not mandatorily redeemable.
Each share of common stock has the right to one vote. The holders of common stock are entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared by the Board from inception through December 31, 2007. The Company’s restated articles of incorporation authorizes the Company to issue up to 100,000,000 shares of $.0001 par value common stock.
In August 2005, the Company issued 13,285,107 shares to founders for aggregate proceeds of $200.
The Company also issued Restricted Stock Units (“RSUs”) to employees and consultants as discussed in Note 7.
All share amounts have been retroactively restated to reflect the conversion rate of 12.454788/1 used to effect the merger between VirnetX, Inc. and VirnetX Holding Corporation and the reverse stock split of 1/3 effective in October 2007.
| |
Note 12 | Employee Benefit Plan |
During 2007, we sponsored a defined contribution, 401K plan, covering substantially all our employees. The Company’s matching contribution to the plan in 2007 was approximately $5,600. There was no plan in 2006 or 2005.
In February 2007 we borrowed $500,000 from a group of preferred shareholders. The note accrued interest at 6% and was convertible into our common stock at $.75 per share upon the completion of the transaction in which VirnetX, Inc. came to be our wholly owned subsidiary, or the “Transaction.” Also in February 2007 we borrowed $1,000,000 from a third party. That note paid interest, in cash, at 10% and was convertible into our common stock at $.75 per share upon the completion of the Transaction. A portion, $350,000 of the proceeds of that note were placed as a retainer with our litigation counsel. The same investor purchased $3,000,000 in common stock at $.75 per share, net of expenses of approximately $47,000. That deposit was placed in an escrow account which was released at the close of the Transaction.
F-17
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
Note 14 | Short Term Borrowings |
During 2007 we borrowed funds on a short-term basis. In June 2007 we borrowed $50,000 at 10% interest. These funds were repaid in July 2007. In December 2007, we borrowed $200,000 in the aggregate from two investors. These funds were repaid, with an aggregate of $2,000 interest, in December 2007.
The Company has Federal and state net operating loss carryforwards of approximately $9,100,000 available to offset future taxable income. The Federal and state loss carryforwards expire beginning in 2025 and 2015 respectively. There are restrictions on the ability of the Company to utilize the benefit in any one year. As a result, the Company has fully reserved any deferred tax benefit from these net operating loss carryforwards.
The Company has Federal and state tax credit carryforwards of approximately $300,000 to reduce future income tax expense. The Federal tax credits expire beginning in 2025. The state tax credits currently do not have an expiration date.
The components of the income tax provision are as follows:
| | | | | | | | | | | | | |
| | | Period Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Provision for income taxes at the federal & state statutory rate | | $ | (3,200,000 | ) | | $ | (600,000 | ) | | $ | (390,000 | ) |
| Stock-based compensation | | | 300,000 | | | | 100,000 | | | | 350,000 | |
| Research and development credits | | | (100,000 | ) | | | (200,000 | ) | | | — | |
| Valuation allowance | | | 3,000,000 | | | | 700,000 | | | | 40,000 | |
| | | | | | | | | | | | | |
| Tax provision | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | |
The elements of deferred taxes are as follows:
| | | | | | | | | | | | | |
| | | Period Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Tax benefit of net operating loss carryforwards | | $ | 3,400,000 | | | $ | 500,000 | | | $ | 40,000 | |
| Research and development credits | | | 300,000 | | | | 200,000 | | | | | |
| | | | | | | | | | | | | |
| Subtotal | | | 3,700,000 | | | | 700,000 | | | | 40,000 | |
| Less valuation allowance | | | (3,700,000 | ) | | | (700,000 | ) | | | (40,000 | ) |
| | | | | | | | | | | | | |
| | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | |
The change in the deferred tax valuation allowance was an increase of $40,000, $660,000 and $3,000,000 in the periods ended 2007, 2006 and 2005, respectively.
| |
Note 16 | Merger of VirnetX, Inc. and VirnetX Holding Corporation |
In July 2007, VirnetX Holding Corporation consummated a reverse triangular merger in which the Company’s wholly-owned subsidiary merged with and into VirnetX, Inc. with VirnetX, Inc. as the surviving Corporation to the merger. As a result of the merger VirnetX, Inc. became a wholly-owned subsidiary of the Company, and the pre-merger shareholders of VirnetX Inc. exchanged their shares in VirnetX, Inc. for shares of the common stock of the Company. As a result, the VirnetX, Inc. is considered the acquiror of VirnetX Holding Corporation for accounting purposes.
F-18
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The key terms of the merger include the following:
| | |
| • | Our officers and directors, except for the chief financial officer, were replaced upon completion of the transaction so that the officers and directors of VirnetX, Inc. became our officers and directors. |
|
| • | VirnetX, Inc.’s convertible notes payable for $1,000,000 and $500,000 were converted into the Company’s common stock in July 2007. |
|
| • | VirnetX, Inc.’s escrowed convertible note proceeds of $3,000,000 were released from escrow and converted into the Company’s common stock in July 2007. |
|
| • | The Company issued 29,551,398 shares of our common stock and options to purchase 1,785,186 shares of common stock to the pre-merger shareholders, convertible note holders and option holders of VirnetX, Inc. in exchange for 100% of the issued and outstanding capital stock and securities of VirnetX, Inc. Additionally, we issued to MDB Capital Group LLC and its affiliates, warrants to purchase an aggregate of 266,667 shares of our common stock of the Company pursuant to the provisions of the MDB Service Agreement, which we assumed from VirnetX, Inc. in connection with the merger. |
We believe Microsoft Corporation is infringing certain of our patents. Accordingly, we commenced a lawsuit against Microsoft on February 15, 2007 by filing a complaint in the United States District Court for the Eastern District of Texas, Tyler Division. Pursuant to the complaint, we allege that Microsoft infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1, entitled “Agile Network Protocol for Secure Communications with Assured System Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network Without User Entering Any Cryptographic Information.” On April 5, 2007, we filed an amended complaint specifying certain accused products at issue and alleging infringement of a third, recently issued U.S. patent: U.S. Patent No. 7,188,180 B2, entitled “Method for Establishing Secure Communication Link Between Computers of Virtual Private Network.” We are seeking both damages, in an amount subject to proof at trial, and injunctive relief. Microsoft answered the amended complaint and asserted counterclaims against us on May 4, 2007. Microsoft counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. Microsoft seeks an award of its attorneys’ fees and costs. We filed a reply to Microsoft’s counterclaims on May 24, 2007. Discovery has begun and the trial is scheduled to begin on October 12, 2009. We have served our infringement contentions directed to certain of Microsoft’s operating system and unified messaging and collaboration applications. On March 31, 2008, Microsoft filed a Motion to Dismiss for lack of standing, which was denied by the court pursuant to an order dated June 3, 2008. Also pursuant to that court decision, on June 10, 2008, SAIC joined us in our lawsuit.
Although we believe Microsoft infringes three of our patents and we intend to vigorously prosecute this case, at this stage of the litigation the outcome cannot be predicted with any degree of reasonable certainty. Additionally, the Microsoft litigation will be costly and time-consuming, and we can provide no assurance that we will obtain a judgment against Microsoft for damagesand/or injunctive relief. Should the District Court issue a judgment in favor of Microsoft, and in connection with such judgment determine that we had acted in bad faith or with fraudulent intent, or we were otherwise found to have exhibited inequitable conduct, the Court could award attorney fees to Microsoft, which would be payable by us.
F-19
VirnetX Holding Corporation
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Because the outcome of this litigation cannot be estimated at this time, we have made no provision for loss or expenses in the accompanying financial statements.
| |
Note 18 | Quarterly Financial Information (unaudited) |
| | | | | | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | |
| | | (amounts in thousands except per share) | |
| |
2007 | | | | | | | | | | | | | | | | |
| Revenue | | $ | 0 | | | $ | 0 | | | $ | 47 | | | $ | 28 | |
| Loss from operations | | | (410 | ) | | | (1,526 | ) | | | (2,589 | ) | | | (4,125 | ) |
| Net loss | | | (410 | ) | | | (1,572 | ) | | | (2,566 | ) | | | (4,144 | ) |
| Net loss per common share | | $ | (0.02 | ) | | $ | (0.10 | ) | | $ | (0.09 | ) | | $ | (.015 | ) |
2006 | | | | | | | | | | | | | | | | |
| Revenue | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Loss from operations | | | (376 | ) | | | (340 | ) | | | (294 | ) | | | (398 | ) |
| Net loss | | | (374 | ) | | | (349 | ) | | | (284 | ) | | | (394 | ) |
| Net loss per common share | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.02 | ) |
F-20
VIRNETX HOLDING CORPORATION
(Unaudited)
| | | | | | | | | |
| | | June 30,
| | | December 31,
| |
| | | 2008 | | | 2007 | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 4,208,722 | | | $ | 8,589,447 | |
| Accounts receivable, net | | | 13,229 | | | | 5,860 | |
| Prepaid expense and other current assets | | | 457,410 | | | | 399,201 | |
| | | | | | | | | |
Total current assets | | | 4,679,361 | | | | 8,994,508 | |
| | | | | | | | | |
| Property and equipment, net | | | 36,280 | | | | 32,658 | |
| Intangible and other assets | | | 252,000 | | | | 252,000 | |
| | | | | | | | | |
Total assets | | $ | 4,967,641 | | | $ | 9,279,166 | |
| | | | | | | | | |
exclusions.
See accompanying notesalso the undertakings set out in response to condensed consolidated financial statements
F-21
Item 17 herein.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | |
| | | June 30,
| | | December 31,
| |
| | | 2008 | | | 2007 | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 1,079,565 | | | $ | 531,790 | |
| Current portion long-term obligation | | | 44,000 | | | | 48,000 | |
| | | | | | | | | |
Total Current Liabilities | | | 1,123,565 | | | | 579,790 | |
| | | | | | | | | |
| Long-term obligation, net of current portion | | | 160,000 | | | | 204,000 | |
| Commitments and contingencies | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, par value $0.0001 per share, authorized 10,000,000 shares, issued and outstanding: 0 shares at June 30, 2008 and December 31, 2007, respectively | | | 0 | | | | 0 | |
| Common stock, par value $0.0001 per share, authorized 100,000,000 shares, issued and outstanding: 34,899,985 shares at June 30, 2008 and 34,667,214 at December 31, 2007, respectively | | | 3,489 | | | | 3,467 | |
| Additional paid-in capital | | | 20,736,895 | | | | 19,467,890 | |
| Accumulated deficit | | | (17,056,308 | ) | | | (10,975,981 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 3,684,076 | | | | 8,495,376 | |
| | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 4,967,641 | | | $ | 9,279,166 | |
| | | | | | | | | |
See accompanying notes to condensed consolidated financial statements
F-22
VIRNETX HOLDING CORPORATION
(Unaudited)
| | | | | | | | | | | | | |
| | | | | | | | | For the period
| |
| | | Three Months
| | | Three Months
| | | August 2, 2005
| |
| | | Ended
| | | Ended
| | | (Date of Inception)
| |
| | | June 30,
| | | June 30,
| | | to June 30,
| |
| | | 2008 | | | 2007 | | | 2008 | |
| |
| Revenue — royalties | | $ | 50,744 | | | $ | — | | | $ | 158,916 | |
| Operating expense | | | | | | | | | | | | |
| Research and development | | | 240,109 | | | | 113,898 | | | | 1,712,326 | |
| General and administrative | | | 2,906,800 | | | | 1,119,491 | | | | 15,585,567 | |
| | | | | | | | | | | | | |
Total operating expense | | | (3,146,909 | ) | | | (1,233,389 | ) | | | (17,297,893 | ) |
| | | | | | | | | | | | | |
| Loss from operations | | | (3,096,165 | ) | | | (1,233,389 | ) | | | (17,138,977 | ) |
| Interest and other income (expense), net | | | 47,572 | | | | 2,302 | | | | 82,669 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (3,048,593 | ) | | $ | (1,231,087 | ) | | $ | (17,056,308 | ) |
| | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.09 | ) | | $ | (0.07 | ) | | | | |
| | | | | | | | | | | | | |
Weighted average shares outstanding | | | 34,899,688 | | | | 17,619,419 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | For the period
| |
| | | Six Months
| | | Six Months
| | | August 2, 2005
| |
| | | Ended
| | | Ended
| | | (Date of Inception)
| |
| | | June 30,
| | | June 30,
| | | to June 30,
| |
| | | 2008 | | | 2007 | | | 2008 | |
| |
| Revenue — royalties | | $ | 84,050 | | | $ | — | | | $ | 158,916 | |
| Operating expense | | | | | | | | | | | | |
| Research and development | | | 417,823 | | | | 268,178 | | | | 1,712,326 | |
| General and administrative | | | 5,864,707 | | | | 1,698,247 | | | | 15,585,567 | |
| | | | | | | | | | | | | |
Total operating expense | | | (6,282,530 | ) | | | (1,966,425 | ) | | | (17,297,893 | ) |
| | | | | | | | | | | | | |
| Loss from operations | | | (6,198,480 | ) | | | (1,966,425 | ) | | | (17,138,977 | ) |
| Interest and other income (expense), net | | | 118,153 | | | | (45,488 | ) | | | 82,669 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (6,080,327 | ) | | $ | (2,011,913 | ) | | $ | (17,056,308 | ) |
| | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.17 | ) | | $ | (0.11 | ) | | | | |
| | | | | | | | | | | | | |
Weighted average shares outstanding | | | 34,850,991 | | | | 17,600,817 | | | | | |
| | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements
F-23
VIRNETX HOLDING CORPORATION
(Unaudited)
| | | | | | | | | | | | | |
| | | | | | | | | For the period
| |
| | | Six Months
| | | Six Months
| | | August 2, 2005
| |
| | | Ended
| | | Ended
| | | (Date of Inception)
| |
| | | June 30,
| | | June 30,
| | | to June 30,
| |
| | | 2008 | | | 2007 | | | 2008 | |
| |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (6,080,327 | ) | | $ | (2,011,913 | ) | | $ | (17,056,308 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Depreciation | | | 8,536 | | | | 7,300 | | | | 34,834 | |
| Stock-based compensation | | | 1,145,322 | | | | 41,715 | | | | 2,977,640 | |
| (Increase) decrease in current assets | | | 65,578 | | | | (461,370 | ) | | | (360,268 | ) |
| Increase (decrease) in accounts payable and accrued expenses | | | 543,776 | | | | 809,911 | | | | 1,075,565 | |
| | | | | | | | | | | | | |
Net cash used in operating activities | | | (4,317,115 | ) | | | (1,614,357 | ) | | | (13,328,537 | ) |
| | | | | | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | | | | | |
| Cash acquired in acquisition | | | 0 | | | | 0 | | | | 14,009 | |
| Purchase of fixed assets | | | (15,610 | ) | | | (8,955 | ) | | | (69,489 | ) |
| | | | | | | | | | | | | |
Net cash used in investing activities | | | (15,610 | ) | | | (8,955 | ) | | | (55,480 | ) |
| | | | | | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | | | | | |
| Proceeds from convertible debt | | | 0 | | | | 1,550,000 | | | | 1,500,000 | |
| Payment of royalty obligation | | | (48,000 | ) | | | 0 | | | | (48,000 | ) |
| Proceeds from sale of common stock | | | 0 | | | | 20,150 | | | | 14,730,934 | |
| Proceeds from issuance of preferred stock | | | 0 | | | | 0 | | | | 1,147,625 | |
| Proceeds from issuance of restricted stock and options | | | 0 | | | | 0 | | | | 262,180 | |
| | | | | | | | | | | | | |
Net cash used in financing activities | | | (48,000 | ) | | | 1,570,150 | | | | 17,592,739 | |
| | | | | | | | | | | | | |
Net increase (decrease) in cash | | | (4,380,725 | ) | | | (53,162 | ) | | | 4,208,722 | |
Cash — beginning | | | 8,589,447 | | | | 139,997 | | | | 0 | |
| | | | | | | | | | | | | |
Cash — ending | | $ | 4,208,722 | | | $ | 86,835 | | | $ | 4,208,722 | |
| | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements
F-24
VIRNETX HOLDING CORPORATION
(Unaudited)
| Item 16. | |
Note 1 — | Basis of PresentationExhibits |
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. The accompanying unaudited interim financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation. The information contained in this report on should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2007 which are contained in the Company’s Annual Report onForm 10-K filed with the Securities and Exchange Commission, or the SEC, on March 31, 2008.
| |
Note 2 — | Formation and Business of the Company |
VirnetX Holding Corporation (“we,” “us,” “our” or the “Company”) is a development stage company focused on commercializing a patent portfolio for providing solutions for secure real-time communications such as instant messaging, or IM, and voice over internet protocol, or VoIP.
In July 2007 we effected a merger between PASW, Inc., a company which had at the time of the merger, publicly traded common stock with limited operations, and VirnetX, Inc., which became our principal operating subsidiary. As a result of this merger, the former security holders of VirnetX, Inc. came to own a majority of our outstanding common stock and all of the common shares of PASW, Inc. were exchanged for shares of our common stock.
Under GAAP, the accompanying financial statements have been prepared as if VirnetX, Inc., a company whose inception date was August 2, 2005, who is our predecessor for accounting purposes, had acquired PASW, Inc. on July 5, 2007. Accordingly, the accompanying statements of operations include the consolidated results for the periods ended June 30, 2008 as well as the deficit accumulated during the development stage, which includes the operations of VirnetX, Inc. from August 2, 2005 to June 30, 2008 and the operations of PASW, Inc. from July 5, 2007 to June 30, 2008. The historical share activity of VirnetX, Inc. has been retroactively restated to account for the exchange rate used in affecting the merger and for a one for three reverse stock split completed on October 29, 2007.
Our principal business activities to date are our efforts to commercialize our patent portfolio. We also conduct the remaining activities of PASW, Inc., which are generally limited to the collection of royalties on certain internet-based communications by a wholly owned Japanese subsidiary of PASW, Inc. pursuant to the terms of a single license agreement. The revenue generated by this agreement is not significant.
Although we believe we may derive revenues in the future from our principal patent portfolio and are currently endeavoring to develop certain of those patents into marketable products, we have not done so to date. Because we have limited capital resources, our revenues are insignificant and our expenses, including but not limited to those we expect to incur in our patent infringement case against Microsoft Corporation, (“Microsoft”) are substantial, we may be unable to successfully complete our business plans, our business may fail and your investment in our securities may become worthless.
We are in the development stage and consequently we are subject to the risks associated with development stage companies including: the need for additional financings; the uncertainty that our licensing program development efforts will produce revenue bearing licenses for us; the uncertainty that our development initiatives will produce successful commercial products as well as the marketing and customer acceptance of such products; competition from larger organizations; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators. To achieve successful operations, we will require additional capital to continue research and development and marketing efforts. No assurance can be given as to the timing or ultimate success of obtaining future funding.
F-25
VIRNETX HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
Note 3 — | Earnings Per Share |
SFAS No. 128, “Earnings Per Share” requires presentation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding including potentially dilutive securities such as options, warrants and convertible debt. Because we incurred a loss for each period presented, all such potentially dilutive securities have been excluded because their effect would be anti-dilutive.
As of June 30 2008, we had ten issued U.S. and eight issued foreign technology related patents, and have several pending U.S. and foreign patent applications. The term of each issued U.S. and foreign patent runs through 2019. Most of our issued patents were acquired by our principal operating subsidiary, VirnetX, Inc., from Science Applications International Corporation, or SAIC, pursuant to an Assignment Agreement dated December 21, 2006, and a Patent License and Assignment Agreement dated August 12, 2005, as amended on November 2, 2006, including documents prepared pursuant to the November amendment, and as further amended on March 12, 2008. We are required to make payments to SAIC based on the revenue generated from our ownership or use of the patents assigned to us by SAIC. Minimum annual royalty payments of $50,000 are due beginning in 2008. Royalty amounts vary depending upon the type of revenue generating activities, and certain royalty categories are subject to maximums and other limitations. Generally upon our uncured default on certain material obligations under our agreement with SAIC and certain other events; we require to convey to SAIC our interests in the patents and patent applications acquired from SAIC without consideration. We have granted SAIC a security interest in some of our intellectual property, including the patents and patent applications we obtained from SAIC, to secure these payment obligations.
Generally upon our default of our agreement with SAIC and certain other events, we are required to convey to SAIC our interests in the patents and patent applications acquired from SAIC without consideration.
During the six months ended June 30, 2008, we made our first minimum annual payment of $50,000 to SAIC. As of June 30, 2008, we had not received any royalty revenue on the patents nor begun to amortize the related intangible asset.
We lease our office facility under a non-cancelable operating lease that ends in 2013. We recognize rent expense on a straight-line basis over the term of the lease.
| | | | | |
| | | Minimum
| |
| | | required lease
| |
| | | payments in
| |
For the period | | period | |
| |
| July 1 through December 31, 2008 | | $ | 18,800 | |
| 2009 | | $ | 42,100 | |
| 2010 | | $ | 53,400 | |
| 2011 | | $ | 58,900 | |
| 2012 | | $ | 60,400 | |
| 2013 | | $ | 15,100 | |
In 2005, VirnetX, Inc. adopted the 2005 Stock Plan, or the Plan, which was assumed by us upon the closing of the transaction between VirnetX Holding Corporation and VirnetX, Inc. on July 5, 2007. The Plan provides for the
F-26
VIRNETX HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
Note 6 — | Stock Plan — (Continued) |
granting of stock options and restricted stock units to employees, directors and consultants of ours. Stock options granted under the Plan may be incentive stock options or nonqualified stock options. Incentive stock options, or ISOs, may only be granted to our employees (including officers and directors). Nonqualified stock options, or NSOs, may be granted to our employees and consultants.
Options under the Plan may be granted for a period up to ten years and at prices not less than 85% of the estimated fair market value of the shares on the date of grant as determined by the board of directors, provided, however, that the exercise price of an ISO and NSO shall not be less than 100% or 85% of the estimated fair market value of the shares at the date of grant, respectively, and the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant.
There were 4,238,595 options outstanding at June 30, 2008 and 4,068,595 at December 31, 2007 with an average exercise price of $4.98 at June 30, 2008 and $2.94 at December 31, 2007. As of June 30, 2008, there were 2,881,392 shares available to be granted under the Plan.
There were 170,000 options granted during the period April 1, 2008 through June 30, 2008. No options were exercised in the six months ended June 30, 2008.
| |
Note 7 — | Stock-Based Compensation |
We account for equity instruments issued to employees in accordance with the provisions of Statement of Financial Accounting Standard No. 123 (revised),Shared-Based Payment,or SFAS 123(R), which requires that such issuances be recorded at their fair value on the grant date. Expense recognized is subject to periodic adjustment as the underlying equity instrument vests. We have elected to adopt the modified retrospective application method as provided by SFAS 123(R) and, accordingly, financial statement amounts for the periods presented herein reflect results as if the fair value method of expensing equity awards had been applied from inception.
Stock-based compensation expense is included in general and administrative expense for each period ended June 30, 2008. Total stock-based compensation expense was $613,848 and $1,145,322 for the three and six months ended June 30, 2008 respectively.
As of June 30, 2008, the unrecorded deferred stock-based compensation balance related to stock options was $9,650,718, which will be amortized as expense over the related vesting period. As of June 30, 2008, the weighted average vesting period was approximately 2.8 years.
The fair value of option grants was estimated on the date of grant using the following assumptions:
| | | | | | | | | |
| | | Periods Ended
| | | Year Ended
| |
| | | June 30,
| | | December 31,
| |
| | | 2008 | | | 2007 | |
| |
| Volatility | | | 100.00 | % | | | 100.00 | % |
| Risk-free interest rate | | | 4.45 | % | | | 3.32 | % |
| Expected life | | | 7 years | | | | 6.5 years | |
| Expected dividends | | | 0.00 | % | | | 0.00 | % |
| Weighted-average grant date fair value of stock options granted | | $ | 4.96 | | | $ | 4.96 | |
The expected life was determined using the simplified method outlined in Staff Accounting Bulletin No. 107, or SAB 107, taking the average of the vesting term and the contractual term of the option. Expected volatility of the stock options was based upon historical data and other relevant factors, such as the volatility of comparable publicly-traded companies at a similar stage of life cycle. The Company has not provided an estimate for forfeitures
F-27
VIRNETX HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
because the Company has no history of forfeited options and believes that all outstanding options at June 30, 2008 will vest. In the future, the Company may change this estimate based on actual and expected future forfeiture rates.
During 2007, we issued warrants to purchase 266,667 shares of our common stock at $0.75 per share. The warrants expire in 2012. In January 2008, 233,334 of these warrants were exercised in a cashless exercise transaction. As a result of the January 2008 exercise, a total of 203,910 shares of our common stock were issued. In April 2008, 33,333 of these warrants were exercised in a cashless exercise transaction. As a result of the April 2008 exercise, a total of 28,860 shares of our common stock were issued.
During 2007, we issued warrants to purchase 300,000 shares of our common stock at $4.80 per share to the underwriter of our December 2007 stock issuance. Those warrants are first exercisable in 2008 and expire in 2012.
Note 9 — Litigation
We believe Microsoft is infringing certain of our patents. Accordingly, we commenced a lawsuit against Microsoft on February 15, 2007 by filing a complaint in the United States District Court for the Eastern District of Texas, Tyler Division, or the District Court. Pursuant to the complaint, we allege that Microsoft infringes two of our U.S. patents: U.S. Patent No. 6,502,135 B1, entitled “Agile Network Protocol for Secure Communications with Assured System Availability,” and U.S. Patent No. 6,839,759 B2, entitled “Method for Establishing Secure Communication Link between Computers of Virtual Private Network without User Entering Any Cryptographic Information.” On April 5, 2007, we filed an amended complaint specifying certain accused products at issue and alleging infringement of a third, recently issued U.S. patent: U.S. Patent No. 7,188,180 B2, entitled “Method for Establishing Secure Communication Link between Computers of Virtual Private Network.” We are seeking both damages, in an amount subject to proof at trial, and injunctive relief. Microsoft answered the amended complaint and asserted counterclaims against us on May 4, 2007. Microsoft counterclaimed for declarations that the three patents are not infringed, are invalid and are unenforceable. Microsoft seeks an award of its attorneys’ fees and costs. On March 31, 2008, Microsoft filed its Motion to Dismiss our case. We filed a reply to Microsoft’s counterclaims on May 24, 2007. On June 3, 2008, the court denied the Motion to Dismiss filed by Microsoft. The court’s order denying Microsoft’s motion expressly confirms our constitutional standing to sue for patent infringement. Also pursuant to the court decision on June 10, 2008, San Diego based SAIC (NYSE:SAI) joined us in our lawsuit as a plaintiff. Discovery has begun, a Markman hearing on claim construction is scheduled for February 2009, and the trial is scheduled to begin on October 12, 2009. We have served our infringement contentions directed to certain of Microsoft’s operating system and unified messaging and collaboration applications.
Although we believe Microsoft infringes three of our patents and we intend to vigorously pursue this case, at this stage of the litigation the outcome cannot be predicted. Additionally, the Microsoft litigation will be costly andtime-consuming, and we can provide no assurance that we will obtain a judgment against Microsoft for damagesand/or injunctive relief. Should the District Court issue a judgment in favor of Microsoft, and in connection with such judgment determine that we had acted in bad faith or with fraudulent intent, or we were otherwise found to have exhibited inequitable conduct, the Court could award attorney fees to Microsoft, which would be payable by us.
Because the outcome of this litigation cannot be estimated at this time, we have made no provision for loss or expenses in the accompanying financial statements.
F-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| |
Item 14. | Other Expenses of Issuance and Distribution. |
The following table sets forth all expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates other than the registration fee.
| | | | | |
| | | Amount to be Paid | |
| |
| SEC registration fee | | $ | 5,549 | |
| Printing and engraving | | $ | 10,000 | |
| Legal fees and expenses | | $ | 50,000 | |
| Accounting fees and expenses | | $ | 10,000 | |
| Miscellaneous | | $ | 10,000 | |
| | | | | |
| Total | | $ | 85,549 | |
| | | | | |
| |
Item 15. | Indemnification of Directors and Officers. |
Delaware General Corporation Law
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the company. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director’s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions or for any transaction from which the director derived an improper personal benefit.
Certificate of Incorporation
Our Certificate of Incorporation provides that the personal liability of the directors of the company shall be eliminated to the fullest extent permitted by the provisions of Section 102(b)(7) of the Delaware General Corporation Law, as the same may be amended and supplemented.
Our Certificate of Incorporation provides that the company shall, to the fullest extent permitted by the provisions of Section 145 of the Delaware General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for therein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
II-1
Indemnification Agreements
We have also entered into indemnification agreements with our directors and officers. The indemnification agreements provide indemnification to our directors and officers under certain circumstances for acts or omissions which may not be covered by directors’ and officers’ liability insurance.
Liability Insurance
We have also obtained directors’ and officers’ liability insurance, which insures against liabilities that our directors or officers may incur in such capacities.
A list of exhibits included as part of this registration statementfiled herewith is set forthcontained in the Exhibit Index.exhibit index that immediately precedes such exhibits and is incorporated herein by reference.
| (a) | The undersigned registrant hereby undertakes: |
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
| (i) | include any prospectus required by Section 10(a)(3) of the Securities Act; |
| (ii) | reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the information required to be included in a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflectthose paragraphs is contained in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectusreports filed with or furnished to the Commission pursuant to Rule 424(b) if, inby the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual reportregistrant pursuant to Section 13(a)13 or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that isare incorporated by reference in the registration statement, shall be deemed to beor is contained in a new registration statement relating to the securities offered therein, and the offeringform of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
(5) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) Each prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
II-2
(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which the prospectus relates, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.statement.
II-3
| (2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | That, for the purpose of determining liability under the Securities Act to any purchaser: |
| (i) | If the registrant is relying on Rule 430B, |
| (A) | Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| (B) | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to the effective date; or |
| (ii) | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| (5) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer and sell such securities to such purchaser: |
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (b) | The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (c) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. |
| (d) | The undersigned registrant hereby undertakes that: |
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (e) | The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act. |
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing onForm S-3 and has duly caused this amendment to the Registration Statementregistration statement onForm S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scotts Valley,Zephyr Cove, State of California,Nevada, on September 9, 2008.
VIRNETX HOLDING CORPORATIONAugust 20, 2015.
| VirnetX Holding Corporation | |
| | | |
| | By: | /s/ Kendall Larsen | |
Name: | | Kendall Larsen | | | | | Title: | President and Chief Executive Officer | |
Power of Attorney In accordanceKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kendall Larsen and Richard Nance, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this registration statement on Form S-3, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this amendment to the registration statement on FormS-3 was has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates stated:indicated.
| Signature | | Title | | Date | | | | | | | /s/ Kendall Larsen | | Chief Executive Officer, President and Director | | August 20, 2015 | | Kendall Larsen | | (Principal Executive Officer) | | | | | | | /s/ Richard Nance | | Chief Financial Officer | | August 20, 2015 | | Richard Nance | | (Principal Financial Officer and Principal Accounting Officer) | | | | | | | Signature and Name/s/ Robert D. Short III
| | Director | | August 20, 2015 | | Robert D. Short III | | | | | | | | Capacity/s/ Gary Feiner
| | Date
Director | | August 20, 2015 | | Gary Feiner | | | | | | | | | /s/ Michael F. Angelo | | Director | | August 20, 2015 | | Michael F. Angelo | | | | | | | | | | | /s/ Kendall LarsenThomas M. O'Brien
Kendall Larsen | | President, Chief Executive Officer
(Principal Executive Officer)
and Director | | September 9, 2008 | | | | | | *
William E. Sliney | | Chief Financial Officer
(Principal Accounting and
Financial Officer) | | September 9, 2008 | | | | | | *
Edmund C. Munger | | Director | | September 9, 2008August 20, 2015 | | | | | | *
Scott C. Taylor | | Director | | September 9, 2008 | | | | | | *
Michael F. Angelo | | Director | | September 9, 2008 | | | | | | *
Thomas M. O’Brien | | Director | | September 9, 2008 | | | | | | | | *By: | | /s/ Kendall Larsen
Kendall Larsen
Attorney-in-factO'Brien | | | | |
Exhibit Index
| | Exhibit Title | | | | (1)1.1 | | IncorporatedForm of Underwriting Agreement* | | 1.2 | | Sales Agreement, dated as of August 20, 2015, by referenceand between the Registrant and Cowen and Company, LLC | | | Specimen Common Stock Certificate | | | Form of senior indenture, to be entered into between the Registrant and the trustee designated therein | | 4.3 | | Form of senior note with respect to each particular series of senior notes issued hereunder* | | | Form of subordinated indenture to be entered into between the Registrant and the trustee designated therein | | 4.5 | | Form of subordinated note with respect to each particular series of subordinated notes issued hereunder* | | 4.6 | | Form of Warrant with respect to each warrant issued hereunder* | | 4.7 | | Certificate of designation, preferences and rights with respect to any preferred stock issued hereunder* | | 4.8 | | Form of Depositary Agreement with respect to the Company’sdepositary shares* | | | Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation | | | Statement re Computation of Ratio of Earnings to Fixed Charges | | | Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm | | 23.2 | | Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) | | 24.1 | | Power of Attorney (see page II-5) | | 25.1 | | Form 8-KT-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of designated trustee under the Indenture* |
| * | To be filed withby amendment or as an exhibit to a report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and Exchange Commission on July 12, 2007.incorporated herein by reference. |
|
