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Part 2: Hidden Risk at VirnetX?

Earlier this week I wrote about the hidden risk in Nevada-based VirnetX, a profitless battleground stock trading at a nearly $2 billion stock market valuation on hope about its mobile phone patents.

VirnetX
Source: virnetx.com
VirnetX

The risk, as I described it, was that CEO Kendall Larsen had pledged 7.8 million of his 9.6 million personal shares against an “obligation.” “Obligation” usually means loan, and as with any pledged shares against a loan, the concern is that any collapse in the price could trigger a margin call.

I tried contacting VirnetX several times over the span of a week or so before writing the piece, but got no response.

Then, the morning the piece ran — but hours before I mentioned the piece on air — I got a hold of Larsen, who happened to answer his phone Monday at around 7:30 a.m. his time.

I told him the company (which has 13 employees) hadn’t responded to my inquiries, that I had written about the pledged shares, that I planned to mention them as a risk on air in five hours and that I would love to get any clarification, if one was needed.

Larsen said he didn’t have time to talk and I asked him to get back to me if he had something to say about the pledged shares.

But (lo and behold) after the market’s close Tuesday he filed an amended 13D ownership statement with the SEC with more detail on his loan.

From the document:

“The Reporting Person initially pledged 7,853,192 shares of the Issuer’s Common Stock to Deutsche Bank Securities Inc. to secure a personal line of credit of up to $3.5 million. Subsequently, the number of shares pledged was reduced by 1,000,000 to 6,853,192 shares. As of the date hereof, the amount of this personal line of credit is $5 million.”

Based on that disclosure, and the amount of his line of credit, it would appear that any margin call (at whatever level the stock would have to reach to trigger on) would be insignificant to the stock. In my earlier piece, based on the company’s skimpy disclosure, I had noted that a margin call on the holdings of the chairman of Green Mountain Coffee Roasters — causing him to sell more than $100 million in shares — put pressure on the stock.

Meanwhile, at about the same time Larson filed his explanation, the company issued a press release announcing that it planned to appeal what it calls a “procedural discrepancy” in a complaint it had filed against Apple . Legal scholars can have a field day trying to determine whether the news is positive, negative or a little bit of both.

My take: There’s no doubt that it has intellectual property, but the ultimate question: What’s the value? The bulls believe it’s worth more than $3 billion. To me, until current lawsuits gets through the legal system, VirnetX is no less speculative than any biotech stock that hasn’t cleared Phase 3 trials. Maybe it’ll be a big winner; maybe it won’t. A gamble worthy of the casinos.

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