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					                                                                                                         quity Re
                                                                                                        Eq      esearch
                                                                                                                        t
                                                                                                                   August 20, 2012

 Buy
 B                                R
                                  Rating
  rice:
 Pr                                   $26.19         etX  ding Co
                                                 Virne Hold             on
                                                                orporatio (AMEX VHC)
                                                                              X:
  2-Week Range:
 52                                41.93-11.01
                                                      tial   mes   rrent ITC Situation
                                                 Potent Outcom - Cur
 Av Daily Vol. (M
  vg.           MM):                     1.78
                                                       MENT SUMM
                                                 INVESTM       MARY
 D
 Diluted Shares (MM):                    50.6
 Sh
  hares Short (MM
                M):                    ~13.6
                                                 VirnetX has responded to the ITC’s requests (sea documen filed last
                                                                       d             s            aled        nts
 M
 Market Cap (US$ B):
                 B                      $1.34
                                                 month) and it is awa               onse (30 to 90 days post VirnetX’s
                                                                       aiting a respo                          t
 In
  nsiders Own:                         ~%20      appeal). As we have implied pre
                                                                       e            eviously, and based on a legal filing
 St
  tated Book Val./Sh:                   $1.27    published a few week ago, it appe there was a procedural error that
                                                          d           ks            ears         s              l
 Net
 N Cash/Sh.:                            $1.18            d
                                                 occurred and will be r             e                          rch
                                                                       rectified – we implied this in our resear on July
 N Cash (M):
 Net                                      $62             hile
                                                 27th. Wh it is unkn                the
                                                                       nown when t ITC will r     respond to VVirnetX, the
                                                          t           nses
                                                 two most likely respon (in our op  pinion) are:
 LT EPS Growth:
  T                                      15%
 D
 Dividend / Yield                         n/a         a) The ITC simp states that it is conside
                                                         T              ply           t                       X’s
                                                                                                  ering VirnetX appeal –
 Fi
  iscal Year Ends:                       Dec.            i             will          e
                                                         implying it w review the company’s response (inv      vestors can
 12
  2-mos. Target:                           $65           a
                                                         access an abb               ion
                                                                       breviated versi which was made public implying
                                                                                                  s            c),
                                                         i
                                                         it is acknowled             r
                                                                        dging a minor procedural e             d,
                                                                                                  error occurred and plans
 Rev
 R                                                       t              situation
                                                         to rectify the s
  $MM)
 ($              2E
              2012        2013E   2014E
                                                         A              e                         ed,
                                                      b) Assuming the procedural error occurre its acknow      wledged by
 Mar
 M                   $0
                     $     N/A     N/A                   t                           ase          rd,
                                                         the ITC resullting in the ca being hear but requir VirnetX
                                                                                                               res
 Ju
  un                 $0
                     $     N/A     N/A                   t                                        ring currently scheduled
                                                         to refile causiing a potential delay (hear            y
  ept
 Se                 $.5
                    $      N/A     N/A                   f              r            y            en
                                                         for September 5th) that may range betwee 6 and 18 m   months
 Dec
 D                  2.0
                   $2      N/A     N/A
                                                 Net, examining all fac                d,           y            by
                                                                         ctors involved the history of actions b the ITC
  Y
 FY                 2.5
                   $2       $18      $65                   g
                                                 involving similar situa ations, we bel            C
                                                                                       lieve the ITC will hear the case, but
 G
 Growth                   609%     261%                    lly           elayed for a pe
                                                 realistical it will be de             eriod of time.

 EPS             2E
              2012        2013E   2014E          No decission by the IT has any im
                                                                       TC                          ederal “situati
                                                                                     mpact to the Fe             ion” (Judge
                                                                        d
                                                 Davis) – still scheduled for early Noovember.
                  70)
              ($0.7       $0.07    $0.51
                                                 We reiter our Buy r
                                                         rate                   5
                                                                   rating and $65 target.


                                                            on.
                                                 Descriptio Based in Zep     phyr Cove, NV, VirnetX was inc  corporated in 20005. Through
                                                 the acquisiition of certain ppatents from Sc                ons              l
                                                                                             cience Applicatio International Corporation
                                                             2               any             ed
                                                 (SAIC) in 2006, the compa has develope a series of tec      chnologies and cuurrently has a
                                                 patent por  rtfolio (GABRIE                  n
                                                                             EL) focused on securing real-    -time communic  cations – its
                                                                                              censing business model. The company has
                                                 intellectual property (IP) iis core to its lic               s
                                                            s                n              nd
                                                 evolved its core encryption technology an currently poss                    le
                                                                                                              sesses IP capabl of securing
                                                 communica   ations transmiss                t
                                                                             sions over next generation net   tworks (4G/LTE), a critical
Roobert V. Tango Jr.
                o,                                                           ed
                                                 element to standards define by the 3rd Gen                  ship Project (3GP
                                                                                             neration Partners               PP).
(212) 940-9244
rob             fordsecurities.co
  bert.tango@gilf               om




  LFORD SECU
GIL            URITIES INCO ORPORATED                                                                                       Page 1 of 4
  ease refer to page 5 of this document for importan disclosures
Ple             p                       f          nt          s
                                                                               VirnetX Holding Corporation



                         RISKS


                         We believe an investment in VirnetX Holding may involve the following risks:
                        On-going Litigation May be Lengthy – Outcome Remains Uncertain. On-going litigation will
                         continue for several months/quarters – the ITC hearing with AAPL officially begins on
                         September 5th. Despite a favorable Markman opinion and settlement by Aastra, many
                         variables remain. We anticipate highly sophisticated legal tactics will be utilized by
                         existing litigants – a very common practice with intellectual property cases. It is unclear
                         how the various legal systems may view the evidence, presenting a risk regarding the
                         potential for settlements and/or timing licensing arrangements.

                        Trading Risk due to the view the company is a “Concept”. Because the company is in the very
                         early stages of establishing a core business model (licensing agreements), investors have
                         limited tangible evidence of a consistent revenue/cash flow stream - thus determining
                         an appropriate valuation remains speculative. “Concept” models may be volatile until
                         some degree of confidence and understanding regarding its business is achieved.

                        4G/LTE deployments May be Delayed due to a Weak Macro Environment. On-going macro
                         concerns in has caused service providers to delay their investments in 4G/LTE
                         infrastructure between 2 and 4 months, in our opinion. Early stage shipments of
                         equipment were expected to begin by late Q4 2011/early Q1 2012 – to date
                         deployments have been limited (China most active) – some degree of acceleration may
                         occur during the 2H 2012, albeit at a moderate pace., Therefore, certain 4G/LTE
                         participants potentially seeking to establish a relationship with VirnetX may pause near-
                         term.

                        Royalty Rate Debate will Persist and Cause Uncertainty. Debate regarding what royalty rate
                         VirnetX could obtain will persist. The investment community is wary of the potential
                         royalty rate range that the company could obtain (1% to 2% is our assumption)
                         depending on the player and product/application it is providing. Despite concerns
                         within the investment community that the company may structure deals at a rate below
                         the aforementioned range, we feel this risk/concern is not material.




GILFORD SECURITIES INCORPORATED                                                                      Page 2 of 4
                                                                                                                 VirnetX Holding Corporation



Valuation Analysis

Case study - QCOM's QTL division: we estimate approximately 205 customers licensing technology at royalty rates ranging between 1.5% and 4%


GS 4G/LTE estimated investment cycle (hardware and operating systems): $450b (more than 700 potential players)
Total dollar value of equipment (hardware and operating systems) shipped meeting all requirements set by the 3GPP: ~$125b
Average royalty rate: 100 bps


Potential royalty revenue stream:           $1.250 b
Estimated operating margin:                   75%
Estimated operating profit:                 $0.938 b
Estimated LT tax rate:                        36%
Estimated LT net income:                    $0.600 m
LT diluted share count:                         0.06 m
Estimated LT EPS:                           $10.00
Discount at 15% for 8 years:                 $3.27
Multiple assumption:                       20
Price per share:                                $65


Valuation/price target excludes any potential cash settlements related to on-going litigation




GILFORD SECURITIES INCORPORATED                                                                                                               Page 3 of 7
                                                                                                                             VirnetX Holding Corporation

VirnetX Holding Corporation (VHC)
Quarterly Earnings Model
FY Dec ember
($ in millions)
                                                                       Q1 12A     Q2 12A     Q3 12E    Q4 12E
                                      2009A      2010A       2011A     Mar-12     Jun-12     Sep-12    Dec-12     2012E      2013E     2014E     2015E     2016E     2017E


Total royalty revenues                0.026      0.068       0.021     0.000      0.036      0.500     2.000      2.536     18.000    65.000    140.000   265.000   435.000


Cost of revenues                                                                                                            1.800     6.500     14.000    31.800    52.200
   Gross profit                                                                                                             16.200    58.500    126.000   233.200   382.800


Royalty expense                                  59.207
Researc h & development               0.864      2.412       1.464      0.256     0.274      0.300      0.450     1.280      1.440     1.625     2.100     2.385     2.610
SG&A                                  12.250    33.764      15.932     6.967      11.496     12.000    11.000    41.463     22.500    16.700    15.400    15.900    16.530
(Gain on settlement)                            (200.000)


Operating profit/(loss)              (13.088)   104.685     (17.375)   (7.223)   (11.734)   (11.800)   (9.450)   (40.207)   (7.740)   40.175    108.500   214.915   363.660

Gain/(loss) in value of securities    0.559     (30.516)     (5.595)   0.269      (2.248)    0.000      0.000     (1.979)   2.000     4.000      6.000     8.000    10.000


Interest & other inc ome, net          0.0       1.310       0.228      0.074     0.128      0.065      0.060     0.327      0.250     0.300     0.400     0.500     0.700
Pretax inc ome/(loss)                (12.524)   75.479      (22.742)   (6.880)   (13.854)   (11.735)   (9.390)   (41.859)   (5.490)   44.475    114.900   223.415   374.360


Income taxes (benefit)                0.000     34.062       (5.480)   (2.173)    (3.590)      0         0        (5.763)   -1.976    16.011     41.364    80.429   134.770


Net inc ome                          (12.524)   41.417      (17.262)   (4.707)   (10.264)   (11.735)   (9.390)   (36.096)   (3.514)   28.464    73.536    142.986   239.590


Earnings per share (GAAP)            ($0.33)     $0.84      ($0.35)    ($0.09)   ($0.20)    ($0.23)    ($0.18)   ($0.70)    ($0.07)   $0.51      $1.27     $2.38     $3.86
GAAP EPS

Diluted shares                        37.911     49.066      50.028    50.658     50.874     51.500    52.000     51.258    53.000    56.000     58.000    60.000    62.000

M argin analysis
Gross profit margin                                                                                                          90.0%     90.0%     90.0%     88.0%     88.0%
Researc h & development                                                                                                      8.0%      2.5%      1.5%      0.9%      0.6%
SG&A                                                                                                                        85.0%     22.5%      11.0%     6.0%      3.8%
Operating margin                                                                                                            (43.0%)   61.8%      77.5%     81.1%     83.6%
Pretax margin                                                                                                               (30.5%)   68.4%      82.1%     84.3%     86.1%
Tax rate                                                                                                                    36.0%     36.0%      36.0%     36.0%     36.0%
Net margin                                                                                                                  (19.5%)   43.8%      52.5%     54.0%     55.1%


Revenue analysis
YOY growth                                                                                                                  609.8%    261.1%     115.4%    89.3%     64.2%
Sequential growth


EPS analysis
YOY growth                                                                                                                            -866.7%    149.4%    88.0%     62.2%
Sequential growth




GILFORD SECURITIES INCORPORATED                                                                                                                           Page 4 of 4
                                                                                        VirnetX Holding Corporation



 ANALYST CERTIFICATION

 I, Robert Tango, certify that all the views expressed in this research report accurately reflect my personal views of
 the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of
 this report.

 REQUIRED DISCLOSURES

 In the normal course of business, Gilford Securities seeks to perform investment banking and other services for
 various companies and to receive compensation in connection with such services. As such, Gilford Securities
 intends to seek compensation for investment banking services from the subject company in the next three months.

 The analyst owns shares in the subject company.

 STOCK RATINGS

 Buy:      The stock should outperform its industry or peer group by 20% or greater within a 12-month timeframe.

 Sell:     The stock is expected to underperform its industry or peer group by 20% or greater within a 12-month
           timeframe, or fundamentals have deteriorated significantly and the stock is expected to materially
           depreciate.

 Hold:     The stock does not have enough upside or downside potential to rate it a Buy or Sell. It is either fairly
           valued or carries too much uncertainty for a Buy or Sell rating.


 Distribution of Gilford ratings (As of 06-27-12)

  Category               Coverage                     IB Services*
     Buy                    59%                            6%
     Hold                   34%                           10%
     Sell                    7%                            0%
 * Percentage of companies within this category for whom Gilford has provided
   investment banking (IB) Services within the last 12 months.




                              ADDITIONAL INFORMATION AVAILABLE UPON REQUEST




GILFORD SECURITIES INCORPORATED                                                                                Page 5 of 5

				
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