sv1za
As filed with the Securities
and Exchange Commission on January 16, 2009
Registration
No. 333-153645
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 7
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
VirnetX Holding
Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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5615 Scotts Valley Drive, Suite 110
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77-0390628
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(State or Other Jurisdiction of
Incorporation or Organization)
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Scotts Valley, California 95066
(831) 438-8200
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(I.R.S. Employer
Identification Number)
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(Address, Including Zip Code,
and Telephone Number,
Including Area Code, of
Registrants Principal Executive Offices)
Kendall Larsen
Chief Executive
Officer
VirnetX Holding
Corporation
5615 Scotts Valley Drive,
Suite 110
Scotts Valley, California
95066
(831) 438-8200
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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Lowell D. Ness
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
(650) 614-7400
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Christopher C. Paci
Peter M. Astiz
DLA Piper LLP (US)
2000 University Avenue
East Palo Alto, California 94303
(650) 833-2000
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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: o
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: þ
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, 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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering
Price(2)
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Fee(1)
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Common Stock, par value $0.0001
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$30,000,000(3)
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$
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1,179.00
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Warrants to purchase Common Stock
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Total Registration Fee
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1,179.00
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*
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(1)
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Calculated pursuant to
Rule 457(o) on the basis of the maximum aggregate offering
price of all of the securities to be registered. Pursuant to
Rule 457(g), no separate registration fee is required for the
Warrants because we are registering those Securities in the
same registration statement as the underlying common stock.
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(2)
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Includes the common stock
underlying the warrants to purchase shares of common stock that
are being offered to the public as well as the shares of common
stock underlying the underwriters warrant disclosed in the
prospectus included in this amendment. In accordance with Rule
416 under the Securities Act of 1933 in order to prevent
dilution, a presently indeterminable number of shares of common
stock are registered hereunder which may be issued in the event
of a stock split, stock dividend or similar transaction. No
additional registration fee has been paid for these shares of
common stock.
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(3)
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The registrant has previously paid
a registration fee to the Securities and Exchange Commission for
an offering with a proposed maximum aggregate offering price of
$30,000,000. The prospectus included in this amendment reflects
a reduction in the proposed maximum aggregate offering price.
This prospectus contemplates an offering, at an assumed offering
price of $1.75 per share and associated warrants, with a
proposed maximum aggregate offering price of $18,750,000
(including proceeds from exercise of the warrants offered
hereby, but excluding proceeds from exercise of the
over-allotment option granted to the underwriter). There are
therefore no additional registration fees remaining to be paid
by the registrant.
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*
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Previously paid.
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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. We 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.
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PROSPECTUS
(Subject to Completion) |
Dated January 16, 2009 |
3,000,000 Shares of Common
Stock
Warrants to Purchase
4,500,000 Shares of Common Stock
VIRNETX HOLDING
CORPORATION
We are offering 3,000,000 shares of our common stock,
warrants to purchase 1,500,000 shares of our common stock
at an exercise price of $2.00 per share, warrants to
purchase 1,500,000 shares of our common stock at an
exercise price of $3.00 per share, and warrants to purchase
1,500,000 shares of our common stock at an exercise price of
$4.00 per share. This prospectus also covers the offer and
sale of 4,500,000 shares of common stock issuable upon
exercise of the warrants offered hereby.
Our common stock is currently listed on the American Stock
Exchange under the symbol VHC. We do not intend to
apply for listing of the warrants on any securities exchange. On
January 14, 2009, the last reported sales price of our
common stock as reported on the American Stock Exchange was
$1.49 per share.
Our business and an investment in our common stock and
warrants involve significant risks. These risks are described
under the caption Risk Factors beginning on
page 8 of this prospectus.
Gilford Securities Incorporated has agreed to act as the
underwriter in connection with this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the offered
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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of Common Stock and
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Associated Warrants
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Total(1)
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Public Offering Price
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$
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$
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Underwriting
Discount*
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$
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$
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Offering Proceeds before expenses**
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$
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$
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* |
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See section entitled Underwriting on page 69 of this
prospectus. |
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** |
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Our underwriter is offering these shares on a firm commitment
basis and expects that delivery of shares will be made on or
about ,
2009. We have granted the underwriter a
45-day
option to purchase up to 450,000 additional shares and warrants
to purchase up to an additional 225,000 shares at an exercise
price of $2.00 per share, an additional 225,000 shares at an
exercise price of $3.00 per share and an additional 225,000
shares at an exercise price of $4.00 per share from us at the
public offering price, less the underwriting discount, to cover
over-allotments. In addition, we will issue the underwriter a
warrant to purchase 300,000 shares of our common stock. The
underwriters over-allotment option and the
underwriters warrant are subject to adjustment for stock
splits, stock dividends or similar transactions. |
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(1) |
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Table excludes shares of common stock issuable upon exercise of
warrants offered hereby. |
Gilford Securities
Incorporated
,
2009
TABLE OF
CONTENTS
This prospectus does not contain all of the information set
forth in the registration statement of which this prospectus is
a part, as permitted by the rules and regulations of the
Securities and Exchange Commission. For additional information
regarding us and the offered securities, please refer to the
registration statement of which this prospectus is a part.
Before purchasing any of the offered securities, 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 on
page 68. In particular, you should carefully consider the
risks and uncertainties described under the section titled
Risk Factors in this prospectus starting on
page 7 before you decide whether to purchase any of the
offered securities. These risks and uncertainties, together with
those not known to us or those that we may deem immaterial,
could impair our business and ultimately affect the price of our
common stock.
You should rely only on the information contained in this
prospectus. We have 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 offers are being made hereby in any jurisdiction where
the offer or sale is not permitted. You should assume that the
information in this prospectus is accurate only as of the date
on the cover. Our business, financial condition, results of
operations and prospects may have changed since that date.
i
PROSPECTUS
SUMMARY
The following summary provides an overview of certain
information about our company and the offering and may not
contain all the information that may be important to you. This
summary is qualified in its entirety by and should be read
together with the information contained in other parts of this
prospectus. You should carefully read this entire prospectus
before making a decision about whether to invest in the offered
securities.
The
Company
We are developing and commercializing 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, enabling users to create a secure
communication link using secure domain names. We also intend to
establish the exclusive secure domain name registry in the
United States and other key markets around the world. 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 and remote
desktop. 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.
We intend to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. The leaders in these markets include Alcatel-Lucent,
Avaya Inc., Cisco Systems, Inc., Juniper Networks, Inc., LM
Ericsson Telephone Company, Motorola, Inc., NEC Corporation,
Nokia Corporation, Nortel Networks Corporation, Samsung
Electronics Co. Ltd. and Sony Ericsson Mobile Communications AB,
among others. We also intend to license our patent portfolio,
technology, and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators. We believe that the market opportunity
for our software and technology solutions is large and
expanding. As part of our licensing strategy, in March 2008, we
hired ipCapital Group, a leading advisor on licensing technology
and intellectual property, to initiate discussions with several
major potential licensees. Since its founding in 1998, ipCapital
Group has supported the licensing efforts of clients across a
variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. We are
currently in discussions with prospective customers in our
target markets.
Our portfolio of intellectual property is the foundation of our
business model. We currently have 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. 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 software and technology solutions also have
additional applications in operating systems and network
security. The core development team behind our patent portfolio,
technology, and software has worked together for over ten years
and is the same team that invented and developed this technology
while working at Science Application International Corporation,
or SAIC. SAIC 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.
In 2006, we acquired this patent portfolio, which now serves as
the foundation of our planned licensing and service offerings.
We expect to derive the majority of our revenue from license
fees and royalties associated with these patents. We also intend
to continue our research and development efforts to further
strengthen and expand our patent portfolio, and over time, we
plan to leverage this portfolio to develop a product suite that
can be sold to enterprise customers and developers.
Industry
Overview
The Internet is increasingly evolving into a rich medium used by
individuals and businesses to conduct commerce, share
information and engage in real-time communications including
email, text messaging, IM,
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and voice and video calls. This communications experience is
richer and more complex than ever before. Session initiation
protocol, or SIP, was developed to enable the convergence of
voice and data networks and today is the predominant industry
standard for establishing multimedia communications over the
Internet such as voice, video, instant messaging, presence
information and file transfer. SIP as well as other real-time
collaboration-protocols such as XMPP, use DNS lookup as their
primary means of connecting Internet devices but is an open
architecture that remains inherently unsecure. As the workforce
becomes increasingly dispersed, mobile features enabled by
Internet protocol-based communications such as presence, unified
messaging, find me/follow me, white-boarding and document
sharing have become more commonplace. However, the development
of the security infrastructure for these applications has lagged
behind the adoption of next-generation networks, leaving them
vulnerable to a multitude of threats including
man-in-middle,
eavesdropping, domain hijacking, distributed denial of service,
or DDoS, spam over Internet telephony, or SPIT, and spam over
instant messaging, or SPIM. These threats continue to highlight
the need for securing these next-generation networks.
We believe that accessing a diversity of services from a single
device, anytime and anywhere, and the ability to access these
same services from a range of devices, are emerging as key
market requirements. The portions of the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology
solutions are forecasted to grow from approximately
$59 billion in total revenues in 2006 to approximately
$162 billion in total revenues by 2011, representing a
compound annual growth rate, or CAGR, of approximately 23%. This
growing trend represents a significant opportunity for VirnetX
to license its patent portfolio, technology and software, and
establish its secure domain name registry.
Our
Solutions
Our software and technology solutions, including GABRIEL
Connection
Technologytm,
our secure domain name registry, and our patents are designed to
secure all types of real-time communications over the Internet.
Our patented GABRIEL Connection
Technologytm
combines industry standard encryption protocols with our
patented techniques for automated DNS lookup mechanisms,
enabling users to create a secure communication link using
secure domain names. Our technology can be built into network
infrastructure, operating systems or silicon chips developed for
a communication or computing device to secure real-time
communications over the Internet between any number of devices.
Our technology automatically encrypts data allowing
organizations and individuals to establish communities of
secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or
SPDs, are designed to be fully-customizable and support rich
content applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a secure
environment. Our approach is a unique and patented solution that
provides the robust security platform required by these rich
content applications and real-time communications over the
Internet. The key benefits and features of our technology
include the following:
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Automatic and seamless to the user. After a
one-time registration, users connect securely on a
zero-click or single-click basis.
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Secure data communications. Users create
secure networks with people they trust and communicate over a
secure channel.
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Control of data at all times. Users can secure
and customize their unified communication and collaboration
applications such as file sharing and remote desktop with
policy-based access and secure presence information.
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Authenticated users. Users know they are
communicating with authenticated users with secure domain names.
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Application-agnostic technology. Our solution
provides security at the IP layer of the network by using
patented techniques for automated DNS lookup mechanisms to make
connections between secure domain names, thereby obviating the
need to provide application specific security.
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Competitive
Strengths
We believe the following competitive strengths will enable our
success in the marketplace:
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Unique patented technology. We are focused on
developing innovative technology for securing real-time
communications over the Internet, and establishing the exclusive
secure domain name registry in the United States and other key
markets around the world. Our unique solutions combine industry
standard encryption methods and communication protocols with our
patented techniques for automated DNS lookup mechanisms. Our
technology and patented approach enables users to create a
secure communication link by generating secure domain names. We
have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our portfolio
includes patents and pending patent applications in the United
States and other key markets that support our secure domain name
registry service for the Internet.
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Scalable licensing business model. Our
intellectual property portfolio is the foundation of our
business model. We are actively engaged in commercializing our
intellectual property portfolio by pursuing licensing agreements
with OEMs, service providers and system integrators within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
end-markets. We have engaged ipCapital Group to accelerate our
patent and technology licensing program with customers and to
expand the depth of our intellectual property portfolio, and we
are actively pursuing our first licensing agreements. We believe
that our licensing business model is highly scalable and has the
potential to generate strong margins once we achieve significant
revenue growth.
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Highly experienced research and development
team. Our research and development team is
comprised of nationally recognized network security and
encryption technology scientists and experts that have worked
together as a team for over ten years and, collectively, have
over 120 years of experience in the field. During their
careers, this team has developed several cutting-edge
technologies for U.S. national defense, intelligence and
civilian agencies, many of which remain critical to our national
security today. Prior to joining VirnetX, our team worked for
SAIC during which time they invented the technology that is the
foundation of our patent portfolio, technology, and software.
Based on the collective knowledge and experience of our
development team, we believe that we have one of the most
experienced and sophisticated groups of security experts
researching vulnerability and threats to real-time communication
over the Internet and developing solutions to mitigate these
problems.
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Our
Strategy
Our strategy is to become the market leader in securing
real-time communications over the Internet and to establish our
GABRIEL Communications
Technologytm
as the industry standard security platform. Key elements of our
strategy are to:
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Implement a patent and technology licensing program to
commercialize our intellectual property, including our GABRIEL
Connection
Technologytm.
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Establish VirnetX as the exclusive universal registry of secure
domain names and to enable our customers to act as registrars
for their users and broker secure communication between users on
different registries.
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Leverage our patent portfolio, technology and software to
develop a suite of products that can be sold directly to
end-user enterprises.
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In furtherance of our strategy, in March 2008, we engaged
ipCapital Group to help us support and grow our licensing
business. The ipCapital Group is a leading advisor on licensing
technology and intellectual
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property. Through our alliance with ipCapital Group, we are
actively engaged in discussions with several potential customers
in our target markets. ipCapital Group is led by John Cronin.
Prior to founding ipCapital Group, Mr. Cronin was a
distinguished inventor at IBM for 17 years where he
patented 100 inventions, published over 150 technical papers,
received IBMs Most Distinguished Inventor
Award, and was recognized as IBMs Top
Inventor. As a member of the senior technical staff and
the prestigious IBM Academy, Mr. Cronin led an intellectual
asset team that spearheaded efforts to produce and manage the
development of intellectual property at IBM. Eventually known as
The IBM Patent Factory, this select group supported
the division that increased IBMs annual licensing revenue
from $30 million in 1992 to more than $1 billion in
1997 when Mr. Cronin left IBM. Since its founding in 1998,
ipCapital Group has supported the licensing efforts of clients
across a variety of technologies and markets, resulting in
transactions representing several hundred million dollars of
value.
Microsoft
Litigation
We filed a patent infringement lawsuit against Microsoft
Corporation on February 15, 2007. The lawsuit involves
three patents and 18 claims. The patent infringement claims
extend to eight Microsoft products including Windows Vista,
Windows XP, Server 2003, Server 2008 and Officer Communicator,
among others. On March 31, 2008, Microsoft filed a Motion
to Dismiss our patent infringement case against it. On
June 3, 2008, the court held that VirnetX has
constitutional standing to file its complaint and on that basis
denied Microsofts motion to dismiss. Also pursuant to the
June 2008 court decision, SAIC joined us in our lawsuit as a
plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. A Markman hearing is scheduled for
February 17, 2009. After the hearing, the Court will make
certain determinations regarding the scope of our patent claims.
The trial is scheduled to begin on October 12, 2009.
Corporate
Information
Our principal executive offices 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.
In November 2006, we acquired certain patents from SAIC. In July
2007, we effected a reverse merger between PASW, Inc., a
publicly traded company with limited operations, 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.
VirnetXtm
and GABRIEL Connection
Technologytm
are our trademarks 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.
4
The
Offering
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Securities offered:
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3,000,000 shares of our common stock and warrants to
purchase 4,500,000 shares of our common stock (as described
in more detail below). |
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Offering price:
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We anticipate that the offering price of each share of our
common stock and associated warrants will be
$ . |
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Description of the warrants:
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We are offering three types of warrants for each share of our
common stock offered hereby. The warrants will be issued in
registered form under a warrant agency agreement between
Corporate Stock Transfer, Inc., as warrant agent, and us. The
three types of warrants have similar terms but are exercisable
at different prices. For each share purchased at the closing of
the offering, an investor will receive a warrant to purchase
0.5 shares of our common stock at $2.00 per share,
0.5 shares of our common stock at $3.00 per share and
0.5 shares of our common stock at $4.00 per share
(fractional shares will be rounded up). All warrants will be
exercisable on or after the applicable closing date of this
offering through and including the
18-month
anniversary of the first closing date. All warrants will also
include a call feature that gives us the right to require the
holder of the warrant to exercise the warrant when our average
closing stock price over five consecutive trading days is equal
to or exceeds two times the applicable warrants purchase
price, failing which the warrant will terminate. |
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Common stock outstanding before the offering:
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34,899,985 shares of our common stock. |
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Common stock outstanding after the offering:
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37,899,985 shares of our common stock. |
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Use of proceeds:
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To fund product development, pursue our litigation strategy and
for general working capital needs. We anticipate that our
existing cash and cash equivalents, together with net proceeds
from this offering, at an assumed public offering price of $1.75
per share and associated warrants and assuming no warrants are
exercised, may only be sufficient to fund our operations for the
next five months. See the Liquidity and Capital
Resources section in this prospectus for additional
information. |
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Amex symbol:
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VHC |
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Risk factors:
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See Risk Factors beginning on page 7 of this
prospectus and the other information in this prospectus for a
discussion of factors you should consider before you decide to
invest in our securities. |
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Unless otherwise noted in this prospectus, all information in
this prospectus related to the number of shares of our common
stock to be outstanding or beneficially owned after this
offering:
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is based on 34,899,985 shares of common stock outstanding
as of December 31, 2008;
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assumes no exercise of the underwriters over-allotment
option;
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assumes no exercise of the warrants to purchase
4,500,000 shares of our common stock offered hereby;
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assumes no exercise of the 300,000 shares of our common
stock issuable upon exercise of the warrant to be issued to the
underwriter at the closing of this offering;
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excludes 300,000 shares of our common stock issuable upon
exercise of the warrant issued to the underwriter in connection
with our previous public offering which closed on
December 31, 2007; and
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excludes 4,318,596 shares of our common stock issuable upon
exercise of stock options outstanding as of December 31,
2008.
|
6
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
Managements 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
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
$
|
107,955
|
|
|
$
|
46,664
|
|
|
$
|
74,866
|
|
|
$
|
|
|
|
$
|
|
|
Total operating expenses:
|
|
|
9,253,611
|
|
|
|
4,571,749
|
|
|
|
8,725,210
|
|
|
|
1,407,675
|
|
|
|
882,478
|
|
Total other income (expenses), net:
|
|
|
142,454
|
|
|
|
(23,111
|
)
|
|
|
(41,820
|
)
|
|
|
6,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(8,692,164
|
)
|
|
$
|
(1,401,339
|
)
|
|
$
|
(882,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash and cash equivalents:
|
|
$
|
2,260,170
|
|
|
$
|
8,589,447
|
|
|
$
|
139,997
|
|
|
$
|
86,552
|
|
Total assets:
|
|
|
3,079,152
|
|
|
|
9,279,166
|
|
|
|
195,123
|
|
|
|
147,722
|
|
Accounts payable and accrued expenses:
|
|
|
1,467,412
|
|
|
|
531,790
|
|
|
|
87,386
|
|
|
|
|
|
Total stockholders equity (deficit):
|
|
$
|
1,407,740
|
|
|
$
|
8,495,376
|
|
|
$
|
107,737
|
|
|
$
|
(82,278
|
)
|
7
RISK
FACTORS
You should carefully consider the following material risks in
addition to the other information set forth in this prospectus
before making any investment in the offered securities. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also
adversely affect our business. If any of these risk factors
occurs, you could lose substantial value or your entire
investment in the offered securities.
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 virtual private networks, or 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 required 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 Microsofts 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,
although our business strategy is focused primarily on bringing
patented products to market, our business strategy also 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
ability to pursue the Microsoft litigation.
As a public company, our management must devote substantial
time, attention and financial resources to comply with
U.S. securities laws. This may have a material adverse
affect on managements 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 that will be available to
8
Microsoft as well as any other future litigation opponents. We
may, from time to time, be required to disclose information that
will have a 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 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 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 and the existence and outcome of
any such litigation could harm our business. In addition,
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 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 do not anticipate launching any new products
into the market until the first quarter of 2009, at the
earliest. 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. We anticipate that our existing cash
and cash equivalents, together with net proceeds from this
offering, at an assumed public offering price of $1.75 per share
and associated warrants and assuming no warrants are exercised,
may only be sufficient to fund our operations for the next five
months. See the Liquidity and Capital Resources
section in this prospectus for additional information.
We
anticipate incurring operating losses and negative cash flows
for 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 and there is no assurance that we will be
able to do so. 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.
9
Our
business plan for commercializing our patents and technology 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 a security platform for
real-time communications; however, this is not a defined market.
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 communications based on SIP or using DNS lookup
protocols as well as customer adoption of our GABRIEL
Communication
Technologytm
and our secure domain name registry. We cannot assure you that
customers will adopt our products and services, or that we will
succeed in building a profitable business based on our business
plan.
We may
or may not be able to capitalize on potential market
opportunities related to our licensing strategy or our patent
portfolio.
Our business strategy calls for us to enter into licensing
relationships with the leading companies in our target market in
order to reach a larger end-user base than we could reach
through direct sales and marketing efforts. We have engaged
ipCapital Group to help develop our licensing strategy and to
introduce the Company to five potential strategic licensees of
the Companys technology. In connection with this
engagement, we agreed to pay ipCapital Group 10% of the
royalties of each resulting licensing arrangement, up to an
aggregate maximum of $2 million per licensee, or
$10 million in the aggregate. There can be no assurance
that we will be able to capitalize on the potential market
opportunity. Our inability to generate licensing revenues
associated with the potential market opportunity 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;
|
|
|
|
we may not be successful in entering into licensing
relationships with our targeted customers on commercially
acceptable terms; and
|
|
|
|
the validity of our patents underlying the licensing opportunity
is currently being challenged in our litigation against
Microsoft.
|
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 expect to utilize a substantial portion of the proceeds of
this offering to finance our litigation with Microsoft. We will
require significant additional capital from sources including
equity
and/or debt
financings, license arrangements, grants, collaborative research
arrangements
and/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 anticipate that
our existing cash and cash equivalents, together with net
proceeds from this offering, at an assumed public offering price
of $1.75 per share and associated warrants and assuming no
warrants are exercised, may only be sufficient to fund our
operations for the next five months. There can be no assurance
that we will be able to close this offering on acceptable terms
or at all, especially in the current capital markets environment.
Our
business greatly depends on the growth of IM, VoIP, mobile
services, streaming video, file transfer and remote desktop and
other next-generation Internet-based applications.
We cannot assure you that next-generation Internet-based
applications such as instant messaging, or IM, voice over
Internet protocol, or VoIP, mobile services, streaming video,
file transfer and remote desktop will continue to gain
widespread market acceptance. The Internet may ultimately prove
not to be a viable commercial marketplace for such applications
for a number of reasons, including:
|
|
|
|
|
unwillingness of consumers to shift to VoIP and use other such
next-generation Internet-based applications;
|
|
|
|
refusal to purchase security products to secure information
transmitted through such applications;
|
10
|
|
|
|
|
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;
|
|
|
|
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.
|
If the
market for IM, VoIP, mobile services, streaming video, file
transfer and remote desktop does not grow as anticipated, our
business would be adversely affected.
The success of our products that secure IM, VoIP, mobile
services, streaming video, file transfer and remote desktop,
among other real-time communications applications, depends on
the growth in the number of users, which in turn depends on the
Internet gaining more widespread acceptance as the basis for
these real-time communications applications. These real-time
communications applications are still in early stages of market
acceptance and we cannot assure you that they will continue to
develop a broader audience. For example, 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 inconvenience.
While
the use of IM and other next-generation Internet-based
applications has grown rapidly in personal and professional use,
there can be no assurance that users will pay to secure their
use of such applications.
Many services such as Microsoft, Yahoo! and America Online offer
IM free of charge. However, security solutions for these
services are not free, and OEMs may not want to adopt such
security solutions if users of IM do not see the value and do
not want to pay for such security solutions. If personal and
professional users of IM and other next-generation
Internet-based solutions do not want to pay for the security
solutions, we will have difficulty marketing and selling our
products and technologies.
We
expect that we will experience long and unpredictable sales
cycles, which may impact our quarterly operating
results.
We expect that our sales cycles will be long and unpredictable
due to a number of uncertainties such as:
|
|
|
|
|
the need to educate potential customers about our patent rights
and our product and service capabilities;
|
|
|
|
customers willingness to invest potentially substantial
resources and modify their network infrastructures to take
advantage of our products;
|
|
|
|
customers budgetary constraints;
|
|
|
|
the timing of customers budget cycles; and
|
|
|
|
delays caused by customers internal review processes.
|
We
expect that we will be substantially dependent on a concentrated
number of customers. If we are unable to establish, maintain or
replace our relationships with customers and develop a
diversified customer base, our revenues may fluctuate and our
growth may be limited.
We expect that for the foreseeable future, a significant portion
of our revenues will be generated from a limited number of
customers. There can be no guarantee that we will be able to
obtain such customers, or if we do so, to sustain our revenue
levels from these customers. If we cannot establish, maintain or
replace the limited group of customers that we anticipate will
generate a substantial majority revenues, or if they do not
generate revenues at the levels or at the times that we
anticipate, our ability to maintain or grow our revenues will be
adversely affected.
11
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 and
IP-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, launch
and/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
patented 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.
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
products
and/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.
Our
products are highly technical and may contain undetected errors,
which could cause harm to our reputation and adversely affect
our business.
Our products are highly technical and complex and, when
deployed, may contain errors or defects. In addition, we rely on
third parties for software development and technology services,
and there may be errors in the development processes used by our
third party counterparts that may adversely affect our end
products.
12
Despite testing, some errors in our products may only be
discovered after a product has been installed and used by
customers. Any errors or defects discovered in our products
after commercial release could result in failure to achieve
market acceptance, loss of revenue or delay in revenue
recognition, loss of customers and increased service and
warranty cost, any of which could adversely affect our business,
operating results and financial condition. In addition, we could
face claims for product liability, tort or breach of warranty,
including claims relating to changes to our products made by our
channel partners. The performance of our products could have
unforeseen or unknown adverse effects on the networks over which
they are delivered as well as on third-party applications and
services that utilize our services, which could result in legal
claims against us, harming our business. Furthermore, we expect
to provide implementation, consulting and other technical
services in connection with the implementation and ongoing
maintenance of our products, which typically involves working
with sophisticated software, computing and communications
systems. We expect that our contracts with customers will
contain provisions relating to warranty disclaimers and
liability limitations, which may not be upheld. Defending a
lawsuit, regardless of its merit, is costly and may divert
managements attention and adversely affect the
markets perception of us and our products. In addition, if
our business liability insurance coverage proves inadequate or
future coverage is unavailable on acceptable terms or at all,
our business, operating results and financial condition could be
adversely impacted.
Malfunctions
of third-party communications infrastructure, hardware and
software exposes us to a variety of risks we cannot
control.
In addition, our business will also depend upon the capacity,
reliability and security of the infrastructure owned by third
parties that we will use to deploy our offerings. We have no
control over the operation, quality or maintenance of a
significant portion of that infrastructure or whether or not
those third parties will upgrade or improve their equipment. We
depend on these companies to maintain the operational integrity
of our connections. If one or more of these companies is unable
or unwilling to supply or expand its levels of service to us in
the future, our operations could be severely interrupted. Also,
to the extent the number of users of networks utilizing our
future products suddenly increases, the technology platform and
secure 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
communications; 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.
System
failure or interruption or our failure to meet increasing
demands on our systems could harm our business.
The success of our license and service offerings will depend on
the uninterrupted operation of various systems, secure data
centers and other computer and communication networks that we
establish. 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, service interruptions or delays or system
failures. Our systems and operations will also be vulnerable to
damage or interruption from:
|
|
|
|
|
power loss, transmission cable cuts and other telecommunications
failures;
|
|
|
|
damage or interruption caused by fire, earthquake, and other
natural disasters;
|
|
|
|
computer viruses or software defects; and
|
|
|
|
physical or electronic break-ins, sabotage, intentional acts of
vandalism, terrorist attacks and other events beyond our control.
|
System interruptions or failures and increases or delays 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. These types of
13
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.
Any significant problem with our systems or operations could
result in lost revenue, customer dissatisfaction or lawsuits
against us. A failure in the operation of our secure domain name
registration system could result in the inability of one or more
registrars to register and maintain secure domain names for a
period of time. A failure in the operation or update of the
master directory that we plan to maintain could result in
deletion or discontinuation of assigned secure domain names for
a period of time. The inability of the registrar systems we
establish, including our back office billing and collections
infrastructure, and telecommunications systems to meet the
demands of an increasing number of secure domain name requests
could result in substantial degradation in our customer support
service and our ability to process registration requests in a
timely manner.
If we
experience security breaches, we could be exposed to liability
and our reputation and business could suffer.
We will retain certain confidential customer information in our
secure data centers and secure domain name registry. It will be
critical to our business strategy that our facilities and
infrastructure remain secure and are perceived by the
marketplace to be secure. Our secure domain name registry
operations will also depend on our ability to maintain our
computer and telecommunications equipment in effective working
order and to reasonably protect our systems against
interruption, and potentially depend on protection by other
registrars in the shared registration system. The secure domain
name servers that we will operate will be critical hardware to
our registry services operations. Therefore, we expect to have
to expend significant time and money to maintain or increase the
security of our facilities and infrastructure.
Security technologies are constantly being tested by computer
professionals, academics and hackers. Advances in
the techniques for attacking security solutions could make some
or all of our products obsolete or unmarketable. Likewise, if
any of our products are found to have significant security
vulnerabilities, then we may need to dedicate engineering and
other resources to eliminate the vulnerabilities and to repair
or replace products already sold or licensed to our customers.
Despite our security measures, our infrastructure may be
vulnerable to physical break-ins, computer viruses, attacks by
hackers or similar disruptive problems. It is possible that we
may have to expend additional financial and other resources to
address such problems. Any physical or electronic break-in or
other security breach or compromise of the information stored at
our secure data centers and domain name registration systems may
jeopardize the security of information stored on our premises or
in the computer systems and networks of our customers. In such
an event, we could face significant liability and customers
could be reluctant to use our services. Such an occurrence could
also result in adverse publicity and therefore adversely affect
the markets perception of the security of electronic
commerce and communications over IP networks as well as of the
security or reliability of our services.
We may
incur significant expenses and damages because of liability
claims.
An actual or perceived breach of our security solutions could
result in a product liability claim against us. A substantial
product liability claim against us could harm our operating
results and financial condition. In addition, any actual or
perceived breach of our security solution, whether or not caused
by the failure of one of our products, could hurt our reputation
and cause potential customers to turn to our competitors
products.
Our
ability to sell our solutions will be dependent on the quality
of our technical support, and our failure to deliver
high-quality technical support services could have a material
adverse effect on our sales and results of
operations.
If we do not effectively assist our customers in deploying our
products, succeed in helping our customers quickly resolve
post-deployment issues and provide effective ongoing support, or
if potential customers perceive that we may not be able achieve
to the foregoing, our ability to sell our products would be
adversely affected, and our reputation with potential customers
could be harmed. In addition, as we expand our
14
operations internationally, our technical support team will face
additional challenges, including those associated with
delivering support, training and documentation in languages
other than English. As a result, our failure to deliver and
maintain high-quality technical support services to our
customers could result in customers choosing to use our
competitors products instead of ours in the future.
There
has been increased competition for security solutions 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.
We expect competition for our products and services to be
intense. We expect to compete directly against other companies
offering similar security products and services that will
compete directly with our proposed products and services. We
also expect that we will compete against established vendors
within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. These companies may incorporate other competitive
technologies into their product offerings, whether developed
internally or by third parties. For the foreseeable future,
substantially all of our competitors are likely to be 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:
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substantially greater financial, technical and marketing
resources;
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a larger customer base;
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better name recognition; and
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more expansive product offerings.
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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.
If we
are not able to adequately protect our patented 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 intellectual property 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:
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our applications for patents, trademarks and copyrights relating
to our business may not be granted and, if granted, may be
challenged or invalidated;
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issued trademarks, copyrights, or patents may not provide us
with any competitive advantages;
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our efforts to protect our intellectual property rights may not
be effective in preventing misappropriation of our
technology; or
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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.
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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 patented rights would have a negative
impact on our operations and revenues.
In addition, legal standards relating to the validity,
enforceability, and scope of protection of intellectual property
rights in Internet-related businesses are uncertain and still
evolving. Because of the growth of the Internet and Internet
related businesses, patent applications are continuously and
simultaneously being filed in connection with Internet-related
technology. There are a significant number of U.S. and
foreign patents and patent applications in our areas of
interest, and we believe that there has been, and is likely to
continue to be, significant litigation in the industry regarding
patent and other intellectual property rights.
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
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.
When
we attempt to implement our secure domain name registry services
business, we may be subject to government and industry
regulation and oversight which may impede our ability to achieve
our business strategy.
The U.S. government has historically controlled the
authoritative domain name system, or DNS, root server since the
inception of the Internet. On July 1, 1997, the President
of the United States directed the U.S. Secretary of
Commerce to privatize the management of the domain name system
in a manner that increases competition and facilitates
international participation in its management.
On September 29, 2006, the U.S. Department of Commerce
extended its delegation of authority by entering into a new
agreement with the Internet Corporation for Assigned Names and
Numbers, or ICANN, a California non-profit corporation
headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers
and registrars that manage the assignment of top level domain
names associated with the authoritative DNS root directory.
Although other DNS root directories are possible to create and
manage privately without accreditation from ICANN, the
possibility of conflicting name and number assignments makes it
less likely that users would widely adopt a top level domain
name associated with an alternative DNS root directory provided
by a non-ICANN-accredited registry service.
On June 26, 2008, ICANN announced that it will be relaxing
its prior position and will begin to issue generic top level
domain names, or gTLDs, more broadly than it had previously.
ICANN expects to begin to take applications for gTLDs in April
or May of 2009 with an application fee of $100,000 or more per
application. ICANN expects the first of these customized gTLDs
to be issued in the fourth quarter of 2009.
We are currently evaluating whether we will apply to become an
ICANN-accredited registry provider with respect to one or more
customized gTLDs, or create our own alternative DNS root
directory to manage the assignment of non-standard secure domain
names. We have not yet begun discussions with ICANN and we
cannot assure you that we will be successful in obtaining ICANN
accreditation for our registry service on terms acceptable to us
or at all. Whether or not we obtain accreditation from ICANN, we
will be subject to
16
the ongoing risks arising out of the delegation of the
U.S. governments responsibilities for the domain name
system to the U.S. Department of Commerce and ICANN and the
evolving government regulatory environment with respect to
domain name registry services.
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, state
and/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. The
U.S. Federal Communications Commission has imposed some
traditional telephony requirements on VoIP such as disability
access requirements and other obligations. It is possible that
federal and state legislatures may seek to impose increased fees
and administrative burdens on VoIP, data and video providers.
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 laws
and/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 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 the Internet 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.
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. We have no employment
agreements with any of our key
17
executives that prevent them from leaving us at any time. In
addition, we do not maintain key person life insurance for any
of our officers or key employees. 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. Competition for
engineering, sales, marketing and executive personnel is
intense, particularly in the technology and Internet sectors and
in the regions where our facilities are located. We can provide
no assurance that we will attract or retain such personnel.
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:
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the need for continued development of the financial and
information management systems;
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the need to manage relationships with future licensees,
resellers, distributors and strategic partners;
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the need to hire and retain skilled management, technical and
other personnel necessary to support and manage our
business; and
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the need to train and manage our employee base.
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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
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:
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challenges caused by distance, language and cultural differences;
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legal, legislative and regulatory restrictions;
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currency exchange rate fluctuations;
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economic instability;
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longer payment cycles in some countries;
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credit risk and higher levels of payment fraud;
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potentially adverse tax consequences; and
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other higher costs associated with doing business
internationally.
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These risks could harm our international expansion efforts,
which would in turn harm our business prospects.
We
will continue to incur significant costs as a result of being a
public company.
As a public company, we will continue to incur significant
legal, accounting and other expenses that VirnetX did not incur
as a private company. We expect the laws, rules and regulations
governing public
18
companies to increase our 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:
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Farber Hass Hurley LLP proposed, and we recorded, adjustments to
our accounting for equity transactions during 2007;
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Farber Hass Hurley LLP noted that our controls over financial
disclosures need to be improved; and
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Farber Hass Hurley LLP noted that certain expenses within 2007
were not timely accrued prior to receipt of billing statements.
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Prior to becoming our subsidiary, VirnetX 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 engaged independent
auditors to audit its financial statements for certain prior
periods. During the course of that audit, VirnetXs
independent auditors concluded that VirnetXs 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 is now our
wholly-owned subsidiary, the material weaknesses in
VirnetXs 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, and management believes it has addressed the
material weaknesses identified by Farber Hass Hurley LLP in the
course of the audit of our 2007 financial statements. However,
that process has been and may continue to be time consuming and
costly and there can be no assurance that our audit firm will
not continue to identify these and other material weaknesses and
significant deficiencies in the course of the audit of our 2008
financial statements.
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 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.
19
Our
ability to sell our solutions will be dependent on the quality
of our technical support, and our failure to deliver
high-quality technical support services could have a material
adverse effect on our sales and results of
operations.
If we do not effectively assist our customers in deploying our
products, succeed in helping our customers quickly resolve
post-deployment issues and provide effective ongoing support, or
if potential customers perceive that we may not be able achieve
the foregoing, our ability to sell our products would be
adversely affected, and our reputation with potential customers
could be harmed. In addition, as we expand our operations
internationally, our technical support team will face additional
challenges, including those associated with delivering support,
training and documentation in languages other than English. As a
result, our failure to deliver and maintain high-quality
technical support services to our customers could result in
customers choosing to use our competitors products instead
of ours in the future.
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. In the past several months, the market price
of our common stock has experienced significant fluctuation.
Between January 1, 2008 and December 31, 2008, the
reported last sale price for our common stock has ranged from
$7.06 to $0.89 per share. We expect the price of our common
stock to continue to be volatile as a result of a number of
factors, including, but not limited to, the following:
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developments in our pending litigation against Microsoft;
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quarterly variations in our operating results;
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large purchases or sales of common stock;
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actual or anticipated announcements of new products or services
by us or competitors;
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general conditions in the markets in which we compete; and
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economic and financial conditions.
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Purchasers
in this offering will immediately experience substantial
dilution in net tangible book value and may experience further
dilution.
The public offering price of our common stock is substantially
higher than $0.03, the net tangible book value per share of our
common stock as of September 30, 2008. Therefore, if you
purchase our common stock in this offering, and assuming no
warrants are exercised, you will incur an immediate dilution of
$1.60 in net tangible book value per share from the price you
paid, based on an assumed public offering price of $1.75 per
share.
The exercise of outstanding options to purchase shares of our
common stock at a weighted average exercise price of $3.54 per
share will result in further dilution.
Because
ownership of our common shares is concentrated, you and other
investors will have minimal influence on stockholder
decisions.
As of December 31, 2008, our officers and directors
beneficially owned an aggregate of 9,385,618 shares, or
26.16% 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
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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 were released from
contractual restrictions on July 5, 2008 and
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 entered into a
lock-up
agreement restricting sales of their shares until July 5,
2008. Subsequently, certain of our stockholders signed a
lock-up
agreement with the underwriter in connection with our public
offering in December 2007, which restricted sales of their
shares until December 31, 2008. Sales of the shares
released from
lock-up on
July 5, 2008 may have driven down the price of our
stock. Certain of these additional shares were released after
the first quarter of 2008, and certain of the shares were
released on December 31, 2008. Sales of such additional
shares may drive down the price of our stock. The
8,489,545 shares that became eligible for trading on
December 31, 2008 represented 24.3% of our outstanding
common stock as of December 31, 2009.
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:
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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.
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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 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.
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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.
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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.
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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.
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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.
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Securities
analysts may not cover our common stock and this may have a
negative impact on our common stocks 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 stocks 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. 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.
22
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.
ABOUT
THIS PROSPECTUS
As used in this prospectus:
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VirnetX refers to VirnetX, Inc., a Delaware
corporation;
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VirnetX Holding Corporation refers to VirnetX
Holding Corporation, a Delaware corporation, formerly PASW,
Inc., on and after our reincorporation which became effective on
March 30, 2007 and name change which became effective on
October 29, 2007, and refers to PASW, Inc., a California
corporation, prior to that date;
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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; and
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we, our, us and the
company refer to VirnetX Holding Corporation and its
wholly-owned subsidiaries, including VirnetX, collectively, on a
consolidated basis after giving effect to the merger.
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USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
offered securities, assuming gross proceeds of $5.3 million
(which is the amount of gross proceeds received by us, based
upon an assumed public offering price of $1.75 per share
and associated warrants and assuming no warrants are exercised),
will be approximately $4.1 million, after deducting the
underwriters fees and expense reimbursement and other
estimated expenses of this offering.
We expect to use all of the proceeds received from the sale of
our shares of common stock and the associated warrants in this
offering. We will have significant discretion in the use of any
net proceeds raised in this offering less than all of the
proceeds currently anticipated. Investors will be relying on the
judgment of our management regarding the application of the
proceeds of any sale of the securities. We may invest the net
proceeds received from this offering temporarily until we use
them for their stated purpose. We anticipate that the net
proceeds obtained from this offering will be used to fund
development activities, pursue our litigation strategy and for
general working capital needs. We anticipate that our existing
cash and cash equivalents, together with net proceeds from this
offering, at an assumed public offering price of $1.75 per share
and associated warrants and assuming no warrants are exercised,
may only be sufficient to fund our operations for the next five
months. See the Liquidity and Capital Resources
section in this prospectus for additional information.
DIVIDEND
POLICY
We have not in the past paid, and 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.
24
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report, including this Managements Discussion and
Analysis of Financial Condition and Results of Operations
contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
which provides a safe harbor for statements about
future events, products and future financial performance that
are based on the beliefs of, estimates made by and information
currently available to our management. Except for the historical
information contained herein, the outcome of the events
described in these forward-looking statements is subject to
risks and uncertainties. See Risk Factors for a
discussion of these risks and uncertainties. The following
discussion should be read in conjunction with and is qualified
in its entirety by reference to our consolidated financial
statements included elsewhere in this prospectus. Actual results
and the outcome or timing of certain events may differ
significantly from those stated or implied by these
forward-looking statements due to the factors listed under
Risk Factors, and from time to time in our other
filings with the Securities and Exchange Commission, 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 have 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.
As used herein, we, us,
our, or the Company means VirnetX
Holding Corporation and its wholly-owned subsidiaries, including
VirnetX, collectively, on a consolidated basis after giving
effect to the merger.
Company
Overview
We are a development stage company focused on commercializing a
patent portfolio for securing real-time communications over the
Internet. These patents were acquired by our principal operating
subsidiary, VirnetX, from Science Applications International
Corporation, or SAIC. SAIC 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.
In December 2007, we closed an underwritten public offering of
3.45 million shares of our common stock, raising gross
proceeds of $13.8 million before underwriting discounts and
commissions and offering expenses. In connection with the 2007
offering, our common shares began trading on the American Stock
Exchange under the ticker symbol VHC. 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 ours 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, 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 patent and technology 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
25
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.
Recent
Developments
We announced our GABRIEL Connection
Technologytm
on April 1, 2008. Our GABRIEL Connection
Technologytm
is designed to secure all types of real-time communications over
the Internet. This technology uses industry standard encryption
methods with our patented DNS lookup mechanisms to create a
secure communication link between users intending to communicate
in real time over the Internet. This technology automatically
encrypts data allowing organizations and individuals to
establish communities of secure, registered users to transmit
information between multiple devices and operating systems.
These secure network communities, which we call secure private
domains, or SPDs, are designed to be fully-customizable and
support applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a
completely secure environment.
On May 14, 2008, we announced jointly with ipCapital Group
the completion and results of ipCapital Groups evaluation
of our business model, product, patent portfolio, technology and
software. The goal of the evaluation was to determine the
potential commercialization value range to potential licensing
partners in IP telephony, mobility, fixed-mobile convergence and
unified communications markets. Based on ipCapital Groups
proprietary ipValue Model, the estimated potential
commercialization value range of our business model, product,
patent portfolio, technology and software indicates a
significant market opportunity. We are currently in discussions
with prospective customers in our target markets.
On March 31, 2008, Microsoft filed a motion to dismiss our
patent infringement case against it. On June 3, 2008, the
court denied Microsofts motion to dismiss. The court ruled
that VirnetX has constitutional standing to sue for
patent infringement. Also pursuant to the court decision, on
June 10, 2008, SAIC joined us in our lawsuit as a plaintiff.
On August 26, 2008, we were awarded another
U.S. patent, number 7,418,504, by the U.S. Patent and
Trademark Office. The new patent, titled Agile network
protocol 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 the
secure domain name registry service for the Internet. Additional
information about the patent can be found on www.uspto.gov.
On October 23, 2008, our Board of Directors authorized the
establishment of an advisory board and we concurrently entered
into advisory board agreements with John Cronin, Paul Henderson,
and John F. Slitz. The members of our advisory board
collaborate with and provide advice and assistance to us, with a
focus on facilitating the development and commercialization of
our licensing program. We will strategically select members of
our advisory board, including those appointed on
October 23, 2008, who are
well-informed
and
well-connected
in fields relevant to our software and technology solutions,
market direction, and future plans. Additional biographical
information regarding the advisors appointed on October 23,
2008 is included under the section of this prospectus entitled
Management.
On November 19, 2008, the court granted our motion to amend
our infringement contentions, permitting us to provide increased
specificity and citations to Microsofts proprietary
documents and source code to support our infringement case
against Microsofts accused products, including, among
other things, Windows XP, Vista, Server 2003, Server 2008, Live
Communication Server, Office Communication Server and Office
Communicator. Microsoft was ordered to provide further
information regarding its non-infringement contentions and
invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
26
Critical
Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires us 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 the reported amounts of revenues and expenses
during the reported period. The critical accounting policies we
employ in the preparation of our consolidated financial
statements are those which involve impairment of long-lived
assets, income taxes, fair value of financial instruments and
stock-based compensation.
Impairment
of Long-Lived Assets
We identify and record impairment losses on long-lived assets
used in operations when events and changes in circumstances
indicate that the carrying amount of an asset might not be
recoverable, but not less than annually. 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.
Income
Taxes
We account for income taxes under the 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.
Fair
Value of Financial Instruments
Carrying amounts of our financial instruments, including cash
and cash equivalents, accounts payable, and accrued liabilities,
approximate their fair values due to their short maturities.
Stock-Based
Compensation
We account for share-based compensation in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 123 (revised 2004), Share-Based
Payment, or 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 financial
statements presented herein reflect compensation expense for
stock-based awards as if the provisions of SFAS 123(R) had
been applied from the date of our inception.
In addition, as required by Emerging Issues Task Force Consensus
No. 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 investments issued as they vest over the performance
period.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141 (revised 2007),
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 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
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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 EITF
No. 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 ratified
EITF 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. EITF
No. 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, or 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, or SFAS No. 161. SFAS No. 161
requires enhanced disclosures about an entitys 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 entitys 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.
Nine
Months Ended September 30, 2008
Compared with Nine Months Ended September 30,
2007
Results
of Operations
Revenue
Royalties
Revenue generated increased to $107,955 for the nine months
ended September 30, 2008 from $46,664 for the nine months
ended September 30, 2007. Our revenue in 2008 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.
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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 by $165,095 to
$633,335 for the nine months ended September 30, 2008, from
$468,240 for the nine months ended September 30, 2007. This
increase is primarily due to increased engineering activities
for product development and the addition of one engineer,
bringing the total number of engineers we employ to four. 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.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses include management
and administrative personnel, as well as outside legal,
accounting, and consulting services.
Our selling, general and administrative expenses increased by
$4,516,767 to $8,620,276 for the nine months ended
September 30, 2008 from $4,103,509 for the nine month
period ended September 30, 2007.
Within selling, general and administrative expenses, legal fees
increased by $2,166,735 to $4,618,256 for the nine months ended
September 30, 2008 from $2,451,521 for the nine months
ended September 30, 2007. The increase in fees incurred was
due primarily to our patent infringement litigation against
Microsoft and the filing of a
Form S-1
registration statement on September 24, 2008.
In addition, during the nine months ended September 30,
2008, we made our first minimum annual royalty payment of
$50,000 to SAIC pursuant to the patent license and assignment
agreement, as amended, by and between VirnetX and SAIC. As of
September 30, 2008, we had not received any royalty revenue
on the patents nor begun to amortize the related intangible
asset.
Also within selling, general and administrative expenses,
expenses increased by $2,350,032 to $4,002,020 for the nine
months ended September 30, 2008, from $1,651,988 for the
nine month period ended September 30, 2007. The increase
was due principally to stock options granted to our employees
and directors. In addition, we increased the number of employees
and resources in order to comply with the requirements
associated with being an SEC reporting company.
Once we begin to generate royalty revenues, we expect that our
selling expenses will increase significantly as we must make
payments to ipCapital Group and SAIC with respect to such
revenues and as we begin to expand our sales force.
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) 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.
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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.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses include management
and administrative personnel, as well as outside legal,
accounting, and consulting services.
Our selling, 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 selling, 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
2007. The fees were incurred to pursue the litigation with
Microsoft, assist in the merger between VirnetX 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 selling, 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 selling, 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.
Once we begin to generate royalty revenues, we expect that our
selling expenses will increase significantly as we must make
payments to ipCapital Group and SAIC with respect to such
revenues and as we begin to expand our sales force.
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 September 30, 2008, we had approximately $2,260,170 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,
together with net proceeds from this offering, at an assumed
public offering price of $1.75 per share and associated warrants
and assuming no warrants are exercised, may only be sufficient
to fund our operations for the next five months.
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 and services or that our products and
services will gain sufficient market acceptance to enable us to
earn a profit. If we are unable to obtain additional capital or
generate sufficient revenue from such efforts, we may be
required to cease operations or
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to reduce cash used in our business, including the termination
of commercialization 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.
We believe that our 2009 average cash requirement to fund
operations will average approximately $950,000 per month. We
anticipate our monthly cash requirements will increase
significantly as we increase our expenditures for:
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our lawsuit against Microsoft;
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infrastructure;
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sales and marketing;
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research and development;
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personnel; and
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general business enhancements.
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We may exceed those projected amounts if we increase these
expenditures in response to business conditions we do not
currently expect or for other reasons. 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 patented
technology offerings will achieve market acceptance. We are
unable to predict when we will begin to generate material net
cash inflows from our patent and technology licensing program
and our secure domain name registry service.
Off-Balance
Sheet Arrangements
As of December 31, 2008, we did not have any off balance
sheet arrangements except for operating lease commitments and
the contingent portion of our royalty obligation under our
royalty agreement with SAIC as discussed in the notes to the
financial statements.
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BUSINESS
The
Company
We are developing and commercializing 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, enabling users to create a secure
communication link using secure domain names. We also intend to
establish the exclusive secure domain name registry in the
United States and other key markets around the world. 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 and remote
desktop. 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.
We intend to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. The leaders in these markets include Alcatel-Lucent,
Avaya Inc., Cisco Systems, Inc., Juniper Networks, Inc., LM
Ericsson Telephone Company, Motorola, Inc., NEC Corporation,
Nokia Corporation, Nortel Networks Corporation, Samsung
Electronics Co. Ltd. and Sony Ericsson Mobile Communications AB,
among others. We also intend to license our patent portfolio,
technology and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators. We believe that the market opportunity
for our software and technology solutions is large and
expanding. As part of our licensing strategy, in March 2008, we
hired ipCapital Group, a leading advisor on licensing technology
and intellectual property, to initiate discussions with several
major potential licensees. Since its founding in 1998, ipCapital
Group has supported the licensing efforts of clients across a
variety of technologies and markets, resulting in transactions
representing several hundred million dollars of value. We are
currently in discussions with prospective customers in our
target markets.
Our portfolio of intellectual property is the foundation of our
business model. We currently have 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. 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 software and technology solutions also have
additional applications in operating systems and network
security. The core development team behind our patent portfolio,
technology, and software has worked together for over ten years
and is the same team that invented and developed this technology
while working at Science Application International Corporation,
or SAIC. SAIC 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.
In 2006, we acquired this patent portfolio, which now serves as
the foundation of our planned licensing and service offerings.
We expect to derive the majority of our revenue from license
fees and royalties associated with these patents. We also intend
to continue our research and development efforts to further
strengthen and expand our patent portfolio, and over time, we
plan to leverage this portfolio to develop a product suite that
can be sold to enterprise customers and developers.
Industry
Overview
The Internet is increasingly evolving into a rich medium used by
individuals and businesses to conduct commerce, share
information and engage in real-time communications including
email, text messaging, IM, and voice and video calls. This
communications experience is richer and more complex than ever
before. Session initiation protocol, or SIP, was developed to
enable the convergence of voice and data networks and today is
the predominant industry standard for establishing multimedia
communications over the Internet such as voice, video, instant
messaging, presence information and file transfer. SIP, as well
as other real-time
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collaboration protocols such as XMPP, use DNS lookup as its
primary means of connecting Internet devices but is an open
architecture that remains inherently unsecure.
We believe that accessing a diversity of services from a single
device, anytime and anywhere, and the ability to access these
same services from a range of devices, are emerging as key
market requirements. The portions of the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets that could benefit from our software and technology
solutions are forecasted to grow from approximately
$59 billion in total revenues in 2006 to approximately
$162 billion in total revenues by 2011, representing a
compound annual growth rate, or CAGR, of approximately 23%. This
growing trend represents a significant opportunity for VirnetX
to license its patent portfolio, technology and software, and
establish its secure domain name registry.
IP
Telephony
IP telephony includes technologies that use Internet
Protocols packet-switched connections to exchange voice,
fax, and other forms of information traditionally carried over
the dedicated circuit-switched connections of the public
switched telephone network, or PSTN. The adoption of IP
telephony has helped businesses significantly lower network
operating costs by using a common network for voice and data. As
the workforce becomes increasingly dispersed, mobile features
enabled by Internet protocol-based communications such as
presence, unified messaging, peer-to-peer applications, find
me/follow me, white-boarding and document sharing have become
more commonplace. However, the development of the related
security infrastructure has lagged behind, leaving
next-generation networks vulnerable to a multitude of threats
including
man-in-middle,
eavesdropping, domain hijacking, distributed denial of service,
or DDoS, spam over Internet telephony, or SPIT, and spam over
instant messaging, or SPIM. These threats continue to highlight
the need for securing next-generation networks. As the use of IP
telephony systems extends beyond the boundaries of an
organizations private network, security is likely to
become an even bigger concern. Worldwide revenue from IP
telephony products like
IP-PBX
including IP phones, service provider VoIP and IMS equipment,
VoIP gateways and hosted VoIP services for businesses is
forecasted to grow from approximately $15 billion in 2006
to approximately $43 billion in 2011, representing a CAGR
of approximately 24%. We believe our unique and patented
solution provides the robust security platform required for
providing on-demand secure communication links between
enterprises intending to communicate securely without manually
configuring the connections. We believe a standard security
solution such as ours will further accelerate the adoption of IP
telephony products in the market and allow enterprises to take
full advantage of these rich content applications and real-time
communications over the Internet, thereby significantly
increasing their return on investment.
Fixed-Mobile
Convergence
Fixed-mobile convergence is an environment where wireline and
wireless phones work together with Internet Protocol to deliver
services (voice, video, data and combinations thereof) uniformly
across multiple access networks, including, among others, WiMAX,
WiFi, cellular and fixed. We believe that the fixed-mobile
convergence infrastructure equipment revenue will grow from
approximately $9 million in 2006 to over $406 million
in revenue in 2011, representing a CAGR of approximately 116%.
Additionally, according to a thought leadership paper entitled
Road to Full Convergence published by Fixed-Mobile
Convergence Alliance, or FMCA, an alliance of leading operators
representing a customer base of over 850 million customers,
consumers increasingly feel the need to be connected and have
real-time access to media streams, blogs and breaking news.
During the past ten years, users have become increasingly
technologically sophisticated and are now demanding greater
functionality from the Internet. Today, the Internet is used for
commerce, social networking, online dating and a number of other
forms of media-rich, real-time communication and collaboration.
Mobile devices like dual mode (cellular/WiFi) phones lie at the
center of this transition and have become the device with the
closest proximity and relationship to the user. We believe that
accessing a diversity of services from a single device, anytime
and anywhere, and the ability to access the same services from a
range of devices, is emerging as a key market requirement.
Worldwide total dual mode cellular/WiFi phone revenue was
approximately $17 billion in 2006 and is expected to grow
to over $76 billion
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in 2011, representing a CAGR of approximately 35%. The strong
projected growth for converged cellular/WiFi phones and related
services in enterprise and consumer market segments represents a
significant opportunity for VirnetXs patent portfolio,
technology, and software to become the industry standard for
securing real-time communication.
IP
Mobility
Smartphones are multi-functional devices that handle a wide
variety of business-critical applications and support
increasingly complex functions including, enhanced data
processing, Internet access,
e-mail
access, calendars and scheduling, contact management and the
ability to view electronic documents. Users have continual
access to these applications while on the move making them an
increasingly essential business tool for the mobile worker.
These devices enable mobile workers to have similar
functionality inside or outside the office thereby increasing
employee efficiency. However, it is critical that this mobile
environment have the same level of security as an
enterprises internal network. Worldwide revenue from IP
mobility products like smartphones and mobile data cards is
expected to grow from approximately $26 billion in 2006 to
approximately $41 billion by 2011, representing a CAGR of
approximately 9%. We believe in order to realize the full
functionality of IP mobility, several challenges including
security must be overcome. When users are mobile, connections
and data need to cross multiple network boundaries, each of
which poses a security threat. Wireless networks present unique
threats because rogue users can enter the enterprise network
through wireless access points that may not be sufficiently
protected as part of an organizations IT security
protocols. Providing authenticated access to the wireless
networks and enterprise applications through the wireless domain
are important requirements and represent a significant market
opportunity for VirnetXs patented technology and secure
domain names to provide users fully authenticated secure access
on a zero-click or single-click basis.
Unified
Communications
The need to enhance productivity is putting increasing demand on
instant access to, and the management of, rapidly expanding
real-time information. Mobile collaboration, and the ability to
conduct business whether inside or outside of the office, are
high priorities. Business and consumer users are nomadic and
expect instant access everywhere. The ability to establish
multiple secure simultaneous network connections and provide IP
sessions with strong security and encryption will be critical to
widespread deployment of next-generation networks. A shortcoming
of this new communications environment is that the various modes
of communication operate independently from one another and do
not integrate easily, if at all. As the number of devices grows,
individual points of contact multiply and communication becomes
more sophisticated and increasingly vulnerable.
The idea behind unified communications is to organize the array
of communication methodologies, integrating the various
fragmented ways individuals communicate today into a single
communications experience, ultimately increasing utility and
productivity. The basic components comprising unified
communications include: a directory for storing addresses,
various modes of communication with each user/contact (desk
phone, mobile phone, IM, etc.), message storage for all messages
regardless of communication method and secure presence of a
users status for each mode of communication (available,
away, busy, etc.). Worldwide unified communications market
generated approximately $377 million in revenue in 2006 and
is forecasted to grow rapidly over the next few years generating
approximately $813 million in revenue in 2011, representing
a CAGR of approximately 17%. We believe the growth in unified
communication products may not reach its full potential due to
the lack of transparent and seamless security as users hesitate
to place their presence information online for all to see and as
organizations block access due to the lack of credentials
verified by a neutral third party. Our solutions help address
these concerns and should enable significant growth in the
unified communications market.
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Our
Solutions
Our software and technology solutions, including our secure
domain name registry, our patents and our GABRIEL Connection
Technologytm
are designed to secure all types of real-time communications
over the Internet. Our technology uses industry standard
encryption methods with our patented DNS lookup mechanisms to
create a secure communication link between users intending to
communicate in real time over the Internet. Our technology can
be built into network infrastructure, operating systems or
silicon chips developed for a communication or computing device
to secure real-time communications over the Internet between any
number of devices. Our technology automatically encrypts data
allowing organizations and individuals to establish communities
of secure, registered users and transmit information between
multiple devices, networks and operating systems. These secure
network communities, which we call secure private domains, or
SPDs, are designed to be fully-customizable and support rich
content applications such as IM, VoIP, mobile services,
streaming video, file transfer and remote desktop in a
completely secure environment. Our approach is a unique and
patented solution that provides the robust security platform
required by these rich content applications and real-time
communications over the Internet. The key benefits and features
of our technology include the following:
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Automatic and seamless to the user. After a
one-time registration, users connect securely on a
zero-click or single-click basis.
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Secure data communications. Users create
secure networks with people they trust and communicate over a
secure channel.
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Control of data at all times. Users can secure
and customize their unified communication and collaboration
applications such as file sharing and remote desktop with
policy-based access and secure presence information.
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Authenticated users. Users know they are
communicating with authenticated users with secure domain names.
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Application-agnostic technology. Our solution
provides security at the IP layer of the network by using
patented DNS lookup mechanisms to make connections between
secure domain names, thereby obviating the need to provide
application specific security.
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Competitive
Strengths
We believe the following competitive strengths will enable our
success in the marketplace:
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Unique patented technology. We are focused on
developing innovative technology for securing real-time
communications over the Internet, and establishing the exclusive
secure domain name registry in the United States and other key
markets around the world. Our unique solutions combine industry
standard encryption methods and communication protocols with our
patented techniques for automated DNS lookup mechanisms. Our
technology and patented approach enables users to create a
secure communication link by generating secure domain names. We
have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. Our portfolio
includes patents and pending patent applications in the United
States and other key markets that support our secure domain name
registry service for the Internet.
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Scalable licensing business model. Our
intellectual property portfolio is the foundation of our
business model. We are actively engaged in commercializing our
intellectual property portfolio by pursuing licensing agreements
with OEMs, service providers and system integrators within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
end-markets. We have engaged ipCapital Group to accelerate our
patent and technology licensing program with customers and to
expand the depth of our intellectual property portfolio, and we
are actively pursuing our first licensing agreements. We believe
that our licensing business model is highly scalable and has the
potential to generate strong margins once we achieve significant
revenue growth.
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Highly experienced research and development
team. Our research and development team is
comprised of nationally recognized network security and
encryption technology scientists and experts that have worked
together as a team for over ten years and, collectively, have
over 120 years of experience in the field. During their
careers, this team has developed several cutting-edge
technologies for U.S. national defense, intelligence and
civilian agencies, many of which remain critical to our national
security today. Prior to joining VirnetX, our team worked for
SAIC during which time they invented the technology that is the
foundation of our patent portfolio, technology, and software.
Based on the collective knowledge and experience of our
development team, we believe that we have one of the most
experienced and sophisticated groups of security experts
researching vulnerability and threats to real-time communication
over the Internet and developing solutions to mitigate these
problems.
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Our
Strategy
Our strategy is to become the market leader in securing
real-time communications over the Internet and to establish our
GABRIEL Communications
Technologytm
as the industry standard security platform. Key elements of our
strategy are to:
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Implement a patent and technology licensing program to
commercialize our intellectual property, including our GABRIEL
Connection
Technologytm.
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Establish VirnetX as the exclusive universal registry of secure
domain names and to enable our customers to act as registrars
for their users and broker secure communication between users on
different registries.
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Leverage our existing patent portfolio and technology to develop
a suite of products that can be sold directly to end-user
enterprises.
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In furtherance of our strategy, in March 2008, we engaged
ipCapital Group to help us support and grow our licensing
business. The ipCapital Group is a leading advisor on licensing
technology and intellectual property. Through our alliance with
ipCapital Group, we are actively engaged in discussions with
several potential customers in our target markets. ipCapital
Group is led by John Cronin. Prior to founding ipCapital Group,
Mr. Cronin was a distinguished inventor at IBM for
17 years where he patented 100 inventions, published over
150 technical papers, received IBMs Most
Distinguished Inventor Award, and was recognized as
IBMs Top Inventor. As a member of the senior
technical staff and the prestigious IBM Academy, Mr. Cronin
led an intellectual asset team that spearheaded efforts to
produce and manage the development of intellectual property at
IBM. Eventually known as The IBM Patent Factory,
this select group supported the division that increased
IBMs annual licensing revenue from $30 million in
1992 to more than $1 billion in 1997 when Mr. Cronin
left IBM. Since its founding in 1998, ipCapital Group has
supported the licensing efforts of clients across a variety of
technologies and markets, resulting in transactions representing
several hundred million dollars of value.
License
and Service Offerings
We plan to offer a diversified portfolio of license and service
offerings focused on securing real-time communications over the
Internet, including:
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VirnetX patent licensing: Customers who want
to develop their own implementation of the VirnetX code module
for supporting secure domain names, or who want to use their own
techniques that are covered by our patent portfolio for
establishing secure communication links, will purchase a patent
license. The number of patents licensed, and therefore the cost
of the patent license to the customer, will depend upon which of
the patents are used in a particular product or service. These
licenses will typically include an initial license fee, as well
as an ongoing royalty.
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GABRIEL Connection
Technologytm
Software Development Kit, or SDK: OEM customers
who want to adopt the GABRIEL Connection
Technologytm
as their solution for establishing secure connections using
secure domain names within their products will purchase an SDK
license. The
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software development kit consists of object libraries, sample
code, testing and quality assurance tools and the supporting
documentation necessary for a customer to implement our
technology. These tools are comprised of software for a secure
domain name connection test server, a relay test server and a
registration test server. Customers will pay an up-front license
fee to purchase an SDK license and a royalty fee for every
product shipped with the embedded VirnetX code module.
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Secure domain name registrar
service: Customers, including service providers,
telecommunication companies, ISPs, system integrators and OEMs
can purchase a license to our secure domain name registrar
service. We provide the software suite and technology support to
enable such customers to provision devices with secure domain
names and facilitate secure connections between registered
devices. This suite includes the following server software
modules:
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Registrar server software: Enables customers
to operate as a secure domain name registrar that provisions
devices with secure domain names. The registrar server software
provides an interface for our customers to register new virtual
private domains and sub-domain names. This server module must be
enrolled with the VirnetX secure domain name master registry to
obtain its credentials before functioning as an authorized
registrar.
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Connection server software: Allows customers
to provide connection services to enrolled devices. The
connection services include registration of presence information
for authenticated users and devices, presence information query
request services, enforcement of policies and support for
communication with peers behind firewalls.
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Relay server software: Allows customers to
dynamically maintain connections and relay data to private IP
addresses for network devices that reside behind firewalls.
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Secure domain name registrar service customers will enter into a
technology licensing and revenue sharing agreement with VirnetX
whereby we will typically receive an up-front licensing fee for
the secure domain name registrar technology, as well as ongoing
annual royalties for each secure domain name issued by the
customer.
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Secure domain name master registry and connection
service: As part of enabling the secure domain
name registrar service, we will maintain and manage the secure
domain name master registry. This service will enroll all secure
domain name registrar customers and generate the credentials
required to function as an authorized registrar. It also
provides connection services and universal name resolution,
presence information and secure connections between authorized
devices with secure domain names.
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Technical support services: We intend to
provide high-quality technical support services to licensees and
customers for the rapid customization and deployment of GABRIEL
Connection
Technologytm
in an individual customers products and services.
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Our research and development team was the team responsible for
inventing the patents that form the foundation of the technology
we intend to license to OEMs and service providers globally.
This team has worked together for over ten years and,
collectively, has over 120 years of experience in
engineering and technology. We intend to leverage this
experience and continue investing in research and development
and, over time, expect to strengthen and expand our patent
portfolio, technology, and software. While we are currently
focused on securing
real-time
communications over the Internet and establishing the first and
only secure domain name registry, we believe our existing and
future intellectual property portfolio will extend to additional
areas including, among others, network security and operating
systems for fixed and mobile devices.
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Customers
We are currently focused on commercializing our technology and
are actively pursuing our first licensing agreements. We intend
to license our patents and our GABRIEL Connection
Technologytm
to original equipment manufacturers, or OEMs, within the
IP-telephony,
mobility, fixed-mobile convergence and unified communications
markets. We also intend to license our patent portfolio,
technology and software, including our secure domain name
registry service, to communication service providers as well as
to system integrators.
Marketing
and Sales
We plan to employ a leveraged, partner-oriented, marketing
strategy for our patent and technology licensing program. The
marketing strategy for our patent and technology licensing
program will primarily be focused on OEMs. We have engaged
ipCapital Group to accelerate our patent and technology
licensing program with these customers and are actively pursuing
our first licensing agreements.
We plan to directly market our domain name registry services to
our service provider and system integrator customers. ipCapital
Group is also focused on building our marketing efforts with
these potential customers. Additionally, we hope to leverage our
relationship with SAIC to extend our offering to departments and
agencies within the federal government. SAIC 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.
Once we begin generating revenue, we intend to build a sales
force that will be responsible for managing existing accounts
and pursuing licensing and sales opportunities with new
customers.
Competition
We believe our technology and solutions will compete primarily
against various proprietary security solutions. We group these
solutions into three main categories:
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Proprietary or home-grown application specific security
solutions have been developed by vendors and integrated directly
into their products for our target markets including
IP-telephony,
mobility, fixed-mobile convergence, and unified communications.
These proprietary solutions have been developed due to the lack
of standardized approaches to securing real-time communications.
This approach has led to corporate networks that are isolated
and, as a result, restrict enterprises to using these
next-generation networks within the boundaries of their private
network. These solutions generally do not provide security for
communications over the Internet or require network
administrators to manually exchange keys and other security
parameters with each destination network outside their corporate
network boundary. The cost-savings and other benefits of
IP-based
real-time communications are significantly limited by this
approach to securing real-time communications.
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A session border controller, or SBC, is a device used in
networks to exert control over the signaling and media streams
involved in establishing, conducting and terminating VoIP calls.
Signaling protocols such as SIP and XMPP, transfer information
including endpoint IP addresses and port numbers in a manner
that prevents this information from being seen by a traditional
firewall or network address translation, or NAT, device, and
reaching the intended destination. SBCs are used in physical
networks to address these limitations and enable real-time
session traffic to cross the boundaries created by firewalls and
other NAT devices and enable VoIP calls to be established
successfully. However, SBCs must decrypt and analyze every
single data packet for the information to be transmitted
successfully, thereby preventing end-to-end encryption. This
network designs results in SBCs becoming a single point of
congestion on the network, as well a single point of failure.
SBCs are also limited to the physical network they secure.
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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 and dynamic firewall
functions and support multiple signaling protocols, and media
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functionality, allowing secure interconnection and the flow of
IP media streams across multiple networks. While SIP firewalls
assist in analyzing SIP traffic transmitted over the corporate
network to filter out various threats, they do not necessarily
encrypt the traffic. As a result, this traffic is not entirely
secure from end-to-end nor is it protected against threats like
man-in-middle
and eavesdropping.
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Intellectual
Property and Patent Rights
Our intellectual property is primarily comprised of trade
secrets, patented know-how, issued and pending patents and
technological innovation.
We have a strong portfolio comprised of 11 patents in the United
States and eight international patents, as well as several
pending U.S. and foreign patent applications. 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 software and technology solutions also have
additional applications in operating systems and network
security.
We have included a list of our U.S. patents below. Each patent
below is publicly accessible on the Internet website of the U.S.
Patent and Trademark Office at
www.uspto.gov.
The various terms of our issued U.S. and foreign patents
will expire during the period from 2019 to 2024.
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U.S. Patent
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Number
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Title of Patent
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6,502,135
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Agile network protocol for secure communications with assured
system availability
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6,618,761
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Agile network protocol for secure communications with assured
system availability
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6,826,616
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Method for establishing secure communication link between
computers of virtual private network
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6,834,310
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Preventing packet flooding of a computer on a computer network
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6,839,759
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Method for establishing secure communication link between
computers of virtual private network without user entering any
cryptographic information
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6,907,473
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Agile network protocol for secure communications with assured
system availability
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7,010,604
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Agile network protocol for secure communications with assured
system availability
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7,133,930
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Agile network protocol for secure communications with assured
system availability
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7,188,180
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Method for establishing secure communication link between
computers of virtual private network
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7,209,479
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Third party VPN certification
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7,418,504
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Agile network protocol for secure communications using secure
domain names
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Notwithstanding anything to the contrary set forth in any of
the Companys filings under the Securities Act of 1933 or
the Securities Exchange Act of 1934 that might incorporate
future filings, including this registration statement, of which
this prospectus forms a part, in whole or in part, the
information set forth on the United States Patent and Trademark
Office, or the USPTO Website, shall not be deemed to be a part
of or incorporated by reference into any such filings. The
Company does not warrant the accuracy or completeness of the
USPTO Website, or the adequacy of the USPTO Website, and
expressly disclaims liability for errors or omissions on such
website.
Assignment
of Patents
Most of our issued patents were originally acquired from SAIC
pursuant to an assignment agreement by and between VirnetX and
SAIC dated December 21, 2006, and a 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 and Trademark
Office on December 21, 2006.
39
Key terms of these agreements are as follows:
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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 specifically set forth on Exhibit A to the
assignment document recorded with the U.S. Patent and
Trademark Office, including, without limitation, the right to
sue for past infringement.
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License to SAIC outside the field 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. 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 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; 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 (for example, 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 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, and to make improvements to, the patents and patent
applications we acquired from SAIC, solely outside our field of
use.
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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.
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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 (1) trade, quantity and cash
discounts allowed, (2) 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 VirnetXs industry, and
(3) actual product returns and allowances; (b) 15% of
all non-license gross revenues generated by us outside our field
of use less (1) trade, quantity and cash discounts allowed,
(2) 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 VirnetXs industry, and (3) actual product
returns and allowances; and (c) 50% of all license revenues
generated by us outside our field of use less (1) trade,
quantity and cash discounts allowed, (2) 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
VirnetXs industry, and (3) actual product returns and
allowances.
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Royalty payments are calculated based on each quarter and
payment is due within 30 days following the end of each
quarter.
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Beginning 18 months after January 1, 2007, we must
make a minimum guaranteed annual royalty payment of $50,000.
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The maximum cumulative royalty paid in respect to our
revenue-generating activities in our field of use shall be no
more than $35 million.
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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 million. Any such
payments to SAIC shall be credited against the $35 million
maximum cumulative royalty payable with respect to our
revenue-generating activities in our field of use.
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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 million maximum cumulative royalty payable with
respect to our revenue-generating activities in our field of use.
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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 million maximum cumulative royalty payable with respect
to our revenue-generating activities in our field of use.
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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:
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our failure to pay SAIC an aggregate cumulative amount of at
least $7.5 million within seven years after January 1,
2007;
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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
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for the period prior to the date of our full payment of the
$35 million maximum cumulative royalty, any termination of
the August 2005 agreement with SAIC, as amended.
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If a reversion event occurs due to our failure to pay SAIC an
aggregate cumulative amount of at least $7.5 million within
seven years after January 1, 2007, then we will receive
from SAIC a non-exclusive license to the reverting patents in
our field of use.
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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.
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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.
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41
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 Internets 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.
The U.S. government has historically controlled the
authoritative domain name system, or DNS, root server since the
inception of the Internet. On July 1, 1997, the President
of the United States directed the U.S. Secretary of
Commerce to privatize the management of the domain name system
in a manner that increases competition and facilitates
international participation in its management.
On September 29, 2006, the U.S. Department of Commerce
extended its delegation of authority by entering into a new
agreement with the Internet Corporation for Assigned Names and
Numbers, or ICANN, a California non-profit corporation
headquartered in Marina Del Rey, California. ICANN is
responsible for managing the accreditation of registry providers
and registrars that manage the assignment of top level domain
names associated with the authoritative DNS root directory.
Although other DNS root directories are possible to create and
manage privately without accreditation from ICANN, the
possibility of conflicting name and number assignments makes it
less likely that users would widely adopt a top level domain
name associated with an alternative DNS root directory provided
by a non-ICANN-accredited registry service.
On June 26, 2008, ICANN announced that it will be relaxing
its prior position and will begin to issue generic top level
domain names, or gTLDs, more broadly than it had previously.
ICANN expects to begin to take applications for gTLDs in April
or May of 2009 with an application fee of $100,000 or more per
application. ICANN expects the first of these customized gTLDs
to be issued in the fourth quarter of 2009.
We are currently evaluating whether we will apply to become an
ICANN-accredited registry provider with respect to one or more
customized gTLDs, or create our own alternative DNS root
directory to manage the assignment of non-standard secure domain
names. We have not yet begun discussions with ICANN and we
cannot assure you that we will be successful in obtaining ICANN
accreditation for our registry service on terms acceptable to us
or at all. Whether or not we obtain accreditation from ICANN, we
will be subject to the ongoing risks arising out of the
delegation of the U.S. governments responsibilities
for the domain name system to the U.S. Department of
Commerce and ICANN and the evolving government regulatory
environment with respect to domain name registry services.
Employees
As of December 31, 2008, we had 12 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.
42
Corporate
Overview and History
PASW, Inc. was incorporated in the State of California in
November 1992. PASW, Inc. reincorporated in the State of
Delaware in March 2007. From inception until January 2003, PASW,
Inc. was engaged in the business of developing and licensing
software that enabled Internet and web based communications. In
January 2003, PASW, Inc. sold all of its operating assets and
became a publicly traded company with limited operations.
VirnetX, Inc., which we refer to throughout this prospectus as
VirnetX, was incorporated in the State of Delaware in August
2005. In November 2006, VirnetX acquired certain patents from
SAIC. 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.
43
MANAGEMENT
The following table sets forth the respective names, ages and
positions of each of our directors, and executive officers as of
December 31, 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.
Executive
Officers and Directors
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Name
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Age
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Position
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Kendall Larsen
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President, Chief Executive Officer and Director
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William E. Sliney
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Chief Financial Officer (Interim)
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Edmund C. Munger
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64
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Director
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Scott C. Taylor
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Director
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Michael F. Angelo
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49
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Director
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Thomas M. OBrien
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Director
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Kendall Larsen. Mr. Larsen has been our
President since July 5, 2007 and has been our Chief
Executive Officer and a Director since June 10, 2007.
Mr. Larsen 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. Mr. Sliney previously served as
our President, Chief Financial Officer and Secretary. 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. From March 2004 to March 2006, 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. 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 Gumps, 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, or SAIC. Prior to SAIC,
Mr. Munger was the chief system architect for the
FBIs Counterterrorism Data Warehouse Prototype, and has
worked on several advanced defense systems. Mr. Munger is
named as a co-inventor on substantially all of the 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.
Scott C. Taylor. Mr. Taylor has been a
Director since July 5, 2007. Mr. Taylor has recently
been promoted to Executive Vice President and General Counsel
and had previously served as the Vice President of Corporate
Legal Services for Symantec Corporation since February 2007.
From January 2002 to February 2007, Mr. Taylor worked for
Phoenix Technologies Ltd. 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.
44
Mr. Taylor was admitted to practice law in the State of
California in 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.
Michael F. Angelo. Mr. Angelo has been a
Director since July 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 a Sub-Chairman of the National
Institute of Standards and Technology Board of Assessment for
Programs/National Research Council responsible for the CISD
review, for fiscal years
2000-2001
and
2001-2002,
and a technology contributor and participant on the
U.S. Commerce Departments Information Systems
Technical Advisory Council, or 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.
Thomas M. OBrien. Mr. OBrien
has been a Director since July 2007. He has been Senior Vice
President of Reit Management & Research LLC, an
institutional manager of real estate, public real estate
investment trusts, or REITs, and other public companies, since
April 2006 and served as a Vice President from May 1996 to April
2006. During the last five years, Mr. OBrien has held
various positions with public entities managed by Reit
Management or its affiliates, including serving as:
(1) Chief Executive Officer and President of TravelCenters
of America LLC (AMEX: TA), since February 2007 and a Managing
Director since October 2006; (2) 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 United States and
international real estate, hospitality and finance sectors, from
2003 to May 2007; and (3) 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 from 1996 to 2002. From 1988 to 1996,
Mr. OBrien was a senior manager with Arthur Andersen
LLP where he served a number of public company clients.
Mr. OBrien graduated cum laude from the University of
Pennsylvania, Wharton School of Business, with a B.S. in
Economics.
Significant
Employees
Robert Dunham Short III. Mr. Short has
been the Chief Scientist for VirnetX since May 2006. From
February 2000 to April 2007, Mr. Short was Assistant Vice
President and Division Manager at Science Applications
International Corporation, or SAIC. From 1994 to February 2000,
he also held various other positions at SAIC. Prior to SAIC, he
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
substantially all of 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 our
Chief Administrative Officer. Prior to this position, she served
as our Vice President, Administration and Human Resources since
February 2005. From September 2004 until February 2005,
Ms. Sheehan focused on equity raise and pre-incorporation
activities related to VirnetX. Ms. Sheehan also served as
the Treasurer and Chief Financial Officer of VirnetX from March
2006 until July 2007. From September 2002 to September 2004,
Ms. Sheehan was a Commercial Property Manager for JBD
Properties, a real estate developer. Ms. Sheehans
experience includes Executive Recruiter at Armen and Associates,
Senior Director of Human Resources at CHW Advertising and Human
Resource and Office Manager at Realtime Consulting, Inc./MODIS.
45
Sameer Mathur. Mr. Mathur has been the
Vice President of Corporate Development and Marketing for
VirnetX since July 2007. Prior to that date, Mr. Mathur was
the Vice President of Business Development of VirnetX since
April 2006. From March 2004 to April 2006, Mr. Mathur was
Product Line Manager for SonicWALL Inc. 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. Prior to June 1996, Mr. Mathur
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.
Dr. Victor Larson. Dr. Larson is
the Director of Research and Development and a co-inventor of
the VirnetX technologies. Prior to joining VirnetX,
Dr. Larson worked for over 20 years doing system
engineering, software design and technical program management
under contract to many branches of the Department of Defense and
the intelligence community. Dr. Larson worked on numerous
advanced prototypes to implement new solutions to secure
communications, remote sensing data extraction and processing,
intelligence information extraction and data visualization.
Dr. Larson holds a Ph.D. in Information Technology from
George Mason University, an M.S. in Mechanical Engineering from
Rensselaer Polytechnic Institute, and a B.S. in Mechanical
Engineering from Virginia Tech.
Greg Wood. Mr. Wood has been with
VirnetX since October 2007 and has been our Senior Director of
Corporate Communications since May 2008. His executive brand
experience includes McDonalds, Safeway, Nissan, Burger King,
Taco Bell, Nutri-System, Supercuts and Pacific Gas &
Electric with advertising agencies that include J. Walter
Thompson, Chiat/Day, Tracy-Locke/BBDO, Hoefer
Dietrich & Brown and Crossover Creative.
Mr. Woods areas of marketing expertise include
strategic branding, new business development, direct, licensing,
product merchandising, consumer education, multicultural,
investor relations and public relations. Mr. Wood holds a
B.A. degree from the University of California, Davis.
Advisory
Board Members
The VirnetX advisory board collaborates with and provides advice
and assistance to the Company, with a focus on facilitating the
development and commercialization of the Companys
licensing program.
John Cronin. Mr. Cronin has been a
member of our advisory board since October 2008. He is Managing
Director and Chairman of ipCapital Group. John spent over
17 years at IBM Corporation and became its top inventor
with over 100 patents and 150 patent publications. He created
and ran The IBM Patent Factory which was essential
to helping IBM become number one in US patents and the team
contributed to the start of and success of IBMs successful
licensing program. Mr. Cronin holds a BSEE, an MSEE, and a
B.A. degree in Psychology from the University of Vermont.
Paul Henderson. Mr. Henderson has been a
member of our advisory board since October 2008. He is Managing
Director of Clarify LLC, a business advisory firm specializing
in intellectual property strategy for both early stage and
established companies. Prior to this, Mr. Henderson was
Director of IP acquisition at Hewlett Packard, or HP.
Mr. Henderson also managed HPs Product Generation
Consulting Group, providing internal advisory and consulting
services to senior leaders of HP businesses. Mr. Henderson
holds MBAs from UC Berkeley Haas School of Business and Columbia
Graduate School of Business and a degree in Chemical Engineering
from the University of Washington.
John F. Slitz. Mr. Slitz has been a
member of our advisory board since October 2008. He is the
founder of World Series of Golf, Inc. and has been its Chairman
of the Board of Directors since 2003. Mr. Slitz was also
Vice President of IBM from 2005 to 2007. From 2002 to 2005,
Mr. Slitz served as Chief Executive Officer and President
of Systems Research and Development (acquired by IBM in 2005).
From 2000 to 2002, he was a venture partner at Osprey Ventures,
focusing on investments in middleware software companies.
Mr. Slitz was also a principal at Slitz &
Company, a consulting firm to software and Internet companies.
From 1997 to 1999, he was Senior Vice President of Marketing
with Novell, Inc. Mr. Slitz holds a B.A. in Economics from
SUNY at Cortland, MALS in Psychology/Sociology from the Graduate
Faculty New School for Social Research, and an MBA in Management
from Farleigh-Dickinson University.
46
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:
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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 professional
U.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;
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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
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public company peers using data we gathered from the SEC filings
of ten 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.
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The primary objectives of our peer-based executive compensation
program are:
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attracting and retaining the most talented and dedicated
executives possible;
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correlating annual and long-term cash and stock incentives to
achievement of measurable performance objectives; and
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aligning executives incentives with stockholder value
creation.
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To achieve these objectives, we implement and maintain
compensation plans that tie a substantial portion of each
executives 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 committees 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
47
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.
Elements
of Executive Compensation
Executive compensation consists of the following elements:
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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.
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Discretionary annual incentive bonus. Each
year, our compensation committee establishes a target
discretionary annual incentive bonus pool based on a percentage
of an executives 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.
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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.
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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 executives
existing long-term incentives, and retention considerations. In
determining the number of stock options to be granted to
executives, we take into account the individuals position,
scope of responsibility, ability to affect profits and
stockholder value, the individuals historic and recent
performance, and the value of stock options in relation to other
elements of the individual executives total compensation.
We expect to continue to use stock options as a long-term
incentive vehicle because:
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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;
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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;
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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
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the vesting period of stock options encourages executive
retention and the preservation of stockholder value.
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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 groups 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. At a compensation committee meeting held on
December 31, 2007, Mr. Larsens base salary was
increased for the fiscal year 2008 from $245,000 in 2007 to
$275,000 in 2008. In approving such an increase to
Mr. Larsens base salary for the fiscal year 2008, the
compensation committee conducted the benchmarking analysis
discussed above and acknowledged the past services of
Mr. Larsen in connection with the merger and the increased
responsibilities of Mr. Larsen in performing the duties of
a principal executive officer of a fully-operating public
company following the merger. 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, has driven the
organizations performance, leading it from inception,
through the early
start-up
phase and through several rounds of financing. Mr. Larsen
will be critical to our ability to pursue our licensing strategy
going forward.
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. Slineys base salary, our
compensation committee primarily considered
Mr. Slineys 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.
49
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. No bonuses were paid
to Mr. Larsen or Mr. Sliney in the fiscal year 2008.
Long-Term
Incentive Program
In determining the amount of the stock option grants made to
Mr. Larsen and to Mr. Sliney in 2008, our compensation
committee evaluated data derived from the same benchmarking
analysis described above that was used to establish cash
compensation amounts.
In 2008, Mr. Larsen was not granted any 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 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 2008, Mr. Sliney was not granted any 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) of
Regulation S-K:
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Name & Principal Position
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Year
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($)
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($)
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($)
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($)(1)
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($)
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($)
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($)(2)
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($)
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Kendall Larsen
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2008
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275,000
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275,000
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|
Chief Executive Officer,
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2007
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245,000
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244,211
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1,015,612
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1,504,823
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President and Director
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2006
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237,039
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7,665
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244,704
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William E. Sliney
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2008
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98,442
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(3)
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98,442
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Chief Financial Officer
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2007
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36,460
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(4)
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15,313
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1,882,146
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1,933,919
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2006
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30,000
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30,000
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(1)
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The amounts in this column reflect
the estimated grant date present value of (1) $4.761 for
the stock options granted to Kendall Larsen during fiscal year
2007, and (2) $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 our
Form 10-K
for the period ended December 31, 2007, filed with the SEC
on March 31, 2008, identifies the assumptions made in the
valuation of option awards in accordance with SFAS 123(R).
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(2)
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The amounts in this column reflect
compensation earned by the Named Executive Officer for
consulting services he provided to the Company.
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(3)
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Mr. Slineys annual base
salary was decreased to $43,752 in June 2008 when increases in
our support staff, including the hiring of a corporate
controller, enabled Mr. Sliney to reduce his workload.
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(4)
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Mr. Sliney became our Chief
Financial Officer in October 2007 with an annual base
salary of $175,000. The salary earned by Mr. Sliney in 2007
reflects approximately three (3) months of service as our Chief
Financial Officer.
|
50
2008
Grants of Plan-Based Awards
The following table reflects that no grants of stock options
were made during the fiscal year ended December 31, 2008 to
our Named Executive Officers:
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Grant
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All Other
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Date
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Stock
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Exercise
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Fair
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Estimated Future Payouts
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Estimated Future Payouts
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All Other
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Awards:
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or Base
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Value of
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Under Non-Equity Incentive
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Under Equity Incentive
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Stock
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Number of
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Price of
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Stock or
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Plan Awards
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Plan Awards
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Awards:
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Securities
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Option
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Option
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Grant
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Approval
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Threshold
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Target
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Maximum
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Threshold
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Target
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Maximum
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Number of
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Underlying
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Awards
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Awards
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Name
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Date
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Date
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($)
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($)
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($)
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(#)(1)
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(#)
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(#)(1)
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Shares
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Options
|
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($/share)
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($)(2)
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Kendall Larsen
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n/a
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n/a
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n/a
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n/a
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n/a
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n/a
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n/a
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n/a
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|
|
n/a
|
|
|
|
n/a
|
|
Chief Executive Officer, President & Director
|
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|
William E. Sliney
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n/a
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n/a
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|
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n/a
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n/a
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n/a
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|
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|
n/a
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|
n/a
|
|
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|
n/a
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|
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|
n/a
|
|
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|
n/a
|
|
Chief Financial Officer
|
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|
(1)
|
|
Our equity incentive plan does not
include thresholds or maximums as defined in Item 402(d) of
Regulation S-K.
|
Outstanding
Equity Awards at 2008 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 2008:
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|
|
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|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable (#)
|
|
|
Unexercisable (#)
|
|
|
Options (#)
|
|
|
Price ($)
|
|
|
Date
|
|
|
Kendall Larsen
|
|
|
99,290
|
|
|
|
155,545
|
|
|
|
|
|
|
|
6.468
|
|
|
|
12/31/2012
|
(1)
|
Chief Executive Officer, President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Sliney
|
|
|
103,755
|
|
|
|
279,340
|
|
|
|
|
|
|
|
5.88
|
|
|
|
12/30/2017
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As Mr. Larsen is a holder of more than 10% of the
Companys equity, per our equity incentive plan, his
options expire five (5) years from grant. |
Option
Exercises and Stock Vested in Fiscal Year 2008
The following table shows the options exercised and stock vested
held by our Named Executive Officers in the fiscal year 2008:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Options Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
Acquired on
|
|
|
Value Realized
|
|
Name
|
|
Exercise (#)
|
|
|
on Exercise ($)
|
|
|
Vesting (#)
|
|
|
on Vesting ($)
|
|
|
Kendall Larsen
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Chief Executive Officer, President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Sliney
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
51
Pension
Benefits for Fiscal Year 2008
None. We do not maintain a pension plan as
such term is described in Item 402(h) of
Regulation S-K.
Nonqualified
Deferred Compensation for Fiscal Year 2008
None. We do not maintain a nonqualified
defined contribution or other nonqualified deferred compensation
plan as such term is described in Item 402(i) of
Regulation 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 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 at www.virnetx.com in the
Corporate Governance link under the
Investors tab.
The charter of our audit committee affirms that one of our audit
committees 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:
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|
|
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
December 31, 2008 beneficially owned approximately 5.14% of
our issued and outstanding shares of common stock. MDB Capital
Groups affiliates include Anthony DiGiandomenico and
Robert Levande, each of whom is one of our existing stockholders
as a result of the merger.
52
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 Corporations 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 security holders
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 (1) the date when all shares included in the
registration statement have been sold; (2) the date that
all shares can be sold pursuant to Rule 144; and
(3) one year from the effective date of such registration
statement.
Additionally, the Registration Rights Agreement provides the
security holders 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 security holders 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 security holder also has indemnified us, our directors,
officers, agents, and certain other control persons against
damages arising out of or based upon: (1) such security
holders failure to comply with the prospectus delivery
requirements of the Securities Act or (2) such security
holders 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 security holders 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 a
lock-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 stock or any securities convertible into or
which may be exercised to purchase any shares of our common
stock acquired in connection with the merger for a period of at
least 12 months after the consummation of the merger. That
lock-up
agreement expired on July 5, 2008. In addition, all of our
officers and directors, as well as certain of our stockholders,
entered into a
lock-up
agreement with the underwriter of our December 2007 public
offering, which restricts sales of their shares until
December 31, 2008. Certain of those shares are now no
longer subject to the transfer restrictions of such
underwriters
lock-up
agreement from our December 2007 offering. Only shares
beneficially owned by our directors and officers, which
53
represent 26.16% of our outstanding common stock as of
December 31, 2008, currently remain subject to the
provisions of such underwriters
lock-up
agreement.
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. Russells historical compensation from VirnetX
Holding Corporation in his capacity as its Chief Executive
Officer prior to the merger has been disclosed in VirnetX
Holding Corporations 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 December 31, 2008:
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San Gabriel Fund, LLC
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JMW Fund, LLC
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John P. McGrain
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The John P. McGrain Grantor Retained Annuity Trust u/t/d/
June 25, 2007
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John P. McGrain, SEP IRA
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John P. McGrain, 401K
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The Westhampton Special Situations Fund, LLC
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The Kirby Enterprise Fund, LLC
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Kearney Properties, LLC
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Kearney Holdings, LLC
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Charles F. Kirby, Roth IRA
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Charles F. Kirby
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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
54
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.
Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of our
common stock as of December 31, 2008 by:
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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;
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each director;
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each of our Named Executive Officers in the table under
Executive Compensation Summary Compensation
Table; and
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all current directors and executive officers as a group.
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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
December 31, 2008. Options to purchase shares of our common
stock that are exercisable within 60 days of
December 31, 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 persons number of shares owned or
ownership percentage.
55
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 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.
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Number of
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Shares
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Percent
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Beneficially
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of
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Name and Address of Beneficial Owner
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Owned(l)
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Class(2)
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5% or Greater Stockholders:
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Gregory Hugh Bailey
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2,343,342
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(10)
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6.71
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%
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15 Barbery Place, Suite 809
Toronto, Canada
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Kendall Larsen
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8,402,482
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(3)
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24.01
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%
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Robert M. Levande
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2,084,101
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(4)
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5.97
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%
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575 Madison Ave. Suite 1006
New York, NY 10022
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Blue Screen LLC
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1,764,428
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(5)
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5.06
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%
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7663 Fisher Island Drive
Miami, Florida 33109
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Christopher A. Marlett Living Trust
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1,792,766
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(6)
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5.14
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%
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420 Wilshire Boulevard,
Suite 1020
Santa Monica, California 90401
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Directors and Executive Officers:
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Kendall Larsen
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8,402,482
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(3)
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24.01
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%
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Edmund C. Munger
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760,200
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(7)
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2.14
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%
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William E. Sliney
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103,921
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(8)
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*
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Thomas M. OBrien
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25,833
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(9)
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*
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Michael F. Angelo
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67,349
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(9)
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*
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Scott C. Taylor
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25,833
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(9)
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*
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All directors and executive officers as a group
(6 persons):
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9,385,618
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(3)(7)(8)(9)
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26.16
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%
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(1) |
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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 December 31, 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. |
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(2) |
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Based upon 34,899,985 shares of common stock issued and
outstanding on December 31, 2008. |
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(3) |
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Includes 99,290 shares issuable pursuant to options
exercisable within 60 days. |
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(4) |
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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. |
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(5) |
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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. |
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(6) |
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Christopher A. Marlett has voting and investment power with
respect to the 1,792,766 shares held by the Christopher A.
Marlett Living Trust. |
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(7) |
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Includes 691,933 shares issuable pursuant to options
exercisable within 60 days. |
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(8) |
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Includes 103,755 shares issuable pursuant to options
exercisable within 60 days. |
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(9) |
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Includes 25,833 shares issuable pursuant to options
exercisable within 60 days. |
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(10) |
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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. |
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(*) |
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Less than 1%. |
56
CORPORATE
GOVERNANCE
Our Corporate Governance Guidelines
Our Board of Directors has established guidelines that it
follows in matters of corporate governance. The following is a
summary of those guidelines. A complete copy of the documents
underlying our guidelines is available online at www.virnetx.com
in the Corporate Governance link under the
Investors tab, or in paper form upon request to our
corporate secretary.
Role of
the Board
Our directors are appointed to oversee the actions and results
of our management. They were selected for their educational
background, professional experience, knowledge of our business,
integrity, professional reputation, independence, wisdom and
ability to represent the best interests of our stockholders.
Their responsibilities include:
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providing general oversight of the business;
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approving corporate strategy;
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approving major management initiatives;
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providing oversight of legal and ethical conduct;
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overseeing our management of significant business risks;
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selecting, compensating, and evaluating directors;
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evaluating Board processes and performance; and
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reviewing and implementing recommendations and reports of the
compensation committee on our compensation practices.
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Composition
of the Board of Directors
Mix of
Independent Directors and
Officer-Directors
Our Board has determined that it is beneficial for us and our
stockholders to have a Board with a majority of independent
directors and for our chief executive officer to also be a Board
member. Other officers may, from time to time, be Board members,
but no officer other than the chief executive officer should
expect to be elected to our Board by virtue of his or her office.
Selection
of Director Candidates
Our Board is responsible for selecting candidates for Board
membership and for establishing the criteria to be used in
identifying potential candidates. Our Board delegates the
screening process to the nominating and corporate governance
committee.
Independence
Determinations
Our Board annually determines the independence of directors
based on a review by the directors and the nominating and
corporate governance committee. No director is considered
independent unless our Board has determined that he or she has
no material relationship with the Company, either directly or as
a partner, stockholder, or officer of an organization that has a
material relationship with the Company.
We have adopted the following standards for director
independence in compliance with the American Stock Exchange and
Item 407 of
Regulation S-Ks
corporate governance listing standards:
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no director qualifies as independent if such person
has a relationship which, in the determination of at least a
majority of the Board, would interfere with exercise of
independent judgment in carrying out the responsibilities of a
director;
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57
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a director who is an officer or employee of us or our
subsidiaries, or one whose immediate family member is an
executive officer of us or our subsidiaries, is not
independent until three years after the end of such
employment relationship;
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a director who accepts, or whose immediate family member
accepts, more than $100,000 in compensation from us or any of
our subsidiaries during any period of 12 consecutive months
within the three years preceding the determination of
independence, other than certain permitted payments such as
compensation for Board or Board committee service, payments
arising solely from investments in our securities, compensation
paid to a family member who is a non-executive employee of us or
a subsidiary of ours, or benefits under a tax-qualified
retirement plan is not considered independent;
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a director who is, or who has a family member who is, a partner
in, or a controlling stockholder or an executive officer of, any
organization to which we made, or from which we received,
payments for property or services that exceed 5% of the
recipients consolidated gross revenues for that year, or
$200,000, whichever is more, is not independent
until three years after falling below such threshold;
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a director who is employed, or one whose immediate family member
is employed, as an executive officer of another company where
any of our, or any of our subsidiaries, present executives
serve on that companys compensation committee is not
independent until three years after the end of such
service or employment relationship; and
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a director who is, or who has a family member who is, a current
partner of our independent registered public accounting firm,
Farber Hass Hurley LLP, or was a partner or employee of Farber
Hass Hurley LLP who worked on our audit is not
independent until three years after the end of such
affiliation or employment relationship.
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Our Board has determined that Michael F. Angelo, Thomas M.
OBrien and Scott C. Taylor meet the aforementioned
independence standards. There are no family relationships among
any of our directors or executive officers.
Director
Compensation and Equity Ownership
Our compensation committee annually reviews director
compensation. Any recommendations for changes are made to our
full Board by our compensation committee.
In order to align directors incentives with the creation
of stockholder value, we believe that directors should hold
meaningful equity ownership positions in the Company;
accordingly, a significant portion of overall director
compensation is in the form of equity of the Company.
Board
Meetings and Committees and Annual Meeting Attendance
Our Board held a total of nine meetings and acted by written
consent four times during the calendar year ended
December 31, 2008. Mr. OBrien attended eight out
of the nine Board meetings; otherwise, every director has
attended every Board meeting and the meetings of all committees
to which he is a member. Since June 29, 2007, our Board had
a standing audit committee, compensation committee and
nominating and corporate governance committee. Our audit
committee charter, compensation committee charter, and
nominating and corporate governance committee charter, each as
adopted by the Board, are posted on our website at
www.virnetx.com in the Corporate Governance link
under the Investors tab.
We encourage, but do not require, our Board members to attend
our annual meetings of stockholders. We expect all Board members
to be present at this Annual Meeting.
Stockholders
Communications Process
Any of our stockholders who wish to communicate with our Board,
a committee of our Board, our non-management directors as a
group, or any individual member of our Board, may send
correspondence to our
58
Corporate Secretary at VirnetX Holding Corporation, 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066.
Our Corporate Secretary will compile and submit on a periodic
basis all stockholder correspondence to our entire Board, or, if
and as designated in the communication, to a committee of our
Board, our non-management directors as a group, or an individual
Board member. The independent directors of our Board review and
approve the stockholders communications process
periodically to ensure effective communication with stockholders.
Code of
Ethics
We have adopted a Code of Ethics for all employees and directors
to prohibit conflicts of interest between our employees and the
Company. A copy of our Code of Ethics is available on our
website at
http://www.virnetx.com/
in the Corporate Governance link under the
Investors tab, or by writing to us at VirnetX
Holding Corporation, 5615 Scotts Valley Drive, Suite 110,
Scotts Valley, California 95066, Attention: Investor Relations.
We intend to post on our website any amendment to, or waiver
from, a provision of our Code of Ethics within four
(4) business days following the date of such amendment or
waiver. We do not anticipate any such amendments or waivers.
Committees
of the Board of Directors
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Nominating
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and
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Corporate
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Governance
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Compensation
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Audit
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Director
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|
Committee
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Committee
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Committee
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Michael F. Angelo
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Chair
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X
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X
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Kendall Larsen
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Edmund C. Munger
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Thomas M. OBrien
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X
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X
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Chair
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Scott C. Taylor
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X
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Chair
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X
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Nominating
and Corporate Governance Committee Matters
Membership
and Independence
Our nominating and corporate governance committee met once
during the fiscal year ended December 31, 2008.
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our nominating and
corporate governance committee. Mr. Angelo is the chairman
of our nominating and corporate governance committee. Our Board
has determined that each of Messrs. Angelo, OBrien
and Taylor meet current SEC and American Stock Exchange
requirements for independence. The nominating and corporate
governance committee is responsible for, among other things:
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assisting our Board in identifying prospective director nominees
and recommending to the Board director nominees for each annual
meeting of stockholders, vacancy or newly created director
position;
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developing and recommending to our Board governance principles
applicable to us, including the Code of Ethics;
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overseeing the evaluation of our Board and management; and
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delegating such of its authority and responsibilities as it
deems proper to members of the committee or a subcommittee.
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59
A more detailed description of our nominating and corporate
governance committees functions can be found in our
nominating and corporate governance committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Stockholder
Recommendations and Nominees
The policy of our nominating and corporate governance committee
is to consider properly submitted recommendations for candidates
to our Board from stockholders. In evaluating such
recommendations, our nominating and corporate governance
committee seeks to achieve a balance of experience, knowledge,
integrity, and capability on our Board and to address the
membership criteria set forth under Director
Qualifications below. Any stockholder recommendations for
consideration by our nominating and corporate governance
committee should include the candidates name, biographical
information, information regarding any relationships between the
candidate and the Company within the last three years, at least
three personal references, a statement of recommendation of the
candidate from the stockholder, a description of Common Stock
beneficially owned by the stockholder, a description of all
arrangements between the candidate and the recommending
stockholder and any other person pursuant to which the candidate
is being recommended, a written indication of the
candidates willingness to serve on our Board, and a
written indication to provide such other information as the
nominating and corporate governance committee may reasonably
request.
Stockholder recommendations to our Board should be sent to our
Corporate Secretary at VirnetX Holding Corporation, 5615 Scotts
Valley Drive, Suite 110, Scotts Valley, California 95066.
Director
Qualifications
Our nominating and corporate governance committee evaluates and
recommends candidates for membership on our Board consistent
with criteria established by the committee. Our nominating and
corporate governance committee has not formally established any
specific, minimum qualifications that must be met by each
candidate for our Board or specific qualities or skills that are
necessary for one or more of the members of our Board to
possess. However, our nominating and corporate governance
committee, when considering a potential non-incumbent candidate,
will factor into its determination the following qualities of a
candidate: educational background, professional experience,
including whether the person is a current or former chief
executive officer or chief financial officer of a public company
or the head of a division of a large international organization,
knowledge of our business, integrity, professional reputation,
independence, wisdom and ability to represent the best interests
of our stockholders.
Identification
and Evaluation of Nominees for Directors
Our nominating and corporate governance committee uses a variety
of methods for identifying and evaluating nominees for director.
Our nominating and corporate governance committee regularly
assesses the appropriate size and composition of our Board, the
needs of our Board and the respective committees of our Board
and the qualifications of candidates in light of these needs.
Candidates may come to the attention of the nominating and
corporate governance committee through stockholders, management,
current members of our Board, or search firms. The evaluation of
these candidates may be based solely upon information provided
to the committee or may also include discussions with persons
familiar with the candidate, an interview of the candidate, or
other actions the committee deems appropriate, including the use
of third parties to review candidates.
Audit
Committee Matters
Membership
and Independence
Our audit committee met eight times during the fiscal year ended
December 31, 2008.
60
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our audit committee.
Mr. OBrien is the chairman of our audit committee.
Our Board has determined that Messrs. Angelo, OBrien
and Taylor each satisfy the requirements for independence under
the rules and regulations of the American Stock Exchange and the
SEC. Our Board has also determined that Mr. OBrien
qualifies as an audit committee financial expert as
defined in the SEC rules and satisfies the financial
sophistication requirements of the American Stock Exchange. Our
audit committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended, or the Exchange Act.
Responsibilities
Our audit committees responsibilities include the
following:
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appointment of and approval of compensation for our independent
public accounting firm, including oversight of its independence;
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oversight of our accounting and financial reporting processes;
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oversight of the audits of our financial statements;
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oversight of the effectiveness of our internal control over
financial reporting; and
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preparing the audit committee report that the SEC requires in
our annual proxy statement.
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A more detailed description of our audit committees
functions can be found in our audit committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Compensation
Committee Matters
Membership
and Independence
Messrs. Angelo, OBrien and Taylor, each of whom is a
non-employee member of our Board, comprise our compensation
committee. Mr. Taylor is the chairman of our compensation
committee. Our Board has determined that each member of our
compensation committee meets the requirements for independence
under the rules of the American Stock Exchange, and is a
non-employee director within the meaning of the
Exchange Act, and is an outside director, within the
meaning of the Code.
Scope
of Authority
Our compensation committees responsibilities include the
following:
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exclusive authority for determining our chief executive
officers compensation;
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determining for other executive officers: annual base salary,
annual incentive bonus, including the specific goals and amount,
equity compensation, employment agreements, severance
arrangements and change in control agreements/provisions, and
any other benefits or compensation arrangement, including
delegating its authority on these matters with regard to our
non-officer employees and consultants to appropriate supervisory
personnel;
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evaluating and recommending to our Board compensation plans,
policies, and programs for our chief executive officer and other
executive officers;
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administering our equity incentive plans; and
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preparing the compensation committee report that the SEC
requires in our annual proxy statement.
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Except with respect to determining the chief executive
officers compensation, the Committee may delegate its
authority to a subcommittee of the committee and, to the extent
permitted by applicable law, the
61
committee may delegate to officers or appropriate supervisory
personnel the authority to grant stock awards to non-executive,
non-director
employees.
A more detailed description of our compensation committees
functions can be found in our compensation committee charter at
www.virnetx.com in the Corporate Governance link
under the Investors tab, or by writing to us at
VirnetX Holding Corporation, 5615 Scotts Valley Drive,
Suite 110, Scotts Valley, California 95066, Attention:
Investor Relations.
Our
Compensation Committees Processes and
Procedures
Our compensation committees primary processes for
establishing and overseeing executive compensation include:
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Meetings. Our compensation committee acted by
written consent one time during the fiscal year ended
December 31, 2008; and
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Role of executive officers. 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.
|
Directors compensation is established by our Board upon
the recommendation of our directors and our compensation
committee.
Compensation
Committee Interlocks and Insider Participation
None of Messrs. Angelo, OBrien and Taylor, who
comprise our compensation committee, has served as one of our
officers or employees in the past year. Other than our
subsidiaries, no executive officer currently serves, or in the
past year has served, as a member of a board or compensation
committee of another entity where that entitys executive
officer serves on our Board or compensation committee.
62
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 December 31, 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
Our Certificate of Incorporation authorizes the issuance of
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,
without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting, or other rights which
could adversely affect the voting power or other rights of the
holders of the common stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in
control of the Company.
The descriptions of our common stock and preferred stock above
are only summaries and are qualified in their entirety by the
provisions of our Certificate of Incorporation and By-Laws,
copies of which are attached or referenced as exhibits to the
registration statement of which this prospectus forms a part.
Warrants
Issued in Previous Securities Offerings
On a post-split basis, warrants for the issuance of
266,667 shares of our common stock were issued in July 2007
and exercisable at $0.75 per share. 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.
In addition, 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. These warrants provide
for anti-dilution protection in the event of stock splits and
dividends.
Warrants
to be Issued as Part of this Offering
We are offering three types of warrants in this offering:
warrants to purchase 1,500,000 shares of our common stock at an
exercise price of $2.00 per share; warrants to purchase
1,500,000 shares of our common stock at an exercise price of
$3.00 per share; and warrants to purchase 1,500,000 shares of
our common stock at an exercise price of $4.00 per share. We
refer to the three types of warrants, collectively, as the
warrants. The warrants will be issued in registered form under a
warrant agency agreement between Corporate Stock Transfer, Inc.,
as warrant agent, and us. Each form of warrant issued pursuant
to this offering is an exhibit to
63
the warrant agency agreement. You should review a copy of the
warrant agency agreement, which has been filed as an exhibit to
the registration statement of which this prospectus is a part,
for a complete description of the terms and conditions
applicable to the warrants. The following is a brief summary of
the warrants and is subject in all respects to the provisions
contained in the warrants.
Each warrant represents the right to purchase 0.5 additional
shares of our common stock at an exercise price equal to either
$2.00, $3.00, or $4.00, subject to adjustment as described
below, and depending on the particular warrant. Each warrant may
be exercised on or after the applicable closing date of this
offering through and including the
18-month
anniversary of the first closing date. The warrants may be
exercised by surrendering to the warrant agent the warrant
certificate evidencing the warrants to be exercised with the
accompanying exercise notice, appropriately completed, duly
signed and delivered, together with cash payment of the exercise
price.
Upon surrender of the warrant certificate, with the exercise
notice appropriately completed and duly signed and cash payment
of the exercise price, on and subject to the terms and
conditions of the warrant, we will deliver or cause to be
delivered, to or upon the written order of such holder, the
number of whole shares of common stock to which the holder is
entitled, which shares may be delivered in book-entry form. If
less than all of the warrants evidenced by a warrant certificate
are to be exercised, a new warrant certificate will be issued
for the remaining number of warrants.
Holders of warrants will be able to exercise their warrants only
if a registration statement relating to the shares of common
stock underlying the warrants is then in effect, or the exercise
of such warrants is exempt from the registration requirements of
the Securities Act. A holder of a warrant also will be able to
exercise warrants only if the shares of common stock underlying
the warrant are qualified for sale or are exempt from
qualification under the applicable securities or blue sky laws
of the states in which such holder (or other persons to whom it
is proposed that shares be issued on exercise of the warrants)
reside.
All warrants will include a company call feature that will give
the company the right to require the holder of the warrant to
exercise the warrant when the Companys average closing
stock price on the American Stock Exchange, or any successor
national securities exchange thereto, equals or exceeds two
times the applicable warrants purchase price on any five
consecutive trading days.
The exercise price and the number of shares underlying the
warrants are subject to appropriate adjustment in the event of
stock splits, stock dividends on our common stock, stock
combinations or similar events affecting our common stock. In
addition, in the event we consummate any merger, consolidation,
sale or other reorganization event in which our common stock is
converted into or exchanged for securities, cash or other
property or we consummate a sale of substantially all of our
assets, then following such event, the holders of the warrants
will be entitled to receive upon exercise of the warrants the
kind and amount of securities, cash or other property which the
holders would have received had they exercised the warrants
immediately prior to such reorganization event.
No fractional shares of common stock will be issued in
connection with the exercise of a warrant. In lieu of fractional
shares, we will round up such fractional interest to the next
whole share. A warrant may be transferred by a holder without
our consent, upon surrender of the warrant to us, properly
endorsed (by the holder executing an assignment in the form
attached to the warrant). The warrants will not be listed on any
securities exchange or automated quotation system and we do not
intend to arrange for any exchange or quotation system to list
or quote the warrants.
Anti-Takeover
Effects of Delaware Law, our Certificate of Incorporation and
our By-Laws
We have a number of protective provisions that could delay,
discourage or prevent a third party from acquiring the company
without the approval of our Board of Directors. Our protective
provisions include:
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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 the Board of
Directors since it will
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take two annual meetings to effectively replace at least three
directors which represents a majority of the Board of Directors;
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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 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
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 will have the ability to do so in the
future very rapidly and without stockholder approval;
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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;
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Elimination of stockholder actions by written
consent: This has the effect of eliminating the
ability of a stockholder or a group of stockholders representing
a majority of the outstanding shares to 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;
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Super majority requirement for stockholder amendments to the
By-laws: Our By-laws may be altered or amended or
new By-laws adopted by the affirmative vote of at least
662/3%
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; and
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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 shares, may need to wait for
the annual meeting before nominating directors or raising other
business proposals to be voted on by the stockholders.
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Transfer
Agent, Registrar and Warrant Agent
The transfer agent and registrar for our common stock and
warrant agent for our warrants sold in this offering is
Corporate Stock Transfer, Inc. of Denver, Colorado.
65
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock was previously traded in the over-the-counter
market on the Nasdaq OTC Bulletin Board under the symbols
VNXH and prior to that PASW. On
December 26, 2007, our common stock began trading on the
AMEX under the symbol VHC. The following table shows
the price range of our common stock, as reported on the OTC
Bulletin Board and on the American Stock Exchange for each
quarter ended during the last two fiscal years and the first
three quarters of fiscal 2008 on a post-split basis.
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Quarter Ended
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High
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Low
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3/31/06
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$
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0.60
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$
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0.36
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6/30/06
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$
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0.53
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$
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0.21
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9/30/06
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$
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0.50
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$
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0.30
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12/31/06
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$
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0.90
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$
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0.36
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3/31/07
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$
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5.97
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$
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0.63
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6/30/07
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$
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5.10
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$
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3.36
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9/30/07
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$
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5.10
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$
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3.96
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12/31/07
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$
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6.75
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$
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4.08
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3/31/08
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$
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6.95
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$
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4.26
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6/30/08
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$
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7.06
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$
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3.50
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9/30/08
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$
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7.06
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$
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1.26
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12/31/08
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$
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2.85
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$
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0.89
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Holders
As of December 31, 2008, there were 96 holders of record of
our common stock.
Dividends
We have not paid any cash dividends on our common stock, and do
not anticipate paying cash dividends in the foreseeable future.
Our current policy is to retain earnings, if any, to fund
operations, and the development and growth of our business. Any
future determination to pay cash dividends will be at the
discretion of our Board of Directors and will be dependent upon
our financial condition, operation results, capital
requirements, applicable contractual restrictions, restrictions
in our organizational documents, and any other factors that our
Board of Directors deems relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
On April 17, 1998, when we operated under the name PASW,
Inc., we adopted an equity incentive program. Under this
program, we may grant incentive stock options, non-statutory
stock options, stock appreciation rights, stock bonuses and
rights to acquire restricted stock to employees, directors and
consultants (except for incentive stock options which may only
be granted to employees). The number of shares of common stock
initially reserved for issuance under this program was
150,580 shares post-split. As of September 30, 2008,
there were no outstanding options or rights under this program
and we dont intend to grant any equity incentives in the
future under this plan.
In connection with the merger between VirnetX Holding
Corporation and VirnetX, our Board of Directors approved our
adoption of the VirnetX 2005 Stock Plan, as amended, to cover
grants of stock options and restricted stock units to our
employees and consultants. Our Board of Directors renamed this
stock plan the VirnetX 2007 Stock Plan. The total number of
shares of our common stock reserved for issuance under the
VirnetX 2007 Stock 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 2007 Stock Plan at our 2008 annual
stockholders meeting.
66
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 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 Microsofts 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 Microsofts 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
as a plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
Except for those filing that are under seal because
they contain confidential information, filings made by the
parties to the United States District Court of the Eastern
District of Texas, Tyler Division in connection with this
lawsuit are publicly available, after registration and payment
of a fee, on the Public Access to Court Electronic Records, or
PACER, website. In order to review such filings made in
connection with this lawsuit, please follow the following
instructions:
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Go to www.pacer.uscourts.gov
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Click Register for PACER and register
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On PACER Web Links page, scroll down and click Texas
Eastern District Court
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Click Court Information
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Click Reports at top of page
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Click Docket Sheet
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Enter 6:07-cv-80 in case number box
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Click Run Report
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Notwithstanding anything to the contrary set forth in any of
the Companys filings under the Securities Act of 1933 or
the Securities Exchange Act of 1934 that might incorporate
future filings, including this registration statement, of which
this prospectus forms a part, in whole or in part, the
information set forth on the Public Access to Court Electronic
Records, or PACER, website shall not be deemed to be a part of
or incorporated by reference into any such filings. The Company
does not warrant the accuracy or completeness of the PACER
website, or the adequacy of the PACER website and expressly
disclaims liability for errors or omissions on such website.
Because we have determined that Microsofts 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
67
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 the
Risk Factors section of this prospectus.
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
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 in connection with various actions, suits or
proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the right of the
corporation, a derivative action, if they acted in good faith
and in a manner they 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 their conduct was unlawful. A similar standard
is applicable in the case of derivative actions, except that
indemnification only extends to expenses including
attorneys fees incurred in connection with the defense or
settlement of such actions, and the statute requires court
approval before there can be any 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
corporations certificate of incorporation, bylaws,
agreement, a vote of stockholders or disinterested directors or
otherwise.
Our Certificate of Incorporation provides that we will indemnify
and hold harmless, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as
amended from time 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:
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any breach of the directors duty of loyalty to the
corporation or its stockholders;
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
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any transaction from which the director derived an improper
personal benefit.
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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 prospective 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.
68
UNDERWRITING
Subject to the terms and conditions of an underwriting
agreement, Gilford Securities Incorporated has agreed to
purchase 3,000,000 shares of common stock, warrants to
purchase 1,500,000 shares at an exercise price of $2.00 per
share, warrants to purchase 1,500,000 shares at an exercise
price of $3.00 per share and warrants to purchase 1,500,000
shares at an exercise price of $4.00 per share from us. The
underwriting agreement will provide that our underwriter is
committed to purchase all shares and associated warrants offered
in this offering, other than those covered by the over-allotment
option described below. In the underwriting agreement, our
underwriters obligations are subject to approval of
certain legal matters by their counsel, including, without
limitation, the authorization and validity of the securities
offered hereby, and of various other customary conditions,
representations and warranties contained in the underwriting
agreement, such as receipt by our underwriter of officers
certificates and legal opinions of our counsel.
The shares of common stock sold in this offering will be listed
on the American Stock Exchange, subject to notice of issuance.
We do not intend to apply for listing of the warrants offered in
this offering on any securities exchange.
Commissions
and Discounts
Our underwriter has advised us that it proposes to offer the
shares and associated warrants directly to the public at the
price set forth on the cover page of this prospectus, and to
certain dealers that are members of the Financial Industry
Regulatory Authority, Inc., or FINRA, at such price less a
concession not in excess of $ per
share and associated warrants. Our underwriter may allow, and
the selected dealers may reallow, a concession not in excess of
$ per share and associated
warrants to certain brokers and dealers. After the offering, the
offering price and concessions and discounts to brokers and
dealers and other selling terms may from time to time be changed
by our underwriter.
We have agreed to pay our underwriter a cash payment of 7% of
the aggregate public offering price of the shares and associated
warrants offered (including any shares and associated warrants
offered upon exercise of the over-allotment option). We have
agreed to pay our underwriter up to $35,000 as a reimbursement
for our underwriters travel, due diligence and other road
show expenses and expenses incurred by the underwriters
counsel. In addition, we have paid approximately $186,000 in
fees and expenses of our underwriters outside legal
counsel for services performed as placement agents counsel
for a best-efforts placement of equity securities by us that we
did not pursue.
The following table sets forth the public offering price and
underwriting discount to be paid by us to our underwriter and
the proceeds, before expenses, to us. The underwriting agreement
between the underwriter and us has been filed as an exhibit to
the registration statement filed with the SEC in connection with
this offering. This information assumes either no exercise or
full exercise by our underwriter of its over-allotment option.
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Per Share and
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Associated
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Without
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With
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Warrants
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Option(1)
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Option
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Public offering price
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$
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$
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$
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Discount
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$
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$
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$
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Proceeds before expenses(2)
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$
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$
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$
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We have granted our underwriter an option, exercisable for
45 days after the date of this prospectus, to purchase a
number of shares of common stock and associated warrants equal
to 15% of the number of shares and associated warrants sold in
this offering by us solely to cover over-allotments, if any, at
the same price as the initial shares and associated warrants
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The offering expenses are estimated to be $1,239,679. |
69
Underwriter
Warrants
In addition, we have agreed pursuant to the terms and conditions
of an underwriters warrant agreement to issue to our
underwriter at the closing of this offering, for nominal
consideration, warrants to purchase 300,000 shares of common
stock (representing a number of shares of common stock equal to
10% of the number of shares sold in this offering), exclusive of
the over-allotment option. These warrants will be exercisable
for a four year period commencing on the first anniversary of
the closing date of this offering at an exercise price equal to
120% of the price of our common stock offered by this
prospectus, or $ per share. These
warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of one year from the closing of this
offering by our underwriter, except to officers of our
underwriter and broker-dealers participating in this offering
and their bona fide officers and partners, by operation of law
or by reason of our reorganization. The FINRA views these
warrants as underwriting compensation and requires that the
warrants be locked up for 180 days following the
effectiveness of this offering pursuant to FINRA Conduct
Rule 2710 (g)(1).
Our underwriter has been granted certain demand and piggyback
registration rights under these warrants, which rights will
expire on the fifth and seventh anniversaries, respectively, of
the effective date of the registration statement of which this
prospectus is a part.
These warrants contain provisions for appropriate adjustment in
the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar
transaction. The warrants do not entitle our underwriter or a
permissible transferee to any rights as a shareholder until the
warrants are exercised and shares of our common stock are
purchased pursuant to the exercise of the warrants.
These warrants and the shares of our common stock issuable upon
their exercise may not be offered for sale except in compliance
with the applicable provisions of the Securities Act of 1933, as
amended. We are registering the shares of our common stock
issuable upon exercise of the warrants in the registration
statement of which this prospectus forms a part.
Electronic
Distribution; Directed Share Program
Our underwriter has advised us that it will not engage in any
electronic offer, sale or distribution of our shares. Neither we
nor our underwriter will use any third party to host or provide
access to our preliminary prospectus on the Internet.
We will not have a directed share program for our employees or
any others.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit our underwriter from bidding for and purchasing our common
stock. In connection with this offering, however, our
underwriter may engage in stabilizing transactions,
over-allotment transactions, covering transactions and penalty
bids in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by our underwriter of shares and
associated warrants in excess of the number of shares and
associated warrants our underwriter is obligated to purchase,
which creates a short position. The short position may be either
a covered short position or a naked short position. In a covered
short position, the number of shares and associated warrants
over-allotted by our underwriter is not greater than the number
of shares and associated warrants that it may purchase in the
over-allotment option. In a naked short position, the number of
shares and associated warrants involved is greater than the
number of shares and associated warrants in the over-allotment
option. Our underwriter may close out any covered short position
by either exercising its over-allotment option or purchasing
shares in the open market.
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Covering transactions involve the purchase of common stock in
the open market after the distribution has been completed in
order to cover short positions. In determining the source of
shares to close out the short position, our underwriter will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which it
may purchase shares through the over-allotment option. If our
underwriter sells more shares than could be covered by the
over-allotment option (a naked short position) the position can
only be closed out by buying shares in the open market. A naked
short position is more likely to be created if our underwriter
is concerned that there could be downward pressure on the price
of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
|
|
|
|
Penalty bids permit our underwriter to reclaim a selling
concession from a selected dealer when the common stock
originally sold by the selected dealer is purchased in a
stabilizing covering transaction to cover short positions.
|
These stabilizing transactions, covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our common stock or preventing or retarding a
decline in the market price of our common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. Neither we nor our
underwriter makes any prediction or any representation as to the
direction or magnitude of any effect that the transactions
described above may have on the price of our common stock.
Neither we nor our underwriter makes any representation that our
underwriter will engage in these transactions. These
transactions may be effected on the American Stock Exchange or
otherwise and, if commenced, may be discontinued without notice
at any time.
Lock-Up
Arrangements
We and each of our executive officers and directors have agreed
to lock-up
provisions regarding future transfers or sales of our equity
securities for a period of 90 days after this offering,
subject to extension in certain circumstances, as described in
our agreement with the underwriter.
Our officers and directors who beneficially own
9,130,097 shares of common stock, including
716,956 shares issuable upon exercise of stock options,
have agreed with our underwriter not to sell their shares of
common stock for 90 days from the closing of this offering
without the written consent of our underwriter. Following the
expiration of the
lock-up
agreement with our underwriter, shares of our common stock held
beneficially by our officers and directors will remain subject
to holding period restrictions on sale or other transfer under
Rule 144 of the Securities Act.
Our underwriter has no present intention to waive or shorten the
lock-up
period. The granting of any waiver of release would be
conditioned, in the judgment of our underwriter, on such sale
not materially adversely impacting the prevailing trading market
for our common stock on the American Stock Exchange.
Specifically, factors such as average trading volume, recent
price trends and the need for additional public float in the
market for our common stock would be considered in evaluating
such a request to waive or shorten the lockup period.
Indemnification
We have agreed to indemnify our underwriter and its controlling
persons against specified liabilities, including liabilities
under the Securities Act or to contribute to payments that our
underwriter may be required to make for such liabilities.
However, we have been advised that in the opinion of the SEC,
indemnification for liabilities arising under the Securities Act
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
LEGAL
MATTERS
The validity of the offered securities 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
71
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. Certain legal
matters will be passed upon for the underwriter by DLA Piper LLP
(US), East Palo Alto, California and New York, New York.
EXPERTS
The consolidated financial statements of VirnetX Holding
Corporation as of and for 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. The financial statements
of VirnetX, Inc. as of December 31, 2006 and 2005 and for
the year ended December 31, 2006 and the period from
August 1, 2005 (date of inception) to December 31,
2005 included in the prospectus have been included in reliance
upon such report given upon the authority of Burr,
Pilger & Mayer LLP as experts in auditing and
accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1
with the SEC of which this prospectus is a part under the
Securities Act with respect to the offered securities. This
prospectus does not contain all of the information included in
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
offered securities covered by this prospectus, you should read
the registration statement including its exhibits.
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 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 directors 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.
72
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.
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.
73
FINANCIAL
STATEMENTS
Financial
Statements Index
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Page
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F-2
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F-3
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F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-22
|
|
|
|
|
F-23
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|
|
|
|
F-24
|
|
|
|
|
F-25
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board 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
Companys 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 Companys 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 Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America (United
States) and in accordance with the auditing standards of the
Public 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 the
1-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)
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Cumulative from
|
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
August 2, 2005
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
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
|
|
Selling, general and administrative
|
|
|
8,040,894
|
|
|
|
853,488
|
|
|
|
826,478
|
|
|
|
9,720,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
During
|
|
|
Total
|
|
|
|
Series A Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Due from
|
|
|
Development
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholder
|
|
|
Stage
|
|
|
Equity (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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2005
|
|
|
August 2, 2005
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
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 stockholders
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Note 1
|
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.
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, 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. from August 2, 2005 to
December 31, 2007 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
applicable 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 patent and technology
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
F-8
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and 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 remaining estimated useful lives, which range from 3 to
16 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.
F-9
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 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, or 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, or
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 Consensus
No. 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, or Basic EPS, and
diluted earnings per share, or 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.
F-10
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
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
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 EITF
No. 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 ratified
EITF 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. EITF
No. 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, or SFAS No. 161. SFAS No. 161
requires enhanced disclosures about an entitys 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 entitys 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.
F-11
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
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 ten issued U.S. and 8
issued foreign technology related patents, in addition to
pending U.S. and foreign patent applications. The term of
our issued U.S. and foreign patents runs through the period
2019 to 2024. 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. SAIC is entitled to receive a portion of the
proceed revenues, monies or any form of consideration paid for
the acquisition of VirnetX 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 accrue 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.
F-12
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
We lease our office facility under a non-cancelable operating
lease that expires in August 2012.
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, 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 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, 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 of 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.
F-13
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares
|
|
|
|
|
|
Weighted
|
|
|
|
Available
|
|
|
Number of
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Stock-Based Compensation by Type 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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, 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 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.
The following table summarizes activity under the equity
incentive plans for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
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
|
|
|
$
|
11,961,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value is calculated at the difference between the
market price of the Companys stock on the last trading day
of the year ($5.88) 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.
F-15
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Range of
|
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life (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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,635,262
|
|
|
|
1,868,218
|
|
|
|
|
|
|
|
|
|
|
Our Amended and Restated Certificate of Incorporation, as
amended in October 2007, authorizes us to issue
10,000,000 shares of $0.0001 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
F-16
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
December 31, 2007. All of the VirnetX, Inc. preferred stock
converted into VirnetX, Inc. common stock on a
1-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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Shares
|
|
|
Shares
|
|
Series
|
|
Date Issued
|
|
Issue Price
|
|
|
Authorized
|
|
|
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, until the holders of a
the Series A preferred stock shall have received an
aggregate of $2.00 per share. 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 conversion. The initial
conversion price per share of Series A preferred stock was
$1.00 and was 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 converted 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 resulting in aggregate cash proceeds to VirnetX,
Inc. of not less than $8 million, (2) any reverse
merger yielding working capital to VirnetX, Inc. of at least
$8 million and resulting 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.
F-17
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 Companys
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, or 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 Companys
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.
|
|
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.
F-18
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 $3,000,000, $660,000 and $40,000 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 Companys 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.
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 Companys common stock
in July 2007.
|
|
|
|
VirnetX, Inc.s escrowed convertible note proceeds of
$3,000,000 were released from escrow and converted into the
Companys common stock in July 2007.
|
|
|
|
|
|
The Company issued 29,551,398 shares of our common stock
and options to purchase 1,743,670 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.
|
F-19
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 Microsofts 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 Microsofts 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
as a plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to VirnetX. Microsoft was not required to search
disaster recovery tapes for additional information.
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.
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-20
VIRNETX
HOLDING CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
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-21
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,260,170
|
|
|
$
|
8,589,447
|
|
Accounts receivable, net
|
|
|
4,144
|
|
|
|
5,860
|
|
Prepaid expense and other current assets
|
|
|
529,531
|
|
|
|
399,201
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,793,845
|
|
|
|
8,994,508
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
33,307
|
|
|
|
32,658
|
|
Intangible and other assets
|
|
|
252,000
|
|
|
|
252,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,079,152
|
|
|
$
|
9,279,166
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,467,412
|
|
|
$
|
531,790
|
|
Current portion long-term obligation
|
|
|
44,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,511,412
|
|
|
|
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
September 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 September 30, 2008 and 34,667,214
at December 31, 2007, respectively
|
|
|
3,489
|
|
|
|
3,467
|
|
Additional paid-in capital
|
|
|
21,383,434
|
|
|
|
19,467,890
|
|
Accumulated deficit
|
|
|
(19,979,183
|
)
|
|
|
(10,975,981
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,407,740
|
|
|
|
8,495,376
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,079,152
|
|
|
$
|
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)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Revenue royalties
|
|
$
|
23,905
|
|
|
$
|
46,664
|
|
|
$
|
182,821
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
215,513
|
|
|
|
200,062
|
|
|
|
1,927,839
|
|
General and administrative
|
|
|
2,755,568
|
|
|
|
2,435,262
|
|
|
|
18,341,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
(2,971,081
|
)
|
|
|
(2,635,324
|
)
|
|
|
(20,268,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,947,176
|
)
|
|
|
(2,588,660
|
)
|
|
|
(20,086,153
|
)
|
Interest and other income, net
|
|
|
24,301
|
|
|
|
22,377
|
|
|
|
106,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,922,875
|
)
|
|
$
|
(2,566,283
|
)
|
|
$
|
(19,979,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,899,985
|
|
|
|
30,580,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Revenue royalties
|
|
$
|
107,955
|
|
|
$
|
46,664
|
|
|
$
|
182,821
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
633,335
|
|
|
|
468,240
|
|
|
|
1,927,839
|
|
General and administrative
|
|
|
8,620,276
|
|
|
|
4,103,509
|
|
|
|
18,341,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
(9,253,611
|
)
|
|
|
(4,571,749
|
)
|
|
|
(20,268,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,145,656
|
)
|
|
|
(4,525,085
|
)
|
|
|
(20,086,153
|
)
|
Interest and other income (expense), net
|
|
|
142,454
|
|
|
|
(23,111
|
)
|
|
|
106,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(19,979,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,866,480
|
|
|
|
11,135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-23
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
August 2, 2005
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Date of Inception)
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
to September 30, 2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,003,202
|
)
|
|
$
|
(4,548,196
|
)
|
|
$
|
(19,979,183
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,470
|
|
|
|
12,425
|
|
|
|
39,768
|
|
Stock-based compensation
|
|
|
1,915,544
|
|
|
|
348,572
|
|
|
|
3,746,162
|
|
(Increase) in current assets
|
|
|
(128,614
|
)
|
|
|
(561,195
|
)
|
|
|
(548,909
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
937,644
|
|
|
|
678,622
|
|
|
|
1,469,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,265,158
|
)
|
|
|
(4,069,772
|
)
|
|
|
(15,272,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired in acquisition
|
|
|
0
|
|
|
|
0
|
|
|
|
14,009
|
|
Purchase of fixed assets
|
|
|
(14,119
|
)
|
|
|
(17,401
|
)
|
|
|
(71,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,119
|
)
|
|
|
(17,401
|
)
|
|
|
(57,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible debt
|
|
|
0
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
Payment of long-term obligation
|
|
|
(50,000
|
)
|
|
|
0
|
|
|
|
(50,000
|
)
|
Proceeds from sale of common stock
|
|
|
0
|
|
|
|
2,983,439
|
|
|
|
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
|
|
|
(50,000
|
)
|
|
|
4,483,439
|
|
|
|
17,590,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(6,329,277
|
)
|
|
|
396,266
|
|
|
|
2,260,170
|
|
Cash beginning
|
|
|
8,589,447
|
|
|
|
139,997
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash ending
|
|
$
|
2,260,170
|
|
|
$
|
536,263
|
|
|
$
|
2,260,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-24
VIRNETX
HOLDING CORPORATION
(Unaudited)
|
|
Note 1
|
Basis of
Presentation
|
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 quarterly report on
Form 10-Q
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 Companys
Annual Report on
Form 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.
Under GAAP, the accompanying financial statements have been
prepared as if VirnetX, Inc., a company with an inception date
of August 2, 2005 and which 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
September 30, 2008 as well as the deficit accumulated
during the development stage, which includes the operations of
VirnetX, Inc. from August 2, 2005 to September 30,
2008 and the operations of PASW, Inc. from July 5, 2007 to
September 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. 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 patent and technology
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.
|
|
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
F-25
VIRNETX
HOLDING CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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.
|
|
Note 4
|
Patent
Portfolio
|
As of September 30, 2008, we had 11 issued U.S. and
eight issued foreign technology related patents, and have
several pending U.S. and foreign patent applications. The
term of our issued U.S. and foreign patents runs through
the period 2019 to 2024. 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 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 nine months ended September 30, 2008, we made
our first minimum annual payment of $50,000 to SAIC. As of
September 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 2012. We recognize rent expense on a
straight-line basis over the term of the lease.
|
|
|
|
|
|
|
Minimum Required Lease
|
|
For the Period
|
|
Payments in Period
|
|
|
October 1 through December 31, 2008
|
|
$
|
9,409
|
|
2009
|
|
|
42,100
|
|
2010
|
|
|
53,400
|
|
2011
|
|
|
58,900
|
|
2012
|
|
|
40,300
|
|
|
|
|
|
|
|
|
$
|
204,109
|
|
|
|
|
|
|
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 granting of stock
options and restricted stock units to our employees, directors
and consultants. 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.
F-26
VIRNETX
HOLDING CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Options under the Plan may be granted for a period of 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 4,318,596 options outstanding at September 30,
2008 and 4,068,595 at December 31, 2007 with an average
exercise price of $4.34 at September 30, 2008 and $2.94 at
December 31, 2007. As of September 30, 2008, there
were 2,801,391 shares available to be granted under the
Plan.
There were 100,000 options granted during the period
July 1, 2008 through September 30, 2008. No options
were exercised in the nine months ended September 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 2004), 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 September 30,
2008. Total stock-based compensation expense was $678,646 and
$1,915,544 for the three and nine months ended
September 30, 2008 respectively.
As of September 30, 2008, the unrecorded deferred
stock-based compensation balance related to stock options was
$7,886,317, which will be amortized as expense over the related
vesting period. As of September 30, 2008, the weighted
average vesting period was approximately 2.0 years.
The fair value of option grants was estimated on the date of
grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Volatility
|
|
|
190.00
|
%
|
|
|
100.00
|
%
|
Risk-free interest rate
|
|
|
3.83
|
%
|
|
|
3.32
|
%
|
Expected life
|
|
|
6.3 years
|
|
|
|
6.5 years
|
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average grant date fair value of stock options granted
|
|
$
|
3.54
|
|
|
$
|
4.96
|
|
The expected life was determined using the simplified method
outlined in Staff Accounting Bulletin No. 107,
extended by SAB 110, using 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 September 30, 2008 will vest. In
the future, the Company may change this estimate based on actual
and expected future forfeiture rates.
F-27
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 203,911 shares of our common
stock were issued. In March 2008, 33,333 of these warrants were
exercised in a cashless exercise transaction. As a result of the
March 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.
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, 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. We filed a
reply to Microsofts counterclaims on May 24, 2007. We
have served our infringement contentions directed to certain of
Microsofts operating system and unified messaging and
collaboration applications.
A Markman hearing on claim construction is scheduled for
February 2009, and the trial is scheduled to begin on
October 12, 2009. On March 31, 2008, Microsoft filed
its Motion to Dismiss our case. On June 3, 2008, the court
denied the Motion to Dismiss filed by Microsoft. The
courts order denying Microsofts motion expressly
confirms our constitutional standing to sue for patent
infringement. Also pursuant to the court decision on
June 10, 2008, SAIC joined us in our lawsuit as a
plaintiff. On November 19, 2008, the court granted our
motion to amend our infringement contentions, permitting us to
provide increased specificity and citations to Microsofts
proprietary documents and source code to support our
infringement case against Microsofts accused products,
including, among other things, Windows XP, Vista, Server 2003,
Server 2008, Live Communication Server, Office Communication
Server and Office Communicator. Microsoft was ordered to provide
further information regarding its non-infringement contentions
and invalidity contentions in light of the amended infringement
contentions. Microsoft was also ordered to provide additional
e-mail
discovery to us. Microsoft was not required to search disaster
recovery tapes for additional information.
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 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.
Because the outcome of this litigation cannot be estimated at
this time, we have made no provision for loss or future expenses
in the accompanying financial statements.
F-28
3,000,000 Shares of Common
Stock
Warrants to Purchase
4,500,000 Shares of Common Stock
VIRNETX HOLDING
CORPORATION
PROSPECTUS
Gilford Securities
Incorporated
,
2009
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 in
connection with this offering based on an assumed public
offering price of $1.75. All amounts shown are estimates other
than the registration fee and assume no exercise of warrants.
|
|
|
|
|
|
|
Amount to be
|
|
|
|
Paid
|
|
|
SEC registration fee
|
|
$
|
1,179
|
|
Printing and engraving
|
|
|
90,000
|
|
Underwriters fees and expenses
|
|
|
402,500
|
|
Legal fees and expenses
|
|
|
300,000
|
|
Accounting fees and expenses
|
|
|
13,000
|
|
Miscellaneous
|
|
|
333,000
|
|
Total
|
|
|
1,139,679
|
|
|
|
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 directors 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
II-1
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.
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
statement is set forth in the Exhibit Index.
(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:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect 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
prospectus filed with the Commission pursuant to
Rule 424(b) if, in 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 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 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
II-2
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 or 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.
The undersigned registrant will provide to the underwriter at
the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 Securities and Exchange
Commission such indemnification is against public policy as
expressed in the 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 Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430(A) and contained in a form of prospectus filed by
the undersigned registrant pursuant to Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this
registration statement as of the time the SEC declared it
effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of
those securities.
The undersigned registrant hereby further undertakes that:
For determining liability under the Securities Act to any
purchaser: 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 any 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.
II-3
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 on
Form S-1
and has duly caused this Amendment No. 7 to the Registration
Statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Scotts Valley, State of California,
on January 16, 2009.
VIRNETX HOLDING CORPORATION
Name: Kendall Larsen
|
|
|
|
Title:
|
President and Chief Executive Officer
|
In accordance with the requirements of the Securities Act, this
Registration Statement on
Form S-1
was signed by the following persons in the capacities and on the
dates stated:
|
|
|
|
|
|
|
Signature and Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ Kendall
Larsen
Kendall
Larsen
|
|
President, Chief Executive Officer (Principal Executive Officer)
and Director
|
|
January 16, 2009
|
|
|
|
|
|
*
William
E. Sliney
|
|
Chief Financial Officer (Principal Accounting and Financial
Officer)
|
|
January 16, 2009
|
|
|
|
|
|
*
Edmund
C. Munger
|
|
Director
|
|
January 16, 2009
|
|
|
|
|
|
*
Scott
C. Taylor
|
|
Director
|
|
January 16, 2009
|
|
|
|
|
|
*
Michael
F. Angelo
|
|
Director
|
|
January 16, 2009
|
|
|
|
|
|
*
Thomas
M. OBrien
|
|
Director
|
|
January 16, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Kendall
Larsen
Kendall
Larsen
Attorney-in-fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement between VirnetX Holding
Corporation and Gilford Securities Incorporated
|
|
2
|
.1
|
|
Agreement and Plan of Merger of PASW, Inc., a Delaware
corporation and PASW, Inc., a California corporation dated
May 25,
2007(1)
|
|
2
|
.2
|
|
Certificate of Merger filed with the Secretary of State of the
State of Delaware on May 30,
2007(1)
|
|
2
|
.3
|
|
Agreement and Plan of Merger and Reorganization among PASW,
Inc., VirnetX Acquisition, Inc. and VirnetX, Inc. dated as of
June 12,
2007(1)
|
|
3
|
.1
|
|
Certificate of Incorporation of the
Company(1)
|
|
3
|
.2
|
|
By-Laws of the
Company(1)
|
|
4
|
.1
|
|
Form of Warrant Agency Agreement by and between VirnetX Holding
Corporation and Corporate Stock Transfer, Inc. as Warrant Agent
|
|
4
|
.2
|
|
Form of Underwriters Warrant
|
|
5
|
.1
|
|
Opinion of Orrick, Herrington & Sutcliffe LLP*
|
|
10
|
.1
|
|
Amendment No. 2 to Patent License and Assignment Agreement
by and between VirnetX, Inc. and Science Applications
International Corporation, dated as of March 12,
2008(2)
|
|
10
|
.2
|
|
IP Brokerage Agreement by and between ipCapital Group, Inc. and
VirnetX, Inc., effective as of March 13,
2008(2)
|
|
10
|
.3
|
|
Engagement Letter by and between VirnetX Holding Corporation and
ipCapital Group, Inc. dated March 12,
2008(2)
|
|
21
|
.1
|
|
Subsidiaries of the
Registrant(3)
|
|
23
|
.1
|
|
Consent of Farber Hass Hurley LLP, Independent Auditors
|
|
23
|
.2
|
|
Consent of Burr, Pilger & Mayer LLP, Independent
Accountants
|
|
23
|
.3
|
|
Consent of Orrick, Herrington & Sutcliffe LLP
(contained in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (contained in the signature pages hereto)
|
|
99
|
.1
|
|
2007 Stock
Plan(4)
|
|
|
|
* |
|
Previously filed. |
|
(1) |
|
Incorporated by reference to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
July 12, 2007. |
|
(2) |
|
Incorporated by reference to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
March 18, 2008. |
|
(3) |
|
Incorporated by reference to the Companys Form 10-K filed
with the Securities and Exchange Commission on March 31,
2008. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-8
filed with the Securities and Exchange Commission on
March 25, 2008. |
exv1w1
Exhibit
1.1
3,000,000 Shares
and Warrants to Purchase 4,500,000 Shares
VIRNETX HOLDING CORPORATION
Common Stock
UNDERWRITING AGREEMENT
|
|
|
|
|
|
Gilford Securities Incorporated
|
|
New York, New York |
777 Third Avenue,
17th Floor
|
|
January ___, 2009 |
New York, New York 10017 |
|
|
Ladies and Gentlemen:
In connection with a public offering (the Offering) of common stock, $0.0001 par
value per share (Common Stock), and associated warrants to purchase Common Stock, of
VirnetX Holding Corporation, a Delaware corporation (the Company), the Company proposes
to issue and sell to Gilford Securities Incorporated (the Underwriter or you)
pursuant to this Underwriting Agreement (the Agreement) (a) 3,000,000 shares of Common
Stock (the Primary Offering Shares) and (b) associated warrants to purchase an aggregate
of 4,500,000 shares of Common Stock, comprising, for each Primary Offering Share offered, (i) one
warrant to purchase 0.5 shares of Common Stock at an exercise price of $2.00 per share, (ii) one
warrant to purchase 0.5 shares of Common Stock at an exercise price of $3.00 per share and (iii)
one warrant to purchase 0.5 shares of Common Stock at an exercise price of $4.00 per share (the
associated warrants collectively, the Primary Offering Warrants, and, together with the
Primary Offering Shares, the Primary Offering Securities). The date on which the
Securities and Exchange Commission (the Commission) declared the Registration Statement
(as defined below) of the Company effective under the Securities Act of 1933, as amended (the
Act), is referred to herein as the Effective Date. In addition, the Company
proposes to grant to the Underwriter the option referred to in Section 2(b) to purchase all
or any part of (a) an aggregate of 450,000 additional shares of Common Stock (the
Over-Allotment Shares) and (b) associated warrants to purchase an aggregate of 675,000
additional shares of Common Stock, comprising, for each Over-Allotment Share purchased, (i) one
warrant to purchase 0.5 shares of Common Stock at an exercise price of $2.00 per share, (ii) one
warrant to purchase 0.5 shares of Common Stock at an exercise price of $3.00 per share and (iii)
one warrant to purchase 0.5 shares of Common Stock at an exercise price of $4.00 per share (the
associated warrants collectively, the Over-Allotment Warrants; the Over-Allotment
Warrants together with the Primary Offering Warrants, the Public Warrants; the
Over-Allotment Warrants together with the Over-Allotment Shares, the Over-Allotment
Securities; the Over-Allotment Securities together with the Primary Offering Securities, the
Securities).
The Company confirms the agreements made by it with respect to the purchases of the Securities
by the Underwriter, as follows:
1. Representations, Warranties and Agreements of the Company. The Company represents
and warrants to, and agrees with the Underwriter that as of the date hereof, the Applicable Time
and each Closing Date (all as hereinafter defined) that:
(a)(i) A registration statement of the Company on Form S-1 (File No. 333-153645) (including
all pre-effective amendments thereto, the Initial Registration Statement) in respect of
the Securities has been filed with the Securities and Exchange Commission (the
Commission) pursuant to the Securities Act of 1933, as amended (the Securities
Act). The Company meets the requirements for use of Form S-1 under the Securities Act, and the
rules and regulations of the Commission thereunder (the Rules and Regulations). The
Initial Registration Statement and any post-effective amendment thereto, each in the form
heretofore delivered to the Underwriter, and, excluding exhibits thereto, have been declared
effective by the Commission in such form and meet the requirements of the Securities Act and the
Rules and Regulations. Other than (x) a registration statement, if any, increasing the size of the
offering filed pursuant to Rule 462(b) under the Securities Act and the Rules and Regulations (a
Rule 462(b) Registration Statement) and (y) the Prospectus (as defined below)
contemplated by this Agreement to be filed pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 3(a) hereof, no other document with respect to the offer and sale of the
Securities has heretofore been filed with the Commission. No stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the
Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose or
pursuant to Section 8A of the Securities Act has been initiated or threatened by the Commission.
The prospectus filed as part of the registration statement in the form in which it has most
recently been filed with the Commission on or prior to the date of this Agreement and any
prospectus subject to completion included in the Registration Statement or any preliminary
prospectus (including any preliminary prospectus supplement) relating to the Securities filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations is hereinafter called a
Preliminary Prospectus. The various parts of the Initial Registration Statement and the
Rule 462(b) Registration Statement, if any, in each case including all exhibits thereto and (i) the
information contained in the Prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations and (ii) the documents incorporated by reference in the Rule 462(b)
Registration Statement at the time the Rule 462(b) Registration Statement became effective, are
hereinafter collectively called the Registration Statements. The prospectus included in
the Initial Registration Statement at the time of effectiveness thereof, as supplemented by the
final prospectus relating to the offer and sale of the Stock and Warrants, in the form filed
pursuant to and within the time limits described in Rule 424(b) under the Rules and Regulations, is
hereinafter called the Prospectus. Any reference to any Registration Statement shall be
deemed to refer to and include the documents incorporated by reference therein.
(ii) As of the Applicable Time and as of each Closing Date, as the case may be, the Pricing
Prospectus (as defined below) and the information included on Schedule I hereto all considered
together (collectively, the General Disclosure Package), did not include and will not
include any untrue statement of a material fact and did not and will not omit to state a
-2-
material fact necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the Pricing
Prospectus, in reliance upon, and in conformity with, written information furnished to the Company
by the Underwriter specifically for inclusion therein, which information the parties hereto agree
is limited to the Underwriter Information as defined below. As used in this paragraph (a)(i) and
elsewhere in this Agreement:
Applicable Time means [___] [A/P].M., New York time, on the date of this Agreement or
such other time as agreed to by the Company and the Underwriter.
Pricing Prospectus means the Preliminary Prospectus, as amended and supplemented
immediately prior to the Applicable Time, including any document incorporated by reference therein
and any prospectus supplement deemed to be a part thereof.
(b) The Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus. At the time the Registration Statement became effective and at all times
subsequent thereto up to and on each Closing Date: (i) the Registration Statement and Prospectus
will in all material respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any untrue statement of
a material fact or omit to state any material fact required to be stated therein or necessary to
make statements therein not misleading (in light of the circumstances under which they were made in
the case of the Prospectus); provided, however, that the Company makes no
representations, warranties or agreements as to information contained in or omitted from the
Registration Statement or Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriter specifically for use in the preparation
thereof. It is understood that the statements set forth in the Pricing Prospectus and the
Prospectus under the heading Underwriting in the first paragraph thereunder (concerning
the terms of the offering by the Underwriter), the third paragraph thereunder (concerning hedging,
short sale or derivative transactions) and the eighth paragraph thereunder (concerning stabilizing
transactions) and the identity of counsel to the Underwriter under the heading Legal
Matters constitute, for purposes of this section, the only information furnished in writing by
or on behalf of the Underwriter for inclusion in the Pricing Prospectus, the Registration Statement
and the Prospectus (Underwriter Information).
(c) Each of the Company and its subsidiaries has been duly incorporated and is validly
existing as a corporation in good standing, or the substantial equivalent thereof, under the laws
of the jurisdiction of its incorporation with full corporate power and authority to own its
properties and conduct its business as described in the General Disclosure Package and the
Prospectus and is duly qualified or licensed to do business as a foreign corporation and is in good
standing in each other jurisdiction in which the nature of its business or the character or
location of its properties requires such qualification, except where the failure to so qualify will
not materially adversely affect the Companys business, properties or financial condition.
(d) As of each Closing Date, the authorized, issued and outstanding securities (including, but
not limited to, all shares of capital stock, options, warrants, convertible instruments, and notes
and debentures of any kind) of the Company will be as set forth in the
-3-
General Disclosure Package and the Prospectus (which provides in detail all the terms of all such
securities, the owners thereof, the amount authorized and the amount outstanding) which, other than
any securities issued in the Offering, shall not change prior to the last Closing Date. All of such
outstanding securities have been duly authorized, validly issued, fully paid and are
non-assessable, and other than as set forth in the General Disclosure Package and the Prospectus:
(i) none of the Companys capital stock is subject to preemptive rights under Delaware law or any
other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there
are no outstanding debt securities issued by the Company; (iii) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating
to, or securities or rights convertible into or exchangeable for, any shares of capital stock of
the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements
by which the Company or any of its subsidiaries is or may become bound to issue additional shares
of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the Company or any of its
subsidiaries; (iv) except as disclosed in the Registration Statement, there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to register the sale
of any of their securities under the Securities Act; (v) there are no outstanding securities of the
Company or any of its subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to redeem a security of the Company or any of its subsidiaries;
(vi) there are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities, the Underwriters Warrant (as hereinafter
defined) or the shares of Common Stock issuable upon exercise of the Public Warrants or the
Underwriters Warrant (the Underlying Shares); and (vii) the Company does not have any
stock appreciation rights or phantom stock plans or agreements or any similar plan or agreement.
There have been no prior offers or sales of securities of the Company in the United States except,
to the extent required by applicable law, as disclosed in the Registration Statement, and all prior
sales of securities of the Company were either registered under applicable federal and state
securities laws or exempt from such registration, and no security holder has any rescission rights
with respect thereto. The capital stock and other securities of the Company conform in all material
respects to all statements relating thereto contained in the Registration Statement and Prospectus.
(e) The Securities, when paid for, issued and delivered pursuant to this Agreement, and the
Underlying Shares, when paid for, issued and delivered pursuant to the Public Warrants and the
Warrant Agreement (as defined below), will have been duly authorized, validly issued and delivered,
and will be fully paid, non-assessable and free of preemptive rights of any securityholder of the
Company and entitled to the rights and preferences provided by the Companys Certificate of
Incorporation and Bylaws, both as amended, which will be in form and substance filed as exhibits to
the Registration Statement. None of the filing of the Registration Statement, the offering or sale
of the Securities as contemplated by this Agreement, the issuance of the Underwriters Warrant or
the issuance of the Underlying Shares pursuant to the Public Warrants and the Warrant Agreement
gives rise to any rights, other than those which have been waived or satisfied for or relating to
the registration of any securities of the Company under the Act or the laws of any jurisdiction of
the United States of America, except as described in the
-4-
Registration Statement. The terms of the Securities and the Underlying Shares conform in all
material respects to the description thereof in the General Disclosure Package, the Registration
Statement and the Prospectus.
(f) This Agreement, the Public Warrants and the Warrant Agreement have been, and at each
Closing Date will be, duly and validly authorized, executed and delivered by the Company, and
assuming due execution by the other parties thereto, are and will constitute valid and binding
obligations of the Company enforceable against the Company in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting
the rights of creditors generally and that the Company makes no representation or warranty as to
the enforceability of (i) the provisions purporting to govern indemnification or contribution under
the securities laws of any jurisdiction or (ii) any choice of law provisions. The Company has full
power and authority to authorize, issue and sell the Securities to be sold by it hereunder on the
terms and conditions set forth herein and to issue the Underwriters Warrant and the Underlying
Shares pursuant to the Public Warrants and the Underwriters Warrant, and no consent, approval,
authorization or other order of any governmental authority is required in connection with such
authorization, execution and delivery or in connection with the authorization, issuance and sale of
the Securities or the Underlying Shares, except as may be required and have been made under the
Act, or state or federal securities laws.
(g) Except for events that would not have a material adverse effect on the condition
(financial or otherwise), net worth or properties of the Company and its subsidiaries taken as a
whole (a Material Adverse Effect), neither the Company nor any subsidiary is in
violation, breach or default of or under, and consummation of the transactions herein contemplated
and the fulfillment of the terms of this Agreement and the Warrant Agreement will not conflict
with, or result in a breach or violation of, any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge or encumbrance upon any
of the property or assets of the Company or any subsidiary pursuant to the terms of any material
agreement, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries may be bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation, the Bylaws, or other organizational documents, as the case may be, of
the Company or any of its subsidiaries, as amended, or any statute or any order, rule or regulation
applicable to the Company or any of its subsidiaries, of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company or any of its subsidiaries.
(h) The Company and each of its subsidiaries has good and marketable title to all properties
and assets described in the General Disclosure Package and the Prospectus as owned by each of them,
free and clear of all liens, charges, encumbrances or restrictions, except as disclosed in the
financial statements set forth in the General Disclosure Package and the Prospectus or such as are
not material in relation to their business taken as a whole; all of the material leases and
subleases under which the Company and each of its subsidiaries is the lessor or sublessor of
properties or assets or under which the Company or each of its subsidiaries holds
-5-
properties or assets as lessee or sublessee as described in the General Disclosure Package and the
Prospectus are in full force and effect, and, except as described in the General Disclosure Package
and the Prospectus, neither the Company nor any of its subsidiaries is in default in any material
respect with respect to any of the terms or provisions of any of such leases or subleases, and no
claim has been asserted by anyone adverse to rights of the Company and each of its subsidiaries as
lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning the right of the Company or any of its subsidiaries to continued
possession of the leased or subleased premises or assets under any such lease or sublease except as
described or referred to in the General Disclosure Package and the Prospectus; and the Company and
each of its subsidiaries owns or leases all such properties described in the General Disclosure
Package and the Prospectus as are necessary to its operations as now conducted and, except as
otherwise stated in the General Disclosure Package and the Prospectus, as proposed to be conducted
as set forth in the General Disclosure Package and the Prospectus. The Company owns or controls,
directly or indirectly, only the following corporations, partnerships, limited liability
partnerships, limited liability companies, associations or other entities: Alera Systems, Inc.,
Network Research Corp., Pacific Acquisition Corporation, PASW Europe Limited and VirnetX, Inc.
(i) (i) Burr, Pilger & Mayer LLP (the Predecessor Auditor), which has certified the
financial statements for VirnetX, Inc. included or incorporated by reference in the General
Disclosure Package and the Registration Statement and the Prospectus, is an independent registered
public accounting firm within the meaning of Article 2-01 of Regulation S-X and the Public Company
Accounting Oversight Board (United States) (the PCAOB). Except as disclosed in the
Registration Statement and as pre-approved in accordance with the requirements set forth in
Section 10A of the Securities Exchange Act of 1934, as amended (the Exchange Act), the
Predecessor Auditor has not been engaged by the Company to perform any prohibited activities (as
defined in Section 10A of the Exchange Act).
(ii) Farber Hass Hurley LLP (the Auditor), which has certified certain financial
statements included or incorporated by reference in the Registration Statement and the Prospectus,
is an independent registered public accounting firm within the meaning of Article 2-01 of
Regulation S-X and the PCAOB. Except as disclosed in the Registration Statement and as pre-approved
in accordance with the requirements set forth in Section 10A of the Exchange Act, the Auditor has
not been engaged by the Company to perform any prohibited activities (as defined in Section 10A
of the Exchange Act).
(j) The financial statements and schedules together with related notes set forth in the
General Disclosure Package, the Prospectus and each Registration Statement present fairly the
financial position and results of operations and changes in cash flow position of the Company on
the basis stated in the General Disclosure Package and the Prospectus, at the respective dates and
for the respective periods to which they apply. Said statements and schedules and related notes
have been prepared in accordance with generally accepted accounting principles in the
jurisdiction(s) identified in the General Disclosure Package and the Prospectus applied on a basis
which is consistent during the periods involved. Except as disclosed in the General Disclosure
Package, Registration Statement and Prospectus, the
-6-
Companys internal accounting controls and procedures are sufficient to cause the Company and each
subsidiary to prepare financial statements that comply in all material respects with generally
accepted accounting principles in the jurisdiction(s) identified in the General Disclosure Package
and the Prospectus applied on a consistent basis during the periods involved. Except as disclosed
in the General Disclosure Package, Registration Statement and Prospectus, since the formation of
the Company, nothing has been brought to the attention of the Companys management that would
result in any reportable condition relating to the Companys internal accounting procedures,
weaknesses or controls.
(k) Subsequent to the respective dates as of which information is given in the General
Disclosure Package, Registration Statement and Prospectus and except as otherwise disclosed or
contemplated therein, neither the Company nor any of its subsidiaries has: (i) incurred any
liabilities or obligations, direct or contingent, not in the ordinary course of business, or
entered into any transaction not in the ordinary course of business; (ii) had any change in its
capital stock, or any incurrence of short-term or long-term debt; (iii) issued options, warrants or
other rights to purchase its capital stock; or (iv) had an adverse change or any development
involving, so far as can now be reasonably foreseen, a prospective adverse change in their
condition (financial or otherwise), net worth, results of operations, business, key personnel or
properties, individually or which taken together, would have a Material Adverse Effect.
(l) Except as disclosed in the General Disclosure Package, Prospectus and Registration
Statement, there is not now pending or, to the knowledge of the Company, threatened, any material
action, suit, proceeding, inquiry, arbitration or investigation to which the Company or any of its
subsidiaries or any of their officers or directors is a party or subject to that might result in a
Material Adverse Effect, nor are there any actions, suits or proceedings related to environmental
matters or related to discrimination on the basis of age, sex, religion or race; and no labor
disputes involving the employees of the Company or any of its subsidiaries exist or to the
knowledge of the Company, are threatened which might be expected to have a Material Adverse Effect.
(m) The Company and each of its subsidiaries has filed all necessary tax returns required to
be filed as of the date hereof and have paid all taxes shown as due thereon; and there is no tax
deficiency that has been, or to the knowledge of the Company, may be, asserted against the Company
or any of its subsidiaries.
(n) The Company and its subsidiaries own or possess the valid right to use all (i) valid and
enforceable patents, patent applications, trademarks, trademark registrations, service marks,
service mark registrations, Internet domain name registrations, copyrights, copyright
registrations, licenses, trade secret rights (the Intellectual Property Rights) and (ii)
inventions, software, works of authorships, trade marks, service marks, trade names, databases,
formulae, know how, Internet domain names and other intellectual property (including trade secrets
and other unpatented and/or unpatentable proprietary confidential information, systems, or
procedures) (collectively, the Intellectual Property Assets) necessary to conduct their
respective businesses as currently conducted, and as proposed to be conducted and described in the
General Disclosure Package, Registration Statement and the Prospectus. The Company and
-7-
its subsidiaries have not received any opinion from their legal counsel concluding that any
activities of their respective businesses infringe, misappropriate, or otherwise violate, valid and
enforceable Intellectual Property Rights of any other person, and have not received written notice
of any challenge, which is to their knowledge still pending, by any other person to the rights of
the Company and its subsidiaries with respect to any Intellectual Property Rights or Intellectual
Property Assets owned or used by the Company or its subsidiaries. To the knowledge of the Company,
the Company and its subsidiaries respective businesses as now conducted do not give rise to any
infringement of, any misappropriation of, or other violation of, any valid and enforceable
Intellectual Property Rights of any other person. All licenses for the use of the Intellectual
Property Rights described in the Registration Statement and the Prospectus are valid, binding upon,
and enforceable by or against the parties thereto in accordance to its terms. The Company has
complied in all material respects with, and is not in breach nor has received any asserted or
threatened claim of breach of any Intellectual Property license, and the Company has no knowledge
of any breach or anticipated breach by any other person to any Intellectual Property license.
Except as described in the Registration Statement and the Prospectus, no claim has been made
against the Company alleging the infringement by the Company of any patent, trademark, service
mark, trade name, copyright, trade secret, license in or other intellectual property right or
franchise right of any person. The Company has taken all reasonable steps to protect, maintain and
safeguard its Intellectual Property Rights, including the execution of appropriate nondisclosure
and confidentiality agreements. The consummation of the transactions contemplated by this Agreement
will not result in the loss or impairment of or payment of any additional amounts with respect to,
nor require the consent of any other person in respect of, the Companys right to own, use, or hold
for use any of the Intellectual Property Rights as owned, used or held for use in the conduct of
the business as currently conducted. With respect to the use of the software in the Companys
business as it is currently conducted or proposed to be conducted, the Company has not experienced
any material defects in such software including any material error or omission in the processing of
any transactions other than defects which have been corrected, and to the knowledge of the Company,
no such software contains any device or feature designed to disrupt, disable, or otherwise impair
the functioning of any software or is subject to the terms of any open source or other similar
license that provides for the source code of the software to be publicly distributed or dedicated
to the public. The Company has at all times complied with all applicable laws relating to privacy,
data protection, and the collection and use of personal information collected, used, or held for
use by the Company in the conduct of the Companys business. No claims have been asserted or
threatened against the Company alleging a violation of any persons privacy or personal information
or data rights and the consummation of the transactions contemplated hereby will not breach or
otherwise cause any violation of any law related to privacy, data protection, or the collection and
use of personal information collected, used, or held for use by the Company in the conduct of the
Companys business. The Company takes reasonable measures to ensure that such information is
protected against unauthorized access, use, modification, or other misuse. The Company has taken
all necessary actions to obtain ownership of all works of authorship and inventions made by its
employees, consultants and contractors during the time they were employed by or under contract with
the Company and which relate to the Companys business. All founders and key employees have signed
confidentiality and invention assignment agreements with the Company.
-8-
(o) Neither the Company, nor any of its subsidiaries, has directly or indirectly, at any time
(i) made or failed to disclose fully any contributions to any candidate for political office in
violation of law or (ii) made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties, other than payments
or contributions required or allowed by applicable law.
(p) Except as disclosed in the General Disclosure Package, Registration Statement and
Prospectus, the Companys and each of its subsidiarys internal accounting controls and procedures
are sufficient to cause each of them to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, the Sarbanes-Oxley Act of 2002, and the Rules and Regulations, each as in
effect as of the date hereof.
(q) On each Closing Date, all transfer or other taxes (including franchise, capital stock or
other tax, other than income taxes, imposed by any jurisdiction) if any, that are required to be
paid in connection with the sale and transfer of the Securities hereunder will have been fully paid
or provided for by the Company and all laws imposing such taxes will have been complied with in all
material respects.
(r) All contracts and other documents that are, under the Rules and Regulations, required to
be described in or filed as exhibits to the Registration Statement have been so described or filed,
as the case may be.
(s) Other than as set forth in the General Disclosure Package, Registration Statement and
Prospectus, no other firm, corporation or person has any rights to underwrite or place an offering
of any of the Companys securities.
(t) Except as described in the General Disclosure Package, Registration Statement and
Prospectus, no holder of any securities of the Company has the right to include such securities in
the Registration Statement and Prospectus.
(u) Neither the Company nor any of its subsidiaries has any material contingent liabilities.
(v) The Company has no material subsidiary corporations, except as disclosed in the General
Disclosure Package, Registration Statement and Prospectus, nor has it any equity interest in any
partnership, joint venture, association or other entity, except as disclosed in the General
Disclosure Package, Registration Statement and Prospectus. Except as described in the General
Disclosure Package, Registration Statement and Prospectus, the Company owns all of the outstanding
securities of each of its subsidiaries.
(w) The Commission has not issued an order preventing or suspending the use of any Preliminary
Prospectus with respect to the offer and sale of the Securities and each Preliminary Prospectus, as
of its date, has conformed in all material respects with the requirements of the Act and the Rules
and Regulations and did not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein not
-9-
misleading (in light of the circumstances under which they were made in the case of the
Prospectus).
(x) Neither the Company, nor, to the Companys knowledge, any of its officers, directors,
employees or shareholders, has taken or will take, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any of the securities of the Company.
(y) The Registration Statement accurately discloses any and all unregistered securities sold
by the Company since formation. All of such securities were sold in transactions exempt from the
registration provisions of the Act and not in violation of Section 5 thereof.
(z) Other than as set forth in the General Disclosure Package, Registration Statement and
Prospectus, the Company has not entered into any agreement pursuant to which any person is
entitled, either directly or indirectly, to compensation from the Company for services as a finder
in connection with the Offering, and the Company agrees to indemnify and hold harmless the
Underwriter against any losses, claims, damages or liabilities, which shall include, but not be
limited to, all costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(aa) Except as set forth in the Registration Statement, based upon written representations
received by the Company, no officer, director or five percent or greater shareholder of the Company
has any direct or indirect affiliation or association with any member of the Financial Industry
Regulatory Authority (FINRA) and no beneficial owner of the Companys unregistered
securities has any direct or indirect affiliation or association with any FINRA member. The Company
will advise the Underwriter and the FINRA if, to its knowledge, any five percent or greater
shareholder of the Company is or becomes an affiliate or associated person of a FINRA member
participating in the distribution of the Securities.
(bb) The Company and each of its subsidiaries is in compliance in all material respects with
all laws and regulations respecting the employment of its employees and employment practices, terms
and conditions of employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any of its subsidiaries by any governmental agency
responsible for the enforcement of such laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any of its subsidiaries pending before any governmental
agency or body or any strike, picketing, boycott, dispute, slowdown or stoppage pending, or to the
knowledge of the Company, threatened, against or involving the Company or any of its subsidiaries
or any predecessor entity. No question concerning representation exists respecting the employees of
the Company or any of its subsidiaries and no collective bargaining agreement or modification
thereof is currently being negotiated by the Company or any of its subsidiaries. No grievance or
arbitration proceeding is pending under any expired or existing collective bargaining agreements of
the Company or any of its subsidiaries, if any.
-10-
(cc) Each certificate signed by any officer of the Company and delivered to the Underwriter or
counsel to the Underwriter shall be deemed to be a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
(dd) None of the Company, its subsidiaries, any of their affiliates, or any person acting on
any of their behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would cause the Offering to be
integrated with prior offerings by the Company for purposes of the Act or any applicable
shareholder approval provisions. None of the Company, its subsidiaries, their affiliates or any
person acting on any of their behalf will take any action or steps referred to in the preceding
sentence that would cause the Offering to be integrated with other offerings.
(ee) The Company and its Board of Directors have taken all necessary action, if any, in order
to render inapplicable any control share acquisition, business combination, poison pill (including
any distribution under a rights agreement) or other similar anti-takeover provision under the
Companys Certificate of Incorporation, as amended, or Bylaws, as amended, stock option plan, or
the laws of Delaware that is or could become applicable as a result of the transactions
contemplated by this Agreement including, without limitation, the Companys issuance of the
Securities, the Underwriters Warrant and the Underlying Shares.
(ff) As of the date hereof, Kendall Larsen (the Key Executive) is employed by the
Company on a full-time basis, and, to the best of the Companys knowledge, is not planning to cease
being employed by the Company on a full-time basis in his current capacity and the Company is not
aware of any circumstances related to the employment of the Key Executive, apart from circumstances
related to the operation of the Company as a whole, that could result in cessation of his full-time
employment in his current capacity.
(gg) The Company acknowledges and agrees that (i) the purchase and sale of the Securities is
an arms length commercial transaction between the Company and the Underwriter, (ii) in connection
therewith, the Underwriter is acting as principal and not the agent or fiduciary of the Company,
and (iii) the Underwriter has not assumed an advisory responsibility in favor of the Company with
respect to the offering contemplated hereby or the process leading thereto (irrespective of whether
the Underwriter has advised or is currently advising the Company on other matters) or any other
obligation to the Company except the obligations expressly set forth in this Agreement.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement, and upon the basis of the
representations, warranties and agreements, herein contained, the Company agrees to issue and sell
to the Underwriter and the Underwriter agrees to buy from the Company, an aggregate of 3,000,000
shares of Common Stock, and Primary Offering Warrants to purchase an aggregate of 4,500,000 shares
of Common Stock, comprised of (i) warrants to purchase an aggregate of 1,500,000 shares of Common
Stock at an exercise price of $2.00 per share, (ii) warrants to purchase an aggregate of 1,500,000
shares of Common Stock at an exercise price of $3.00 per share, and (iii) warrants to purchase an
aggregate of 1,500,000 shares of Common Stock at an exercise price of $4.00 per share, at $ per
share of Common Stock and associated Primary
-11-
Offering Warrants (the offering price less 7 %), at the place and time herein specified. The
price at which the Underwriter shall sell the Securities to the public shall be $ per share of
Common Stock and associated Primary Offering Warrants.
Delivery of the Primary Offering Securities against payment therefor shall take place at the
offices of the Underwriter, 777 Third Avenue, 17th Floor, New York, New York 10017 (or
at such other place as may be designated by agreement between the Underwriter and the Company) at
9:00 a.m., New York time, not later than three business days following the first date that any of
the Securities are released to the Underwriter, such time and date of payment and delivery for the
Primary Offering Securities being hereinafter referred to as the First Closing Date.
(b) In addition, subject to the terms and conditions of this Agreement, and upon the basis of
the representations, warranties and agreements herein contained, the Company hereby grants an
option to the Underwriter (the Over-Allotment Option) to purchase all or any part of (i)
an aggregate of an additional 450,000 Over-Allotment Shares and (ii) Over-Allotment Warrants to
purchase an aggregate of an additional 675,000 shares of Common Stock, comprised of (x) warrants to
purchase an aggregate of 225,000 shares of Common Stock at an exercise price of $2.00 per share,
(yi) warrants to purchase an aggregate of 225,000 shares of Common Stock at an exercise price of
$3.00 per share, and (z) warrants to purchase an aggregate of 225,000 shares of Common Stock at an
exercise price of $4.00 per share, at the same price per share of Common Stock and associated
Over-Allotment Warrants as the Underwriter shall pay for the Primary Offering Securities. This
option may be exercised one or more times within 45 days after the Effective Date upon written
notice by the Underwriter to the Company advising as to the amount of Over-Allotment Securities to
which the option is being exercised. Delivery of the Over-Allotment Securities against payment
therefor shall take place at the offices of the Underwriter as identified above (or at such other
place as may be designated by agreement between the Underwriter and the Company) on such date as
shall be determined by the Underwriter but shall not be earlier than four nor later than 10 full
business days after each exercise of the Over-Allotment Option (but in no event more than 55 days
after the Effective Date), nor in any event prior to the First Closing Date (each such closing for
the purchase of Over-Allotment Securities, together with the First Closing Date, a Closing
Date). The Over-Allotment Option may be exercised only to cover over-allotments in the sale
by the Underwriter of the Primary Offering Securities. No Over-Allotment Securities shall be
delivered unless all Primary Offering Securities shall have been delivered to the Underwriter as
provided herein.
(c) The Company shall deliver, or cause to be delivered, a credit representing the Primary
Offering Shares and the Primary Offering Warrants to an account or accounts at The Depository Trust
Company (DTC) for the account of the Underwriter at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. The Company shall deliver, or cause to be delivered, a credit representing
the Over-Allotment Shares and the Over-Allotment Warrants to an account or accounts at DTC for the
account of the Underwriter, at the First Closing Date or another Closing Date, as the case may be,
against the irrevocable release of a wire transfer of immediately available funds for the amount of
the purchase price therefor. The Company shall cause the Warrant
Agent to issue to the Underwriter at the First Closing Date the
Underwriters Warrant contemplated by the Underwriters
Warrant Agreement dated as of the date hereof
between the Company and the Underwriter.
3. Covenants of the Company. The Company covenants and agrees with the Underwriter
that:
(a) The Company will file the Prospectus and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rule 424(b) under the Act. The
Company will not at any time after the Effective Date, file any amendment to the Registration
Statement or supplement the Prospectus unless you have previously been
-12-
furnished with a copy and to which you or your counsel shall have reasonably objected in writing or
which is not in compliance with the Act and the Rules and Regulations. At any time prior to the
completion by the Underwriter of the distribution of the securities contemplated hereby (but in no
event more than nine months after the date on which the Registration Statement shall have become or
been declared effective under the Act), the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel to the Company and the Underwriter, may be reasonably
necessary or advisable in connection with the distribution of the Securities contemplated hereby
and as mutually agreed by the Company and the Underwriter.
As soon as the Company is advised thereof, the Company will advise the Underwriter, and
provide the Underwriter copies of any written advice, of the receipt of any comments of the
Commission, of the effectiveness under the Act of any post-effective amendment to the Registration
Statement, of the filing of any supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for an amendment of the Registration Statement or for supplementing
of the Prospectus or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order or threat thereof
suspending the effectiveness of the Registration Statement or any order preventing or suspending
the use of any Preliminary Prospectus or Pricing Prospectus, or of the suspension of the
qualification of the Securities for offering in any jurisdiction, or of the institution of any
proceedings for any of such purposes, and will use its best efforts to prevent the issuance of any
such order, and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to the Underwriter copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such copies for the
purposes permitted by the Act. The Company authorizes the Underwriter and dealers to use the
Prospectus in connection with the sale of the Securities for such period as in the opinion of
counsel to the Underwriter and the Company the use thereof is required to comply with the Act and
the Rules and Regulations. In case of the occurrence, at any time within such period as a
Prospectus is required under the Act to be delivered in connection with sales by the Underwriter or
dealers, of any event of which the Company has knowledge and which materially affects the Company
or the securities of the Company, or which in the opinion of counsel for the Company or counsel for
the Underwriter should be set forth in an amendment to the Registration Statement or a supplement
to the Prospectus in order to make the statements therein not then misleading, or in case it shall
be necessary to amend or supplement the Prospectus to comply with law or with the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and furnish to you copies
of such amended Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so amended or
supplemented, will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements in the Prospectus not misleading in light
of the circumstances under which they were made. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or supplement to be
attached to the Prospectus shall be without expense to the Underwriter, except that in case the
Underwriter is required, in connection with the sale of the Securities to deliver a Prospectus nine
months or more after the Effective Date, the Company will, upon request of the Underwriter, amend
or supplement the Registration Statement and Prospectus and furnish the
-13-
Underwriter with reasonable quantities of prospectuses complying with Section 10(a)(3) of the Act
at the Companys expense.
The Company represents and agrees that it has not made and will not, hereof, make any offer
relating to the Securities that would constitute an issuer writing prospectus as defined in
Rule 433 of the Rules and Regulations or that would otherwise constitute a free writing
prospectus as defined in Rule 405 of the Rules and Regulations.
The Company will comply in all material respects with the Act, the Rules and Regulations and
the Exchange Act and the rules and regulations promulgated thereunder in connection with the
offering and issuance of the Securities. Until the Underwriter shall notify the Company of the
completion of the Offering, the Company will not, and will cause its affiliated purchasers (as
defined in Regulation M under the Exchange Act) not to, either alone or with one or more other
persons, bid for or purchase, for any account in which it or any of its affiliated purchasers has a
beneficial interest, any Common Stock, or attempt to induce any person to purchase any Common
Stock; and not to, and to cause its affiliated purchasers not to, make bids or purchase for the
purpose of creating actual, or apparent, active trading in or of raising the price of the Common
Stock.
(b) The Company will furnish such information as may be required and to otherwise cooperate
and use its best efforts to qualify or register the Securities for sale under the securities or
blue sky laws of such jurisdictions as you may reasonably designate and will make such
applications and furnish such information as may be required for that purpose and to comply with
such laws, provided the Company shall not be required to qualify as a foreign corporation or a
dealer in securities or to execute a general consent of service of process in any jurisdiction in
any action other than one arising out of the offering or sale of the Securities. The Company will,
from time to time, prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as you may reasonably request.
(c) For so long as the Company is a reporting company under either Section 12 or 15(d) of the
Exchange Act, the Company, at its expense and in reasonable detail, will furnish to its
shareholders an annual report (including financial statements audited by independent public
accountants as required by the Act), and will furnish to the Underwriter during the period ending
three years from the Effective Date hereof, (i) as soon as practicable after the end of each fiscal
year, but no earlier than the filing of such information with the Commission, a balance sheet of
the Company as at the end of such fiscal year, together with statements of income, and cash flow of
the Company for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as practicable after the end
of each of the first three fiscal quarters of each fiscal year, but no earlier than the filing of
such information with the Commission, consolidated summary financial information of the Company for
such quarter in reasonable detail; (iii) as soon as they are publicly available, a copy of all
reports (financial or other) mailed to shareholders; (iv) as soon as they are available, a copy of
all non-confidential reports and financial statements furnished to or filed with the Commission or
any securities exchange or automated quotation system on which any class of securities of the
Company is listed; (v) copies of each press release,
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news item and article with respect to the Companys affairs released by the Company; and (vi) such
other information as you may from time to time reasonably request. To the extent that the
information required by this Section 3(c) may be filed with the Commission via the EDGAR electronic
filing system, the filing of such information via the EDGAR electronic filing system shall satisfy
the Companys obligations under this Section 3(c).
(d) In the event the Company has an active subsidiary or subsidiaries, such financial
statements referred to in subsection (c) above will be on a consolidated basis to the extent the
accounts of the Company and its subsidiary or subsidiaries are consolidated in reports furnished to
its shareholders generally.
(e) Subject to this Section 3(e), on or prior to the Effective Date, all officers and
directors of the Company as of the Effective Date shall agree in writing (in the form annexed
hereto as Exhibit A), not to sell, transfer or otherwise dispose of (in any manner
whatsoever, including public dispositions pursuant to Rule 144 under the Act) any Common Stock or
securities exercisable or convertible into Common Stock for a period of ninety (90) days from the
Effective Date, or any longer period required by any state securities commission or the American
Stock Exchange (Amex), without the prior written consent of the Underwriter and, if
applicable, the securities commission of such states or the Amex. The Company further agrees not
to permit, cause, suffer or assist in any such sales, dispositions or transfers. In addition,
without the prior written consent of the Underwriter, the Company shall not sell or offer for sale
any of its securities for a period of ninety (90) days following the Effective Date except pursuant
to options, warrants and convertible securities issued and outstanding on the date of filing of the
Registration Statement or pursuant to any employee stock option plan.
(f) On the Effective Date, the Company shall have taken the necessary action to register the
Securities and the Company will make all filings required to, and will have obtained approval for
the listing of the Shares and the Underlying Shares (other than those issuable upon exercise of the
Underwriters Warrant) on the Amex and, so long as the Company remains a reporting company under
the Exchange Act, it will use its best efforts to maintain such listing or a listing on the Nasdaq
Stock Market, American Stock Exchange or New York Stock Exchange, or any similar national exchange
or quotation system, for at least five years from the Effective Date.
(g) For a period of at least five years from the Effective Date the Company will engage an
independent registered public accounting firm as its auditor.
(h) On the Effective Date, the terms and conditions of all material transactions and proposed
transactions between the Company and each of its subsidiaries, on the one hand, and any of the
Companys officers, directors, affiliates or the beneficial owners of five percent or more of any
class of the Companys equity securities (including, by way of example, but not limitation,
employment agreements, loans, leases, license and service agreements), on the other hand, shall be
reasonably satisfactory to the Underwriter.
(i) Until the Offering has been terminated or concluded, as the case may be, the Company will
not issue a press release or engage in any publicity, other than promotion by
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the Company of its products and services and other press releases in the ordinary course of its
business, without the Underwriters prior written consent, which consent shall not be unreasonably
withheld or delayed.
(j) For a period of three years from the Effective Date, the Underwriter may appoint an
observer reasonably acceptable to the Companys Board of Directors who will be able to attend all
meetings of the Board of Directors and who need not be the same person from meeting to meeting. The
Underwriter shall also have the right to written notice of, and agendas with respect thereto, no
later than notice to other directors of each meeting and to obtain copies of the minutes, if
requested, from all Board of Directors meetings for three years following the Effective Date,
whether or not an observer attends or participates in any such Board meeting. The Company agrees to
reimburse the Underwriter immediately upon the Underwriters request therefor for any reasonable
and documented food, travel and lodging expenses directly incurred by the Underwriter in connection
with its designee or observer attending Company Board of Directors meetings. Nothing in this
Section 3(j) shall require the Company or its Board of Directors to waive its attorney-client
privilege with respect to deliberations and meetings and materials with respect thereto.
(k) The Company shall direct the Depository Trust Company, or such other depository of the
Companys securities, to deliver a special security position report to the Underwriter on a daily
basis for the first 30 days after the Effective Date and on a weekly basis for the first six months
after the Effective Date, each at the Companys sole expense.
(l) For a period of five years following the Effective Date, the Company will maintain
registration with the Commission pursuant to Sections 12(b) or 12(g) of the Exchange Act. In the
event the Company fails to maintain registration with the Commission pursuant to Sections 12(b) or
12(g) during such five year period, the Company will provide reasonable access to an independent
accountant designated by the Underwriter, to all books, records and other documents or statements
that reflect the Companys financial status at least once each quarter, at the Companys reasonable
expense.
(m) For a period of one year from the Effective Date, so long as the Company is a reporting
company under either Sections 12 or 15(d) of the Exchange Act, the Company shall: (i) retain a
transfer agent reasonably acceptable to the Underwriter for the securities of the Company; and (ii)
direct such transfer agent to furnish, at the Companys sole expense, the Underwriter with weekly
transfer sheets as to each of the Companys securities as prepared by the Companys transfer agent
and copies of lists of shareholders when requested by the Underwriter.
(n) The Company will deliver to the Underwriter two manually executed copies of the
Registration Statement including all financial statements and exhibits filed therewith, and of all
amendments thereto when filed with the Commission, and will deliver to the Underwriter such number
of conformed copies of the Registration Statement, including such financial statements and of all
amendments thereto, as the Underwriter may reasonably request. The Company will deliver to or upon
the Underwriters order, from time to time until the Effective Date, as many copies of any
Preliminary Prospectus filed with the Commission prior to
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the Effective Date as the Underwriter may reasonably request. The Company will deliver to the
Underwriter on the Effective Date and thereafter for so long as a Prospectus is required to be
delivered under the Act, from time to time, as many copies of the Prospectus, in final form, or as
thereafter amended or supplemented, as the Underwriter may from time to time reasonably request.
(o) If at any time during the three year period following the Effective Date, the Companys
securities are no longer listed for trading on the Amex or another national securities market or
exchange, the Company shall, at its own expense, undertake to list the Companys securities in the
appropriate recognized securities manual or manuals published by Standard & Poors Corporation and
such other manuals as the Underwriter may designate, such listings to contain the information
required by such manuals and the Uniform Securities Act (the Manuals) and maintain such
listing during said three year period, the Company shall take such action as may be reasonably
requested by the Underwriter to obtain a secondary market trading exemption in such states as may
be reasonably requested by the Underwriter.
(p) At the First Closing Date, the Company shall execute and deliver to you the Underwriters
Warrant Agreement (the Warrant Agreement) substantially in the form filed as an Exhibit
to the Registration Statement, representing the right to purchase 300,000 shares of Common Stock
(representing 10 % of the Primary Offering Shares) (the Underwriters Warrant). The
purchase price for the Underwriters Warrant shall be $.0001 per share of Common Stock covered by
the Underwriters Warrant and it shall be exercisable at 120% of the offering price of the shares
of Common Stock at any time during the four-year period commencing on the first anniversary of the
First Closing Date.
(q) As promptly as practicable after the last Closing Date, the Company will prepare, at its
own expense, hard cover bound volumes relating to the offering, and will distribute such volumes
to the individuals designated by the Underwriter or counsel to the Underwriter.
(r) The Company will apply the net proceeds from the sale of the Securities substantially for
the purposes set forth under Use of Proceeds in the Prospectus.
(s) The Company will make generally available to its securityholders and deliver to the
Underwriter as soon as it is practicable to do so but in no event later than 90 days after the end
of 12 months after its current fiscal quarter, an earnings statement (which need not be
audited) covering a period of at least 12 consecutive months beginning after the Effective Date,
which shall satisfy the requirements of Section 11(a) of the Act.
(t) The Company will reserve and keep available the maximum number of unissued Underlying
Shares and Over-Allotment Securities.
(u) For such period as the Companys securities are registered under the Exchange Act, the
Company will use reasonable best efforts to hold an annual meeting of shareholders for the election
of directors within 180 days after the end of each of the Companys
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fiscal years and, will provide the Companys shareholders with the audited financial statements and
annual reports as required by the Exchange Act and the rules and regulations thereunder.
(v) The Company represents that it has not taken and agrees that it will not take, directly or
indirectly, any action designed to or which has constituted or which might reasonably be expected
to cause or result in the stabilization or manipulation of the price of any of the Securities.
4. Conditions of Underwriters Obligation. The obligations of the Underwriter to
purchase and pay for the Securities are subject to the accuracy as of the Applicable Time, and as
of each Closing Date to the continuing accuracy, of and compliance with the representations and
warranties of the Company herein, to the performance by the Company of its obligations hereunder,
and to the following conditions:
(a) (i) The Registration Statement shall be effective under the Act; (ii) on or prior to each
Closing Date no stop order suspending the effectiveness of the Registration Statement under the Act
or any applicable state securities law shall have been issued and no proceedings for that or a
similar purpose shall have been instituted or shall be pending or, to the knowledge of the Company,
shall be threatened or contemplated by the Commission or any state securities commission; (iii) to
the knowledge of the Company, no stop order suspending the effectiveness of the qualification or
registration of the Securities under the securities or blue sky laws of any jurisdiction (whether
or not a jurisdiction which you shall have specified) shall be threatened or contemplated by the
authorities of any such jurisdiction or shall have been issued and remain in effect; (iv) any
request for additional information on the part of the Commission or any such authorities shall have
been complied with to the satisfaction of the Commission, such authorities and the Underwriter; and
(v) after the date hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to the Underwriter and
the Underwriter did not object thereto. If required, the Prospectus shall have been filed with the
Commission in the manner and within the time period required by Rule 424(b) under the Act.
(b) You shall have received the opinion, dated as of each Closing Date, of Orrick, Herrington
& Sutcliffe LLP, counsel for the Company, in form and substance satisfactory to the Underwriter, to
the effect specified in Exhibit B attached hereto.
The foregoing opinion shall also cover such matters incident to the transactions contemplated
hereby as the Underwriter shall reasonably request. In rendering such opinion, such counsel may
rely upon certificates of any officer of the Company or public officials as to matters of fact.
Such counsel shall also have furnished to the Underwriter a written statement, addressed to
the Underwriter and dated the Closing Date, in form and substance satisfactory to the Underwriter,
to the effect that (x) such counsel has acted as counsel to the Company in connection with the
preparation of the Registration Statement and the Prospectus, and each amendment or supplement
thereto made by the Company prior to the Closing Date, (y) based on such counsels examination of
the Registration Statement and the Prospectus, and each
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amendment or supplement thereto made by the Company prior to the Closing Date and the documents
incorporated by reference in the Registration Statement or the Prospectus and any further amendment
or supplement to any such incorporated document made by the Company prior to the Closing Date, and
such counsels investigations made in connection with the preparation of the Registration Statement
and the Prospectus, and each amendment or supplement thereto made by the Company prior to the
Closing Date, and conferences with certain officers and employees of and with auditors for and
counsel to the Company, such counsel has no reason to believe that (I) the registration statement
for the Offering or any amendment thereto, at the Applicable Time, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading, or that the Prospectus or any amendment or
supplement thereto, at the respective date thereof or at the Closing Date, contained or contains
any untrue statement of a material fact or omits to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they were made, not
misleading; or (II) any document incorporated by reference in the Prospectus, when they were filed
with the Commission, contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; it being understood that such counsel need express no
opinion as to the financial statements or other financial data contained in the Registration
Statement, the Prospectus or an incorporated document. The foregoing statement may be qualified by
a statement to the effect that such counsel has not independently verified the accuracy,
completeness or fairness of the statements contained in the Registration Statement or the
Prospectus and takes no responsibility therefor except to the extent set forth in paragraphs
(xii) and (xiii) of the opinion delivered pursuant to this clause (b).
(c) All corporate proceedings and other legal matters relating directly or indirectly to this
Agreement, the Registration Statement, the Prospectus and other related matters shall be reasonably
satisfactory to the Underwriter.
(d) You shall have received a letter on the date of this Agreement and again on and as of each
Closing Date from Farber Hass Hurley & McEwen LLP, independent registered public accounting firm
for the Company, substantially in the form and substance satisfactory to the Underwriter, stating
that:
(i) they are an independent registered public accounting firm with respect to
the Company within the meaning of the Act and the applicable rules and regulations;
(ii)(A) the financial statements and the schedules included in the Registration
Statement and the Prospectus (other than the financial statements and schedules of
VirnetX, Inc. as of and for the years ended December 31, 2005 and 2006) audited by
them comply, in their opinion, as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations; and (B)
as to the financial statements and schedules of VirnetX, Inc. as of and for the
years ended December 31, 2005 and 2006 included in the Registration Statement and
the Prospectus, nothing has come to their attention
-19-
that would lead them to believe that such financial statements and schedules do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations;
(iii) on the basis of inquiries and procedures conducted by them (not
constituting an audit in accordance with generally accepted auditing standards),
including a reading of the latest available unaudited interim financial statements
or other financial information of the Company (with an indication of the date of the
latest available unaudited interim financial statements), inquiries of officers of
the Company who have responsibility for financial and accounting matters, review of
minutes of all meetings of the shareholders, the Board of Directors and the audit
committee of the Company and other specified inquiries and procedures, nothing has
come to their attention as a result of the foregoing inquiries and procedures that
causes them to believe that:
(A) as of a specified date not more than five days prior to the date of such
letters, there has not been any change in the capital stock, increase in long-term
debt or decrease in consolidated net current assets or stockholders equity or in
any other item appearing in the Companys financial statements as to which the
Underwriter may request advice, in each case as compared with amounts shown in the
balance sheet as of the date of the most recent financial statements included in the
Prospectus and Registration Statement, except in each case for changes, increases or
decreases that the Prospectus and Registration Statement discloses have occurred or
will occur;
(B) during the period from (and including) the date of the financial statements
in the Registration Statement and the Prospectus to such specified date there was
any decrease n consolidated net sales or in the total or per-share amounts of income
before extraordinary items or of net income or any other material change in such
other items appearing in the Companys financial statements as to which the
Underwriter may request advice, in each case as compared with the corresponding
period in the preceding year, xcept in each case for increases, changes or decreases
that the Prospectus discloses have occurred or will occur;
(C) the unaudited interim financial statements of the Company appearing in the
Registration Statement and the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and Regulations
and are fairly presented in conformity with generally accepted accounting principles
and practices on a basis substantially consistent with the audited financial
statements included in the Registration Statements or the Prospectus; and
(iv) they have compared specific dollar amounts, numbers of shares, percentages
of revenues and earnings, statements and other financial information pertaining to
the Company set forth in the Prospectus in each case to the extent
-20-
that such amounts, numbers, percentages, statements and information may be derived
from the general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letters and
found them to be in agreement.
Such letters shall also set forth such other information as may be reasonably requested by
counsel for the Underwriter. Any changes, increases or decreases in the items set forth in such
letters which, in the judgment of the Underwriter, are materially adverse with respect to the
financial position or results of operations of the Company shall be deemed to constitute a failure
of the Company to comply with the conditions of the obligations to the Underwriter hereunder.
(e) You shall have received an opinion from DLA Piper LLP (US), your counsel, dated the
Closing Date, with respect to such matters as the Underwriter may reasonably require, and the
Company shall have furnished to such counsel such documents as they request for enabling them to
pass upon such matters.
(f) (i) the representations and warranties of the Company contained in this Agreement shall be
true and correct in all material respects with the same effect as if made on and as of the Closing
Dates, taking into account the Over-Allotment Option Closing Date(s) and the effect of the
transactions contemplated hereby, and the Company shall have performed all of its obligations
hereunder and satisfied all of the conditions on its part to be satisfied at or prior to such
Closing Date; (ii) the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and shall in all material respects conform to the requirements
thereof, and none of the General Disclosure Package, the Registration Statement or the Prospectus
nor any amendment or supplement thereto shall contain, as of the Applicable Time, the time of this
Agreement and each Closing Date, any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements therein not
misleading (in light of the circumstances under which they were made in the case of the
Prospectus); (iii) there shall have been, since the respective dates as of which information is
given, no material adverse change, or to the Companys knowledge, any development involving a
prospective material adverse change, in the business, properties, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term debt or general affairs
of the Company from that set forth in the General Disclosure Package, the Registration Statement
and the Prospectus, except changes which the General Disclosure Package, the Registration Statement
and Prospectus indicate might occur after the Applicable Time and the Company shall not have
incurred any material liabilities or entered into any material agreement not in the ordinary course
of business other than as referred to in the General Disclosure Package, the Registration Statement
and Prospectus; (iv) except as set forth in the General Disclosure Package and the Prospectus, no
action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the
Company, threatened against the Company which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or, to the knowledge of the Company, threatened
against the
-21-
Company before or by any commission, board or administrative agency, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the Company; and (v) you
shall have received, at such Closing Date, a certificate signed by each of the chief executive
officer and the principal financial officer of the Company, dated as of such Closing Date,
evidencing compliance with the provisions of this subsection (f).
(g) No action shall have been taken by the Commission or the FINRA, the effect of which would
make it improper, at any time prior to a Closing Date, for members of the FINRA to execute
transactions in the Securities and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the Underwriter or the Company, shall be
contemplated by the Commission or the FINRA. The Company and the Underwriter represent that at the
date hereof each has no knowledge that any such action is in fact contemplated against it by the
Commission or the FINRA. The Company shall advise the Underwriter of any FINRA affiliation of any
of its officers, directors, or shareholders or their affiliates.
(h) Prior to the Effective Date, the Underwriter shall have received clearance from the FINRA
as to the amount of compensation allowable or payable to the Underwriter, as described in the
Registration Statement.
(i) If any of the conditions herein provided for in this section shall not have been fulfilled
in all material respects as of the date indicated, this Agreement and all obligations of the
Underwriter under this Agreement may be canceled at, or at any time prior to, each Closing Date by
the Underwriter notifying the Company of such cancellation in writing at or prior to the applicable
Closing Date. Any such cancellation shall be without liability of the Underwriter to the Company.
(j) McDermott Will & Emery LLP, special patent counsel to the Company, shall have furnished to
the Underwriter such counsels written opinion, addressed to the Underwriter and dated each Closing
Date, in form and substance reasonably satisfactory to the Underwriter, to the effect that to the
best of such counsels knowledge, the statements in the
Registration Statement and the Prospectus (and any similar section or
information contained in the General Disclosure Package) under the captions Risk Factors-Risks related to existing and future litigationWe 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,
BusinessIntellectual Property and Patent Rights, Assignment of Patents, and
Legal Proceedings in so far as such statements describe
certain legal proceedings or assignment of patent documents, fairly
summarize in all material respects the matters referred to therein.
(k) The Underwriter shall have received such other documents and items as it or its counsel
has reasonably requested and are satisfied with all other items relating directly and/or indirectly
to the Company and the Offering.
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5. Conditions of the Obligations of the Company. The obligation of the Company to sell
and deliver the Securities is subject to the condition that on or prior to each Closing Date, no
stop order suspending the effectiveness of the Registration Statement under the Act and any
applicable state securities law shall have been issued and no proceedings for that or a similar
purpose shall have been instituted or shall be pending or, or to the knowledge of the Company,
threatened or contemplated by the Commission or any state securities commission. Further, the
obligation of the Company to sell and deliver the Securities is subject to the accuracy of the
representations of the Underwriter contained in Section 12.
6. Indemnification.
(a) The Company agrees (i) to indemnify and hold harmless the Underwriter and each person, if
any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act against any losses, claims, damages or liabilities, joint or several (which shall,
for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense
and investigation and all reasonable attorneys fees), to which the Underwriter or such controlling
person may become subject, under the Act or otherwise, and (ii) to reimburse, as incurred, each
such Underwriter and each such controlling persons for any legal or other expenses reasonably
incurred in connection with investigating, defending against or appearing as a third party witness
in connection with any losses, claims, damages or liabilities; insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) relating to (i) and (ii) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact contained in
(A) the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by the Company
specifically for that purpose containing written information specifically furnished by the Company
and filed in any state or other jurisdiction in order to qualify any or all of the Securities under
the securities laws thereof (any such application, document or information being hereinafter called
a Blue Sky Application), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus, Prospectus, or any
amendment or supplement thereto, or in any Blue Sky Application, a material fact required to be
stated therein or necessary to make the statements therein not misleading (in light of the
circumstances under which they were made in the case of the Prospectus); provided, however, that
the Company will not be required to indemnify the Underwriter and any controlling persons or be
liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with written Underwriter
Information furnished to the Company by or on behalf of the Underwriter specifically for use in the
preparation of the Registration Statement or any such amendment or supplement thereof or any such
Blue Sky Application or any such Preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto; provided, further that the indemnity with respect to any Preliminary Prospectus
shall not be applicable on account of any losses, claims, damages, liabilities or litigation
arising from the sale of Securities to any person if a copy of the Prospectus was not delivered to
such person at or prior to the written confirmation of the sale to such person. This indemnity will
be in addition to any liability which the Company may otherwise have.
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(b) The Underwriter will indemnify and hold harmless the Company, each of its directors, each
of its officers who have signed the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and reasonable attorneys fees) to which the Company or any such
director, officer or controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements therein not
misleading (in light of the circumstances under which they were made in the case of the
Prospectus), in each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or any Blue Sky
Application in reliance upon and in conformity with written Underwriter Information furnished to
the Company by the Underwriter specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party under this section of notice of the
commencement of any action, such indemnified party will, if a claim in respect thereof is to be
made against the indemnifying party under this section, notify in writing the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than under this section. In
case any such action is brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to participate in, and,
to the extent that it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this section for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof, but the fees and expenses of such
counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed
the defense of the action with counsel reasonably satisfactory to the indemnified party; provided
that the reasonable fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party and in the reasonable
judgment of the counsel to the indemnified party, it is advisable for the indemnified party to be
represented by separate counsel (in which case the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party, it being understood,
however, that the indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the
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same jurisdiction arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the indemnified party,
which firm shall be designated in writing by the indemnified party (other than local counsel)). No
settlement of any action against an indemnified party shall be made without the consent of the
indemnified party, which shall not be unreasonably withheld. The indemnified party shall not settle
any action without the consent of the indemnifying party, which consent shall not be unreasonably
withheld. If it is ultimately determined that indemnification is not permitted, then an indemnified
party will return all monies advanced to the indemnifying party.
7. Contribution. In circumstances in which the indemnity agreement provided for in
Section 6 is unavailable or insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in
order to provide for just and equitable contribution, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The
relative benefit received by the Company on the one hand and the Underwriter on the other shall be
deemed to be in the same proportion as the total proceeds from the offering (before deducting
expenses) received by the Company to the total underwriting discounts and commissions received by
the Underwriter. The relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the Company or the
Underwriter, the parties relative intents, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company and the Underwriter agree that it would not be equitable if the
amount of such contributions were determined by pro rata or per capita allocation or by any other
method of allocation that does not take into account the equitable considerations referred to in
the first sentence of this Section 7. Notwithstanding any other provision of this Section 7, the
Underwriter shall not be obligated to make contributions hereunder that in the aggregate exceed the
total compensation received by the Underwriter under this Agreement, less the aggregate amount of
any damages that such Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any,
who controls the Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company.
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8. Costs and Expenses; Reimbursement of Underwriters Expenses. The Company agrees to
pay, or reimburse if paid by the Underwriter, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated: (a) the costs incident to the authorization,
issuance, sale, preparation and delivery of the Securities to the Underwriter and any taxes payable
in that connection; (b) the costs incident to the registration of the Securities under the
Securities Act; (c) the costs incident to the preparation, printing and distribution of the
registration statements for the Offering, any Preliminary Prospectus, the Prospectus, any
amendments, supplements and exhibits thereto or any document incorporated by reference therein and
the costs of printing, reproducing and distributing this Agreement, and any closing documents by
mail, telex or other means of communications; (d) the fees and expenses (including related fees and
expenses of counsel for the Underwriter, which fees and expenses, together with the fees and
expenses of counsel for the Underwriter referenced in clause (f) below, shall not exceed $15,000 in
aggregate) incurred in connection with securing any required review by FINRA of the terms of the
sale of the Securities and any filings made with FINRA, if applicable; (e) any applicable listing
or other fees; (f) the fees and expenses (including related fees and expenses of counsel to the
Underwriter) of qualifying the Securities under the securities laws of the applicable jurisdictions
and of preparing, printing and distributing wrappers, Blue Sky Memoranda and Legal Investment
Surveys; (g) the cost of preparing and printing stock certificates; (h) all fees and expenses of
the registrar and transfer agent of the shares of Common Stock and of the Warrant agent of the Public Warrants;
(i) travel and all other reasonable
out-of-pocket expenses of the Underwriter (including the reasonable fees and disbursements of the Underwriters
counsel), provided that any such expense reimbursement paid to the Underwriter, together with the expense reimbursement
provided for in item (j) below, shall not exceed $35,000; (j) the costs and
expenses relating to investor presentations on any road show undertaken in
connection with the marketing of the offering of the Securities, including, without limitation,
expenses associated with the preparation or dissemination of any electronic road show, expenses
associated with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the officers of the Company and such consultants, including
the cost of any aircraft chartered in connection with the road show, provided that any such expense
reimbursement paid to the Underwriter, together with the expense reimbursement provided for in item (i)
above, shall not exceed $35,000; and (k) all other costs and
expenses incident to the offering of the Securities or the performance of the obligations of the
Company under this Agreement (including, without limitation, the fees and expenses of the Companys
counsel and the Companys independent accountants), provided that, except to the extent otherwise
provided in this Section 8, the Underwriter shall pay its own costs and expenses, including the
fees and expenses of its counsel and the expenses of advertising any offering of the Securities
made by the Underwriter. The Underwriter acknowledges that the
Company has previously paid approximately $186,000 of legal fees and
disbursements of DLA Piper LLP (US) in connection with a best-efforts
placement (in which such law firm was acting as placement agent
counsel) that was not pursued.
Notwithstanding
anything to the contrary in this Agreement, if (a) this Agreement shall have
been terminated pursuant to Section 10, (b) the Company shall fail to tender the Securities for
delivery to the Underwriter for any reason not permitted under this Agreement, (c) the Underwriter
shall decline to purchase the Securities for any reason permitted under this Agreement or (d) the
sale of the Securities is not consummated because any condition to the obligations of the
Underwriter set forth herein is not satisfied or because of the refusal, inability or failure on
the part of the Company to perform any agreement herein or to satisfy any condition or to comply
with the provisions hereof, then in addition to the payment of amounts in accordance with the
preceding paragraph, the Company shall reimburse the Underwriter for the fees and expenses of
Underwriters counsel and for such other accountable out-of-pocket expenses as shall
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have been reasonably incurred by it in connection with this Agreement and the proposed purchase of
the Securities, including, without limitation, travel and lodging expenses of the Underwriter,
without giving effect to any limitations thereon contained in this Section 8, and upon demand the
Company shall pay the full amount borne by the Underwriter to the Underwriter.
9. Effective Date. The Agreement shall become effective upon its execution, except
that the Underwriter may, at the Underwriters option, delay its effectiveness until 11:00 a.m. New
York time on the first full business day following the Effective Date, or at such earlier time on
such business day after the Effective Date as the Underwriter in its discretion shall first
commence the offering of the Securities. The time of the Offering shall mean the time when the
Securities are first generally offered by you to dealers by letter or telegram. This Agreement may
be terminated by you at any time before it becomes effective as provided above, except that
Sections 3, 6, 7, 8, 13, 14, 15, 16 and 17 shall remain in effect notwithstanding such termination.
10. Termination.
(a) After this Agreement becomes effective, this Agreement, except for Sections 3, 6, 7, 8,
12, 14, 15, 16 and 17 hereof, may be terminated at any time prior to the First Closing Date, any
additional Closing Date, and the Over-Allotment Option referred to in Section 2(b) hereof, if
exercised, may be cancelled at any time prior to a Closing Date, by the Underwriter if in the
Underwriters judgment it is impracticable to offer for sale or to enforce contracts made for the
sale of the Securities agreed to be purchased hereunder by reason of: (i) the Company having
sustained a material adverse loss, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government action, order or
decree; (ii) trading in securities on the New York Stock Exchange, Inc., the Amex or the Nasdaq
Stock Market having been suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date hereof); (iv) a
banking moratorium having been declared by United States or New York State authorities; (v) an
outbreak of major international hostilities, a substantial terrorist attack, or other national or
international calamity having occurred involving the United States or; (vi) the passage by the
Congress of the United States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive, which is reasonably
believed likely by the Underwriter to have a material adverse impact on the business, financial
condition or financial statements of the Company or the market for the securities offered hereby;
(vii) any material adverse change in the financial or securities markets beyond normal market
fluctuations having occurred since the date of this Agreement; (viii) any material adverse change
having occurred, since the respective dates as of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects or general condition of the Company,
financial or otherwise, whether or not arising in the ordinary course of business; (ix) a pending
or threatened legal or governmental proceeding or action relating generally to the Companys
business, or a notification having been received by the Company of the threat of any such
proceeding or action, which could, in the reasonable judgment of the Underwriter, materially
adversely affect the Company; (x) the Company is merged or consolidated into or acquired by another
company or group or there exists a binding
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legal commitment for the foregoing or any other material change of ownership or control occurs; or
(xi) the Company shall not have timely complied in all material respects with any material term,
condition or provision on their part to be performed, complied with or fulfilled (including but not
limited to those set forth in this Agreement) in connection with the Offering.
(b) If you elect to prevent this Agreement from becoming effective or to terminate this
Agreement as provided in this Section 10, the Company shall be promptly notified by you by
telephone, confirmed in writing.
11. Warrant Agreement and Warrant Controlling. In the event of any conflict in the
terms of this Agreement and the Warrant Agreement or the Underwriters Warrant, the language in the
form of the Warrant Agreement and the Underwriters Warrant shall control.
12. Representations and Warranties of the Underwriter. The Underwriter represents and
warrants to the Company that it is registered and in good standing as a broker/dealer in all
jurisdictions in which it will seek purchasers for the Securities and that it has adequate net
capital requirements to consummate the transactions contemplated by this Agreement.
13. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or contained in certificates
of officers of the Company submitted pursuant hereto, shall be deemed to be representations,
warranties and agreements at each Closing Date, and such representations, warranties and agreements
of the Company and the indemnity agreements contained in Section 6 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on behalf of the
Underwriter, the Company, any controlling person of the Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the Securities and the
Underwriters Warrant.
14. Notices. Any communications specifically required hereunder to be in writing, if
sent to the Underwriter, will be mailed, delivered or faxed and confirmed to them at Gilford
Securities Incorporated, 777 Third Avenue, 17th Floor, New York, New York 10017,
Attention: Robert A. Maley, facsimile number (212) 223-1683, with a copy (which shall not
constitute notice) sent to DLA Piper LLP (US), 1251 Avenue of the Americas, New York, NY 10020,
Attention: Christopher C. Paci, facsimile number (212) 884-8470; if sent to the Company, will be
mailed, delivered or faxed and confirmed to it at VirnetX Holding Corporation, 5615 Scotts Valley
Drive, Suite 110, Scotts Valley, California 95066, Attention: Kendall Larsen, Chief Executive
Officer, facsimile number (831) 438-8700; with a copy (which shall not constitute notice) sent to
Orrick, Herrington & Sutcliffe LLP, 1000 Marsh Road, Menlo Park, California 94025-1015, Attention:
Lowell D. Ness, facsimile number (650) 614-7401. Notice shall be deemed to have been duly given if
mailed or transmitted by facsimile with receipt confirmation.
15. Parties in Interest. The Agreement herein set forth is made solely for the benefit
of the Underwriter, the Company, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the Prospectus, its officers who
have signed the Registration Statement, and their respective executors, administrators,
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successors, assigns and no other person shall acquire or have any right under or by virtue of this
Agreement. The term successors and assigns shall not include any purchaser, as such
purchaser, of the Securities (exclusive of the Over-Allotment Securities).
16. Applicable Law. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York without regard to the conflicts of laws principles
thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly
or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state
court located in the City, County and State of New York. By its execution hereof, the parties
hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state
courts located in the City, County and State of New York and agree that any process in any such
action may be served upon any of them personally, or by certified mail or registered mail upon them
or their agent, return receipt requested, with the same full force and effect as if personally
served upon them in New York City. The parties hereto expressly and irrevocably waive any claim
that any such jurisdiction is not a convenient forum for any such suit or proceeding and any
defense or lack of in personam jurisdiction with respect thereto. In the event of any such action
or proceeding, the party prevailing therein shall be entitled to payment from the other party
hereto of its reasonable counsel fees and disbursements.
17. Counterparts. This agreement may be executed in one or more counterparts each of
which shall be deemed to constitute an original and shall become effective when one or more
counterparts have been signed by each of the parties hereto and delivered to the other parties
(including by fax, followed by original copies by overnight mail).
18. Entire Agreement; Amendments. This Agreement constitutes the entire agreement of
the parties hereto and supersedes all prior written or oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may not be amended except in
writing, signed by the Underwriter and the Company.
[Remainder of page intentionally left blank]
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If the foregoing is in accordance with your understanding of our agreement, kindly sign and
return this agreement, whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
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Very truly yours, |
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VIRNETX HOLDING CORPORATION |
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By: |
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Name: |
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Title: |
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The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first
above written.
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GILFORD SECURITIES INCORPORATED |
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By: |
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Robert A. Maley |
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President |
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LIST OF SCHEDULES AND EXHIBITS
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Schedule I
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Orally Conveyed Information |
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Exhibit A
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Form of Lock-up Agreement |
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Exhibit B
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Form of Opinion of Orrick, Herrington & Sutcliffe LLP |
Schedule I
Orally Conveyed Information
Exhibit A
[Form of Lock-Up Agreement]
_________ __,
2009
Gilford Securities Incorporated
777 Third Avenue, 17th Floor
New York, New York 10017
Re: VIRNETX HOLDING CORPORATION Registration Statement on Form S-1
Dear Sirs:
This
Agreement is being delivered to you in connection with the proposed
Underwriting Agreement
(the Underwriting Agreement) between VirnetX Holding Corporation, a Delaware corporation (the
Company), and Gilford Securities Incorporated
(Gilford or the Underwriter), and the other parties thereto (if any), relating to the proposed
public offering of 3,000,000 shares of the common stock, par value $0.0001 per share (the Common Stock), of
the Company, and warrants to purchase up to 4,500,000 shares
of Common Stock. The
aggregate shares of Common Stock so proposed to be sold is hereinafter referred to as the Stock
and the number of shares of Common Stock issuable upon exercise of the Warrants is hereinafter
referred to as the Warrant Stock. The Warrant Stock, together with the Stock and the Warrants,
is referred to herein as the Securities.
In order to induce you to enter into the Underwriting Agreement, and in light of the benefits
that the offering of the Securities will confer upon the undersigned in its capacity as a
securityholder and/or an officer, director or employee of the Company, and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with the Underwriter that, during the period beginning on and including the date of the
Underwriting Agreement through and including the date that is the 90th day after the date of the
Underwriting Agreement (the Lock-Up Period), the undersigned will not, without the prior
written consent of the Underwriter, directly or indirectly, (i) offer, sell, assign,
transfer, pledge, contract to sell, or otherwise dispose of, or announce the intention to otherwise
dispose of, any shares of Common Stock (including, without
2
limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same
may be amended or supplemented from time to time (such shares, the Beneficially Owned Shares)) or
securities convertible into or exercisable or exchangeable for Common Stock, (ii) enter into any
swap, hedge or similar agreement or arrangement that transfers in whole or in part, the economic
risk of ownership of the Beneficially Owned Shares or securities convertible into or exercisable or
exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with
respect to which the undersigned has or hereafter acquires the power of disposition, or (iii)
engage in any short selling of the Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock. If (i) the Company issues an earnings release or material news or a
material event relating to the Company occurs during the last 17 days of the Lock-Up Period, or
(ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release
earnings results during the 16-day period beginning on the last day of the Lock-Up Period, the
Lock-Up Period shall be extended and the restrictions imposed by this Agreement shall continue to
apply until the expiration of the 18-day period beginning on the issuance of the earnings release
or the occurrence of the material news or material event.
The restrictions set forth in the immediately preceding paragraph shall not apply to:
(1) if the undersigned is a natural person, any transfers made by the undersigned (a) as a
bona fide gift to any member of the immediate family (as defined below) of the undersigned
or to a trust the beneficiaries of which are exclusively the undersigned or members of the
undersigneds immediate family, (b) by will or intestate succession upon the death of the
undersigned or (c) as a bona fide gift to a charity or educational institution,
(2) if the undersigned is a corporation, partnership, limited liability company or other
business entity, any transfers to any shareholder, partner or member of, or owner of a
similar equity interest in, the undersigned, as the case may be, if, in any such case, such
transfer is not for value, and
(3) if the undersigned is a corporation, partnership, limited liability company or other
business entity, any transfer made by the undersigned (a) in connection with the sale or
other bona fide transfer in a single transaction of all or substantially all of the
undersigneds capital stock, partnership interests, membership interests or other similar
equity interests, as the case may be, or all or substantially all of the undersigneds
assets, in any such case not undertaken for the purpose of avoiding the restrictions imposed
by this agreement or (b) to another corporation, partnership, limited liability company or
other business entity so long as the transferee is an affiliate (as defined below) of the
undersigned and such transfer is not for value;
provided, however, that in the case of any transfer described in clause (1), (2) or (3) above, it
shall be a condition to the transfer that (A) the transferee
executes and delivers to the Underwriter, not later than one business day prior to such transfer, a written agreement, in
substantially the form of this agreement (it being understood that any references to immediate
family in the agreement executed by such transferee shall expressly refer only to the immediate
family of the undersigned and not to the immediate family of the transferee) and otherwise
satisfactory in form and substance to the Underwriter, and (B) if the undersigned is
required to file a report under Section 16(a) of the Securities Exchange Act of 1934, as amended,
reporting a reduction in beneficial ownership of shares of Common Stock or Beneficially Owned
Shares or any securities convertible into or exercisable or exchangeable for Common Stock or
Beneficially Owned Shares during the Lock-Up Period (as the same may be extended as described
above), the undersigned shall include a statement in such report to the effect that, in the case of
any transfer pursuant to clause (1) above, such transfer is being made as a gift or by will or
intestate succession or, in the case of any transfer pursuant to clause (2) above, such transfer is
being made to a shareholder, partner or member of, or owner of a similar equity interest in, the
undersigned and is not a transfer for value or, in the case of any transfer pursuant to clause (3)
above, such transfer is being made either (a) in connection with the sale or other bona fide
transfer in a single transaction of all or substantially all of the undersigneds capital stock,
partnership interests, membership interests or other similar equity interests, as the case may be,
or all or substantially all of the undersigneds assets or (b) to another corporation, partnership,
limited liability company or other business entity that is an affiliate of the undersigned and such
transfer is not for value. For purposes of this paragraph, immediate family shall mean a spouse,
child, grandchild or other lineal descendant (including by adoption), father, mother, brother or
sister of the undersigned; and affiliate shall have the meaning set forth in Rule 405 under the
Securities Act of 1933, as amended.
3
In order to enable this covenant to be enforced, the undersigned hereby consents to the placing of
legends or stop transfer instructions with the Companys transfer agent with respect to any Common
Stock or securities convertible into or exercisable or exchangeable for Common Stock.
The undersigned further agrees that (i) it will not, during the Lock-Up Period (as the same may be
extended as described above), make any demand or request for or exercise any right with respect to
the registration under the Securities Act of 1933, as amended, of any shares of Common Stock or
other Beneficially Owned Shares or any securities convertible into or exercisable or exchangeable
for Common Stock or other Beneficially Owned Shares, and (ii) the Company may, with respect to any
Common Stock or other Beneficially Owned Shares or any securities convertible into or exercisable
or exchangeable for Common Stock or other Beneficially Owned Shares owned or held (of record or
beneficially) by the undersigned, cause the transfer agent or other registrar to enter stop
transfer instructions and implement stop transfer procedures with respect to such securities during
the Lock-Up Period (as the same may be extended as described above).
The undersigned hereby represents and warrants that the undersigned has full power and authority to
enter into this agreement and that this agreement has been duly authorized (if the undersigned is
not a natural person), executed and delivered by the undersigned and is a valid and binding
agreement of the undersigned. This agreement and all authority herein conferred are irrevocable
and shall survive the death or incapacity of the undersigned (if a natural person) and shall be
binding upon the heirs, personal representatives, successors and assigns of the undersigned.
The undersigned acknowledges and agrees that whether or not any public offering of Securities
actually occurs depends on a number of factors, including market conditions.
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Very truly yours, |
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(Name of Stockholder Please Print) |
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(Signature) |
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(Name of Signatory if Stockholder is an entity Please Print) |
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(Title of Signatory if Stockholder is an entity Please Print) |
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Address: |
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Exhibit B
Form of Opinion of Orrick, Herrington & Sutcliffe LLP
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The Company and VirnetX, Inc. have been duly incorporated and are validly existing as
corporations or other legal entities in good standing under the laws of their respective
jurisdictions of organization and have all power and authority necessary to own their
respective properties and to conduct the businesses in which they are engaged as described in
the General Disclosure Package and the Prospectus and to enter into and perform its
obligations under this Agreement. |
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The Company and VirnetX, Inc. are duly qualified to do business and are in good standing as
foreign corporations in California and Delaware. |
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The Company has an authorized capitalization as set forth in under the heading
capitalization in the Pricing Prospectus and the Prospectus; and the authorized capital
stock of the Company conforms as to legal matters to the description thereof contained in the
General Disclosure Package and the Prospectus. |
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(iv) |
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The Securities, the Underwriters Warrant, and the shares of Common Stock issuable upon exercise of the Public Warrants
and the Underwriters Warrant (the Warrant Stock) have been duly and validly authorized for issuance and sale to the
Underwriter pursuant to the Underwriting Agreement; when issued and delivered by the Company
pursuant to the Underwriting Agreement and against payment of the consideration therefor, the
Securities and the Warrant Stock will be validly issued and fully paid and nonassessable. The
form of certificate used to evidence the Primary Offering Shares and Over-Allotment Shares
complies in all material respects with all applicable statutory requirements, all applicable
requirements of the charter and by-laws of the Company and all applicable requirements of the
American Stock Exchange. |
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(v) |
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All the issued shares of capital stock (or analogous ownership interests, as applicable) of
VirnetX, Inc. have been duly and validly authorized and issued, are fully paid and
nonassessable and, except to the extent set forth in the General Disclosure Package and the
Prospectus, are owned by the Company directly or indirectly through one or more wholly-owned
subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction
upon voting or transfer or any other claim of any third party; and none of the outstanding
shares of capital stock (or analogous ownership interests, as applicable) of any subsidiary of
the Company was issued in violation of the preemptive or similar rights of any securityholder
of such subsidiary. |
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(vi) |
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There are no preemptive or other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the Securities, the Underwriters Warrant, or the Warrant Stock, pursuant to the
Companys charter or by-laws or any agreement or other instrument known to such counsel. |
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(vii) |
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The Underwriting Agreement has been duly authorized, executed and delivered by the Company. |
(viii) |
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[Reserved]. |
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(ix) |
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The Warrant Agent Agreement has been duly authorized, executed and delivered by the Company is a
valid and binding agreement of the Company, enforceable against the Company in accordance with
its terms. |
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(x) |
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The execution, delivery and performance of this Agreement by the Company, the issuance and
sale of the Securities, the Underwriters Warrant and the Warrant Stock and the consummation by the Company of the
transactions contemplated hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the properties or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the charter or by-laws (or analogous
governing instruments, as applicable) of the Company or of any of its subsidiaries or any law,
statute, rule, regulation, judgment, order or decree of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of their
properties or assets. |
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(xi) |
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Except for the registration of the Securities and the
shares of Common Stock issuable upon exercise of the
Underwriters Warrant under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection with the sale of the
Securities and the Underwriters Warrant to the Underwriter, no consent, approval, authorization or order of, or filing,
qualification or registration with, any court or governmental or non-governmental agency or
body, which has not been obtained or taken and is not in full force
and effect, is required
for the execution, delivery and performance of this Agreement by the Company, the offer, issue
and sale of the Securities and the Underwriters Warrant or the consummation by the Company of the transactions contemplated
hereby or thereby. |
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(xii) |
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The statements under the heading Risk FactorsRisks relating to existing and future
litigationWe 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, If we fail to meet our obligations to SAIC, we may
lose our rights to key technologies on which our business depends, When we attempt to
implement our secure domain name registry services business, we may be subject to government
and industry regulation and oversight which may impede our ability to achieve our business
strategy, 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, Risks related to our stockOur 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, BusinessAssignment of Patents, Litigation,
Government Regulation, Executive CompensationTransactions with Related
PersonsIndemnification Agreements, Registration Rights Agreement, Lockup Agreements,
Corporate Governance, Description of Securities, Legal |
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Proceedings, Indemnification of Officers and Directors and Plan of Distribution in the
Prospectus (and any similar section or information contained in the General Disclosure
Package), to the extent that such statements purport to constitute summaries of matters of
law or regulation, legal conclusions or legal proceedings or summaries of documents referred
to therein, fairly summarize the matters described therein in all material respects. |
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(xiii) |
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The description in the Registration Statement, the General Disclosure Package and the
Prospectus of statutes, legal or governmental proceedings and contracts and other documents
are fairly summarized in all material respects and there are no pending legal or governmental
proceedings or contracts or other documents to which the Company or any of its subsidiaries is
a party or to which the property of the Company or any of its subsidiaries is subject that are
required to be described in the General Disclosure Package or the Prospectus or a document
incorporated by reference therein or to be filed as exhibits to the Registration Statements or
a document incorporated by reference therein which are not described or filed as required. |
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(xiv) |
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Neither the Company nor VirnetX, Inc. (i) is in violation of its charter or by-laws (or
analogous governing instrument, as applicable), (ii) is in default, and no event has occurred,
which, with notice or lapse of time or both, would constitute a default, in the due
performance or observance of any term, covenant or condition contained in any agreement or
instrument to which it is a party or by which it is bound or to which any of its properties or
assets is subject that is listed as an exhibit to the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 or any Quarterly Report on Form 10-K for any
quarters in 2008 or any Current Report on Form 8-K in 2008 or (iii) is in violation of any
law, statute, ordinance, governmental rule, regulation or court decree to which it or its
property or assets may be subject or has failed to obtain any license, permit, certificate,
franchise or other governmental or non-governmental authorization or permit necessary for the
ownership of its property or to the conduct of its business as described in the General
Disclosure Package and the Prospectus. |
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(xv) |
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Other than as set forth in the General Disclosure Package and the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property or asset of the Company or any of its subsidiaries is the
subject which, singularly or in the aggregate, if determined adversely to the Company or any
of its subsidiaries, might have a Material Adverse Effect or would prevent or adversely affect
the ability of the Company to perform its obligations under this Agreement; and, to the best
of such counsels knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others. |
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(xvi) |
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Each Registration Statement was declared effective under the Securities Act as of the date
and time specified in such opinion, the Rule 462(b) Registration Statement, if any, was filed
with the Commission on the date specified therein and became effective immediately upon such
filing, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule
424(b) and in compliance with Rules 430A of the Rules and Regulations on the date specified in
such opinion and no stop order suspending the |
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effectiveness of any Registration Statement or any part thereof has been issued and, to the
knowledge of such counsel, no proceeding for that purpose is pending or threatened by the
Commission. |
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(xvii) |
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The Registration Statements and any amendments thereto made by the Company prior to the
Closing Date (other than the financial statements and other financial data contained therein,
as to which such counsel need express no opinion), at the Applicable Time and as of the date
of this Agreement, complied as to form in all material respects with the requirements of the
Securities Act and the Rules and Regulations; the Pricing Prospectus (other than the financial
statements and other financial data contained therein, as to which such counsel need express
no opinion), as of the Applicable Time, complied as to form in all material respects with the
requirements of the Securities Act; and the Prospectus and any amendments or supplements
thereto made by the Company prior to the Closing Date (other than the financial statements and
other financial data contained therein, as to which such counsel need express no opinion), as
of the respective date thereof, complied as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations; and the documents
incorporated by reference in the Pricing Prospectus and the Prospectus when they were filed
with the Commission complied as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission thereunder. |
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(xviii) |
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To the best of such counsels knowledge, no person or entity has the right to require
registration of shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statements or otherwise, except for persons and
entities who have expressly waived such right or who have been given proper notice and have
failed to exercise such right within the time or times required under the terms and conditions
of such right. |
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(xix) |
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The Company is not, and after giving effect to the offering and sale of the Securities and
the application of the proceeds thereof as described in the General Disclosure Package and the
Prospectus will not be, an investment company within the meaning of such term as defined in
the Investment Company Act and the rules and regulations of the Commission thereunder. |
exv4w1
Exhibit 4.1
WARRANT AGENCY AGREEMENT
WARRANT AGENCY AGREEMENT (the Agreement) dated as of ___, 2009, by and
between VirnetX Holding Corporation, a Delaware corporation, with offices at 5615 Scotts Valley
Drive, Suite 110, Scotts Valley, California, 95066 (the Company), and Corporate Stock
Transfer, Inc. a Colorado corporation, with offices at 3200 Cherry Creek South Drive, Suite 430,
Denver, Colorado 80209 (CST or the Warrant Agent).
WHEREAS,
the Company is engaged in a public offering (the
Offering) of up to 3,000,000 shares of the
Companys common stock, $0.0001 par value per share (the
Common Stock, and warrants to purchase up to an
aggregate of 4,500,000 shares of Common Stock, which securities have
been registered for sale under a Registration Statement on
Form S-1 (File No. 333-153645) declared effective on
January , 2009; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the
Warrant Agent is willing so to act, in connection with the issuance
by the Company at the consummation of the Offering of (a) warrants to
purchase (i) an aggregate of 1,500,000 shares of Common stock,
at an exercise price of $2.00 per share (the $2.00 Public
Warrants), (ii) an aggregate of 1,500,000
shares of Common Stock at an exercise price of $3.00 per share (the
$3.00 Public Warrants) and (iii) an aggregate of 1,500,000
shares of Common Stock at an exercise price of $4.00 per share (the
$4.00 Public Warrants;) (collectively, the Public
Warrants), and (b) a warrant (the
Underwriters Warrant) to purchase 300,000 shares
of Common Stock to Gilford Securities Incorporated (the
Underwriter) or its designees pursuant to an
Underwriters Warrant Agreement between the Company and the
Underwriter (the Underwriters Warrant together with the Public
Warrants, the Warrants subject to adjustment, and other
matters as provided herein.
NOW, THEREFORE, for the mutual promises contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints CST to act as Warrant
Agent for the Company in connection with the issuance, registration,
transfer, exchange, redemption and exercise of the Warrants in accordance with the provisions set forth in
the Warrants and this Agreement, and CST hereby
accepts such appointment.
2. Form of Warrants; Incorporation by Reference. The Warrants shall be in registered
form only. The Public Warrants shall be substantially in the forms set forth in Exhibit A,
Exhibit B, and Exhibit C attached hereto. The
form of the warrant certificate issued in connection with the Underwriters Warrant shall be
substantially in the form set forth in Annex A attached hereto. The terms and provisions
of the Warrants are hereby incorporated by reference herein and made a part hereof.
3. Indemnification; Limitation of Liability.
(a) The Company agrees to indemnify the Warrant Agent and its officers, directors, employees
and agents for, and to hold them harmless against, any loss, claim, liability or expense, incurred
without gross negligence, willful misconduct or bad faith on the part of the Warrant Agent or any
such officer, director, employee or agent, arising out of or in connection with the administration
of the Warrants, including the costs and expenses of defending against any claim or liability
arising out of or resulting from the administration of the Warrants or in connection with the
exercise or performance of any of its powers or duties hereunder or under the Warrants.
(b) The obligations of the Company under this Section 3 shall survive any termination of this
Agreement, including any termination under any bankruptcy, insolvency or similar law, or any
removal or resignation of the Warrant Agent.
4. Miscellaneous Provisions.
4.1. Successors. All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective
successors and assigns.
4.2. Termination. This Agreement shall terminate upon the earlier of (a) the
expiration of the Warrants, or (b) the resignation or removal of the Warrant Agent, in each case
pursuant to the terms of the Warrants.
4.3. Notices. Unless provided for differently elsewhere in this Agreement, any
notice, statement or demand authorized by this Agreement to be given or made by the Warrant
Agent or by the holder of any Warrant to or on the Company shall be sufficiently given when so
delivered if by hand or overnight delivery or if sent by certified mail or private courier service
within five days after deposit of such notice, postage prepaid, or sent by facsimile transmission
(with confirmation of receipt), addressed (until another address is filed in writing by the Company
with the Warrant Agent), as follows:
VirnetX Holding Corporation
5615 Scotts Valley Drive, Suite 110
Scotts Valley, California 95066
Attention: Kendall Larsen, Chief Executive Officer
with copy to:
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
Attention: Lowell D. Ness, Esq.
Unless provided for differently elsewhere in this Agreement, any notice, statement or demand
authorized by this Agreement to be given or made by the holder of any Warrant or by the Company to
or on the Warrant Agent shall be sufficiently given when so delivered if by hand or overnight
delivery or if sent by certified mail or private courier service within five days after deposit of
such notice, postage prepaid, or sent by facsimile transmission (with confirmation of receipt)
addressed (until another address is filed in writing by the Warrant Agent with the Company), as
follows:
Corporate Stock Transfer, Inc.
3200 Cherry Creek South Drive
Suite 430
Denver, Colorado 80209
Attn: Carylyn Bell
Fax No.: (303) 282-5800
with a copy to:
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
Attention: Lowell D. Ness, Esq.
Fax No.: (650) 474-0452
and
2
DLA
Piper LLP (US)
1251 Avenue of the Americas
New York, NY 10020-1104
Attention: Christopher C. Paci
Fax No.: (212) 884-8470
4.4. Applicable Law. The validity, interpretation, and performance of this Agreement
and of the Warrants shall be governed in all respects by the laws of the State of New York, without
giving effect to conflicts of law principles that would result in the application of the
substantive laws of another jurisdiction. The Company hereby agrees that any action, proceeding or
claim against it arising out of or relating in any way to this Agreement shall be brought and
enforced in the courts of the State of New York or the United States District Court for the
Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction
shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and
that such courts represent an inconvenience forum. Any such process or summons to be served upon
the Company may be served by transmitting a copy thereof by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in Section 4.3 hereof.
Such mailing shall be deemed personal service and shall be legal and binding upon the Company in
any action, proceeding or claim.
4.5. Examination of the Warrant Agreement. A copy of this Agreement shall be
available at all reasonable times at the office of the Warrant Agent in Denver, Colorado, for
inspection by the registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his Warrant for inspection by it.
4.6. Counterparts. This Agreement may be executed in any number of counterparts and
each of such counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument.
4.7. Effect of Headings. The Section headings herein are for convenience only and are
not part of this Agreement and shall not affect the interpretation thereof.
[Remainder of Page Intentionally Left Blank]
3
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day
and year first above written.
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VIRNETX HOLDING CORPORATION
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By: |
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Name: |
Kendall Larsen |
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Title: |
Chief Financial Officer |
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CORPORATE STOCK TRANSFER, INC.
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By: |
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Name: |
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Title: |
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Exhibit A
Form of Public Warrant $2.00 Exercise Price
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE
AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT) OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY AND THE WARRANT AGENT
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
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Warrant No.
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Date of Issuance: January ___, 2009 |
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Number of Shares: |
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(subject to adjustment) |
VIRNETX HOLDING CORPORATION
COMMON
STOCK PURCHASE WARRANT
($2.00 EXERCISE PRICE)
VirnetX Holding Corporation, a Delaware corporation (the Company), for value
received, hereby certifies that , or its registered assigns (the
Registered Holder), is entitled, subject to the terms set forth below, to purchase from
the Company, at any time after the date hereof and on or before July ___, 2010 (the Expiration
Date) ___ shares of the Companys Common Stock (the Common Stock) at a per share
purchase price equal to two dollars ($2.00) (the Purchase Price), as adjusted from time
to time pursuant to the provisions of this Warrant. The shares purchasable upon exercise of this
Warrant, as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter
referred to as the Warrant Stock.
This Warrant is issued pursuant to, and is subject to the terms and conditions of:
1. Number of Shares. Subject to the terms and conditions hereinafter set forth, the
Registered Holder is entitled, upon surrender of this Warrant, to purchase from the Company the
number of shares (subject to adjustment as provided herein) of Warrant Stock first set forth above.
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised by the Registered Holder, in
whole or in part, by surrendering this Warrant, with the purchase/exercise form appended hereto as
Exhibit A duly executed by such Registered Holder or by such Registered Holders duly
authorized attorney, at the principal office of Corporate Stock Transfer, Inc. (the Warrant
Agent), or at such other office or agency as the Warrant Agent may designate, accompanied by
payment in full of the Purchase Price payable in respect of the number of shares of Warrant Stock
purchased upon such exercise. The Purchase Price may be paid by cash, check or wire transfer, or
under the circumstances described in Section 2(b), pursuant to the cashless exercise provisions of
Section 2(b).
(b) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
an effective registration statement covering the Warrant Stock that is the subject of the Exercise
Notice is not available for the resale of such Warrant Stock (the Unavailable Warrant
Shares), the Holder may, in its sole discretion, exercise this Warrant in whole or in part
and, in lieu of making the cash payment otherwise contemplated to be made to the Warrant Agent upon
such exercise in payment of the Purchase Price, elect instead to receive upon such exercise the
Net Number of shares of Common Stock determined according to the following formula (a
Cashless Exercise):
Net Number = (A x B) - (A x C)
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this Warrant is then being exercised.
B= the closing sale price of the shares of Common Stock on the date immediately preceding the
date of the Exercise Notice.
C= the Purchase Price then in effect for the applicable Warrant Stock at the time of such
exercise.
(c) Effective Time of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which this Warrant shall
have been surrendered to the Warrant Agent as provided in Section 2(a). At such time, the person
or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 2(d) shall be deemed to have become the holder or holders of record
of the Warrant Stock represented by such certificates.
(d) Notification to Company. The Warrant Agent shall notify the Company immediately
upon receipt by the Warrant Agent of payment of the applicable Purchase Price from the Registered
Holder pursuant to Section 2(a). The Warrant Agent shall transfer each payment made by the
Registered Holder hereof pursuant to Section 2(a) to the Company in immediately available funds no
later than 5:00 p.m. (New York City time) on the date of exercise of the Warrant (and, pending such
transfer, shall hold each such payment for the benefit of the Registered Holder hereof in a
segregated trust account).
(e) Delivery to Holder. As soon as practicable after the exercise of this Warrant in
whole or in part, and in any event within twenty (20) days
thereafter, the Warrant Agent, at the Companys
expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such
Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may
direct:
(i) a certificate or certificates, or book-entry position, for the number of shares of Warrant
Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof)
of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of
Warrant Stock equal (without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares purchased by the Registered
Holder upon such exercise as provided in Sections 2(a) or 2(b), as applicable.
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(f) The Companys obligations to issue and cause the Warrant Agent to deliver Warrant Stock in
accordance with the terms hereof are absolute and unconditional upon satisfaction by the Registered
Holder of the conditions to exercise this Warrant set forth in
Sections 2(a) or 2(b), as applicable, irrespective of any
action or inaction by the Registered Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any person or any action to enforce
the same, or any setoff, counterclaim, recoupment, limitation, or termination, or any breach or
alleged breach by the Registered Holder or any other person of any obligation to the Company (other
than the Registered Holders obligations with respect to the exercise hereof in accordance with
Sections 2(a) or 2(b), as applicable,), or any violation or alleged violation of law by the Registered Holder or any other
person, and irrespective of any other circumstance which might otherwise limit such obligations of
the Company or the Warrant Agent to the Registered Holder in connection with the issuance of
Warrant Stock. Nothing herein shall limit a Registered Holders right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Warrant Agents failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant
to the terms hereof.
3. Company Call. If, prior to the exercise or earlier expiration of this Warrant
pursuant to the terms hereof, the average closing stock price of the Common Stock on the
American Stock Exchange, or any successor national securities exchange thereto, equals or exceeds
two (2) times the Purchase Price on any five
(5) consecutive trading days, the Company shall
be entitled, at its option, to direct the Warrant Agent to issue a notice (a Call Notice) to the Registered
Holder of this Warrant to the effect that the Company is exercising its rights pursuant to this
Section 3. Upon receipt of a Call Notice (which receipt will be deemed to occur on the one (1)
business day following the dispatch of such Call Notice by the Warrant Agent by a nationally
recognized overnight courier), the Registered Holder shall have until 5.00 p.m., Denver, Colorado
time, on the 10th business day following receipt of the Call Notice to exercise the Warrant, for
that number of shares of Warrant Stock covered by the Call Notice, in accordance with Section 2
hereof. Upon the expiration of such 10 business day period, if not sooner exercised, this Warrant will
terminate with respect to the number of shares specified in the Call Notice and the Registered
Holders rights and the Companys obligations hereunder with respect to the number of shares
specified in the Call Notice will cease without payment of consideration. Notwithstanding the
foregoing provisions of this Section 3, the Company may not issue a Call Notice unless and until a
registration statement is effective, or no longer required, with respect to the resale of the
Warrant Stock.
4. Adjustments.
(a) Stock Splits and Dividends. If outstanding shares of the Companys Common Stock
shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in
respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at
the record date of such dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced. If outstanding
shares of Common Stock shall be combined into a smaller number of shares, the Purchase Price in
effect immediately prior to such combination shall, simultaneously with the effectiveness of such
combination, be proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant
shall be changed to the number determined by dividing (i) an amount equal to the number of shares
issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the
Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect
immediately after such adjustment.
(b) Reclassification, Etc. In case there occurs any reclassification or change of the
outstanding securities of the Company or of any reorganization of the Company (or any other
corporation the stock or securities of which are at the time receivable upon the exercise of this
Warrant) or any similar
-3-
corporate reorganization on or after the date hereof, then and in each such case the
Registered Holder, upon the exercise hereof at any time after the consummation of such
reclassification, change, or reorganization shall be entitled to receive, in lieu of the stock or
other securities and property receivable upon the exercise hereof prior to such consummation, the
stock or other securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to
further adjustment pursuant to the provisions of this Section 4.
(c) Adjustment Certificate. When any adjustment is required to be made in the Warrant
Stock or the Purchase Price pursuant to this Section 4, the Company shall promptly mail to the
Registered Holder a certificate setting forth (i) a brief statement of the facts requiring such
adjustment, (ii) the Purchase Price after such adjustment and (iii) the kind and amount of stock or
other securities or property into which this Warrant shall be exercisable after such adjustment.
(d) Reorganizations, Mergers and Consolidations. If at any time or from time to time
after the date hereof there is a reorganization of the Company (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for elsewhere in this
Section 4) or a merger or consolidation of the Company with or into another corporation, then, as a
part of such reorganization, merger or consolidation, provision shall be made so that the
Registered Holder of this Warrant thereafter shall be entitled to receive, upon exercise of this
Warrant, the number of shares of stock or other securities or property of the Company, or of such
successor corporation resulting from such reorganization, merger or consolidation, to which a
holder of Common Stock would have been entitled on such reorganization, merger or consolidation. In
any such case, appropriate adjustment shall be made in the application of the provisions of this
Section 4 with respect to the rights of the Registered Holder of this Warrant after the
reorganization, merger or consolidation to the end that the provisions of this Section 4 (including
adjustment of the Purchase Price then in effect and number of shares issuable upon exercise of this
Warrant, as applicable) shall be applicable after that event and be as nearly equivalent to the
provisions hereof as may be practicable. This Section 4(d) shall similarly apply to successive
reorganizations, mergers and consolidations. Notwithstanding the foregoing, if any such
reorganization, merger or consolidation constitutes or results in (a) a going private transaction
as defined in Rule 13e-3 under the Exchange Act, (b) an acquisition of the Company primarily for
cash, or (c) an acquisition, merger or sale with or into a Person not traded on an Eligible Market
(as defined below), then the Company (or any such successor or surviving entity) shall require that
the Registered Holder waive the above requirements of this Section 4(d) in exchange for a payment
of cash on the closing date of such reorganization, merger or consolidation, equal to the Black
Scholes Value of the remaining unexercised portion of this Warrant on the closing date of such
reorganization, merger or consolidation, provided that the per share consideration to be received
by the holders of shares of Common Stock upon the consummation of such reorganization, merger or
consolidation is less than the Exercise Price. Concurrently with such payment, this Warrant shall
be cancelled. Black Scholes Value means the value of this Warrant based on the Black and Scholes
Option Pricing Model obtained from the OV function on Bloomberg determined as of the day
immediately following the public announcement of the applicable reorganization, merger or
consolidation and reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate
for a period equal to the remaining term of this Warrant as of such date and (ii) an expected
volatility equal to the 100 day volatility obtained from the HVT function on Bloomberg. Eligible
Market means the American Stock Exchange, The New York Stock Exchange, Inc., The Nasdaq Capital
Market, The NASDAQ Global Market or The NASDAQ Global Select Market.
(e) Pro Rata Rights Upon Distributions of Assets. If the Company shall declare or
make any dividend or other distribution of its assets (or rights to acquire its assets) to holders
of shares of Common Stock (which dividend or other distribution has not already been given to the
Registered Holders of the Warrants), including, without limitation, any distribution of cash,
equity or debt securities or rights or warrants to subscribe for or purchase any equity or debt
security, or other property or assets at
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any time after the issuance of this Warrant and prior to the Expiration Date, then, in each
such case (in each case, Distributed Property), the Registered Holder shall be entitled
upon exercise of this Warrant for the purchase of any or all of the Warrant Stock, to receive the
amount of Distributed Property which would have been payable to the Registered Holder had such
Registered Holder been the holder of such Warrant Stock on the record date for the determination of
shareholders entitled to such Distributed Property. The Company will at all times set aside and
keep available for distribution to such holder upon exercise of this Warrant a portion of the
Distributed Property to satisfy the distribution to which such Registered Holder is entitled
pursuant to the preceding sentence.
5. Transfers.
(a) Registration Statement. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Stock have been registered under the Securities Act of 1933, as amended
(the Securities Act), pursuant to a registration
statement on Form S-1 (File No. 333-153645) which must be
amended on a post-effective basis from time to time in order to maintain its accuracy and keep it
up-to-date, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise
dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Securities Act as to the sale of any such securities and
registration or qualification of such securities under any applicable U.S. federal or state
securities law then in effect, or (ii) an opinion of counsel, satisfactory to the Company, that
such registration and qualification are not required. Each certificate or other instrument for
Warrant Stock issued upon the exercise of this Warrant shall bear a legend substantially to the
foregoing effect and as described in Section 15.
(b) Transferability. Prior to the Expiration Date and subject to compliance with any
applicable securities laws and the conditions set forth in this Section 5, this Warrant and all
rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Warrant Agent, together with a written assignment of this Warrant
substantially in the form attached hereto as Exhibit B duly executed by the Registered
Holder or its agent or attorney, and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. If a registration statement is not then
effective, the transferee shall also sign an investment letter in form and substance
reasonably satisfactory to the Warrant Agent and the Company. Upon such surrender and, if
required, such payment, the Warrant Agent shall execute and deliver a new Warrant or Warrants in
the name of the assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of
this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly
assigned, may be exercised by a new holder for the purchase of Warrant Stock without having a new
Warrant issued.
6. No Impairment. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will
(subject to Section 13) at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to protect the rights
of the holder of this Warrant against impairment.
7. Notices of Certain Transactions. In case:
(a) the Company shall take a record of the holders of its Common Stock (or other stock or
securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling
or enabling them to receive any dividend or other distribution, or to receive any right to
subscribe for or purchase any shares of stock of any class or any other securities, or to receive
any other right, to subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or
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(b) of any capital reorganization of the Company, any reclassification of the capital stock of
the Company, any consolidation or merger of the Company, any consolidation or merger of the Company
with or into another corporation (other than a consolidation or merger in which the Company is the
surviving entity), or any transfer of all or substantially all of the assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder
of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption
or conversion is to take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or such other stock or securities at the time deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least
ten (10) days prior to the record date or effective date for the event specified in such notice.
8. Reservation of Stock. The Company will at all times reserve and keep available,
solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant
Stock and other stock, securities and property, as from time to time shall be issuable upon the
exercise of this Warrant.
9. Fully Paid and Non-assessable. The Company covenants that all Warrant Stock shall,
upon issuance and the payment of the applicable Purchase Price in accordance with the terms hereof,
be duly and validly authorized, issued and fully paid and non-assessable.
10. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant
or Warrants, properly endorsed, to the Warrant Agent at the principal
office of the Warrant Agent, the Warrant Agent will, subject to the provisions of Section 5, issue and deliver to or upon the order of such
Registered Holder, at the Companys expense, a new Warrant or Warrants of like tenor, in the name
of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof
for the number of shares of Warrant Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
11. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the
Warrant Agent of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required)
in an amount reasonably satisfactory to the Warrant Agent, or (in the case of mutilation) upon surrender
and cancellation of this Warrant, the Warrant Agent will issue, in lieu thereof, a new Warrant of like
tenor.
12. Notices. Any notice required or permitted pursuant to this Warrant shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally or by overnight
courier or sent by email or fax (upon customary confirmation of receipt), or forty-eight (48) hours
after being deposited in the regular mail, as certified or registered mail (airmail if sent
internationally), with postage prepaid, addressed (a) if to the Registered Holder, to the address
of the Registered Holder most recently furnished in writing to the Warrant Agent and (b) if to the
Warrant Agent, to the address set forth below or subsequently modified by written notice to the
Registered Holder.
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Corporate Stock Transfer, Inc.
3200 Cherry Creek South Drive
Suite 430
Denver, Colorado 80209
Attn: Carylyn Bell
Fax No.: (303) 282-5800
with a copy to:
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
Attention: Lowell D. Ness, Esq.
Fax No.: (650) 474-0452
13. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of
the Company. Notwithstanding the foregoing, the Company shall provide the Registered Holder with
copies of the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
14. No Fractional Shares. No fractional shares of Common Stock shall be issued upon
exercise of this Warrant. In lieu of any fractional shares which would otherwise be issuable upon
exercise of this Warrant, the Company shall round up such fractional interest to the next whole
share.
15. Warrant Legends.
(a) Each Warrant shall contain a legend in substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE AMENDMENT
THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE ACT) OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE ACT AND
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE
COMPANY AND THE WARRANT AGENT THAT REGISTRATION IS NOT REQUIRED UNDER
THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES.
(b) Each
certificate representing the Warrant Stock, unless a registration
statement is not then effective, shall contain a legend substantially in the following form:
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THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POST-EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, (THE ACT) OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
16. [RESERVED]
17. Headings. The headings in this Warrant are for purposes of reference only and
shall not limit or otherwise affect the meaning of any provision of this Warrant.
18. Governing Law. This Warrant shall be governed, construed and interpreted in
accordance with the laws of the State of New York, without giving effect to principles of conflicts
of law.
19. Survival of Representations. Unless otherwise set forth in this Warrant, the
representations, warranties and covenants contained in or made pursuant to this Warrant shall
survive the execution and delivery of this Warrant.
20. Successors and Assigns. The terms and conditions of this Warrant shall inure to
the benefit of and be binding upon the respective successors and assigns of the parties. Nothing
in this Warrant, express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Warrant, except as expressly provided in this Warrant.
21. Counterparts. This Warrant may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one instrument.
22. Attorneys Fees. If any action at law or in equity (including arbitration) is
necessary to enforce or interpret the terms of any of this Warrant, the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
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23. Severability. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, the parties agree to renegotiate such provision in good faith.
In the event that the parties cannot reach a mutually agreeable and enforceable replacement for
such provision, then (a) such provision shall be excluded from this Warrant, (b) the balance of
this Warrant shall be interpreted as if such provision were so excluded and (c) the balance of this
Warrant shall be enforceable in accordance with its terms.
24. Delays or Omissions. No delay or omission to exercise any right, power or remedy
accruing to any party under this Warrant, upon any breach or default of any other party under this
Warrant, shall impair any such right, power or remedy of such non-breaching or non-defaulting party
nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein,
or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Warrant, or any waiver on the part of any party of any
provisions or conditions of this Warrant, must be in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this Warrant or by law
or otherwise afforded to any party, shall be cumulative and not alternative.
25. Remedies, Other Obligations, Breaches and Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant, at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Registered Holder to pursue
actual damages for any failure by the Company to comply with the terms of this Warrant. The
Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Registered Holder and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened breach, the Registered
Holder shall be entitled to seek, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and without any bond or
other security being required
26. Warrant Agent.
(a) Registration of Warrants. The Warrant Agent will keep a register in which the
Warrant Agent will provide for the registration of Warrants and the registration of transfers of
Warrants representing whole numbers of Warrants. The Company and the Warrant Agent may treat the
person in whose name any Warrants is registered on such register as the owner thereof for all
purposes. Any Registered Holder may change such Registered Holders address as shown on the
warrant register by written notice to the Warrant Agent in accordance with Section 12 requesting
such change.
(b) Limitation on Liability. The Warrant Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in connection with its
administration of the Warrants in reliance upon any instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or
other paper or document in good faith believed by it to be genuine and to be signed, executed and,
where necessary, verified and acknowledged, by the proper person or persons.
(c) Duties of Warrant Agent. The Warrant Agent shall undertake only the specific
duties and obligations imposed hereunder upon the following terms and conditions, by all of which
the Company and the Registered Holder shall be bound:
(i) The Warrant Agent may consult with legal counsel (who may or may not be legal counsel for
the Company), and the opinion of such counsel shall be full and complete authorization and
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protection to the Warrant Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion, provided the Warrant Agent shall have exercised reasonable care in
the selection by it of such counsel.
(ii) Whenever in the performance of its duties hereunder the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter may be deemed to be conclusively
proved and established by a certificate signed by an executive officer of the Company and delivered
to the Warrant Agent and such certificate shall be full authorization to the Warrant Agent for any
action taken or suffered in good faith by it hereunder in reliance upon such certificate.
(iii) The Warrant Agent shall be liable hereunder only for its own gross negligence, willful
misconduct or bad faith.
(iv) The Warrant Agent shall not be liable for or by reason of any of the statements of fact
or recitals contained herein or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(v) The Warrant Agent shall not have any responsibility in respect of and makes no
representation as to the validity of this Warrant or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent), nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Warrant, nor shall it by any act hereunder
be deemed to make any representation or warranty as to the Warrant Shares.
(vi) The Warrant Agent is hereby authorized and directed to accept instructions with respect
to the performance of its duties hereunder from the Chief Executive Officer and the Chief Financial
Officer of the Company, and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer.
(vii) The Warrant Agent and any stockholder, director, officer, or employee of the Warrant
Agent may buy, sell, or deal in any of the Warrants or other securities of the Company or otherwise
act as fully and freely as though it were not Warrant Agent hereunder, so long as such persons do
so in full compliance with all applicable laws. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
(viii) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in
it or perform any duty hereunder either by itself or by or through its attorneys or agents.
(ix) The Warrant Agent shall act solely as the agent of the Company hereunder. The Warrant
Agent shall not be liable except for the failure to perform such duties as are specifically set
forth herein, and no implied covenants or obligations shall be read into this Warrant against the
Warrant Agent, whose duties shall be determined solely by the express provisions hereof. The
Warrant Agent shall not be deemed to be a fiduciary.
(x) The Warrant Agent shall not have any duty to calculate or determine any adjustments with
respect either to the Purchase Price or to the kind and amount of property receivable by the
Registered Holder upon the exercise of this Warrant.
(xi) The Warrant Agent shall not be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained herein.
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(xii) The Warrant Agent shall not be under any obligation or duty to institute, appear in, or
defend any action, suit, or legal proceeding in respect hereof, unless first indemnified to its
satisfaction, provided that this provision shall not affect the power of the Warrant Agent to take
such action as the Warrant Agent may consider proper, whether with or without such indemnity. The
Warrant Agent shall promptly notify the Company in writing of any claim made or action, suit or,
proceeding instituted against it arising out of or in connection with this Warrant.
(xiii) The Company will perform, execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further acts, instruments, and assurances as may be
required by the Warrant Agent in order to enable it to carry out or perform its duties hereunder.
(d) Change of Warrant Agent. The Warrant Agent may resign and be discharged from its
duties hereunder upon thirty (30) days notice in writing sent to the Company by registered or
certified mail, and to the Registered Holders of the Warrants by first class registered or
certified mail, return receipt requested, at the expense of the Warrant Agent; provided, however,
that no such resignation or discharge shall become effective until a successor Warrant Agent shall
have been appointed hereunder. The Company may remove the Warrant Agent or any successor Warrant
Agent upon thirty (30) days, notice in writing, sent to the Warrant Agent or successor Warrant
Agent, as the case may be, and to the Registered Holders of the Warrants by first class registered
or certified mail, return receipt requested; provided, further, however, that no such removal shall
become effective until a successor Warrant Agent shall have been appointed hereunder. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company
shall promptly appoint a successor to the Warrant Agent, which may be designated as an interim
Warrant Agent. If an interim Warrant Agent is designated, the Company shall then appoint a
permanent successor to the Warrant Agent, which may be the interim Warrant Agent. If the Company
shall fail to make such appointment of a permanent successor within a period of thirty (30) days
after such removal or within sixty (60) days after notification in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the Registered Holder of a
Warrant, then the Warrant Agent or any Registered Holder of a Warrant may apply to any court of
competent jurisdiction for the appointment of such a successor. Any entity which may be merged or
consolidated with or which shall otherwise succeed to substantially all of the trust or agency
business of the Warrant Agent shall be deemed to be the successor Warrant Agent without any further
action.
27. Entire Agreement. This Warrant and the documents referred to herein constitute
the entire agreement between the parties hereto pertaining to the subject matter hereof, and any
and all other written or oral agreements relating to the subject matter hereof existing between the
parties hereto are expressly canceled.
[Signature Page Follows]
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IN
WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant to be duly executed as of the day and
year first above written.
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VIRNETX HOLDING CORPORATION |
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Address:
5615 Scotts Valley Drive, Suite 110
Scotts Valley, California 95066
Fax: (831) 438-8700 |
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THE WARRANT AGENT: |
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CORPORATE STOCK TRANSFER, INC. |
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Address:
3200 Cherry Creek South Drive, Suite 430
Denver, Colorado 80209
Fax: (303) 282-5800 |
VirnetX Holding Corporation $2.00 Common Stock Purchase Warrant
EXHIBIT A
PURCHASE/EXERCISE FORM
To: Corporate Stock Transfer, Inc. Dated:
The undersigned, pursuant to the provisions set forth in the attached Warrant No. , hereby
irrevocably elects to purchase shares of the Common Stock covered by such
Warrant and herewith makes payment of $ , representing the full Purchase Price
for such shares at the price per share provided for in such Warrant.
Payment shall take the form of (check applicable box):
o in lawful money of the United States; or
o the cancellation of such amount of Warrant Stock as is necessary, in accordance
with the formula set forth in Section 2(b), to exercise this Warrant with respect to the
maximum amount of Warrant Stock purchasable pursuant to the cashless exercise procedure
set forth in Section 2(b).
The undersigned acknowledges that it has reviewed the representations and warranties of the
Registered Holder set forth in the Warrant and by its signature below hereby makes such
representations and warranties to the Company and the Warrant Agent. Defined terms contained in
such representations and warranties shall have the meanings assigned to them in the Warrant,
provided that the term Securities shall refer to the Warrant Stock.
ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns and
transfers all of the rights of the undersigned under the attached Warrant with respect to the
number of shares of capital stock covered thereby set forth below, unto:
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ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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Exhibit B
Form of Public Warrant $3.00 Exercise Price
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE
AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT) OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY AND THE WARRANT AGENT
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
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Warrant No.
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Date of Issuance: January ___, 2009 |
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VIRNETX HOLDING CORPORATION
COMMON
STOCK PURCHASE WARRANT
($3.00 EXERCISE PRICE)
VirnetX Holding Corporation, a Delaware corporation (the Company), for value
received, hereby certifies that , or its registered assigns (the
Registered Holder), is entitled, subject to the terms set forth below, to purchase from
the Company, at any time after the date hereof and on or before July ___, 2010 (the Expiration
Date) ___ shares of the Companys Common Stock (the Common Stock) at a per share
purchase price equal to three dollars ($3.00) (the Purchase Price), as adjusted from time
to time pursuant to the provisions of this Warrant. The shares purchasable upon exercise of this
Warrant, as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter
referred to as the Warrant Stock.
This Warrant is issued pursuant to, and is subject to the terms and conditions of:
1. Number of Shares. Subject to the terms and conditions hereinafter set forth, the
Registered Holder is entitled, upon surrender of this Warrant, to purchase from the Company the
number of shares (subject to adjustment as provided herein) of Warrant Stock first set forth above.
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised by the Registered Holder, in
whole or in part, by surrendering this Warrant, with the purchase/exercise form appended hereto as
Exhibit A duly executed by such Registered Holder or by such Registered Holders duly
authorized attorney, at the principal office of Corporate Stock Transfer, Inc. (the Warrant
Agent), or at such other office or agency as the Warrant Agent may designate, accompanied by
payment in full of the Purchase Price payable in respect of the number of shares of Warrant Stock
purchased upon such exercise. The Purchase Price may be paid by cash, check or wire transfer, or
under the circumstances described in Section 2(b), pursuant to the cashless exercise provisions of
Section 2(b).
(b) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
an effective registration statement covering the Warrant Stock that is the subject of the Exercise
Notice is not available for the resale of such Warrant Stock (the Unavailable Warrant
Shares), the Holder may, in its sole discretion, exercise this Warrant in whole or in part
and, in lieu of making the cash payment otherwise contemplated to be made to the Warrant Agent upon
such exercise in payment of the Purchase Price, elect instead to receive upon such exercise the
Net Number of shares of Common Stock determined according to the following formula (a
Cashless Exercise):
Net Number = (A x B) - (A x C)
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this Warrant is then being exercised.
B= the closing sale price of the shares of Common Stock on the date immediately preceding the
date of the Exercise Notice.
C= the Purchase Price then in effect for the applicable Warrant Stock at the time of such
exercise.
(c) Effective Time of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which this Warrant shall
have been surrendered to the Warrant Agent as provided in Section 2(a). At such time, the person
or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 2(d) shall be deemed to have become the holder or holders of record
of the Warrant Stock represented by such certificates.
(d) Notification to Company. The Warrant Agent shall notify the Company immediately
upon receipt by the Warrant Agent of payment of the applicable Purchase Price from the Registered
Holder pursuant to Section 2(a). The Warrant Agent shall transfer each payment made by the
Registered Holder hereof pursuant to Section 2(a) to the Company in immediately available funds no
later than 5:00 p.m. (New York City time) on the date of exercise of the Warrant (and, pending such
transfer, shall hold each such payment for the benefit of the Registered Holder hereof in a
segregated trust account).
(e) Delivery to Holder. As soon as practicable after the exercise of this Warrant in
whole or in part, and in any event within twenty (20) days
thereafter, the Warrant Agent, at the Companys
expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such
Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may
direct:
(i) a certificate or certificates, or book-entry position, for the number of shares of Warrant
Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof)
of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of
Warrant Stock equal (without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares purchased by the Registered
Holder upon such exercise as provided in Sections 2(a) or 2(b), as applicable.
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(f) The Companys obligations to issue and cause the Warrant Agent to deliver Warrant Stock in
accordance with the terms hereof are absolute and unconditional upon satisfaction by the Registered
Holder of the conditions to exercise this Warrant set forth in
Sections 2(a) or 2(b), as applicable, irrespective of any
action or inaction by the Registered Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any person or any action to enforce
the same, or any setoff, counterclaim, recoupment, limitation, or termination, or any breach or
alleged breach by the Registered Holder or any other person of any obligation to the Company (other
than the Registered Holders obligations with respect to the exercise hereof in accordance with
Sections 2(a) or 2(b), as applicable,), or any violation or alleged violation of law by the Registered Holder or any other
person, and irrespective of any other circumstance which might otherwise limit such obligations of
the Company or the Warrant Agent to the Registered Holder in connection with the issuance of
Warrant Stock. Nothing herein shall limit a Registered Holders right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Warrant Agents failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant
to the terms hereof.
3. Company Call. If, prior to the exercise or earlier expiration of this Warrant
pursuant to the terms hereof, the average closing stock price of the Common Stock on the
American Stock Exchange, or any successor national securities exchange thereto, equals or exceeds
two (2) times the Purchase Price on any five
(5) consecutive trading days, the Company shall
be entitled, at the its option, to direct the Warrant Agent to issue a notice (a Call Notice) to the Registered
Holder of this Warrant to the effect that the Company is exercising its rights pursuant to this
Section 3. Upon receipt of a Call Notice (which receipt will be deemed to occur on the one (1)
business day following the dispatch of such Call Notice by the Warrant Agent by a nationally
recognized overnight courier), the Registered Holder shall have until 5.00 p.m., Denver, Colorado
time, on the 10th business day following receipt of the Call Notice to exercise the Warrant, for
that number of shares of Warrant Stock covered by the Call Notice, in accordance with Section 2
hereof. Upon the expiration of such 10 business day period, if not sooner exercised, this Warrant will
terminate with respect to the number of shares specified in the Call Notice and the Registered
Holders rights and the Companys obligations hereunder with respect to the number of shares
specified in the Call Notice will cease without payment of consideration. Notwithstanding the
foregoing provisions of this Section 3, the Company may not issue a Call Notice unless and until a
registration statement is effective, or no longer required, with respect to the resale of the
Warrant Stock.
4. Adjustments.
(a) Stock Splits and Dividends. If outstanding shares of the Companys Common Stock
shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in
respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at
the record date of such dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced. If outstanding
shares of Common Stock shall be combined into a smaller number of shares, the Purchase Price in
effect immediately prior to such combination shall, simultaneously with the effectiveness of such
combination, be proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant
shall be changed to the number determined by dividing (i) an amount equal to the number of shares
issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the
Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect
immediately after such adjustment.
(b) Reclassification, Etc. In case there occurs any reclassification or change of the
outstanding securities of the Company or of any reorganization of the Company (or any other
corporation the stock or securities of which are at the time receivable upon the exercise of this
Warrant) or any similar
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corporate reorganization on or after the date hereof, then and in each such case the
Registered Holder, upon the exercise hereof at any time after the consummation of such
reclassification, change, or reorganization shall be entitled to receive, in lieu of the stock or
other securities and property receivable upon the exercise hereof prior to such consummation, the
stock or other securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to
further adjustment pursuant to the provisions of this Section 4.
(c) Adjustment Certificate. When any adjustment is required to be made in the Warrant
Stock or the Purchase Price pursuant to this Section 4, the Company shall promptly mail to the
Registered Holder a certificate setting forth (i) a brief statement of the facts requiring such
adjustment, (ii) the Purchase Price after such adjustment and (iii) the kind and amount of stock or
other securities or property into which this Warrant shall be exercisable after such adjustment.
(d) Reorganizations, Mergers and Consolidations. If at any time or from time to time
after the date hereof there is a reorganization of the Company (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for elsewhere in this
Section 4) or a merger or consolidation of the Company with or into another corporation, then, as a
part of such reorganization, merger or consolidation, provision shall be made so that the
Registered Holder of this Warrant thereafter shall be entitled to receive, upon exercise of this
Warrant, the number of shares of stock or other securities or property of the Company, or of such
successor corporation resulting from such reorganization, merger or consolidation, to which a
holder of Common Stock would have been entitled on such reorganization, merger or consolidation. In
any such case, appropriate adjustment shall be made in the application of the provisions of this
Section 4 with respect to the rights of the Registered Holder of this Warrant after the
reorganization, merger or consolidation to the end that the provisions of this Section 4 (including
adjustment of the Purchase Price then in effect and number of shares issuable upon exercise of this
Warrant, as applicable) shall be applicable after that event and be as nearly equivalent to the
provisions hereof as may be practicable. This Section 4(d) shall similarly apply to successive
reorganizations, mergers and consolidations. Notwithstanding the foregoing, if any such
reorganization, merger or consolidation constitutes or results in (a) a going private transaction
as defined in Rule 13e-3 under the Exchange Act, (b) an acquisition of the Company primarily for
cash, or (c) an acquisition, merger or sale with or into a Person not traded on an Eligible Market
(as defined below), then the Company (or any such successor or surviving entity) shall require that
the Registered Holder waive the above requirements of this Section 4(d) in exchange for a payment
of cash on the closing date of such reorganization, merger or consolidation, equal to the Black
Scholes Value of the remaining unexercised portion of this Warrant on the closing date of such
reorganization, merger or consolidation, provided that the per share consideration to be received
by the holders of shares of Common Stock upon the consummation of such reorganization, merger or
consolidation is less than the Exercise Price. Concurrently with such payment, this Warrant shall
be cancelled. Black Scholes Value means the value of this Warrant based on the Black and Scholes
Option Pricing Model obtained from the OV function on Bloomberg determined as of the day
immediately following the public announcement of the applicable reorganization, merger or
consolidation and reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate
for a period equal to the remaining term of this Warrant as of such date and (ii) an expected
volatility equal to the 100 day volatility obtained from the HVT function on Bloomberg. Eligible
Market means the American Stock Exchange, The New York Stock Exchange, Inc., The Nasdaq Capital
Market, The NASDAQ Global Market or The NASDAQ Global Select Market.
(e) Pro Rata Rights Upon Distributions of Assets. If the Company shall declare or
make any dividend or other distribution of its assets (or rights to acquire its assets) to holders
of shares of Common Stock (which dividend or other distribution has not already been given to the
Registered Holders of the Warrants), including, without limitation, any distribution of cash,
equity or debt securities or rights or warrants to subscribe for or purchase any equity or debt
security, or other property or assets at
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any time after the issuance of this Warrant and prior to the Expiration Date, then, in each
such case (in each case, Distributed Property), the Registered Holder shall be entitled
upon exercise of this Warrant for the purchase of any or all of the Warrant Stock, to receive the
amount of Distributed Property which would have been payable to the Registered Holder had such
Registered Holder been the holder of such Warrant Stock on the record date for the determination of
shareholders entitled to such Distributed Property. The Company will at all times set aside and
keep available for distribution to such holder upon exercise of this Warrant a portion of the
Distributed Property to satisfy the distribution to which such Registered Holder is entitled
pursuant to the preceding sentence.
5. Transfers.
(a) Registration Statement. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Stock have been registered under the Securities Act of 1933, as amended
(the Securities Act), pursuant to a registration
statement on Form S-1 (File No. 333-153645) which must be
amended on a post-effective basis from time to time in order to maintain its accuracy and keep it
up-to-date, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise
dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Securities Act as to the sale of any such securities and
registration or qualification of such securities under any applicable U.S. federal or state
securities law then in effect, or (ii) an opinion of counsel, satisfactory to the Company, that
such registration and qualification are not required. Each certificate or other instrument for
Warrant Stock issued upon the exercise of this Warrant shall bear a legend substantially to the
foregoing effect and as described in Section 15.
(b) Transferability. Prior to the Expiration Date and subject to compliance with any
applicable securities laws and the conditions set forth in this Section 5, this Warrant and all
rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Warrant Agent, together with a written assignment of this Warrant
substantially in the form attached hereto as Exhibit B duly executed by the Registered
Holder or its agent or attorney, and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. If a registration statement is not then
effective, the transferee shall also sign an investment letter in form and substance
reasonably satisfactory to the Warrant Agent and the Company. Upon such surrender and, if
required, such payment, the Warrant Agent shall execute and deliver a new Warrant or Warrants in
the name of the assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of
this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly
assigned, may be exercised by a new holder for the purchase of Warrant Stock without having a new
Warrant issued.
6. No Impairment. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will
(subject to Section 13) at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to protect the rights
of the holder of this Warrant against impairment.
7. Notices of Certain Transactions. In case:
(a) the Company shall take a record of the holders of its Common Stock (or other stock or
securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling
or enabling them to receive any dividend or other distribution, or to receive any right to
subscribe for or purchase any shares of stock of any class or any other securities, or to receive
any other right, to subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or
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(b) of any capital reorganization of the Company, any reclassification of the capital stock of
the Company, any consolidation or merger of the Company, any consolidation or merger of the Company
with or into another corporation (other than a consolidation or merger in which the Company is the
surviving entity), or any transfer of all or substantially all of the assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder
of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption
or conversion is to take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or such other stock or securities at the time deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least
ten (10) days prior to the record date or effective date for the event specified in such notice.
8. Reservation of Stock. The Company will at all times reserve and keep available,
solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant
Stock and other stock, securities and property, as from time to time shall be issuable upon the
exercise of this Warrant.
9. Fully Paid and Non-assessable. The Company covenants that all Warrant Stock shall,
upon issuance and the payment of the applicable Purchase Price in accordance with the terms hereof,
be duly and validly authorized, issued and fully paid and non-assessable.
10. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant
or Warrants, properly endorsed, to the Warrant Agent at the principal
office of the Warrant Agent, the Warrant Agent will, subject to the provisions of Section 5, issue and deliver to or upon the order of such
Registered Holder, at the Companys expense, a new Warrant or Warrants of like tenor, in the name
of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof
for the number of shares of Warrant Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
11. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the
Warrant Agent of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required)
in an amount reasonably satisfactory to the Warrant Agent, or (in the case of mutilation) upon surrender
and cancellation of this Warrant, the Warrant Agent will issue, in lieu thereof, a new Warrant of like
tenor.
12. Notices. Any notice required or permitted pursuant to this Warrant shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally or by overnight
courier or sent by email or fax (upon customary confirmation of receipt), or forty-eight (48) hours
after being deposited in the regular mail, as certified or registered mail (airmail if sent
internationally), with postage prepaid, addressed (a) if to the Registered Holder, to the address
of the Registered Holder most recently furnished in writing to the Warrant Agent and (b) if to the
Warrant Agent, to the address set forth below or subsequently modified by written notice to the
Registered Holder.
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Corporate Stock Transfer, Inc.
3200 Cherry Creek South Drive
Suite 430
Denver, Colorado 80209
Attn: Carylyn Bell
Fax No.: (303) 282-5800
with a copy to:
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
Attention: Lowell D. Ness, Esq.
Fax No.: (650) 474-0452
13. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of
the Company. Notwithstanding the foregoing, the Company shall provide the Registered Holder with
copies of the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
14. No Fractional Shares. No fractional shares of Common Stock shall be issued upon
exercise of this Warrant. In lieu of any fractional shares which would otherwise be issuable upon
exercise of this Warrant, the Company shall round up such fractional interest to the next whole
share.
15. Warrant Legends.
(a) Each Warrant shall contain a legend in substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE AMENDMENT
THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE ACT) OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE ACT AND
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE
COMPANY AND THE WARRANT AGENT THAT REGISTRATION IS NOT REQUIRED UNDER
THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES.
(b) Each
certificate representing the Warrant Stock, unless a registration
statement is not then effective, shall contain a legend substantially in the following form:
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THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POST-EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, (THE ACT) OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
16. [RESERVED]
17. Headings. The headings in this Warrant are for purposes of reference only and
shall not limit or otherwise affect the meaning of any provision of this Warrant.
18. Governing Law. This Warrant shall be governed, construed and interpreted in
accordance with the laws of the State of New York, without giving effect to principles of conflicts
of law.
19. Survival of Representations. Unless otherwise set forth in this Warrant, the
representations, warranties and covenants contained in or made pursuant to this Warrant shall
survive the execution and delivery of this Warrant.
20. Successors and Assigns. The terms and conditions of this Warrant shall inure to
the benefit of and be binding upon the respective successors and assigns of the parties. Nothing
in this Warrant, express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Warrant, except as expressly provided in this Warrant.
21. Counterparts. This Warrant may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one instrument.
22. Attorneys Fees. If any action at law or in equity (including arbitration) is
necessary to enforce or interpret the terms of any of this Warrant, the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
-8-
23. Severability. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, the parties agree to renegotiate such provision in good faith.
In the event that the parties cannot reach a mutually agreeable and enforceable replacement for
such provision, then (a) such provision shall be excluded from this Warrant, (b) the balance of
this Warrant shall be interpreted as if such provision were so excluded and (c) the balance of this
Warrant shall be enforceable in accordance with its terms.
24. Delays or Omissions. No delay or omission to exercise any right, power or remedy
accruing to any party under this Warrant, upon any breach or default of any other party under this
Warrant, shall impair any such right, power or remedy of such non-breaching or non-defaulting party
nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein,
or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Warrant, or any waiver on the part of any party of any
provisions or conditions of this Warrant, must be in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this Warrant or by law
or otherwise afforded to any party, shall be cumulative and not alternative.
25. Remedies, Other Obligations, Breaches and Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant, at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Registered Holder to pursue
actual damages for any failure by the Company to comply with the terms of this Warrant. The
Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Registered Holder and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened breach, the Registered
Holder shall be entitled to seek, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and without any bond or
other security being required
26. Warrant Agent.
(a) Registration of Warrants. The Warrant Agent will keep a register in which the
Warrant Agent will provide for the registration of Warrants and the registration of transfers of
Warrants representing whole numbers of Warrants. The Company and the Warrant Agent may treat the
person in whose name any Warrants is registered on such register as the owner thereof for all
purposes. Any Registered Holder may change such Registered Holders address as shown on the
warrant register by written notice to the Warrant Agent in accordance with Section 12 requesting
such change.
(b) Limitation on Liability. The Warrant Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in connection with its
administration of the Warrants in reliance upon any instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or
other paper or document in good faith believed by it to be genuine and to be signed, executed and,
where necessary, verified and acknowledged, by the proper person or persons.
(c) Duties of Warrant Agent. The Warrant Agent shall undertake only the specific
duties and obligations imposed hereunder upon the following terms and conditions, by all of which
the Company and the Registered Holder shall be bound:
(i) The Warrant Agent may consult with legal counsel (who may or may not be legal counsel for
the Company), and the opinion of such counsel shall be full and complete authorization and
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protection to the Warrant Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion, provided the Warrant Agent shall have exercised reasonable care in
the selection by it of such counsel.
(ii) Whenever in the performance of its duties hereunder the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter may be deemed to be conclusively
proved and established by a certificate signed by an executive officer of the Company and delivered
to the Warrant Agent and such certificate shall be full authorization to the Warrant Agent for any
action taken or suffered in good faith by it hereunder in reliance upon such certificate.
(iii) The Warrant Agent shall be liable hereunder only for its own gross negligence, willful
misconduct or bad faith.
(iv) The Warrant Agent shall not be liable for or by reason of any of the statements of fact
or recitals contained herein or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(v) The Warrant Agent shall not have any responsibility in respect of and makes no
representation as to the validity of this Warrant or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent), nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Warrant, nor shall it by any act hereunder
be deemed to make any representation or warranty as to the Warrant Shares.
(vi) The Warrant Agent is hereby authorized and directed to accept instructions with respect
to the performance of its duties hereunder from the Chief Executive Officer and the Chief Financial
Officer of the Company, and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer.
(vii) The Warrant Agent and any stockholder, director, officer, or employee of the Warrant
Agent may buy, sell, or deal in any of the Warrants or other securities of the Company or otherwise
act as fully and freely as though it were not Warrant Agent hereunder, so long as such persons do
so in full compliance with all applicable laws. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
(viii) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in
it or perform any duty hereunder either by itself or by or through its attorneys or agents.
(ix) The Warrant Agent shall act solely as the agent of the Company hereunder. The Warrant
Agent shall not be liable except for the failure to perform such duties as are specifically set
forth herein, and no implied covenants or obligations shall be read into this Warrant against the
Warrant Agent, whose duties shall be determined solely by the express provisions hereof. The
Warrant Agent shall not be deemed to be a fiduciary.
(x) The Warrant Agent shall not have any duty to calculate or determine any adjustments with
respect either to the Purchase Price or to the kind and amount of property receivable by the
Registered Holder upon the exercise of this Warrant.
(xi) The Warrant Agent shall not be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained herein.
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(xii) The Warrant Agent shall not be under any obligation or duty to institute, appear in, or
defend any action, suit, or legal proceeding in respect hereof, unless first indemnified to its
satisfaction, provided that this provision shall not affect the power of the Warrant Agent to take
such action as the Warrant Agent may consider proper, whether with or without such indemnity. The
Warrant Agent shall promptly notify the Company in writing of any claim made or action, suit or,
proceeding instituted against it arising out of or in connection with this Warrant.
(xiii) The Company will perform, execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further acts, instruments, and assurances as may be
required by the Warrant Agent in order to enable it to carry out or perform its duties hereunder.
(d) Change of Warrant Agent. The Warrant Agent may resign and be discharged from its
duties hereunder upon thirty (30) days notice in writing sent to the Company by registered or
certified mail, and to the Registered Holders of the Warrants by first class registered or
certified mail, return receipt requested, at the expense of the Warrant Agent; provided, however,
that no such resignation or discharge shall become effective until a successor Warrant Agent shall
have been appointed hereunder. The Company may remove the Warrant Agent or any successor Warrant
Agent upon thirty (30) days, notice in writing, sent to the Warrant Agent or successor Warrant
Agent, as the case may be, and to the Registered Holders of the Warrants by first class registered
or certified mail, return receipt requested; provided, further, however, that no such removal shall
become effective until a successor Warrant Agent shall have been appointed hereunder. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company
shall promptly appoint a successor to the Warrant Agent, which may be designated as an interim
Warrant Agent. If an interim Warrant Agent is designated, the Company shall then appoint a
permanent successor to the Warrant Agent, which may be the interim Warrant Agent. If the Company
shall fail to make such appointment of a permanent successor within a period of thirty (30) days
after such removal or within sixty (60) days after notification in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the Registered Holder of a
Warrant, then the Warrant Agent or any Registered Holder of a Warrant may apply to any court of
competent jurisdiction for the appointment of such a successor. Any entity which may be merged or
consolidated with or which shall otherwise succeed to substantially all of the trust or agency
business of the Warrant Agent shall be deemed to be the successor Warrant Agent without any further
action.
27. Entire Agreement. This Warrant and the documents referred to herein constitute
the entire agreement between the parties hereto pertaining to the subject matter hereof, and any
and all other written or oral agreements relating to the subject matter hereof existing between the
parties hereto are expressly canceled.
[Signature Page Follows]
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IN
WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant to be duly executed as of the day and
year first above written.
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THE COMPANY: |
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VIRNETX HOLDING CORPORATION |
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Address:
5615 Scotts Valley Drive, Suite 110
Scotts Valley, California 95066
Fax: (831) 438-8700 |
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THE WARRANT AGENT: |
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CORPORATE STOCK TRANSFER, INC. |
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Address:
3200 Cherry Creek South Drive, Suite 430
Denver, Colorado 80209
Fax: (303) 282-5800 |
VirnetX
Holding Corporation $3.00 Common Stock Purchase Warrant
EXHIBIT A
PURCHASE/EXERCISE FORM
To: Corporate Stock Transfer, Inc. Dated:
The undersigned, pursuant to the provisions set forth in the attached Warrant No. , hereby
irrevocably elects to purchase shares of the Common Stock covered by such
Warrant and herewith makes payment of $ , representing the full Purchase Price
for such shares at the price per share provided for in such Warrant.
Payment shall take the form of (check applicable box):
o in lawful money of the United States; or
o the cancellation of such amount of Warrant Stock as is necessary, in accordance
with the formula set forth in Section 2(b), to exercise this Warrant with respect to the
maximum amount of Warrant Stock purchasable pursuant to the cashless exercise procedure
set forth in Section 2(b).
The undersigned acknowledges that it has reviewed the representations and warranties of the
Registered Holder set forth in the Warrant and by its signature below hereby makes such
representations and warranties to the Company and the Warrant Agent. Defined terms contained in
such representations and warranties shall have the meanings assigned to them in the Warrant,
provided that the term Securities shall refer to the Warrant Stock.
ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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(Registered Holder) |
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EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns and
transfers all of the rights of the undersigned under the attached Warrant with respect to the
number of shares of capital stock covered thereby set forth below, unto:
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Name of Assignee
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Address/Facsimile Number
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ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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Exhibit C
Form of Public Warrant $4.00 Exercise Price
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE
AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT) OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY AND THE WARRANT AGENT
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
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Warrant No.
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Date of Issuance: January ___, 2009 |
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VIRNETX HOLDING CORPORATION
COMMON
STOCK PURCHASE WARRANT
($4.00 EXERCISE PRICE)
VirnetX Holding Corporation, a Delaware corporation (the Company), for value
received, hereby certifies that , or its registered assigns (the
Registered Holder), is entitled, subject to the terms set forth below, to purchase from
the Company, at any time after the date hereof and on or before July ___, 2010 (the Expiration
Date) ___ shares of the Companys Common Stock (the Common Stock) at a per share
purchase price equal to four dollars ($4.00) (the Purchase Price), as adjusted from time
to time pursuant to the provisions of this Warrant. The shares purchasable upon exercise of this
Warrant, as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter
referred to as the Warrant Stock.
This Warrant is issued pursuant to, and is subject to the terms and conditions of:
1. Number of Shares. Subject to the terms and conditions hereinafter set forth, the
Registered Holder is entitled, upon surrender of this Warrant, to purchase from the Company the
number of shares (subject to adjustment as provided herein) of Warrant Stock first set forth above.
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised by the Registered Holder, in
whole or in part, by surrendering this Warrant, with the purchase/exercise form appended hereto as
Exhibit A duly executed by such Registered Holder or by such Registered Holders duly
authorized attorney, at the principal office of Corporate Stock Transfer, Inc. (the Warrant
Agent), or at such other office or agency as the Warrant Agent may designate, accompanied by
payment in full of the Purchase Price payable in respect of the number of shares of Warrant Stock
purchased upon such exercise. The Purchase Price may be paid by cash, check or wire transfer, or
under the circumstances described in Section 2(b), pursuant to the cashless exercise provisions of
Section 2(b).
(b) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
an effective registration statement covering the Warrant Stock that is the subject of the Exercise
Notice is not available for the resale of such Warrant Stock (the Unavailable Warrant
Shares), the Holder may, in its sole discretion, exercise this Warrant in whole or in part
and, in lieu of making the cash payment otherwise contemplated to be made to the Warrant Agent upon
such exercise in payment of the Purchase Price, elect instead to receive upon such exercise the
Net Number of shares of Common Stock determined according to the following formula (a
Cashless Exercise):
Net Number = (A x B) - (A x C)
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this Warrant is then being exercised.
B= the closing sale price of the shares of Common Stock on the date immediately preceding the
date of the Exercise Notice.
C= the Purchase Price then in effect for the applicable Warrant Stock at the time of such
exercise.
(c) Effective Time of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which this Warrant shall
have been surrendered to the Warrant Agent as provided in Section 2(a). At such time, the person
or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 2(d) shall be deemed to have become the holder or holders of record
of the Warrant Stock represented by such certificates.
(d) Notification to Company. The Warrant Agent shall notify the Company immediately
upon receipt by the Warrant Agent of payment of the applicable Purchase Price from the Registered
Holder pursuant to Section 2(a). The Warrant Agent shall transfer each payment made by the
Registered Holder hereof pursuant to Section 2(a) to the Company in immediately available funds no
later than 5:00 p.m. (New York City time) on the date of exercise of the Warrant (and, pending such
transfer, shall hold each such payment for the benefit of the Registered Holder hereof in a
segregated trust account).
(e) Delivery to Holder. As soon as practicable after the exercise of this Warrant in
whole or in part, and in any event within twenty (20) days
thereafter, the Warrant Agent, at the Companys
expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such
Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may
direct:
(i) a certificate or certificates, or book-entry position, for the number of shares of Warrant
Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof)
of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of
Warrant Stock equal (without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares purchased by the Registered
Holder upon such exercise as provided in Sections 2(a) or 2(b), as applicable.
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(f) The Companys obligations to issue and cause the Warrant Agent to deliver Warrant Stock in
accordance with the terms hereof are absolute and unconditional upon satisfaction by the Registered
Holder of the conditions to exercise this Warrant set forth in
Sections 2(a) or 2(b), as applicable, irrespective of any
action or inaction by the Registered Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any person or any action to enforce
the same, or any setoff, counterclaim, recoupment, limitation, or termination, or any breach or
alleged breach by the Registered Holder or any other person of any obligation to the Company (other
than the Registered Holders obligations with respect to the exercise hereof in accordance with
Sections 2(a) or 2(b), as applicable,), or any violation or alleged violation of law by the Registered Holder or any other
person, and irrespective of any other circumstance which might otherwise limit such obligations of
the Company or the Warrant Agent to the Registered Holder in connection with the issuance of
Warrant Stock. Nothing herein shall limit a Registered Holders right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Warrant Agents failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant
to the terms hereof.
3. Company Call. If, prior to the exercise or earlier expiration of this Warrant
pursuant to the terms hereof, the average closing stock price of the Common Stock on the
American Stock Exchange, or any successor national securities exchange thereto, equals or exceeds
two (2) times the Purchase Price on any five
(5) consecutive trading days, the Company shall
be entitled, at the its option, to direct the Warrant Agent to issue a notice (a Call Notice) to the Registered
Holder of this Warrant to the effect that the Company is exercising its rights pursuant to this
Section 3. Upon receipt of a Call Notice (which receipt will be deemed to occur on the one (1)
business day following the dispatch of such Call Notice by the Warrant Agent by a nationally
recognized overnight courier), the Registered Holder shall have until 5.00 p.m., Denver, Colorado
time, on the 10th business day following receipt of the Call Notice to exercise the Warrant, for
that number of shares of Warrant Stock covered by the Call Notice, in accordance with Section 2
hereof. Upon the expiration of such 10 business day period, if not sooner exercised, this Warrant will
terminate with respect to the number of shares specified in the Call Notice and the Registered
Holders rights and the Companys obligations hereunder with respect to the number of shares
specified in the Call Notice will cease without payment of consideration. Notwithstanding the
foregoing provisions of this Section 3, the Company may not issue a Call Notice unless and until a
registration statement is effective, or no longer required, with respect to the resale of the
Warrant Stock.
4. Adjustments.
(a) Stock Splits and Dividends. If outstanding shares of the Companys Common Stock
shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in
respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at
the record date of such dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced. If outstanding
shares of Common Stock shall be combined into a smaller number of shares, the Purchase Price in
effect immediately prior to such combination shall, simultaneously with the effectiveness of such
combination, be proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant
shall be changed to the number determined by dividing (i) an amount equal to the number of shares
issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the
Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect
immediately after such adjustment.
(b) Reclassification, Etc. In case there occurs any reclassification or change of the
outstanding securities of the Company or of any reorganization of the Company (or any other
corporation the stock or securities of which are at the time receivable upon the exercise of this
Warrant) or any similar
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corporate reorganization on or after the date hereof, then and in each such case the
Registered Holder, upon the exercise hereof at any time after the consummation of such
reclassification, change, or reorganization shall be entitled to receive, in lieu of the stock or
other securities and property receivable upon the exercise hereof prior to such consummation, the
stock or other securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to
further adjustment pursuant to the provisions of this Section 4.
(c) Adjustment Certificate. When any adjustment is required to be made in the Warrant
Stock or the Purchase Price pursuant to this Section 4, the Company shall promptly mail to the
Registered Holder a certificate setting forth (i) a brief statement of the facts requiring such
adjustment, (ii) the Purchase Price after such adjustment and (iii) the kind and amount of stock or
other securities or property into which this Warrant shall be exercisable after such adjustment.
(d) Reorganizations, Mergers and Consolidations. If at any time or from time to time
after the date hereof there is a reorganization of the Company (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for elsewhere in this
Section 4) or a merger or consolidation of the Company with or into another corporation, then, as a
part of such reorganization, merger or consolidation, provision shall be made so that the
Registered Holder of this Warrant thereafter shall be entitled to receive, upon exercise of this
Warrant, the number of shares of stock or other securities or property of the Company, or of such
successor corporation resulting from such reorganization, merger or consolidation, to which a
holder of Common Stock would have been entitled on such reorganization, merger or consolidation. In
any such case, appropriate adjustment shall be made in the application of the provisions of this
Section 4 with respect to the rights of the Registered Holder of this Warrant after the
reorganization, merger or consolidation to the end that the provisions of this Section 4 (including
adjustment of the Purchase Price then in effect and number of shares issuable upon exercise of this
Warrant, as applicable) shall be applicable after that event and be as nearly equivalent to the
provisions hereof as may be practicable. This Section 4(d) shall similarly apply to successive
reorganizations, mergers and consolidations. Notwithstanding the foregoing, if any such
reorganization, merger or consolidation constitutes or results in (a) a going private transaction
as defined in Rule 13e-3 under the Exchange Act, (b) an acquisition of the Company primarily for
cash, or (c) an acquisition, merger or sale with or into a Person not traded on an Eligible Market
(as defined below), then the Company (or any such successor or surviving entity) shall require that
the Registered Holder waive the above requirements of this Section 4(d) in exchange for a payment
of cash on the closing date of such reorganization, merger or consolidation, equal to the Black
Scholes Value of the remaining unexercised portion of this Warrant on the closing date of such
reorganization, merger or consolidation, provided that the per share consideration to be received
by the holders of shares of Common Stock upon the consummation of such reorganization, merger or
consolidation is less than the Exercise Price. Concurrently with such payment, this Warrant shall
be cancelled. Black Scholes Value means the value of this Warrant based on the Black and Scholes
Option Pricing Model obtained from the OV function on Bloomberg determined as of the day
immediately following the public announcement of the applicable reorganization, merger or
consolidation and reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate
for a period equal to the remaining term of this Warrant as of such date and (ii) an expected
volatility equal to the 100 day volatility obtained from the HVT function on Bloomberg. Eligible
Market means the American Stock Exchange, The New York Stock Exchange, Inc., The Nasdaq Capital
Market, The NASDAQ Global Market or The NASDAQ Global Select Market.
(e) Pro Rata Rights Upon Distributions of Assets. If the Company shall declare or
make any dividend or other distribution of its assets (or rights to acquire its assets) to holders
of shares of Common Stock (which dividend or other distribution has not already been given to the
Registered Holders of the Warrants), including, without limitation, any distribution of cash,
equity or debt securities or rights or warrants to subscribe for or purchase any equity or debt
security, or other property or assets at
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any time after the issuance of this Warrant and prior to the Expiration Date, then, in each
such case (in each case, Distributed Property), the Registered Holder shall be entitled
upon exercise of this Warrant for the purchase of any or all of the Warrant Stock, to receive the
amount of Distributed Property which would have been payable to the Registered Holder had such
Registered Holder been the holder of such Warrant Stock on the record date for the determination of
shareholders entitled to such Distributed Property. The Company will at all times set aside and
keep available for distribution to such holder upon exercise of this Warrant a portion of the
Distributed Property to satisfy the distribution to which such Registered Holder is entitled
pursuant to the preceding sentence.
5. Transfers.
(a) Registration Statement. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Stock have been registered under the Securities Act of 1933, as amended
(the Securities Act), pursuant to a registration
statement on Form S-1 (File No. 333-153645) which must be
amended on a post-effective basis from time to time in order to maintain its accuracy and keep it
up-to-date, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise
dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Securities Act as to the sale of any such securities and
registration or qualification of such securities under any applicable U.S. federal or state
securities law then in effect, or (ii) an opinion of counsel, satisfactory to the Company, that
such registration and qualification are not required. Each certificate or other instrument for
Warrant Stock issued upon the exercise of this Warrant shall bear a legend substantially to the
foregoing effect and as described in Section 15.
(b) Transferability. Prior to the Expiration Date and subject to compliance with any
applicable securities laws and the conditions set forth in this Section 5, this Warrant and all
rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Warrant Agent, together with a written assignment of this Warrant
substantially in the form attached hereto as Exhibit B duly executed by the Registered
Holder or its agent or attorney, and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. If a registration statement is not then
effective, the transferee shall also sign an investment letter in form and substance
reasonably satisfactory to the Warrant Agent and the Company. Upon such surrender and, if
required, such payment, the Warrant Agent shall execute and deliver a new Warrant or Warrants in
the name of the assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of
this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly
assigned, may be exercised by a new holder for the purchase of Warrant Stock without having a new
Warrant issued.
6. No Impairment. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will
(subject to Section 13) at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to protect the rights
of the holder of this Warrant against impairment.
7. Notices of Certain Transactions. In case:
(a) the Company shall take a record of the holders of its Common Stock (or other stock or
securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling
or enabling them to receive any dividend or other distribution, or to receive any right to
subscribe for or purchase any shares of stock of any class or any other securities, or to receive
any other right, to subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or
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(b) of any capital reorganization of the Company, any reclassification of the capital stock of
the Company, any consolidation or merger of the Company, any consolidation or merger of the Company
with or into another corporation (other than a consolidation or merger in which the Company is the
surviving entity), or any transfer of all or substantially all of the assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder
of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption
or conversion is to take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or such other stock or securities at the time deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least
ten (10) days prior to the record date or effective date for the event specified in such notice.
8. Reservation of Stock. The Company will at all times reserve and keep available,
solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant
Stock and other stock, securities and property, as from time to time shall be issuable upon the
exercise of this Warrant.
9. Fully Paid and Non-assessable. The Company covenants that all Warrant Stock shall,
upon issuance and the payment of the applicable Purchase Price in accordance with the terms hereof,
be duly and validly authorized, issued and fully paid and non-assessable.
10. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant
or Warrants, properly endorsed, to the Warrant Agent at the principal
office of the Warrant Agent, the Warrant Agent will, subject to the provisions of Section 5, issue and deliver to or upon the order of such
Registered Holder, at the Companys expense, a new Warrant or Warrants of like tenor, in the name
of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof
for the number of shares of Warrant Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
11. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the
Warrant Agent of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required)
in an amount reasonably satisfactory to the Warrant Agent, or (in the case of mutilation) upon surrender
and cancellation of this Warrant, the Warrant Agent will issue, in lieu thereof, a new Warrant of like
tenor.
12. Notices. Any notice required or permitted pursuant to this Warrant shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally or by overnight
courier or sent by email or fax (upon customary confirmation of receipt), or forty-eight (48) hours
after being deposited in the regular mail, as certified or registered mail (airmail if sent
internationally), with postage prepaid, addressed (a) if to the Registered Holder, to the address
of the Registered Holder most recently furnished in writing to the Warrant Agent and (b) if to the
Warrant Agent, to the address set forth below or subsequently modified by written notice to the
Registered Holder.
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Corporate Stock Transfer, Inc.
3200 Cherry Creek South Drive
Suite 430
Denver, Colorado 80209
Attn: Carylyn Bell
Fax No.: (303) 282-5800
with a copy to:
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, California 94025
Attention: Lowell D. Ness, Esq.
Fax No.: (650) 474-0452
13. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of
the Company. Notwithstanding the foregoing, the Company shall provide the Registered Holder with
copies of the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
14. No Fractional Shares. No fractional shares of Common Stock shall be issued upon
exercise of this Warrant. In lieu of any fractional shares which would otherwise be issuable upon
exercise of this Warrant, the Company shall round up such fractional interest to the next whole
share.
15. Warrant Legends.
(a) Each Warrant shall contain a legend in substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST-EFFECTIVE AMENDMENT
THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE ACT) OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE ACT AND
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE
COMPANY AND THE WARRANT AGENT THAT REGISTRATION IS NOT REQUIRED UNDER
THE ACT. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES.
(b) Each
certificate representing the Warrant Stock, unless a registration
statement is not then effective, shall contain a legend substantially in the following form:
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THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POST-EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, (THE ACT) OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
OR FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES.
16. [RESERVED]
17. Headings. The headings in this Warrant are for purposes of reference only and
shall not limit or otherwise affect the meaning of any provision of this Warrant.
18. Governing Law. This Warrant shall be governed, construed and interpreted in
accordance with the laws of the State of New York, without giving effect to principles of conflicts
of law.
19. Survival of Representations. Unless otherwise set forth in this Warrant, the
representations, warranties and covenants contained in or made pursuant to this Warrant shall
survive the execution and delivery of this Warrant.
20. Successors and Assigns. The terms and conditions of this Warrant shall inure to
the benefit of and be binding upon the respective successors and assigns of the parties. Nothing
in this Warrant, express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Warrant, except as expressly provided in this Warrant.
21. Counterparts. This Warrant may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one instrument.
22. Attorneys Fees. If any action at law or in equity (including arbitration) is
necessary to enforce or interpret the terms of any of this Warrant, the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
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23. Severability. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, the parties agree to renegotiate such provision in good faith.
In the event that the parties cannot reach a mutually agreeable and enforceable replacement for
such provision, then (a) such provision shall be excluded from this Warrant, (b) the balance of
this Warrant shall be interpreted as if such provision were so excluded and (c) the balance of this
Warrant shall be enforceable in accordance with its terms.
24. Delays or Omissions. No delay or omission to exercise any right, power or remedy
accruing to any party under this Warrant, upon any breach or default of any other party under this
Warrant, shall impair any such right, power or remedy of such non-breaching or non-defaulting party
nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein,
or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Warrant, or any waiver on the part of any party of any
provisions or conditions of this Warrant, must be in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this Warrant or by law
or otherwise afforded to any party, shall be cumulative and not alternative.
25. Remedies, Other Obligations, Breaches and Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant, at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Registered Holder to pursue
actual damages for any failure by the Company to comply with the terms of this Warrant. The
Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm
to the Registered Holder and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened breach, the Registered
Holder shall be entitled to seek, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and without any bond or
other security being required
26. Warrant Agent.
(a) Registration of Warrants. The Warrant Agent will keep a register in which the
Warrant Agent will provide for the registration of Warrants and the registration of transfers of
Warrants representing whole numbers of Warrants. The Company and the Warrant Agent may treat the
person in whose name any Warrants is registered on such register as the owner thereof for all
purposes. Any Registered Holder may change such Registered Holders address as shown on the
warrant register by written notice to the Warrant Agent in accordance with Section 12 requesting
such change.
(b) Limitation on Liability. The Warrant Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in connection with its
administration of the Warrants in reliance upon any instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or
other paper or document in good faith believed by it to be genuine and to be signed, executed and,
where necessary, verified and acknowledged, by the proper person or persons.
(c) Duties of Warrant Agent. The Warrant Agent shall undertake only the specific
duties and obligations imposed hereunder upon the following terms and conditions, by all of which
the Company and the Registered Holder shall be bound:
(i) The Warrant Agent may consult with legal counsel (who may or may not be legal counsel for
the Company), and the opinion of such counsel shall be full and complete authorization and
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protection to the Warrant Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion, provided the Warrant Agent shall have exercised reasonable care in
the selection by it of such counsel.
(ii) Whenever in the performance of its duties hereunder the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter may be deemed to be conclusively
proved and established by a certificate signed by an executive officer of the Company and delivered
to the Warrant Agent and such certificate shall be full authorization to the Warrant Agent for any
action taken or suffered in good faith by it hereunder in reliance upon such certificate.
(iii) The Warrant Agent shall be liable hereunder only for its own gross negligence, willful
misconduct or bad faith.
(iv) The Warrant Agent shall not be liable for or by reason of any of the statements of fact
or recitals contained herein or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(v) The Warrant Agent shall not have any responsibility in respect of and makes no
representation as to the validity of this Warrant or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent), nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Warrant, nor shall it by any act hereunder
be deemed to make any representation or warranty as to the Warrant Shares.
(vi) The Warrant Agent is hereby authorized and directed to accept instructions with respect
to the performance of its duties hereunder from the Chief Executive Officer and the Chief Financial
Officer of the Company, and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer.
(vii) The Warrant Agent and any stockholder, director, officer, or employee of the Warrant
Agent may buy, sell, or deal in any of the Warrants or other securities of the Company or otherwise
act as fully and freely as though it were not Warrant Agent hereunder, so long as such persons do
so in full compliance with all applicable laws. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
(viii) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in
it or perform any duty hereunder either by itself or by or through its attorneys or agents.
(ix) The Warrant Agent shall act solely as the agent of the Company hereunder. The Warrant
Agent shall not be liable except for the failure to perform such duties as are specifically set
forth herein, and no implied covenants or obligations shall be read into this Warrant against the
Warrant Agent, whose duties shall be determined solely by the express provisions hereof. The
Warrant Agent shall not be deemed to be a fiduciary.
(x) The Warrant Agent shall not have any duty to calculate or determine any adjustments with
respect either to the Purchase Price or to the kind and amount of property receivable by the
Registered Holder upon the exercise of this Warrant.
(xi) The Warrant Agent shall not be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained herein.
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(xii) The Warrant Agent shall not be under any obligation or duty to institute, appear in, or
defend any action, suit, or legal proceeding in respect hereof, unless first indemnified to its
satisfaction, provided that this provision shall not affect the power of the Warrant Agent to take
such action as the Warrant Agent may consider proper, whether with or without such indemnity. The
Warrant Agent shall promptly notify the Company in writing of any claim made or action, suit or,
proceeding instituted against it arising out of or in connection with this Warrant.
(xiii) The Company will perform, execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further acts, instruments, and assurances as may be
required by the Warrant Agent in order to enable it to carry out or perform its duties hereunder.
(d) Change of Warrant Agent. The Warrant Agent may resign and be discharged from its
duties hereunder upon thirty (30) days notice in writing sent to the Company by registered or
certified mail, and to the Registered Holders of the Warrants by first class registered or
certified mail, return receipt requested, at the expense of the Warrant Agent; provided, however,
that no such resignation or discharge shall become effective until a successor Warrant Agent shall
have been appointed hereunder. The Company may remove the Warrant Agent or any successor Warrant
Agent upon thirty (30) days, notice in writing, sent to the Warrant Agent or successor Warrant
Agent, as the case may be, and to the Registered Holders of the Warrants by first class registered
or certified mail, return receipt requested; provided, further, however, that no such removal shall
become effective until a successor Warrant Agent shall have been appointed hereunder. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company
shall promptly appoint a successor to the Warrant Agent, which may be designated as an interim
Warrant Agent. If an interim Warrant Agent is designated, the Company shall then appoint a
permanent successor to the Warrant Agent, which may be the interim Warrant Agent. If the Company
shall fail to make such appointment of a permanent successor within a period of thirty (30) days
after such removal or within sixty (60) days after notification in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the Registered Holder of a
Warrant, then the Warrant Agent or any Registered Holder of a Warrant may apply to any court of
competent jurisdiction for the appointment of such a successor. Any entity which may be merged or
consolidated with or which shall otherwise succeed to substantially all of the trust or agency
business of the Warrant Agent shall be deemed to be the successor Warrant Agent without any further
action.
27. Entire Agreement. This Warrant and the documents referred to herein constitute
the entire agreement between the parties hereto pertaining to the subject matter hereof, and any
and all other written or oral agreements relating to the subject matter hereof existing between the
parties hereto are expressly canceled.
[Signature Page Follows]
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IN
WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant to be duly executed as of the day and
year first above written.
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THE COMPANY: |
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VIRNETX HOLDING CORPORATION |
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Address:
5615 Scotts Valley Drive, Suite 110
Scotts Valley, California 95066
Fax: (831) 438-8700 |
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THE WARRANT AGENT: |
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CORPORATE STOCK TRANSFER, INC. |
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Title: |
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Address:
3200 Cherry Creek South Drive, Suite 430
Denver, Colorado 80209
Fax: (303) 282-5800 |
VirnetX
Holding Corporation $4.00 Common Stock Purchase Warrant
EXHIBIT A
PURCHASE/EXERCISE FORM
To: Corporate Stock Transfer, Inc. Dated:
The undersigned, pursuant to the provisions set forth in the attached Warrant No. , hereby
irrevocably elects to purchase shares of the Common Stock covered by such
Warrant and herewith makes payment of $ , representing the full Purchase Price
for such shares at the price per share provided for in such Warrant.
Payment shall take the form of (check applicable box):
o in lawful money of the United States; or
o the cancellation of such amount of Warrant Stock as is necessary, in accordance
with the formula set forth in Section 2(b), to exercise this Warrant with respect to the
maximum amount of Warrant Stock purchasable pursuant to the cashless exercise procedure
set forth in Section 2(b).
The undersigned acknowledges that it has reviewed the representations and warranties of the
Registered Holder set forth in the Warrant and by its signature below hereby makes such
representations and warranties to the Company and the Warrant Agent. Defined terms contained in
such representations and warranties shall have the meanings assigned to them in the Warrant,
provided that the term Securities shall refer to the Warrant Stock.
ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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(Signature)
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EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns and
transfers all of the rights of the undersigned under the attached Warrant with respect to the
number of shares of capital stock covered thereby set forth below, unto:
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Name of Assignee
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Address/Facsimile Number
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No. of Shares |
ACKNOWLEDGED AND AGREED TO BY
THE REGISTERED HOLDER:
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Annex A
Form
of Underwriters Warrant Certificate
VIRNETX HOLDING CORPORATION
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M. EASTERN TIME ON JANUARY ___, 2014
NO. W-__________ __________ Warrants
This Warrant Certificate (Warrant Certificate) certifies that Gilford Securities
Incorporated, or its assigns, is the registered holder (Holder) of Warrants (as defined
in the Underwriters Warrant Agreement between the Company and Holder dated as of January ___, 2009 (the
Warrant Agreement)) of VirnetX Holding Corporation (the Company). Each Warrant
permits Holder to purchase, at any time from January ___, 2009 (Purchase Date) until 5:30
p.m. Eastern Time on January ___, 2014 (the Expiration Time), one share of the Companys
Common Stock (the Shares) at the initial exercise price, subject to adjustment in certain
events, of $ per share (120% of the public offering price) (the Exercise Price).
No Warrant may be exercised after the Expiration Time, at which time all Warrants evidenced
hereby, unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of
Warrants issued pursuant to the Warrant Agreement. Capitalized terms used but not otherwise
defined herein shall have the meanings assigned to such terms in the Warrant Agreement.
The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price
and the type or number of the Companys securities issuable thereupon may be adjusted.
Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company
shall forthwith issue to Holder a new Warrant Certificate representing such number of unexercised
Warrants.
The Company may deem and treat Holder as the absolute owner of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by anyone)
for the purpose of any exercise hereof, and of any distribution to Holder, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
[Remainder of This Page Intentionally Left Blank; Signature Page to Follow]
2
IN WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant Certificate to be duly executed.
Dated as of January ___, 2009
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VIRNETX HOLDING CORPORATION
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Kendall Larsen |
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Chief Executive Officer |
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CORPORATE STOCK TRANSFER, INC., as Warrant Agent
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EXHIBIT A
FORM OF SUBSCRIPTION (CASH EXERCISE)
(To be signed only upon exercise of Warrant)
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TO:
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Corporate Stock Transfer, Inc. |
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3200 Cherry Creek South Drive |
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Suite 430 |
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The undersigned holder of Warrant Certificate number (the Warrant
Certificate), representing Warrants (as defined in the Warrant Certificate) of
VirnetX Holding Corporation (the Company), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to purchase Shares (as defined in the Warrant
Certificate), and herewith makes payment of $ therefore, all in accordance with the
Warrant Certificate and the Warrant Agreement referred to in the Warrant Certificate. Certificates
for the Shares shall be issued in the name of and delivered to the following
address:
By:
Name:
Social Security Number or Tax Identification Number:
Date:
(Signature must conform in all respects to name of Holder as specified on the face of the
Warrant Certificate)
Address
Social Security Number or
Tax Identification Number
EXHIBIT B
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
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TO:
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Corporate Stock Transfer, Inc. |
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3200 Cherry Creek South Drive |
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Suite 430 |
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Denver, Colorado 80209 |
The undersigned holder of Warrant Certificate number (the Warrant
Certificate), representing Warrants (as defined in the Warrant Certificate) of
VirnetX Holding Corporation (the Company), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to purchase (on a cashless exercise basis in accordance with
the formula set forth in Section 3.1(b) of the Warrant Agreement referred to in the Warrant
Certificate (the Warrant Agreement)) Shares (as defined in the Warrant
Certificate), all in accordance with the Warrant Certificate and the Warrant Agreement.
Certificates for the Shares shall be issued in the name of and delivered to the
following address:
By:
Name:
Social Security Number or Tax Identification Number:
Date:
(Signature must conform in all respects to name of Holder as specified on the face of the
Warrant Certificate)
Address
Social Security Number or
Tax Identification Number
FORM OF ASSIGNMENT
(To be exercised by the registered holder if such Holder desires to transfer the Warrant
Certificate)
FOR VALUE RECEIVED
hereby sells, assigns and
transfers unto:
Print Name of Transferee
Address
City State Zip Code
this Warrant Certificate, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint
_________ Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of substitution.
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Dated:
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(Signature must conform in all respects to name of
Holder as specified on the face of the Warrant
Certificate) |
Social Security Number or Other Identifying Number of Assignee
exv4w2
Exhibit 4.2
UNDERWRITERS WARRANT AGREEMENT
Underwriters Warrant Agreement (the Agreement), dated as of January ___, 2009,
between VirnetX Holding Corporation (the Company) and Gilford Securities Incorporated
(the Underwriter).
WITNESSETH:
WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement dated as of
January ___, 2009 between the Company and the Underwriter (the Underwriting Agreement),
to act as the underwriter in connection with the Companys proposed public offering of up to
3,000,000 shares of the Companys common stock, $0.0001 par value per share (the Common
Stock), and warrants to purchase (i) an aggregate of 1,500,000 shares of Common Stock at an
exercise price of $2.00 per share, (ii) an aggregate of 1,500,000 shares of Common Stock at an
exercise price of $3.00 per share and (iii) an aggregate of 1,500,000 shares of Common Stock at an
exercise price of $4.00 per share, at the public offering price of $ per share of Common Stock
and associated warrants (the Public Offering); and
WHEREAS, the Company proposes to issue to the Underwriter and/or member firms of the Financial
Industry Regulatory Authority (FINRA) participating in the Public Offering and the bona
fide officers and partners thereof as permitted by Rule 2710(c)(7)(A) and (B) (the Rule)
of the NASD Conduct Rules (each, a Holder, and collectively, the Holders),
warrants (Warrants) to purchase up to 300,000 shares of Common Stock (the
Shares); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the First
Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Holders
in consideration for, and as part of the compensation in connection with, the Underwriter acting as
underwriter pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment to the Company of $.0001 per
Warrant, the agreements set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
(a) The above recitals are true and correct. The Public Offering has been registered under a
Registration Statement on Form S-1 (File No. 333-153645) and declared effective by the Securities
and Exchange Commission (the Commission) on January ___, 2009 (the Effective
Date). This Agreement, relating to the purchase of the Warrants, is entered into pursuant to
the Underwriting Agreement between the Company and the Underwriter in connection with the Public
Offering.
(b) Pursuant to the Warrants, the Holders are hereby granted the right to purchase from the
Company, at any time during the period commencing on the first anniversary of the First Closing
Date and expiring upon the fifth anniversary of the First Closing Date (the Expiration
Time), up to 300,000 shares of Common Stock of the Company at an initial exercise price
(subject to adjustment as provided in Section 7 hereof) of $ per share
(representing 120% of the public offering price per share of the Common Stock and associated
warrants in the Public Offering) (the Exercise Price or Purchase Price),
subject to the terms and conditions of this Agreement.
(c) Except as specifically otherwise provided herein, the Shares shall bear the same terms and
conditions as such securities described under the caption Description of Securities in
the Registration Statement, and as designated in the Companys Amended and Restated Certificate of
Incorporation and any amendments thereto, and the Holders shall have registration rights under the
Securities Act of 1933, as amended (the Act), for the Shares, as more fully described in
Section 6 of this Agreement.
2. Warrant Certificates. The warrant certificates (Warrant Certificates)
delivered and to be delivered pursuant to this Agreement shall be in the form set forth in the form
of Warrant Certificate, attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions, and other variations as required or permitted by this Agreement.
(a) The Holder may effect a cash exercise of the Warrants by surrendering to the Company the
Warrant Certificate, together with a Subscription in the form of Exhibit A attached
thereto, duly executed by such Holder, at any time during the period commencing on the first
anniversary of the First Closing Date and expiring upon the fifth anniversary of the First Closing
Date, at the Companys principal office, accompanied by payment in cash or by certified or official
bank check payable to the order of the Company in the amount of the aggregate purchase price (the
Aggregate Price), subject to any adjustments provided for in this Agreement. The
aggregate price hereunder for each Holder shall be equal to the Exercise Price multiplied by the
number of Shares that are the subject of each Holders Warrant (as adjusted as hereinafter
provided).
(b) The Holder may effect a cashless exercise of the Warrants by delivering the Warrant
Certificate to the Company together with a Subscription in the form of Exhibit B attached
thereto, duly executed by such Holder, in which case no payment of cash will be required. Upon
such cashless exercise, the number of Shares to be purchased by each Holder shall be determined by
dividing: (i) the number obtained by multiplying the number of Shares that are the subject of each
Holders Warrant Certificate by the amount, if any, by which the then Market Value (as hereinafter
defined) exceeds the Purchase Price; by (ii) the then per share Market Value. In no event shall
the Company be obligated to issue any fractional securities and, at the time it causes a
certificate or certificates to be issued, it shall pay the Holder in lieu of any fractional
securities or shares to which such Holder would otherwise be entitled, by Company check, in an
amount equal to such fraction multiplied by the Market Value. The Market Value shall be
determined on a per Share basis as of the close of the business day preceding the date of exercise,
which determination shall be made as follows: (a) if the Common Stock is listed for trading on a
national or regional stock exchange or is included on an inter-dealer quotation system, the average
closing sale price quoted on such exchange or inter-dealer quotation system which is published in
The Wall Street Journal for the 10 trading days immediately preceding the
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date of exercise, or if no trade of the Common Stock shall have been reported during such
period, the last sale price so quoted for the next day prior thereto on which a trade in the Common
Stock was so reported; or (b) if the Common Stock is not so listed, admitted to trading or
included, the average of the closing highest reported bid and lowest reported ask price as quoted
on the OTC Bulletin Board or in the Pink Sheets published by the National Daily Quotation Bureau
for the first day immediately preceding the date of exercise on which the Common Stock is traded.
3.2 Partial Exercise. The Warrants may also be exercised from time to time in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 hereof, except that
with respect to a cash exercise, the Purchase Price payable shall be equal to the number of Shares
being purchased hereunder multiplied by the per Share Purchase Price, subject to any adjustments
provided for in this Agreement. Upon any such partial exercise, the Company, at its expense, will
forthwith issue to the Holder a new Warrant Certificate or Warrants of like tenor calling in the
aggregate for the number of securities (as constituted as of the date hereof) for which the Warrant
Certificate shall not have been exercised, issued in the name of the Holder or as such Holder (upon
payment by such Holder of any applicable transfer taxes) may direct.
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(a) Upon the exercise of the Warrants, the issuance of certificates for shares of Common Stock
shall be made forthwith (and, in any event within three business days thereafter) without charge to
the Holder thereof including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of Section 5 and Section 6
hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof;
provided, however, that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such certificates in a name
other than that of the Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
(b) The Warrant Certificates and the certificates representing the shares of Common Stock
shall be executed on behalf of the Company by manual or facsimile signature of the then present
Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company.
Warrant Certificates shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate, by acceptance
thereof, covenants and agrees that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one year from the
effectiveness of the Offering, except (a) to a FINRA member firm that participated in the Public
Offering and the bona fide officers or partners thereof, (b) by operation of law, or (c) by reason
of reorganization of the Company.
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6.1 Registration Under the Securities Act of 1933. The Warrants and the Shares
(collectively the Registrable Securities) have not been registered under the Securities
Act of 1933, as amended (the Act). Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares shall bear the following legend in the event there is no
current registration statement effective with the Commission at such time as to such securities:
The securities represented by this certificate may not be offered or sold except pursuant to (i) an
effective registration statement under the Securities Act of 1933, as amended, (ii) to the extent
applicable, Rule 144 under the Securities Act (or any similar rule under the Securities Act
relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall
be reasonably satisfactory to counsel to the issuer, that an exemption from registration under the
Securities Act and applicable state securities laws is available.
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6.2 |
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Piggyback Registration. |
(a) If, at any time commencing on the first anniversary of the Effective Date and expiring
seven years after the Effective Date, the Company prepares and files a post-effective amendment
to the Registration Statement, or a new Registration Statement under the Act, or files a
Notification on Form 1-A or otherwise registers securities under the Act, or files a similar
disclosure document with the Commission (each such filing, a Registration Document) as to
any of its securities under the Act (other than under a Registration Statement pursuant to Form S-8
or Form S-4), it will give written notice by registered mail, at least 20 days prior to the filing
of such Registration Document to the Underwriter and to all other Holders of the Registrable
Securities of its intention to do so. The Company shall include all Registrable Securities in such
Registration Documents with respect to which the Company has received written requests for
inclusion therein within 15 days of actual receipt of the Companys notice.
(b) No Holder of Registrable Securities may participate in any registration hereunder which is
underwritten unless such holder completes and executes all documents as are reasonable and
customary in such offerings.
(c) The Company shall have the right at any time after it shall have given written notice
pursuant to this Section 6.2 (irrespective of whether a written request for inclusion of any
Registration Securities shall have been made) to elect not to file any such Registration Document,
or to withdraw the same after the filing but prior to the effective date thereof.
(a) Expenses to be Paid by the Company. At any time commencing
on the first anniversary of the Effective Date until the fifth anniversary of the Effective Date, Holders of Registrable Securities representing more
than 50% of such securities at that time outstanding (a Majority of Holders) shall have
the right (which right is in addition to the registration rights under Section 6.2 and Section
6.3(b) hereof), exercisable by written notice to the Company, to have the Company prepare and file
with the Commission, on one occasion, a registration statement and/or such other documents,
including a prospectus, and/or any other appropriate disclosure document as may be reasonably
necessary in the opinion of both counsel for the Company and counsel for the
4
Majority of Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Registrable Securities for 12 consecutive months (or
such longer period of time as permitted by the Act) by such Majority of Holders and any other
Holders of any of the Registrable Securities who notify the Company within 20 days after receipt of
notice by registered or certified mail from the Company of such request (Demand
Registration). A Demand Registration shall not be counted as a Demand Registration hereunder
until such Demand Registration has been declared effective by the Commission and maintained
continuously effective for a period of at least 12 months or such shorter period when all
Registrable Securities included therein have been sold in accordance with such Demand Registration.
The Company shall pay all costs (excluding transfer taxes, if any, and the Holders pro-rata
portions of the selling discount or commissions), fees and expenses in connection with all
registration statements filed pursuant to Section 6.2 and this Section 6.3(a) including, without
limitation, the Companys legal and accounting fees, printing expenses, blue sky fees and expenses
and the fees and expenses of one legal counsel to the Holders, so chosen by the Holders.
(b) Expenses to be Paid by the Holder(s). At any time commencing one year after the
First Closing Date until the Expiration Time, a Majority of Holders shall have the right (which
right is in addition to the registration rights under Sections 6.2 and Section 6.3(a) hereof),
exercisable by written notice to the Company, to one Demand Registration. A Demand Registration
shall not be counted as a Demand Registration hereunder until such Demand Registration has been
declared effective by the Commission and maintained continuously effective for a period of at least
nine months or such shorter period when all Registrable Securities included therein have been sold
in accordance with such Demand Registration. The Holder(s) will pay all costs, fees and expenses
in connection with any registration statement filed pursuant to Section this 6.3(b).
(c) The Company covenants and agrees to give written notice by registered or certified mail of
any registration request under this Section 6.3 by the Majority of Holders to all other registered
Holders of any of the Registrable Securities within 10 days from the date of the receipt of any
such registration request.
(d) Any written request by the Holders made pursuant to this Section 6.3 shall:
(i) specify the number of Registrable Securities which the Holders intend to offer and sell
and the minimum price at which the Holders intend to offer and sell such securities;
(ii) state the intention of the Holders to offer such securities for sale;
(iii) describe the intended method of distribution of such securities; and
(iv) contain an undertaking on the part of the Holders to provide all such information and
materials concerning the Holders and take all such action as may be reasonably required to permit
the Company to comply with all applicable requirements of the Commission and to obtain acceleration
of the effective date of the registration statement.
5
6.4 Covenants of the Company with Respect to Registration. In connection with the
filing of any Registration Document by the Company, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration statement within 45 days of
receipt of any Demand Registration pursuant to Section 6.3, and shall use its best efforts to have
any such registration statement declared effective at the earliest practicable time. The Company
will promptly notify each Holder of such Registrable Securities and confirm such advice in writing,
(i) when such registration statement becomes effective, (ii) when any post-effective amendment to
such registration statement becomes effective and (iii) of any request by the Commission for any
amendment or supplement to such registration statement or any prospectus relating thereto or for
additional information.
(b) The Company shall furnish to each Holder of such Registrable Securities such number of
copies of such registration statement and of each such amendment and supplement thereto (in each
case including each preliminary prospectus and summary prospectus) in conformity with the
requirements of the Act, and such other documents as the Holders may reasonably request in order to
facilitate the disposition of the Registrable Securities by such Holders.
(c) If the Company shall fail to comply with the provisions of Section 6.3(a), the Company
shall, in addition to any other equitable or other relief available to the Holder(s), be liable for
any or all special and consequential damages sustained by the Holder(s) requesting registration of
their Registrable Securities.
(d) The Company shall prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection therewith as may be reasonably
necessary to keep such registration statement effective for at least 12 months (or such longer
period as permitted by the Act), and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the Holder or Holders of Registrable
Securities set forth in such registration statement. If at any time the Commission should
institute or threaten to institute any proceedings for the purpose of issuing a stop order
suspending the effectiveness of any such registration statement, the Company will promptly notify
each Holder of Registrable Securities and will use all reasonable efforts to prevent the issuance
of any such stop order or to obtain the withdrawal thereof as soon as possible. The Company will
use its good faith reasonable efforts and take all reasonably necessary action which may be
required in qualifying or registering the Registrable Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such states as reasonably
are required by the Holder(s), provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction. The Company shall use its good faith reasonable efforts
to cause such Registrable Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities of the United States or any State
thereof as may be reasonably necessary to enable the Holder(s) thereof to consummate the
disposition of such Registrable Securities.
6
(e) The Company shall indemnify the Holder(s) of the Registrable Securities to be sold
pursuant to any registration statement and each person, if any, who controls such Holders within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or defending against any
claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter as
contained in the Underwriting Agreement.
(f) If requested by the Company prior to the filing of any registration statement covering the
Registrable Securities, each of the Holder(s) of the Registrable Securities to be sold pursuant to
a registration statement, and their successors and assigns, shall severally, and not jointly,
indemnify the Company, its officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become subject under the
Act, the Exchange Act or otherwise, arising from written information furnished by such Holder, or
their successors or assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant
to which the Underwriters have agreed to indemnify the Company, except that the maximum amount
which may be recovered from each Holder pursuant to this paragraph or otherwise shall be limited to
the amount of net proceeds received by the Holder from the sale of the Registrable Securities.
(g) Nothing contained in this Agreement shall be construed as requiring the Holder(s) to
exercise their Warrants prior to the filing of any registration statement or the effectiveness
thereof.
(h) The Company shall not permit the inclusion of any securities other than the Registrable
Securities to be included in any registration statement filed pursuant to Section 6.3 hereof
without the prior written consent of the Majority of Holders which consent will not be unreasonably
withheld or delayed.
(i) The Company shall furnish to each Holder participating in an offering and to the managing
underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a Cold Comfort letter dated the effective
date of such registration statement (and, if such registration includes an underwritten public
offering, a letter dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Companys financial statements
included in such registration statement, in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included therein) and, in the case of
such accountants letter, with respect to events subsequent to the date of such financial
statements, as are customarily covered in opinions of
7
issuers counsel and in accountants letters delivered to underwriters in underwritten public
offerings of securities.
(j) The Company shall deliver promptly to each Holder participating in an offering and to the
managing underwriter, if any, copies of all correspondence between the Commission and the Company,
its counsel or auditors and all non-privileged memoranda relating to discussions with the
Commission or its staff with respect to the registration statement and permit each Holder and
underwriter to do such investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably necessary to comply
with applicable securities laws or rules of the FINRA. Such investigation shall include access to
books, records and properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such reasonable times and
as often as any such Holder shall reasonably request.
(k) With respect to a registration statement filed pursuant to Section 6.3, the Company, if
requested, shall enter into an underwriting agreement with the managing underwriter, reasonably
satisfactory to the Company, selected for such underwriting by a Majority of Holders requested to
be included in such underwriting. Such agreement shall be satisfactory in form and substance to
the Company, each Holder and such managing underwriter, and shall contain such representations,
warranties and covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The Holders, if required by the
underwriter to be parties to any underwriting agreement relating to an underwritten sale of their
Registrable Securities, may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such underwriters shall also be
made to and for the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the underwriters except as they
may relate to such Holders and their intended methods of distribution.
(l) Notwithstanding the provisions of Section 6.2 or Section 6.3 of this Agreement, the
Company shall not be required to effect or cause the registration of Registrable Securities
pursuant to Section 6.2 or Section 6.3 hereof if, within 30 days after its receipt of a request to
register such Registrable Securities (i) counsel for the Company delivers an opinion to the Holders
and to the Companys transfer agent requesting registration of such Registrable Securities, in form
and substance satisfactory to counsel to such Holder(s), to the effect that the entire number of
Registrable Securities proposed to be sold by such Holder(s) may otherwise be sold, in the manner
proposed by such Holder(s), without registration under the Securities Act, or (ii) the Commission
shall have issued a no-action position, in form and substance satisfactory to counsel for the
Holder(s) requesting registration of such Registrable Securities, to the effect that the entire
number of Registrable Securities proposed to be sold by such Holder(s) may be sold by it, in the
manner proposed by such Holder(s), without registration under the Securities Act; provided,
however, if the Companys transfer agent does not permit the sale of the Registrable Securities
upon request or for any other reason such sale is delayed, the Company shall thereafter immediately
notify such Holders that it will register the Registrable Securities for sale under the Act and
cause such Registrable Securities to be so registered.
8
(m) After completion of the Public Offering, the Company shall not, directly or indirectly,
enter into any merger, business combination or consolidation in which (i) the Company shall not be
the surviving corporation and (ii) the shareholders of the Company are to receive, in whole or in
part, capital stock or other securities of the surviving corporation, unless the surviving
corporation shall, prior to such merger, business combination or consolidation, agree in writing to
assume the obligations of the Company under this Agreement, and for that purpose references
hereunder to Registrable Securities shall be deemed to include the securities which the
Holders would be entitled to receive in exchange for Registrable Securities under any such merger,
business combination or consolidation, provided that to the extent such securities to be received
are convertible into shares of Common Stock of the issuer thereof, then any such shares of Common
Stock as are issued or issuable upon conversion of said convertible securities shall also be
included within the definition of Registrable Securities.
7. |
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Adjustments to Exercise Price and Number of Securities. |
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7.1 |
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Adjustment for Dividends, Subdivisions, Combinations or Reclassifications. |
(a) In case the Company shall (i) pay a dividend or make a distribution in shares of its
capital stock (whether shares of Common Stock or of capital stock of any other class), (ii)
subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its shares of Common Stock any shares of capital stock of the Company; then,
and in each such case, the per Share Exercise Price and the number of Shares in effect immediately
prior to such action shall be adjusted so that the Holder of this Warrant thereafter upon the
exercise hereof shall be entitled to receive the number and kind of shares of the Company which
such Holder would have owned immediately following such action had this Warrant been exercised
immediately prior thereto. An adjustment made pursuant to this Section 7.1 shall become effective
immediately after the record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant to this section, the Holder of
this Warrant shall become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be conclusive) shall
determine the allocation of the adjusted Exercise Price between or among shares of such class of
capital stock.
(b) Immediately upon any adjustment of the Exercise Price pursuant to this section, the
Company shall send written notice thereof to the Holder of Warrant Certificates (by first class
mail, postage prepaid), which notice shall state the Exercise Price resulting from such adjustment,
and any increase or decrease in the number of Shares to be acquired upon exercise of the Warrants,
setting forth in reasonable detail the method of calculation and the facts upon which such
calculation is based.
7.2 Adjustment for Reorganization, Merger or Consolidation. In case of any
reorganization of the Company or consolidation of the Company with, or merger of the Company with,
or merger of the Company into, another corporation (other than a consolidation or merger which does
not result in any reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the
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Holder a supplemental Warrant Agreement providing that the Holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such warrant, the kind and amount of shares of stock and
other securities and property receivable upon such consolidation or merger, by a holder of the
number of shares of Common Stock of the Company for which such warrant might have been exercised
immediately prior to such reorganization, consolidation, merger, conveyance, sale or transfer.
Such supplemental Warrant Agreement shall provide for adjustments which shall be identical to the
adjustments provided in this Section 7 and such registration rights and other rights as provided in
this Agreement. The Company shall not effect any such consolidation, merger, or similar
transaction as contemplated by this paragraph, unless prior to or simultaneously with the
consummation thereof, the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing, receiving, or leasing such assets or other
appropriate corporation or entity shall assume, by written instrument executed and delivered to the
Holders, the obligation to deliver to the Holders, such shares of stock, securities, or assets as,
in accordance with the foregoing provisions, such holders may be entitled to purchase, and to
perform the other obligations of the Company under this Agreement. The above provision of this
Section 7.2 shall similarly apply to successive consolidations or successively whenever any event
listed above shall occur.
7.3 Dividends and Other Distributions. In the event that the Company shall at any
time prior to the exercise of all of the Warrants distribute to its shareholders any assets,
property, rights, evidences of indebtedness, securities (other than a distribution made as a cash
dividend payable out of earnings or out of any earned surplus legally available for dividends under
the laws of the jurisdictions of incorporation of the Company), whether issued by the Company or by
another, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the
shares of Common Stock or other securities and property receivable upon the exercise thereof, to
receive, upon the exercise of such Warrants, the same property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been entitled to receive
at the time of such distribution as if the Warrants had been exercised immediately prior to such
distribution. At the time of any such distribution, the Company shall make appropriate reserves to
ensure the timely performance of the provisions of this subsection or an adjustment to the Exercise
Price, which shall be effective as of the day following the record date for such distribution.
7.4 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price
pursuant to the provisions of this Section 7, the number of securities issuable upon the exercise
of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of securities issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
7.5 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise
Price shall be made if the amount of said adjustment shall be less than $.01 per Share; provided,
however, that in such case any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to at least $.01 per Share.
10
7.6 Accountants Certificate of Adjustment. In each case of an adjustment or
readjustment of the Exercise Price or the number of any securities issuable upon exercise of the
Warrants, the Company, at its expense, shall cause independent certified public accountants of
recognized standing selected by the Company (who may be the independent certified public
accountants then auditing the books of the Company) to compute such adjustment or readjustment in
accordance herewith and prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by first class mail, postage prepaid, to any Holder of the Warrants at the
Holders address as shown on the Companys books. The certificate shall set forth such adjustment
or readjustment, showing in detail the facts upon which such adjustment or readjustment is based
including, but not limited to, a statement of (i) the Exercise Price at the time in effect, and
(ii) the number of additional or fewer securities and the type and amount, if any, of other
property which at the time would be receivable upon exercise of the Warrants.
8. |
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Exchange and Replacement of Warrant Certificates. |
(a) Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by
the registered Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to purchase the same
number of securities in such denominations as shall be designated by the Holder thereof at the time
of such surrender.
(b) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu
thereof.
9. Elimination of Fractional Interest. The Company shall not be required to issue
certificates representing fractions of shares of Common Stock upon the exercise of the Warrants,
nor shall it be required to issue script or pay cash in lieu of fractional interests, it being the
intent of the parties that all fractional interests may be eliminated, at the Companys option, by
rounding any fraction up to the nearest whole number of shares of Common Stock or other securities,
properties or rights, or in lieu thereof paying cash equal to such fractional interest multiplied
by the Market Value of a share of Common Stock.
10. Reservation, Validity and Listing. The Company covenants and agrees that during the
exercise period, the Company shall at all times reserve and keep available out of its authorized
shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as shall be issuable
upon the exercise under this Warrant Certificate. The Company covenants and agrees that, upon
exercise of the Warrants, and payment of the Exercise Price therefor, all shares of Common Stock
and other securities issuable upon such exercise shall be duly authorized, validly issued, fully
paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the
Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common
Stock issuable upon the exercise of the Warrants to be listed and quoted
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(subject to official notice of issuance) on all securities exchanges and systems on which the
Common Stock are then listed and/or quoted, including Nasdaq and the American Stock Exchange.
11. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as
conferring upon the Holders of the Warrants the right to vote or to consent or to receive notice as
a shareholder in respect of any meetings of shareholders for the election of directors or any other
matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any
time prior to the expiration of the Warrants and their exercise, any of the following events shall
occur:
(a) the Company shall take a record of the holders of its shares of Common Stock for the
purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or
a cash dividend or distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the books of the Company;
or
(b) the Company shall offer to all the holders of its Common Stock any additional shares of
capital stock of the Company or securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its property, assets and business
as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice of such event at
least 15 days prior to the date fixed as a record date of the date of closing the transfer books
for the determination of the shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notices shall specify such record date or the date of
closing the transfer books, as the case may be.
12. Notices. All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly given when sent by (i) facsimile; or (ii)
delivered personally or by overnight courier or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of any of the Registrable Securities, to the address of such
Holder as shown on the books of the Company.
With a copy to:
Christopher C. Paci, Esq.
DLA Piper LLP (US)
1251 Avenue of the Americas
New York, NY 10020
Fax: (212) 884-8470
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(b) If to the Company, to the address set forth below or to such other address as the Company
may designate by notice to the Holders.
Kendall Larsen
Chief Executive Officer
VirnetX Holding Corporation
5615 Scotts Valley Drive, Suite 110
Scotts Valley, CA 95066
Fax: (831) 438-3078
With a copy to:
Lowell D. Ness, Esq.
Orrick, Herrington & Sutcliffe LLP
1000 Marsh Road
Menlo Park, CA 94025
Fax: (650) 614-7401
13. Entire Agreement: Modification. This Agreement (and the Underwriting Agreement to the
extent applicable) contains the entire understanding between the parties hereto with respect to the
subject matter hereof, and the terms and provisions of this Agreement may not be modified, waived
or amended except in a writing executed by the Company and a Majority of Holders. Notice of any
modification, waiver or amendment shall be promptly provided to any Holder not consenting to such
modification, waiver or amendment.
14. Successors. All the covenants and provisions of this Agreement shall be binding upon
and inure to the benefit of the Company, the Holders and their respective successors and assigns
hereunder.
15. Termination. This Agreement shall terminate at the earlier of (i) the public sale of
all of the Registrable Securities, or (ii) at the close of business on January ___, 2014.
Notwithstanding the foregoing, the indemnification provisions of Section 6 shall survive such
termination.
16. Governing Law; Submission to Jurisdiction. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York without regard to the
conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or
proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought
solely in a federal or state court located in the City, County and State of New York. By its
execution hereof, the parties hereby covenant and irrevocably submit to the in personam
jurisdiction of the federal and state courts located in the City, County and State of New York and
agree that any process in any such action may be served upon any of them personally, or by
certified mail or registered mail upon them or their agent, return receipt requested, with the same
full force and effect as if personally served upon them in New York City. The parties hereto waive
any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and
any defense or lack of in personam jurisdiction with respect thereto. In the event of any such
action or proceeding, the party prevailing therein shall be entitled to payment from
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the other party hereto of its reasonable counsel fees and disbursements in an amount judicially
determined.
17. Severability. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other provision of this
Agreement.
18. Captions. The caption headings of the sections of this Agreement are for convenience
of reference only and are not intended, nor should they be construed as, a part of this Agreement
and shall be given no substantive effect.
19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to
any person or corporation other than the Company and the Underwriter and any other registered
Holder(s) of the Warrant Certificates or Registrable Securities any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriters and any other Holder(s) of the Warrant Certificates or
Registrable Securities.
20. Counterparts. This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and such counterparts shall
together constitute but one and the same instrument.
[Remainder of This Page Intentionally Left Blank; Signature Page to Follow]
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IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly executed, as of
the day and year first above written.
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VIRNETX HOLDING CORPORATION
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By: |
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Kendall Larsen |
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Chief Executive Officer |
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GILFORD SECURITIES INCORPORATED
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By: |
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Robert A. Maley |
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President |
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15
Exhibit A
VIRNETX HOLDING CORPORATION
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M. EASTERN TIME ON JANUARY ___, 2014
NO. W-__________ __________ Warrants
This Warrant Certificate (Warrant Certificate) certifies that Gilford Securities
Incorporated, or its assigns, is the registered holder (Holder) of Warrants (as defined
in the Underwriters Warrant Agreement between the Company and Holder dated as of January ___, 2009 (the
Warrant Agreement)) of VirnetX Holding Corporation (the Company). Each Warrant
permits Holder to purchase, at any time from January ___, 2009 (Purchase Date) until 5:30
p.m. Eastern Time on January ___, 2014 (the Expiration Time), one share of the Companys
Common Stock (the Shares) at the initial exercise price, subject to adjustment in certain
events, of $ per share (120% of the public offering price) (the Exercise Price).
No Warrant may be exercised after the Expiration Time, at which time all Warrants evidenced
hereby, unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of
Warrants issued pursuant to the Warrant Agreement. Capitalized terms used but not otherwise
defined herein shall have the meanings assigned to such terms in the Warrant Agreement.
The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price
and the type or number of the Companys securities issuable thereupon may be adjusted.
Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company
shall forthwith issue to Holder a new Warrant Certificate representing such number of unexercised
Warrants.
The Company may deem and treat Holder as the absolute owner of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by anyone)
for the purpose of any exercise hereof, and of any distribution to Holder, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
[Remainder of This Page Intentionally Left Blank; Signature Page to Follow]
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IN WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant Certificate to be duly executed.
Dated as of January ___, 2009
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VIRNETX HOLDING CORPORATION
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By: |
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Kendall Larsen |
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Chief Executive Officer |
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CORPORATE STOCK TRANSFER, INC., as
Warrant Agent
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By: |
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Name: |
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Title: |
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EXHIBIT A
FORM OF SUBSCRIPTION (CASH EXERCISE)
(To be signed only upon exercise of Warrant)
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TO:
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Corporate Stock Transfer, Inc. |
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3200 Cherry Creek South Drive |
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Suite 430 |
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Denver, Colorado 80209 |
The undersigned holder of Warrant Certificate number (the Warrant
Certificate), representing Warrants (as defined in the Warrant Certificate) of
VirnetX Holding Corporation (the Company), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to purchase Shares (as defined in the Warrant
Certificate), and herewith makes payment of $ therefore, all in accordance with the
Warrant Certificate and the Warrant Agreement referred to in the Warrant Certificate. Certificates
for the Shares shall be issued in the name of and delivered to the following
address:
By:
Name:
Social Security Number or Tax Identification Number:
Date:
(Signature must conform in all respects to name of Holder as specified on the face of the
Warrant Certificate)
Address
Social Security Number or
Tax Identification Number
EXHIBIT B
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
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TO:
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Corporate Stock Transfer, Inc. |
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3200 Cherry Creek South Drive |
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Suite 430 |
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Denver, Colorado 80209 |
The undersigned holder of Warrant Certificate number (the Warrant
Certificate), representing Warrants (as defined in the Warrant Certificate) of
VirnetX Holding Corporation (the Company), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to purchase (on a cashless exercise basis in accordance with
the formula set forth in Section 3.1(b) of the Warrant Agreement referred to in the Warrant
Certificate (the Warrant Agreement)) Shares (as defined in the Warrant
Certificate), all in accordance with the Warrant Certificate and the Warrant Agreement.
Certificates for the Shares shall be issued in the name of and delivered to the
following address:
By:
Name:
Social Security Number or Tax Identification Number:
Date:
(Signature must conform in all respects to name of Holder as specified on the face of the
Warrant Certificate)
Address
Social Security Number or
Tax Identification Number
FORM OF ASSIGNMENT
(To be exercised by the registered holder if such Holder desires to transfer the Warrant
Certificate)
FOR VALUE RECEIVED
hereby sells, assigns and
transfers unto:
Print Name of Transferee
Address
City State Zip Code
this Warrant Certificate, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint
_________ Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of substitution.
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Dated:
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Signature: |
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(Signature must conform in all respects to name of
Holder as specified on the face of the Warrant
Certificate) |
Social Security Number or Other Identifying Number of Assignee
exv23w1
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
We hereby consent to the use in this Registration Statement on
Form S-1
of our report dated March 31, 2008 relating to the
financial statements of VirnetX Holding Corporation as of
December 31, 2007 and for the year then ended and for the
cumulative period from August 2, 2005 (date of inception)
to December 31, 2007 which appear in such Registration
Statement. We also consent to the reference to us under the
heading Experts in such Registration Statement.
/s/ Farber Hass Hurley LLP
Farber Hass Hurley LLP
Granada Hills, CA
January 16, 2009
exv23w2
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We
hereby consent to the use in this Amendment No. 7 to the Registration Statement on
Form S-1 of our report dated April 30, 2007,
except for the effects of the 1-for-3 reverse stock split discussed
in Note 1 of the financial statements as to which the date is March 31, 2008, relating to the
financial statements of VirnetX, Inc. as of December 31, 2005 and 2006 and for the period from
August 2, 2005 (date of inception) to December 31, 2005 and
the year ended December 31, 2006, which appears in
such Registration Statement. We also consent to the reference to us
under the heading Experts in such Registration Statement.
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/s/ Burr, Pilger & Mayer LLP
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Palo Alto, California |
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January 16, 2009 |
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corresp
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ORRICK, HERRINGTON & SUTCLIFFE llp
1000 Marsh Road
Menlo Park, CA 94025
tel 650-614-7400
fax 650-614-7401
www.orrick.com |
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January 16, 2009
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Lowell D. Ness |
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(650) 614-7455 |
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lness@orrick.com |
Barbara C. Jacobs
Assistant Director
Securities and Exchange Commission (Mail Stop 4561)
100 F Street, N.E.
Washington, D.C. 20549
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Re: |
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VirnetX Holding Corporation (the Company)
Amendment No. 6 to Registration Statement on Form S-1 (the
Registration Statement)
Filed January 2, 2009
File No. 333-153645 |
Dear Ms. Jacobs,
Please find, as set forth below, the Companys responses to the comment letter of the staff of the
Securities and Exchange Commission (the Staff) dated January 13, 2009 (the Staff
Letter). For the Staffs convenience, the Staffs comments from the Staff Letter are set
forth in italics before each response.
General
1. In light of the changes in the underwriting agreement in this offering, please be sure that we
receive a copy of the letter, or a call, from FINRA, stating that FINRA has finished its review and
has no additional concerns with respect to the proposed underwriting agreements.
The Company notes the Staffs comments and will provide the FINRA letter upon receipt, and will
request that FINRA contact the Staff directly when it has finished its review and has no additional
concerns with respect to the proposed underwriting agreements.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources, page 29
2. We note that the company now expects that the net proceeds from this offering, in combination
with the available cash on hand, will only be sufficient to fund operations for the next five
months and that the company is counting on generating revenue from collaborative agreements with
corporate partners to have sufficient capital to fund
January 16, 2009
VirnetX Holding Corporation
Page 2
operations for a full 12 months. Please disclose the status of any collaborative agreements with
corporate partners. Please also disclose how you anticipate funding your operations for the next
12 months if you are not able to generate your forecasted revenue from such collaborative
agreements. In addition, please revise your disclosure in the summary, risk factors and use of
proceeds sections of the prospectus to indicate that the full proceeds of this offering may be used
to fund your operations and that such proceeds, in addition to cash on hand, may only be sufficient
to fund your operations for the next five months.
The Company notes the Staffs comments and respectfully submits that the Company is in development
stage and, although it has aggressively pursued collaborative agreements with corporate partners,
the Company has not entered into any collaborative agreement with corporate partners to date.
Accordingly, the Company has decided to limit its discussion in this section of the prospectus to
the discussion of the Companys cash position assuming only receipt of the net proceeds of the
offering.
The Company notes the Staffs questions regarding how the Company anticipates funding its
operations if it is not able to generate sufficient revenue and the Company respectfully submits
that it has previously disclosed that if the Company is unable to
generate sufficient capital or sufficient revenue from its
commercialization efforts, the Company may be required to cease operations or to reduce the cash
used in its business, including the termination of its commercialization efforts, the sale of its
patent portfolio or other assets, the abandonment of its litigation with Microsoft or others and
the reduction in overall operating activities.
The Company notes the Staffs suggestions regarding the revised disclosure in the summary, risk
factors and use of proceeds sections of the prospectus and has accordingly revised such sections to
indicate that the full proceeds of this offering may be used to fund the Companys operations and
that such proceeds, in addition to the cash on hand, may only be sufficient to fund its operations
for the next five months.
Compensation Discussion and Analysis
Named Executive Officers Compensation
Base Salary, page 48
3. We note that both of your named executive officers received significant increases in their base
salaries for fiscal year 2008. Please discuss the factors the compensation committee considered in
determining the increases in your officers base salaries.
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January 16, 2009
VirnetX Holding Corporation
Page 3
The Company notes the Staffs comments and respectfully submits that,
as was disclosed by Form 8-K
filed with the Securities and Exchange Commission on January 7, 2008, the Companys compensation
committee made a determination to increase Mr.
Larsens base salary for the fiscal year 2008 at a meeting held on December 31, 2007. At that time, the
compensation committee performed the Companys benchmarking analysis and, in
acknowledgment of Mr. Larsens services during the merger and in recognition of
his increased responsibilities in the management of a
fully-operating public company following the merger, the compensation committee decided to increase
Mr. Larsens base salary accordingly. The
Company has updated the disclosure in Amendment No. 7 to the
Companys Registration Statement on Form S-1 in accordance
with the Staffs comments to reflect these factors considered by
the committee in determining the executive compensation of Mr.
Larsen.
Mr. Sliney became the
Companys Chief Financial Officer in October 2007 and the
summary compensation table for the fiscal year 2007 reflects approximately three
(3) months of his service in that position at an annual base salary of $175,000. In June
2008, increases in support staff at the Company, including the hiring
of a corporate controller, enabled Mr. Sliney to reduce his workload
and his annual base salary was accordingly reduced to $43,752. The disclosure in Amendment
No. 7 has been revised to reflect this additional information.
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Please let us know if you have any questions
Very truly yours,
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Lowell D. Ness |
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Orrick, Herrington & Sutcliffe LLP |
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cc: Kendall Larsen (VirnetX Holding Corporation)
/Enclosures/
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