UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-33852

VirnetX Holding Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (775) 548-1785

Former name, former address and former fiscal year, if changed since last report:

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

 

The number of shares outstanding of the Registrant’s Common Stock as of August 2, 2017, was 58,309,034.

 

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		Page
PART I — FINANCIAL INFORMATION		1
	Item 1 —Condensed Consolidated Financial Statements.	1
	Condensed Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements	4
	Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3 —Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4 —Controls and Procedures	20
PART II — OTHER INFORMATION		21
	Item 1 —Legal Proceedings	21
	Item 1A —Risk Factors	24
	Item 6 —Exhibit	34
SIGNATURES		35
EXHIBIT INDEX		36

Exhibit 10.1

 

 

STOCK PURCHASE AGREEMENT

 

BY AND AMONG

VIRNETX HOLDING CORPORATION

AND

PUBLIC INTELLIGENCE TECHNOLOGY ASSOCIATES

 

May 31, 2017

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

TABLE OF CONTENTS

 

1.	Definitions		1
2.	Authorization, Purchase and Sale of Common Stock		4
	2.1	Authorization, Purchase and Sale	4
	2.2	Closing	4
3.	Representations and Warranties of the Company		4
	3.1	Organization and Power	4
	3.2	Capitalization	4
	3.3	Authorization	5
	3.4	Valid Issuance	5
	3.5	No Conflict	5
	3.6	Consents	5
	3.7	SEC Reports; Financial Statements.	5
4.	Representations and Warranties of the Purchaser		6
	4.1	Organization	6
	4.2	Authorization	6
	4.3	No Conflict	6
	4.4	Consents	6
	4.5	Brokers and Finders	7
	4.6	Purchase Entirely for Own Account	7
	4.7	General Solicitation	7
	4.8	Investor Status.	7
	4.9	Securities Not Registered	7
	4.10	No “Bad Actor” Disqualification Events	7
	4.11	Reliance by the Company	8
	4.12	Ownership of Common Stock	8
	4.13	Representation of Non-United States Persons	8
5.	Conditions Precedent		8
	5.1	Conditions to the Obligation of the Purchaser	8
	5.2	Conditions to the Obligation of the Company	9
6.	Revenue Sharing; Surrender.		9
	6.1	Purchaser Revenue Share	9
	6.2	Surrender	9
7.		Company Repurchase Option	10
	7.1	Repurchase Option	10
	7.2	Exercise	10
8.	Termination		11
	8.1	Conditions of Termination.	11
	8.2	Effect of Termination	11

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

TABLE OF CONTENTS (CONTINUED)

9.	Miscellaneous Provisions		11
	9.1	Public Statements or Releases	11
	9.2	Interpretation	11
	9.3	Notices	12
	9.4	Severability	12
	9.5	Governing Law; Submission to Jurisdiction; Venue; Waiver of Trial by Jury	13
	9.6	Waiver	13
	9.7	Expenses	13
	9.8	Assignment	14
	9.9	Assistance of Counsel	14
	9.10	Confidential Information	14
	9.11	Third Parties	15
	9.12	Counterparts	15
	9.13	Entire Agreement; Amendments	15
	9.14	Additional Matters	15

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

This STOCK PURCHASE AGREEMENT (this “Agreement”) is dated as of May 31, 2017, by and between VirnetX Holding Corporation, a Delaware corporation (the “Company”), and Public Intelligence Technology Associates, kk (Japanese Corporation)(the “Purchaser”).

WHEREAS, the Company has authorized the issuance of the Shares (as defined below) of common stock, $0.0001 par value per share, of the Company (the “Common Stock);

WHEREAS, the Company desires to issue and sell to the Purchaser pursuant to the terms and conditions of this Agreement, and the Purchaser desires to purchase from the Company the Shares;

WHEREAS, the Shares issued and sold pursuant to this Agreement shall be automatically proportionately reduced pursuant to surrenders of the Shares on the schedule identified herein for no additional consideration upon payment of each Quarterly share Revenue Payment (as defined below); and

WHEREAS, concurrently with the execution and delivery hereof, the Company and the Purchaser have entered into the Revenue Sharing Agreement and the Gabriel License Agreement (each, as defined below).

NOW THEREFORE, in consideration of the mutual agreements, representations, warranties and covenants herein contained, the parties hereto agree as follows:

1.             Definitions  As used in this Agreement, the following terms shall have the following respective meanings:

“Affiliate” shall mean, with respect to any Person, any other Person, whether or not existing on the date hereof, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such first Person, as such terms are used in and construed under Rule 405 under the Securities Act.

“Agreement” has the meaning set forth in the recitals hereof.

“Beneficially Own,” “Beneficially Owned,” or “Beneficial Ownership” shall have the meaning set forth in Rule 13d-3 of the rules and regulations promulgated under the Exchange Act, except that for purposes of this Agreement the words “within sixty days” in Rule 13d-3(d)(1)(i) shall not apply, to the effect that a Person shall be deemed to be the beneficial owner of a security if that Person has the right to acquire beneficial ownership of such security at any time.

“Board of Directors” shall mean the Board of Directors of the Company.

“Closing” has the meaning set forth in Section 2.2 hereof.

“Closing Date” has the meaning set forth in Section 2.2 hereof.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Common Stock” has the meaning set forth in the recitals hereof.

“Company” has the meaning set forth in the recitals hereof.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

“Company Japan Revenues” means revenue recognized from cash or cash equivalents received by Network Research Corporation Japan Ltd. from a Japanese Company that is directly attributable to (i) patent license fees or royalties for licenses granted under the Company’s Japanese patents with respect to the products and services of the Japanese Company sold in Japan, (ii) licensing of the Gabriel Collaboration Suite to the Japanese Company for end use in Japan, or (iii) provision of other commercial services by the Company to the Japanese Company in Japan, such as the Company’s Secure Domain Name services; but in each case excluding any litigation- or settlement-related expenses, contingency fees, commissions and other contractually-required payments to third parties, taxes, and other deductions and costs associated with such revenue.

“Confidential Information” has the meaning set forth in Section 9.10 hereof.

“Control” (including the terms “controlling” “controlled by” and “under common control with”) with respect to any Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Disqualification Event” has the meaning set forth in Section 4.11 hereof.

 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgated thereunder.

“Financial Statements” has the meaning set forth in Section 3.7(b) hereof.

“GAAP” has the meaning set forth in Section 3.7(b) hereof.

“Gabriel License Agreement” means an agreement pursuant to which Purchaser shall undertake certain marketing and promotion of the Company’s products and services.

“Governmental Entity” means any supranational, national, state, municipal, local or foreign government, any court, arbitrator, administrative agency, commission or other governmental official, authority or instrumentality, in each case whether domestic or foreign, any stock exchange or similar self-regulatory organization or any quasi-governmental or private body exercising any regulatory, taxing or other governmental or quasi-governmental authority.

“Japanese Company” means a Japanese company that is incorporated or otherwise created under the laws of Japan and which Japanese company is headquartered in Japan.

“Lockup Period” has the meaning set forth in the Stockholders Agreement.

“Material Adverse Effect” shall mean such facts, circumstances, events or changes that are, individually or in the aggregate, materially adverse to (i) the business, financial condition, assets or continuing operations of the Company and its Subsidiaries taken as a whole or (ii) the Company’s ability to perform its obligations under this Agreement, but shall not include facts, circumstances, events or changes (a) generally affecting any of the industries in which the Company, taken together with its Subsidiaries, operates, in the United States or elsewhere in the world or the economy or the financial or securities markets in the United States or elsewhere in the world, in each case, except to the extent such facts, circumstances, events or changes disproportionately affect the Company and its Subsidiaries; (b) political conditions, including acts of war (whether or not declared), armed hostilities and terrorism, or developments or changes therein; (c) any conditions resulting from natural disasters; (d) any action taken or omitted to be taken by or at the written request of the Purchaser; (e) any announcement of this Agreement or the transactions contemplated in this Agreement, in each case, solely to the extent due to such announcement; (f) resulting from changes in applicable legal requirements, GAAP or accounting standards; (g) resulting from a change in the Company’s stock price or the trading volume in the Common Stock in and of itself or (h) resulting from a failure to meet securities analysts’ published revenue or earnings predictions for the Company in and of itself.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

“NYSE” means the NYSE MKT LLC.

“Person” shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or any other entity or organization.

“Per Share Purchase Price” has the meaning set forth in Section 2.1 hereof.

“Priority Revenue Sharing Period” means the period commencing on the Closing Date and ending on the earliest to occur of (i) when the Purchaser no longer holds or owns any Shares acquired pursuant to this Agreement, (ii) when the Company has made aggregate payments pursuant to Section 6.1 of this Agreement equal to $20,000,000, it being understood that the Priority Revenue Sharing Period shall end pursuant to this clause (ii) as soon as payment equal to $20,000,000 is made (for the avoidance of doubt, whether payment is from a series of transactions, one transaction, or part of one transaction in which the Company receives Company Japan Revenues) or (iii) the end of the Lockup Period.

“Proxy” has the meaning set forth in the Stockholders Agreement.

“Purchaser” has the meanings set forth in the recitals hereof.

“Purchaser Adverse Effect” has the meaning set forth in Section 4.1 hereof.

“Quarterly Revenue Share Payment” has the meaning set forth in Section 6.1 hereof.

“Representatives” has the meaning set forth in Section 9.10 hereof.

“Repurchase Option” has the meaning set forth in Section 7.1 hereof.

“Repurchase Price Per Share” has the meaning set forth in Section 7.1 hereof.

“Repurchase Closing Date” has the meaning set forth in Section 7.2 hereof.

“Repurchased Securities” has the meaning set forth in Section 7.2 hereof.

“Revenue Sharing Agreement” means an agreement pursuant to which each of Purchaser and the Company shall share certain portions of their revenues with the other Party.

 “SEC” shall mean the Securities and Exchange Commission.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

“SEC Reports” shall mean the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017, the Company’s Proxy Statement on Schedule 14A for its 2017 Annual Meeting of Stockholders, and any Current Reports on Form 8-K, filed or furnished by the Company after December 31, 2016 and on or prior to the date of hereof, together in each case with any documents incorporated by reference therein or exhibits thereto.

“Securities Act” shall mean the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder.

“Shares” shall have the meeting set forth in Section 2.1.

“Stockholders Agreement” has the meaning set forth in Section 5.1(e) hereof.

“Subsidiary” when used with respect to any party shall mean any corporation or other organization, whether incorporated or unincorporated, at least a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries.

“Transaction Agreements” shall mean this Agreement, the Gabriel Licensing Agreement, the Revenue Sharing Agreement and the Stockholders Agreement.

 

2.1           Authorization, Purchase and Sale.  The Company has authorized the sale and issuance to the Purchaser of the Shares.  Subject to the conditions, and upon the terms, set forth in this Agreement, at the Closing, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, 5,494,505 shares of Common Stock (the “Shares”) at a purchase price per share of $3.64 (the “Per Share Purchase Price”) for an aggregate purchase price of $19,999,998.20.

2.2           Closing.  The closing of the purchase and sale of the Shares (the “Closing”) shall take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California, 94304, as promptly as practicable following the satisfaction or waiver of the conditions set forth in Section 5, but in any case no later than June 19, 2017, or such other date as is mutually agreed upon in writing by the Company and the Purchaser (the “Closing Date”).  At the Closing, the Shares shall be transferred and duly registered in the name of the Purchaser against payment to the Company of the purchase price therefor by wire transfer to the Company of immediately available funds to an account to be designated by the Company.

3.             Representations and Warranties of the Company.  Except as set forth in the SEC Reports, the Company hereby represents and warrants to the Purchaser as follows:

3.1           Organization and Power.  Each of the Company and VirnetX, Inc. is a corporation duly organized, validly existing and in good standing (where relevant) under the laws of its jurisdiction of organization, has the requisite power and authority to own, lease and operate its properties and to carry on its business as now conducted and as described in the SEC Reports and is qualified to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification, except where such failures of VirnetX, Inc. be so organized or existing, or of the Company or VirnetX, Inc. to be in good standing or to have such power and authority or to so qualify, would not reasonably be expected to have a Material Adverse Effect.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

3.2           Capitalization.  The authorized and outstanding capital stock of the Company as of March 31, 2017 are as set forth in the Company’s Form 10-Q as filed with the SEC on May 8, 2017.  All outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any pre-emptive rights, liens or encumbrances other than any liens of encumbrances created by or imposed upon the holders thereof.

3.3           Authorization.  All corporate action on the part of the Company necessary for the authorization, execution and delivery of, and the performance of all obligations of the Company under, the Transaction Agreements has been taken, and the Transaction Agreements, when executed and delivered, will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except (a) as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) the effect of rules of law governing the availability of equitable remedies and (b) as rights to indemnity or contribution may be limited under federal or state securities laws or by principles of public policy thereunder.

3.4           Valid Issuance.  The Shares, upon issuance pursuant to the terms hereof and the terms of the Company’s Amended and Restated Certificate of Incorporation, will be duly and validly issued, fully paid and non-assessable.  Subject to the accuracy of the representations made by the Purchaser in Section 4 hereof, the Shares will be issued to the Purchaser in compliance with applicable exemptions from (i) the registration and prospectus delivery requirements of the Securities Act and (ii) the registration and qualification requirements of applicable securities laws of the states of the United States.

3.5           No Conflict.  The execution, delivery and performance of the Transaction Agreements by the Company, the issuance of the Shares and the consummation of the other transactions contemplated in this Agreement will not (i) conflict with or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation, a change of control right or to a loss of a benefit under any agreement or instrument, credit facility, franchise, license, judgment, order, statute, law, ordinance, rule or regulations, applicable to the Company or its Subsidiaries or their respective properties or assets or (ii) violate any provision of the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of the Company, except, in the case of clause (i), as would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect.

3.6           Consents.  All consents, approvals, orders and authorizations required on the part of the Company in connection with the execution, delivery or performance of this Agreement and the issuance of the Shares have been obtained or made, other than (i) the filing of such qualifications or filings under the Securities Act and all applicable state securities laws as may be required in connection with the transactions contemplated by this Agreement, (ii) the filing of any reports and other documents pursuant to the Exchange Act relating to the transactions contemplated hereby, (iii) any supplemental listing application in respect of the Shares on NYSE, and (iv) such consents, approvals, orders and authorizations the failure of which to make or obtain would not reasonably be expected to have a Material Adverse Effect.

3.7           SEC Reports; Financial Statements.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

(a)           The Company has filed all required reports, schedules, forms, statements and other documents required to be filed by it with the SEC since December 31, 2016. The information contained or incorporated by reference in the SEC Reports was true and correct in all material respects as of the respective dates of the filing thereof with the SEC (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing); and, as of such respective dates, the SEC Reports did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.  All of the SEC Reports, as of their respective dates, complied as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder.

(b)           The financial statements of the Company included in the SEC Reports (collectively, the “Financial Statements”) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the dates indicated, and the results of its operations and cash flows for the periods therein specified, all in accordance with United States generally accepted accounting principles applied on a consistent basis (“GAAP”) throughout the periods therein specified (except as otherwise noted therein, and in the case of quarterly financial statements except for the absence of footnote disclosure and subject, in the case of interim periods, to normal year-end adjustments).

4.             Representations and Warranties of the Purchaser.  The Purchaser represents and warrants to the Company as follows:

4.1          Organization.  The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the requisite power and authority to (a) carry on its business as presently conducted, and (b) enter into the Transaction Agreements and to consummate the transactions contemplated thereby.  The Purchaser is qualified to do business and is in good standing in each jurisdiction in which the failure to so qualify would reasonably be expected, individually or in the aggregate, to have a Purchaser Adverse Effect.  A “Purchaser Adverse Effect” means a material adverse effect on the authority or ability of the Purchaser to perform its obligations under the Transaction Agreements or to consummate the transactions contemplated hereby or thereby.

4.2           Authorization.  All corporate action on the part of the Purchaser necessary for the authorization, execution and delivery of, and the performance of all obligations of the Purchaser under the Transaction Agreements has been taken.  The Transaction Agreements constitute valid and legally binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, except (a) as may be limited by (i) applicable bankruptcy, insolvency, reorganization or others laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) the effect of rules of law governing the availability of equitable remedies and (b) as rights to indemnity or contribution may be limited under federal or state securities laws or by principles of public policy thereunder.

4.3           No Conflict.  The execution, delivery and performance of the Transaction Agreements by the Purchaser, the purchase of the Shares and the consummation of the other transactions contemplated in this Agreement will not conflict with or result in any violation of or default by such Purchaser (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation, a change of control right or to a loss of a material benefit under (i) any provision of the organizational documents of such Purchaser or (ii) any agreement or instrument, credit facility, franchise, license, judgment, order, statute, law, ordinance, rule or regulations, applicable to such Purchaser or its respective properties or assets, except, in the case of clause (ii), as would not, individually or in the aggregate, have a Purchaser Adverse Effect.

 

4.4           Consents.  All consents, approvals, orders and authorizations required on the part of the Purchaser in connection with the execution, delivery or performance of this Agreement, the purchase of the Shares and the consummation of the other transactions contemplated herein have been obtained or made, other than such consents, approvals, orders and authorizations the failure of which to make or obtain, individually or in the aggregate, would not reasonably be expected to have a Purchaser Adverse Effect.

4.5           Brokers and Finders.  The Purchaser has not retained, utilized or been represented by any broker or finder in connection with the transactions contemplated by this Agreement.

4.6           Purchase Entirely for Own Account.  The Purchaser is acquiring the Shares for its own account and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act. Except as specifically provided for in the Agreement, the Purchaser has no present agreement, undertaking, arrangement, obligation or commitment providing for the disposition of the Shares except as provided in Section 6.2 of this Agreement.

4.7           General Solicitation.  The Purchaser is not purchasing the Shares as a result of any general solicitation or general advertising (within the meaning of Regulation D of the Securities Act), including, but not limited to, any advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or on the Internet or broadcast over radio, television or the Internet, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising.

4.8           Investor Status.

(a)           The Purchaser certifies and represents to the Company that the Purchaser is an “accredited investor” as defined in Rule 501 of Regulation D promulgated under the Securities Act.

(b)           The Purchaser (i) is able to fend for itself in the transactions contemplated by this Agreement, (ii) has such knowledge and experience in financial and business matters as to be able to evaluate the risks and merits of its prospective investment in the Shares, and (iii) has the ability to bear the economic risks of its prospective investment and can afford the complete loss of such investment.

(c)           The Purchaser (i) has conducted its own investigation of the Company and the terms of the Shares, (ii) has had access to the Company’s public filings, including the SEC reports, and to such business, financial and other information as it deems necessary to make its investment decision, (iii) has been afforded the opportunity to ask questions of and receive answers from the management of the Company concerning this investment, and (iv) has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Shares.

4.9           Securities Not Registered.  The Purchaser understands that the issuance of the Shares has not been registered under the Securities Act, and that the Shares must continue to be held by the Purchaser unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration and in each case in accordance with any applicable securities laws of any state of the United States.  The Purchaser understands that the Shares are “restricted securities” within the meaning of Rule 144 and will bear restrictive legends as set forth in the Stockholders Agreement (as defined below).  The Purchaser understands that the exemptions from registration afforded by Rule 144 (the provisions of which are known to it) promulgated under the Securities Act depend on the satisfaction of various conditions including, but not limited to, the time and manner of sale, the holding period and on requirements relating to the Company, which are outside of the Purchaser’s control and which the Company is under no obligation to satisfy and may not be able to satisfy, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts.

 

[***] = CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS OMITTED INFORMATION.

 

4.10         No “Bad Actor” Disqualification Events.  Neither (i) the Purchaser, (ii) any of its directors, executive officers, other officers that may serve as a director or officer of any company in which it invests, general partners or managing members, nor (iii) any beneficial owner of the Company’s voting equity securities (in accordance with Rule 506(d) of the Securities Act) held by the Purchaser is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii) under the Securities Act (“Disqualification Events”), except for Disqualification Events covered by Rule 506(d)(2) or (d)(3) under the Securities Act and disclosed reasonably in advance of the Closing in writing in reasonable detail to the Company.

4.11         Reliance by the Company.  The Purchaser acknowledges that the Company will rely upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgements and understandings of the Purchaser set forth herein.

4.12         Ownership of Common Stock.  Other than the Shares, the Purchaser does not, and during the period beginning on the date of this Agreement and ending immediately prior to the Closing will not, own any shares of Common Stock.

4.13         Representation of Non-United States Persons.  The Purchaser hereby represents that the consummation of the transactions contemplated hereby is satisfied as to the full observance of the laws of the Purchaser’s jurisdiction in connection with any invitation to subscribe for the Shares or any use of the Transaction Agreements, including (i) the legal requirements within the Purchaser’s jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of such securities. The Purchaser’s subscription and payment for, and the Purchaser’s continued beneficial ownership of, the Shares will not violate any applicable securities or other laws of the Purchaser’s jurisdiction.

5.             Conditions Precedent.

5.1           Conditions to the Obligation of the Purchaser.  The obligations of the Purchaser to consummate the transactions to be consummated at the Closing, and to purchase and pay for the Shares being purchased by it at the Closing pursuant to this Agreement, are subject to the satisfaction or waiver of the following conditions precedent:

(a)           The representations and warranties of the Company contained herein shall be true and correct on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (it being understood and agreed by the Purchaser that for purposes of this Section 5.1(a), in the case of any representation and warranty of the Company contained  herein (i) which is not qualified above in this Agreement by application thereto of a materiality standard, such representation and warranty need be true and correct only in all material respects or (ii) which is made as of a specific date, such representation and warranty need be true and correct only as of such specific date).

 

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(b)           The Company shall have performed in all material respects all obligations and conditions herein required to be performed or observed by the Company on or prior to the Closing Date.

(c)           The purchase of and payment for the Shares by the Purchaser shall not be prohibited or enjoined by any law or governmental or court order or regulation.

(d)           The Company shall have executed and delivered the Stockholders Agreement (the “Stockholders Agreement”) to the Purchaser.

5.2           Conditions to the Obligation of the Company. The obligation of the Company to consummate the transactions to be consummated at the Closing, and to issue and sell to the Purchaser the Shares at the Closing pursuant to this Agreement, is subject to the satisfaction or waiver of the following conditions precedent:

(a)           The representations and warranties contained herein and in the other Transaction Agreements of the Purchaser shall be true and correct on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date.

(b)           The Purchaser shall have performed in all material respects all obligations and conditions herein required to be performed or observed by such Purchaser on or prior to the Closing Date.

(c)           The purchase of and payment for the Shares by the Purchaser shall not be prohibited or enjoined by any law or governmental or court order or regulation.

(d)           The Purchaser shall have executed and delivered the Stockholders Agreement to the Company.

(e)           The Purchaser shall have executed and delivered the Proxy to the Company.

6.             Revenue Sharing; Surrender.

6.1           Purchaser Revenue Share.  Within sixty (60) days of the end of each calendar quarter during the Priority Revenue Sharing Period, the Company will pay to Purchaser [***] of the Company Japan Revenues earned during such quarter (the “Quarterly Revenue Share Payment”).  Except as may be otherwise provided in this Agreement, all payments pursuant to this Section 6.1 will be made in accordance with payment terms set forth in the Revenue Sharing Agreement, and Sections 2.3, 2.4 and 3 of the Revenue Sharing Agreement shall apply to such payments.  Notwithstanding the foregoing, the Company makes no, and the Purchaser does not rely on any, warranties and representations regarding the Company Japan Revenues or that the Company’s activities will result in any Company Japan Revenues. The Company has the sole right and discretion to enter into any transactions that may result in Company Japan Revenues.  In no event shall the Company be required to make any payments under this Agreement with respect to any period other than the Priority Revenue Sharing Period, nor shall the aggregate payments made pursuant to this Section 6.1 exceed twenty million dollars ($20,000,000.00). For the avoidance of doubt, any payments made pursuant to any revenue sharing arrangement with respect to the Company Japan Revenue subsequent to the Priority Revenue Sharing Period shall be governed solely by the Revenue Sharing Agreement.

 

6.2           Surrender.  Upon each Quarterly Revenue Share Payment made during the Priority Revenue Sharing Period by the Company to Purchaser as set forth in Section 6.1 above, the Shares acquired by Purchaser pursuant to this Agreement and then held by Purchaser shall be automatically surrendered to the Company for no consideration according to the following schedule:

(a)           For each Quarterly Revenue Share Payment made during the period commencing on the Closing Date and ending on the earlier of (i) the day immediately preceding the six-month anniversary of the Closing Date and (ii) the expiration of the Priority Revenue Sharing Period, the number of Shares surrendered shall equal such Quarterly Revenue Share Payment divided by the Per Share Purchase Price, rounded up to the nearest whole share of Common Stock;

(b)           For each Quarterly Revenue Share Payment made during the period commencing on the six-month anniversary of the Closing Date and ending on the earlier of (i) the day immediately preceding the twelve-month anniversary of the Closing Date and (ii) the expiration of the Priority Revenue Sharing Period, the number of Shares surrendered shall equal such Quarterly Revenue Share Payment divided by the product of (i) 1.025 and (ii) the Per Share Purchase Price, rounded up to the nearest whole share of Common Stock; and

(c)           For each Quarterly Revenue Share Payment made during the period commencing on the twelve-month anniversary of the Closing Date and ending on the expiration of the Priority Revenue Sharing Period, the number of Shares surrendered shall equal such Quarterly Revenue Share Payment made divided by the product of (i) 1.05 and (ii) the Per Share Purchase Price, rounded up to the nearest whole share of Common Stock.

7.             Company Repurchase Option.

7.1           Repurchase Option. During the Lockup Period, the Company shall have an irrevocable and exclusive option to repurchase (the “Repurchase Option”), exercisable by the Company in its sole discretion, any and all Shares acquired by the Purchaser pursuant to this Agreement that have not been automatically surrendered pursuant to Section 6.2 above, at a price per share determined as follows (the “Repurchase Price Per Share”):

(a)           If the Repurchase Option is exercised during the period commencing on the Closing Date and ending on the day immediately preceding the six-month anniversary of the Closing Date, the Repurchase Price Per Share shall be the Per Share Purchase Price;

(b)           If the Repurchase Option is exercised during the period commencing on the six-month anniversary of the Closing Date and ending on the day immediately preceding the twelve-month anniversary of the Closing Date, the Repurchase Price Per Share shall be the Per Share Purchase Price multiplied by 1.025; and

(c)           If the Repurchase Option is exercised during the period commencing on the twelve-month anniversary of the Closing Date and ending on the expiration of the Lockup Period, the Repurchase Price Per Share shall be the Per Share Purchase Price multiplied by 1.05.

 

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7.2           Exercise. The Repurchase Option shall be exercised at any time by the Company by written notice to the Purchaser, and such notice shall indicate the number of Shares to be repurchased by the Company (the “Repurchased Securities”). Within five business days of the receipt of such notice (the “Repurchase Closing Date”), the Company shall deliver payment of the aggregate purchase price, based on the Repurchase Price Per Share as determined pursuant to Section 7.1 above, by check or wire transfer of immediately available funds to an account designated by the Purchaser at least one (1) business day prior to the Repurchase Closing Date and the Purchaser shall deliver to the Company the Repurchased Securities and any stock certificates representing such Repurchased Securities free and clear of liens and encumbrances, and the Purchaser shall execute and deliver to the Company such instruments of conveyance as the Company may reasonably request.

8.             Termination.

8.1           Conditions of Termination.  This Agreement may be terminated at any time prior to the Closing by (i) a writing executed by the Company and the Purchaser; (ii) by the Company, in its sole discretion, prior to the fifth (5th) calendar day prior to the Closing Date, which termination will be effective upon delivery of written notice by the Company to the Purchaser; or (iii) either the Company or the Purchaser, upon written notice to the other party, in the event that any Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable.  In addition, this Agreement will terminate automatically, with no further action by either party hereto, if, prior to the Closing Date, either the Revenue Sharing Agreement or the Gabriel Licensing Agreement is terminated in accordance with its terms.

8.2           Effect of Termination.  In the event of any termination pursuant to Section 8.1 hereof, this Agreement shall become null and void and have no effect, with no liability on the part of the Company or the Purchaser, or their directors, officers, agents or stockholders, with respect to this Agreement, except for liability for any willful breach of, or failure to comply with, this Agreement.

9.             Miscellaneous Provisions.

9.1           Public Statements or Releases.  Neither the Company nor the Purchaser shall make any public announcement with respect to the existence or terms of this Agreement or the transactions provided for herein without the prior approval of the other party, which shall not be unreasonably withheld or delayed, other than a statement consistent with public announcements that were previously made by a party hereto in accordance with this Section 9.1. Notwithstanding the foregoing, nothing in this Section 9.1 shall prevent any party from making any public announcement it considers necessary in order to satisfy its obligations under the law or under the rules of any national securities exchange, provided that such party shall notify the other party prior to making such disclosure, shall use its commercially reasonable efforts to give the other party an opportunity (as is reasonable under the circumstances) to comment on such disclosure, and shall make only such disclosure as it is so obligated to disclose.

9.2           Interpretation.  The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement will refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and subsection references are to this Agreement unless otherwise specified. The headings in this Agreement are included for convenience of reference only and will not limit or otherwise affect the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they will be deemed to be followed by the words “without limitation.” The phrases “the date of this Agreement,” “the date hereof” and terms of similar import, unless the context otherwise requires, will be deemed to refer to the date set forth in the first paragraph of this Agreement. The meanings given to terms defined herein will be equally applicable to both the singular and plural forms of such terms. All matters to be agreed to by any party hereto must be agreed to in writing by such party unless otherwise indicated herein.  References to agreements, policies, standards, guidelines or instruments, or to statutes or regulations, are to such agreements, policies, standards, guidelines or instruments, or statutes or regulations, as amended or supplemented from time to time (or to successors thereto).

 

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9.3           Notices.  Any notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to be given when delivered in person or by private courier with receipt, if telefaxed when verbal or email confirmation from the recipient is received, or three (3) days after being deposited in the United States mail, first-class, registered or certified, return receipt requested, with postage paid and:

(a)           If to the Company, addressed as follows:

308 Dorla Ct.

Zephyr Cove, NV 89448

Attention: Kendall Larsen, Chief Executive Officer

Facsimile: (775) 580-7527

E-mail: Kendall_Larsen@virnetx.com

with a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Attention: Bradley L. Finkelstein

E-mail: bfinkelstein@wsgr.com

(b)           If to the Purchaser, at the Purchaser’s address, facsimile number or electronic mail address as provided by Purchaser to the Company prior to the Closing Date.

Any Person may change the address to which notices and communications to it are to be addressed by notification as provided for herein.

9.4           Severability. If any part or provision of this Agreement is held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provisions shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties hereto.

9.5           Governing Law; Submission to Jurisdiction; Venue; Waiver of Trial by Jury.

 

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(a)           This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to choice of laws or conflicts of laws provisions thereof that would require the application of the laws of any other jurisdiction, except to the extent that mandatory principles of Delaware law may apply.

(b)           The Company and the Purchaser each hereby irrevocably and unconditionally:

(i)          submits for itself and its property in any legal action or proceeding relating solely to this Agreement or the transactions contemplated in this Agreement, to the general jurisdiction of the State of Delaware or United States Federal court sitting in the State of Delaware;

(ii)         consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same to the extent permitted by applicable law;

(iii)        agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the party, as the case may be, at its address set forth in Section 9.3 or at such other address of which the other party shall have been notified pursuant thereto;

(iv)        agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction for recognition and enforcement of any judgment or if jurisdiction in the courts referenced in the foregoing clause (i) are not available despite the intentions of the parties hereto;

(v)         agrees that final judgment in any such suit, action or proceeding brought in such a court may be enforced in the courts of any jurisdiction to which such party is subject by a suit upon such judgment, provided that service of process is effected upon such party in the manner specified herein or as otherwise permitted by law;

(vi)        agrees that to the extent that such party has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process with respect to itself or its property, such party hereby irrevocably waives such immunity in respect of its obligations under this Agreement, to the extent permitted by law; and

(vii)       irrevocably and unconditionally waives trial by jury in any legal action or proceeding in relation to this Agreement.

9.6           Waiver.  No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or be construed as, a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement.

9.7           Expenses.  Each of the Company and the Purchaser shall bear their respective fees and expenses, incurred in connection with the proposed investment in the Shares, the negotiation of the Transaction Agreements, obtaining necessary consents or approvals, and the consummation of the transactions contemplated in the Transaction Agreements.

 

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9.8           Assignment.  None of the parties may assign its rights or obligations under this Agreement or designate another person (i) to perform all or part of its obligations under this Agreement or (ii) to have all or part of its rights and benefits under this Agreement, in each case without the prior written consent of (x) the Company and (y) the Purchaser. In the event of any assignment in accordance with the terms of this Agreement, the assignee shall specifically assume and be bound by the provisions of the Agreement by executing a writing agreeing to be bound by and subject to the provisions of this Agreement and shall deliver an executed counterpart signature page to this Agreement and, notwithstanding such assumption or agreement to be bound by this Agreement by an assignee, no such assignment shall relieve any party assigning any interest pursuant to this Agreement from its obligations or liability pursuant to this Agreement.

9.9           Assistance of Counsel.  Each of the parties hereto acknowledges that it has been represented by counsel of its choice throughout all negotiations that have preceded the execution of this Agreement, and that it has executed this Agreement with the advice of such counsel. Each party hereto and its counsel cooperated and participated in the drafting and preparation of this Agreement, and any and all drafts of this Agreement exchanged among the parties will be deemed the work product of all of the parties and may not be construed against any party by reason of its drafting or preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted or prepared it is of no application and is expressly waived by each of the parties, and any controversy over interpretations of this Agreement will be decided without regard to events of drafting or preparation.

9.10         Confidential Information.  The Purchaser acknowledges that Purchaser has been given access to, and from time to time in the future may be given access to, non-public, proprietary information with respect to the Company (“Confidential Information”). Confidential Information shall include all information pertaining to the Company Japan Revenues. For purposes hereof,  Confidential Information does not include, however, (i) information which is or becomes generally available to the public in accordance with law other than as a result of a disclosure by the Purchaser or its directors, managing members, officers, employees, agents, legal counsel, financial advisors, accounting representatives or potential funding sources (“Representatives”) or its Affiliates, subsidiaries or franchisees in violation of this Section 9.10 or any other confidentiality agreement to which the Company is a party or beneficiary, (ii) is, or becomes, available to the Purchaser on a non-confidential basis from a source other than the Company or any of its Affiliates or any of its Representatives, provided, that such source was not known to the Purchaser (after reasonable investigation) to be bound by a confidentiality agreement with, or any other contractual, fiduciary or other legal obligation of confidentiality to the Company or any of its Affiliates or any of its Representatives, (iii) is already in the Purchaser’s possession (other than information furnished by or on behalf of the Company or directors, officers, employees, representatives and/or agents of the Company), or (iv) is independently developed by the Purchaser without violating any of the confidentiality terms herein. The Purchaser agrees (i) except as required by law or regulatory or legal process, to keep all Confidential Information confidential and not to disclose or reveal any such Confidential Information to any person other than those of its Representatives who need to know the Confidential Information for the purpose of evaluating, monitoring or taking any other action with respect to the investment by the Purchaser in the Common Stock and to cause those Representatives to observe the terms of this Section 9.10 and (ii) not to use Confidential Information for any purpose other than in connection with evaluating, monitoring or taking any other action with respect to the investment by the Purchaser in the Common Stock.

 

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9.11         Third Parties.  Nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties to this Agreement any rights, remedies, claims, benefits, obligations or liabilities under or by reason of this Agreement, and no Person that is not a party to this Agreement (including, without limitation, any partner, member, shareholder, director, officer, employee or other beneficial owner of any party to this Agreement, in its own capacity as such or in bringing a derivative action on behalf of a party to this Agreement) shall have any standing as a third party beneficiary with respect to this Agreement or the transactions contemplated in this Agreement.

9.12         Counterparts.  This Agreement may be signed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

9.13         Entire Agreement; Amendments.  This Agreement constitute the entire agreement between the parties hereto respecting the subject matter hereof and supersede all prior agreements, negotiations, understandings, representations and statements respecting the subject matter hereof, whether written or oral. No modification, alteration, or change in any of the terms of this Agreement shall be valid or binding upon the parties hereto unless made in writing and duly executed by the Company and the Purchaser.  The Company, on the one hand, and the Purchaser, as the case may be, on the other hand, may by an instrument signed in writing by such parties waive the performance, compliance or satisfaction by the Purchaser or the Company, respectively, with any term or provision hereof or any condition hereto to be performed, complied with or satisfied by the Purchaser or the Company, respectively.

9.14         Additional Matters.  For the avoidance of doubt, the parties acknowledge and confirm that the terms and conditions of the Shares were determined as a result of arm’s-length negotiations.

[Remainder of Page Intentionally Left Blank.]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 

	COMPANY:
	VIRNETX HOLDING CORPORATION
	By:	/s/ Kendall Larsen
	Name:	Kendall Larsen
	Title:	President & Chief Executive Officer

 

[Signature Page to Stock Purchase Agreement]

 

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	PURCHASER:
	PUBLIC INTELLIGENCE TECHNOLOGY ASSOCIATES, KK
	By:	/s/ Eriya Unten
	Name:	Eriya Unten
	Title:	Executive Director

 

[Signature Page to Stock Purchase Agreement]

 

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Exhibit 10.2

 

REVENUE SHARING AGREEMENT

 

BY AND BETWEEN

VIRNETX HOLDING CORPORATION

AND

PUBLIC INTELLIGENCE TECHNOLOGY ASSOCIATES

 

May 31, 2017

 

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This REVENUE SHARING AGREEMENT (this “Agreement”) is dated as of May 31, 2017 (“Effective Date”), by and between VirnetX Holding Corporation, a Delaware corporation with an address at 308 Dorla Ct., Zephyr Cove, NV 89448, U.S.A. (the “Company”), and Public Intelligence Technology Associates, kk (Japanese Corporation) with an address at 27F Yomiuri Tokyo Head Office Building, 1-7-1 Otemachi, Chiyoda-ku, Tokyo, 100-8055, Japan (“Representative”).

WHEREAS, the Company and Representative are entering into that certain Share Purchase Agreement dated as of May 31, 2017 (the “Share Purchase Agreement”), pursuant to which Representative has agreed to purchase certain number of shares in the Company; and

WHEREAS, the Company and Representative desire to foster a collaborative relationship to enhance revenue opportunities for each of the parties as may be agreed to from time to time, including as set forth in that certain Gabriel License Agreement being entered into concurrently by and between the parties hereto (the “Gabriel License Agreement”) pursuant to which Representative will work with Company to develop revenue opportunities for certain Company products and services in Japan.

NOW THEREFORE, in consideration of the mutual agreements, representations, warranties and covenants herein contained, the parties hereto agree as follows:

1.             Certain Definitions.  The following terms when used in this Agreement shall have the following definitions.  Capitalized terms that are used in this Agreement but not defined herein shall have the meanings ascribed to such terms in Share Purchase Agreement.

“Adjusted Revenue Sharing Period” means the period beginning on the end of the Priority Revenue Sharing Period and ending on the termination of this Agreement.

“Confidential Information” shall have the meaning ascribed to that term in Section 6.1.

“Representative Revenues” means the worldwide revenues of Representative and its Affiliates, but excluding taxes and other customary deductions.  For purposes of this Agreement, Representative Revenues will be deemed to include all amounts received by Representative or its Affiliates from the licensing or sale of any products and services or other Intellectual Property, and amounts received in rent, returns and other distributions from real estate and Real Estate Investment Trusts’ but in each case, excluding any litigation-or settlement-related expenses, contingency fees, commissions and other contractually-required payments to third parties, taxes, and other deductions and costs associated with such revenue.

“Share Purchase Agreement” shall have the meaning set forth in the recitals to this Agreement.

2.             Collaboration.  The parties will meet from time to time to discuss collaborating with each other in order to enhance their revenue opportunities as mutually agreed from time to time.  Such collaboration will include the marketing and promotion of the Company products by Representative in Japan pursuant to the Gabriel License Agreement.  The parties’ sole and exclusive remuneration for the activities set forth in this Section 2 will be as set forth in Section 3 below.

 

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3.             Revenue Share; Payment.

3.1           Representative Adjusted Revenue Share.  Within sixty (60) days of the end of each calendar quarter during the Adjusted Revenue Sharing Period, the Company will pay to Representative an amount equal to [***] of the Company Japan Revenues for such quarter.  For the avoidance of doubt, payments to Representative during the Priority Revenue Sharing Period are solely as set forth in the Share Purchase Agreement, and in no event shall any payments to Representative be required under this Agreement other than with respect to Adjusted Revenue Sharing Period.

3.2           Company Revenue Share.  Within sixty (60) days of the end of each calendar quarter during the term of this Agreement, Representative will pay to the Company an amount equal to [***] of the Representative Revenues for such quarter.

3.3           Payment Terms.  All amounts owed hereunder shall be paid and due in US Dollars.  To the extent that any payments required hereunder are based on any amounts other than in U.S. dollars, the paying party shall convert such amounts into U.S. dollars at the official rate of exchange of the currency, as quoted by the U.S. Wall Street Journal (or another agreed-upon source if not quoted in the U.S. Wall Street Journal) for the last business day of the calendar quarter to which the payment relates.  All payments shall be made in immediately available funds by wire transfer to such bank accounts as the payee may from time to time designate in writing.

3.4           Taxes.  Each party will be responsible for any duties, taxes, and/or levies to which it is subject as a result of any payment hereunder.  The paying party will deduct or withhold any taxes that it will be legally obligated to deduct or withhold from any amounts payable to the other party hereunder, and the corresponding payment to the other party as reduced by such deductions or withholdings will constitute full payment and settlement to the other party of amounts payable under this Agreement.

4.             Records; Audits.

4.1           Records.  Each party shall keep records adequate to verify each report payment to be made pursuant to this Agreement for three (3) full years following the submission of each such payment.

4.2           Audits.  Each party shall keep records adequate to verify each report payment to be made pursuant to this Agreement for three (3) full years following the submission of each such payment.  Each party shall also permit the books and records maintained pursuant to Section 4.1 to be examined once during each calendar year, upon reasonable notice during regular business hours, at the location at which such books and records are usually kept, by an independent auditor selected and paid for by the other party.  The audited party shall render reasonable cooperation in the conduct of such audit, including by providing complete and accurate English translations of the foregoing books and records to the auditor.  The auditor shall not disclose to the other party any information other than that relating solely to the correctness of, or the necessity for, the reports and payments to be made pursuant to this Agreement.

5.             Term; Termination.

5.1           Term.  This Agreement shall commence on the Effective Date and continue in effect for five (5) years thereafter, unless earlier terminated pursuant to the terms hereof, unless otherwise agreed to in writing by the parties.

 

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5.2           Termination.  Notwithstanding anything to the contrary contained herein, this Agreement shall terminate immediately upon the termination of the Share Purchase Agreement unless the parties agree otherwise in writing.  In addition, this Agreement may also be terminated:

(a)           at any time by mutual written consent of the Company and Representative;

(b)           by either party upon thirty (30) days’ prior written notice, if the other party materially breaches this Agreement and fails to cure such breach to the terminating party’s reasonable satisfaction within such thirty (30) day period; or

(c)           by either party immediately upon written notice upon (a) the institution of any proceedings by or against the other party seeking relief, reorganization or arrangement under any laws relating to insolvency, which proceedings are not dismissed within sixty (60) days, (b) the assignment for the benefit of creditors, or the appointment of a receiver, liquidator or trustee, of the other party’s property or assets, or (c) the liquidation, dissolution or winding up of the other party’s business.

5.3           Effect of Termination.  Termination of this Agreement will not relieve either party of its payment obligations under Section 3 that accrued prior to such termination.  In addition, the following sections will survive any termination of this Agreement: Sections 4, 6, 7, and 8.

6.             Confidentiality.

6.1           Definition.  “Confidential Information” means confidential or proprietary information disclosed by one party to the other that is in written, graphic, machine readable, or other tangible form and is marked “Confidential” or “Proprietary” or in some other manner to indicate its confidential nature.  Confidential Information may also include oral disclosures provided that such information is designated as confidential at the time of disclosure and reduced to a written summary by the disclosing party within 30 days after its oral disclosure, which is marked in a manner to indicate its confidential nature and delivered to the receiving party.

6.2           Exceptions.  Confidential Information will not include any information that (a) was publicly known and made generally available prior to the time of disclosure by the disclosing party, (b) becomes publicly known and made generally available after disclosure by the disclosing party to the receiving party through no action or inaction of the receiving party, (c) is already in the possession of the receiving party at the time of disclosure, (d) is obtained by the receiving party from a third party without a breach of such third party’s obligations of confidentiality, or (e) is independently developed by the receiving party without use of or reference to the disclosing party’s Confidential Information.

6.3           Non-Use and Non-Disclosure.  Each party will (a) treat as confidential all Confidential Information of the other party, (b) not disclose such Confidential Information to any third party, except on a “need to know” basis to third parties that have signed a non-disclosure agreement containing provisions substantially as protective as the terms of this Section provided that the disclosing party has obtained the written consent to such disclosure from the other party, and (c) will not use such Confidential Information except in connection with performing its obligations or exercising its rights under this Agreement. Each party is permitted to disclose the other party’s Confidential Information if required by law so long as the other party is given prompt written notice of such requirement prior to disclosure and assistance in obtaining an order protecting such information from public disclosure.

 

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6.4           Confidentiality of Agreement.  Neither party to this Agreement will disclose the terms of this Agreement to any third party without the consent of the other party, except as required by securities or other applicable laws. Notwithstanding the above provisions, each party may disclose the terms of this Agreement (a) in connection with the requirements of a public offering or securities filing, (b) in confidence, to accountants, banks, and financing sources and their advisors, (c) in confidence, in connection with the enforcement of this Agreement or rights under this Agreement, or (d) in confidence, in connection with a merger or acquisition or proposed merger or acquisition, or the like.

7.             Limitation of Liability.

7.1           Disclaimer of Damages.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, NEITHER PARTY WILL, UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE OTHER PARTY FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS OR LOSS OF BUSINESS, EVEN IF SUCH PARTY IS APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.

7.2           Cap on Liability.  UNDER NO CIRCUMSTANCES WILL EITHER PARTY’S TOTAL LIABILITY OF ALL KINDS ARISING OUT OF OR RELATED TO THIS AGREEMENT, REGARDLESS OF THE FORUM AND REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS BASED ON CONTRACT, TORT, OR OTHERWISE, EXCEED THE TOTAL AMOUNTS PAID OR PAYABLE TO THAT PARTY UNDER THIS AGREEMENT.

8.             Miscellaneous Provisions.

8.1           Independent Contractors.  The relationship of the parties established by this Agreement is that of independent contractors, and nothing contained in this Agreement should be construed to give either party the power to act as an agent of or direct or control the day-to-day activities of the other.  Financial and other obligations associated with each party’s business are the sole responsibility of that party.

8.2           Interpretation.  The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement will refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and subsection references are to this Agreement unless otherwise specified.  The headings in this Agreement are included for convenience of reference only and will not limit or otherwise affect the meaning or interpretation of this Agreement.  Whenever the words “include,” “includes” or “including” are used in this Agreement, they will be deemed to be followed by the words “without limitation.”  The phrases “the date of this Agreement,” “the date hereof” and terms of similar import, unless the context otherwise requires, will be deemed to refer to the date set forth in the first paragraph of this Agreement.  The meanings given to terms defined herein will be equally applicable to both the singular and plural forms of such terms.  All matters to be agreed to by any party hereto must be agreed to in writing by such party unless otherwise indicated herein.  References to agreements, policies, standards, guidelines or instruments, or to statutes or regulations, are to such agreements, policies, standards, guidelines or instruments, or statutes or regulations, as amended or supplemented from time to time (or to successors thereto).

8.3           Notices.  Any notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to be given when delivered in person or by private courier with receipt, if telefaxed when verbal or email confirmation from the recipient is received, or three (3) days after being deposited in the United States mail, first-class, registered or certified, return receipt requested, with postage paid and:

 

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(a)           If to the Company, addressed as follows:

308 Dorla Ct.

Zephyr Cove, NV 89448

Attention: Kendall Larsen, Chief Executive Officer

Facsimile: (775) 580-7527

E-mail: Kendall_Larsen@virnetx.com

 

with a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Attention: Bradley L. Finkelstein

E-mail: bfinkelstein@wsgr.com

(b)           If to Representative, at the Representative’s address, facsimile number or electronic mail address as provided by Representative to the Company prior to the Closing Date (as defined in the Share Purchase Agreement).

A party may change the address to which notices and communications to it are to be addressed by notification as provided for herein.

8.4           Severability.  If any part or provision of this Agreement is held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provisions shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties hereto.

8.5           Governing Law; Jurisdiction.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to choice of laws or conflicts of laws provisions thereof that would require the application of the laws of any other jurisdiction, except to the extent that mandatory principles of Delaware law may apply.

8.6           Arbitration.  Any dispute, controversy or claim arising out of, relating to, or in connection with this Agreement, including the breach, termination or validity hereof, shall be finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (“HKIAC”).  The arbitration shall be conducted in Hong Kong and in accordance with the HKIAC Administered Arbitration Rules in effect at the time of the arbitration, except as they may be modified by mutual agreement of the parties.  The arbitration shall be conducted in the English language.  The arbitration shall be conducted by three arbitrators.  Each party shall appoint one arbitrator and such two (2) arbitrators shall appoint a third arbitrator.  The arbitral award shall be in writing, state the reasons for the award, and be final and binding on the parties.  The award may include an award of costs, including reasonable attorneys’ fees and disbursements.  In addition to monetary damages, the arbitral tribunal shall be empowered to award equitable relief.  The parties agree that the arbitration shall be kept confidential, and that the costs of arbitration shall be borne by the losing party unless otherwise determined by the arbitration award.  All payments made pursuant to the arbitration decision or award and any judgment entered thereon shall be made in United States dollars, free from any deduction, offset or withholding for taxes.  Notwithstanding this Section 8.6 or any other provision to the contrary in this Agreement, neither party shall be obligated to follow the foregoing arbitration procedures where such party intends to apply to any court of competent jurisdiction for an interim injunction or similar equitable relief against any other party, provided there is no unreasonable delay in the prosecution of that application.

 

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8.7           Waiver.  No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or be construed as, a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement.

8.8           Assignment.  Neither party may assign its rights or obligations under this Agreement or designate another person (i) to perform all or part of its obligations under this Agreement or (ii) to have all or part of its rights and benefits under this Agreement, in each case without the prior written consent of the other party; provided that either Party may freely assign this Agreement to a successor to all or substantially all of its relevant assets, whether by sale, merger, or otherwise, and shall provide written notice of such assignment to the other party at least thirty (30) days prior to the effective date of the assignment.  In the event of any assignment in accordance with the terms of this Agreement, the assignee shall specifically assume and be bound by the provisions of the Agreement by executing a writing agreeing to be bound by and subject to the provisions of this Agreement and shall deliver an executed counterpart signature page to this Agreement and, notwithstanding such assumption or agreement to be bound by this Agreement by an assignee, no such assignment shall relieve any party assigning any interest pursuant to this Agreement from its obligations or liability pursuant to this Agreement.

8.9           Counterparts.  This Agreement may be signed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

8.10         Entire Agreement; Amendments.  This Agreement constitute the entire agreement between the parties hereto respecting the subject matter hereof and supersedes all prior agreements, negotiations, understandings, representations and statements respecting the subject matter hereof, whether written or oral.  No modification, alteration, or change in any of the terms of this Agreement shall be valid or binding upon the parties hereto unless made in writing and duly executed by the parties.

[Remainder of Page Intentionally Left Blank.]

 

 

VirnetX Holding Corporation			Public Intelligence Technology Associates, kk
Name:	Kendall Larsen		Name:	Eriya Unten
Title:	President & CEO		Title:	Executive Director
Signature:	/s/ Kendall Larsen		Signature:
Date:	5/31/17		Date:

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 

 

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

VirnetX Holding Corporation			Public Intelligence Technology Associates, kk
Name:	Kendall Larsen		Name:	Eriya Unten
Title:	President & Chief Executive Officer		Title:	Executive Director
Signature:			Signature:	/s/ Eriya Unten
Date:			Date:	5/31/2017

 

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Exhibit 10.4

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STOCKHOLDERS AGREEMENT

between

VIRNETX HOLDING CORPORATION

and

PUBLIC INTELLIGENCE TECHNOLOGY ASSOCIATES

___________, 2017

 

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TABLE OF CONTENTS

 

 

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STOCKHOLDERS AGREEMENT

THIS STOCKHOLDERS AGREEMENT, dated as of [______], 2017 (this “Agreement”), is by and between VirnetX Holding Corporation, a Delaware corporation (the “Company”), and Public Intelligence Technology Associates, kk (Japanese Corporation) (“Investor”).

RECITALS:

A.           The Company and Investor have entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company has agreed to sell, and the Investor has agreed to purchase from the Company, shares of Company Common Stock.

B.            It is a condition to closing the transactions contemplated by the Purchase Agreement that the Company and Investor enter into this Agreement to provide for certain agreements and obligations of the parties following the closing of the transactions contemplated by the Purchase Agreement (the “Closing”).

AGREEMENT:

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, intending to be legally bound, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

 

SECTION 1.1.            Definitions.  The following terms shall have the meanings ascribed to them below:

“13D Group” means any group of Persons who, with respect to those acquiring, holding, voting or disposing of Company Common Stock would, assuming ownership of the requisite percentage thereof, be required under Section 13(d) of the Exchange Act to file a statement on Schedule 13D with the SEC as a “person” within the meaning of Section 13(d)(3) of the Exchange Act.

“Affiliate” of a Person has the meaning set forth in Rule 12b-2 under the Exchange Act.

“Beneficially Own” with respect to any securities means having “beneficial ownership” of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act without limitation by the 60-day provision in paragraph (d)(1)(i) thereof). The terms “Beneficial Ownership” and “Beneficial Owner” have correlative meanings.

“Board” means the Board of Directors of the Company.

 

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“Business Day” means a day, other than a Saturday or Sunday, on which commercial banks in New York City are open for the general transaction of business.

“Capital Stock” means, with respect to any Person at any time, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of capital stock, partnership interests (whether general or limited) or equivalent ownership interests in or issued by such Person.

“Change of Control” means the existence or occurrence of any of the following: (a) the sale, conveyance or disposition of all or substantially all of the assets of the Company; (b) the consolidation, merger or other business combination of the Company with or into any other entity, immediately following which the then current stockholders of the Company fail to own, directly or indirectly, at least Majority Voting Power; (c) a transaction or series of transactions in which any person or “group” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires Majority Voting Power (other than (i) a reincorporation, reorganization or similar corporate transaction in which the Company’s stockholders own, immediately thereafter, interests in the new parent company in essentially the same percentage as they owned in the Company immediately prior to such transaction, or (ii) a transaction described in clause (b) (such as a triangular merger) in which the threshold in clause (b) is not passed) or (d) the replacement of a majority of the Board with individuals who were not nominated, approved or elected by at least a majority of the directors at the time of such replacement.

“Closing” has the meaning ascribed thereto in the recitals of this Agreement.

“Closing Date” means the date on which the Closing occurs.

“Company” has the meaning set forth in the preamble of this Agreement.

“Company Common Stock” means the common stock, par value $0.0001 per share, of the Company.

“Definitive Agreements” means the Purchase Agreement, the Revenue Sharing Agreement (as defined in the Purchase Agreement), and the Gabriel License Agreement (as defined in the Purchase Agreement).

“Director” means any member of the Board.

“Economic Rights” means, with respect to a security, the right to all or any portion of the pecuniary interest in the security, including, without limitation, the right to receive dividends and distributions, proceeds upon liquidation and proceeds of disposition or conversion (if applicable) of the security.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

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“Governmental Entity” means any United States or foreign (a) federal, state, local, municipal or other government, (b) governmental or quasi-governmental entity of any nature (including, without limitation, any governmental agency, branch, department, official or entity and any court or other tribunal) or (c) body exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature, including, without limitation, any arbitral tribunal.

“Investor” shall have the meaning set forth in the preamble of this Agreement. References to Investor also includes any Permitted Transferee to which Investor transfers Company Common Stock and related rights under this Agreement in accordance with, and subject to the terms of, ARTICLE III.

“Law” means any applicable federal, state, local or foreign law, statute, ordinance, rule, guideline, regulation, order, writ, decree, agency requirement, license or permit of any Governmental Entity.

“Lockup Period” means the period commencing on the Closing Date and ending on the date that is eighteen (18) months from the Closing Date.

“Majority Voting Power” of the resulting corporation or of the Company shall mean a majority of all the outstanding voting securities of the resulting corporation or of the Company (or, in each case, the parent thereof), respectively, entitled to vote in the election of directors.

“Permitted Acquisition” has the meaning set forth in Section 2.1(a).

“Permitted Transfer” has the meaning set forth in Section 3.4.

“Permitted Transferee” has the meaning set forth in Section 3.4.

“Person” shall mean any natural person, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof.

“Purchase Agreement” has the meaning ascribed thereto in the recitals of this Agreement.

 “SEC” means the U.S. Securities and Exchange Commission.

“Securities” shall mean the shares of Company Common Stock issued to the Investor pursuant to the Purchase Agreement.

“Securities Act” means the Securities Act of 1933, as amended.

“Standstill Period” means the period commencing on the Closing Date and ending on the earliest to occur of (i) the termination of this Agreement pursuant to its terms or (ii) the date that is sixty (60) months after the date of this Agreement.

 

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“Subsidiary” means, as to any Person, any other Person of which more than 50% of the shares of the voting stock or other voting interests are owned or controlled, or the ability to select or elect more than 50% of the directors or similar managers is held, directly or indirectly, by such first Person or one or more of its Subsidiaries or by such first Person and one or more of its Subsidiaries.

“Transfer” means, directly or indirectly, to offer, sell (including any short sale), transfer, assign, pledge, encumber, hypothecate, lend or similarly dispose of (by merger, testamentary disposition, operation of law or otherwise), either voluntarily or involuntarily, or enter into any contract, option or other arrangement or understanding with respect to the offer, sale (including any short sale), transfer, assignment, pledge, encumbrance, hypothecation or similar disposition of (by merger, testamentary disposition, operation of law or otherwise), any Securities beneficially owned by a Person or any interest (including any Economic Rights or Voting Rights) in any Securities beneficially owned by a Person.  Whether or not treated as an offer or sale of Securities under the Securities Act, “Transfer” shall also include any hedging or other transaction, such as any purchase, sale (including any short sale) or grant of any right (including without limitation any put or call option) with respect to any of the Securities or with respect to any security that includes or derives any part of its value from such Securities.

“Voting Rights” means, with respect to a security, the right to direct the voting of the security with respect to any matter for which the security is entitled to vote.

“Voting Securities” means the shares of Company Common Stock and any other securities of the Company entitled to vote generally for the election of directors or convertible into such securities.

SECTION 1.2.            General Interpretive Principles. Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders. The name assigned this Agreement and the section captions used herein are for convenience of reference only and shall not be construed to affect the meaning, construction or effect hereof. Unless otherwise specified, the terms “hereof,” “herein” and similar terms refer to this Agreement as a whole (including the exhibits hereto), and references herein to sections refer to sections of this Agreement.

ARTICLE II

ACTIONS IN CONCERT WITH OTHERS

SECTION 2.1.            Standstill; Actions in Concert with Others. During the Standstill Period and unless otherwise approved by the Board or provided for in this Agreement, Investor will not, and will cause each of its Affiliates not to, directly or indirectly:

(a)          acquire, offer or propose to acquire or agree to acquire (or request permission to do so), whether by purchase, tender or exchange offer, by joining a partnership, limited partnership, syndicate or other 13D Group or otherwise, ownership (including, but not limited to, Beneficial Ownership) of any of the assets or businesses of the Company or any Subsidiary thereof or shares of Capital Stock of the Company or any Subsidiary thereof or any rights or options to acquire such ownership (whether currently, upon lapse of time, following the satisfaction of any conditions, upon the occurrence of any event or any combination of the foregoing), other than (i) as provided for in the Definitive Agreements, (ii) the acquisition of Capital Stock of the Company or any Subsidiary thereof as a result of any stock splits, stock dividends or other distributions or recapitalizations or offerings made available by the Company to holders of shares of Company Common Stock, including rights offerings, (iii) any acquisition of shares of Company Common Stock that has been approved by the Board, or (iv) any acquisition of shares of Company Common Stock pursuant to a Permitted Transfer (each event listed in clauses (i) through (iv), a “Permitted Acquisition”);

 

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(b)          make, or in any way knowingly participate in or encourage, any “solicitation” (within the meaning of the Exchange Act) of proxies or consents relating to the election of directors with respect to the Company or any Subsidiary thereof, or become a “participant” in any “election contest” (both within the meaning of the Exchange Act) seeking to elect directors not nominated by the Board;

(c)          in any manner, agree, attempt, seek or propose to deposit any shares of Capital Stock of the Company or any Subsidiary thereof or any rights to acquire (whether currently, upon lapse of time, following the satisfaction of any conditions, upon the occurrence of any event or any combination of the foregoing) any Voting Securities in any voting trust or similar arrangement;

(d)          call or seek to have called any meeting of the holders of Voting Securities (or securities convertible into, or exercisable or exchangeable for, Voting Securities);

(e)          seek to advise or influence any Person with respect to the voting of any Voting Securities;

(f)           make any proposal or public recommendation regarding any merger, tender or exchange offer, consolidation, business combination, recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with or involving the Company or any of is Subsidiaries or any of its or their respective securities or assets;

(g)          seek to place a representative on the Board, seek the removal of any member of the Board or otherwise seek or propose to influence or control the Board, the management, or the policies of the Company, including with respect to any Change of Control;

(h)          publicly announce any intention, plan or arrangement inconsistent with the foregoing;

(i)           form, join or in any way knowingly participate in the formation of a 13D Group with respect to any shares of Capital Stock of the Company or any Subsidiary thereof;

(j)           knowingly assist, advise, participate in, provide or arrange financing to or for, solicit, encourage, induce or attempt to induce any effort or attempt by, or enter into any discussions, negotiations, arrangements or understandings with, any Person or Group to do or seek to do any of the foregoing (it being understood that the mere voting by the Investor of its Voting Securities will not, in and of itself, be deemed a violation of this Section 2.1(j));

 

 

(k)          take any action that would reasonably be expected to compel the Company to make a public announcement regarding the possibility of any of the foregoing; or

(l)           seek or request permission to do any of the foregoing or request to amend or waive any provision of this Section 2.1, or make or seek permission to make any public announcement with respect to any of the foregoing.

SECTION 2.2.            Permitted Actions. The restrictions set forth in Section 2.1 shall not apply if any of the following occurs (provided that if any event described in this Section 2.2 occurs and, during the following twelve (12) months, none of the transactions described below has been consummated, then the restrictions set forth in Section 2.1 shall thereafter resume and continue to apply in accordance with their terms):

(a)          in the event that the Company enters into a definitive agreement for a merger, consolidation or other business combination transaction as a result of which the stockholders of the Company would own (including, but not limited to, Beneficial Ownership) securities of the resulting corporation having less than Majority Voting Power, but only for so long as the Board recommends that the stockholders of the Company vote in favor of such merger, consolidation or other business transaction; or

(b)          in the event that a tender offer or exchange offer for at least 50.1% of the shares of the Capital Stock of the Company is commenced by a third person (and not involving any breach of Section 2.1), which tender offer or exchange offer, if consummated, would result in a Change of Control, and the Board recommends that the stockholders of the Company tender their shares in response to such offer or does not recommend against the tender offer or exchange offer within ten (10) Business Days after the commencement thereof or such longer period as shall then be permitted under U.S. federal securities laws.

ARTICLE III

TRANSFER RESTRICTIONS

SECTION 3.1.            Transfer Restrictions

(a)          The Investor will not effect any Transfers, other than as expressly permitted by, and in compliance with, the provisions of this ARTICLE III, or as specifically consented to in writing in advance by the Company.

(b)          Investor shall not effect any Transfer except pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act, and in compliance with any applicable state securities laws (but in all cases subject to Section 3.4).

 

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(c)          The Investor agrees that, so long as is required by this Article III, the Securities shall be subject to the following restrictive legend:

“THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED OR EXEMPT FROM REGISTRATION UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS.  IN ADDITION, THESE SHARES ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN A STOCKHOLDER AGREEMENT, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.”

The Securities shall not be subject to the first sentence of such legend (i) while a registration statement covering the resale of the Securities is effective under the Securities Act, (ii) following any sale of such Securities pursuant to Rule 144 if the holder provides the Company with a legal opinion (and the documents upon which the legal opinion is based) reasonably acceptable to the Company to the effect that the Securities can be sold under Rule 144, or (iii) if the holder provides the Company with a legal opinion (and the documents upon which the legal opinion is based) reasonably acceptable to the Company to the effect that the legend is not required under applicable requirements of the Securities Act (including controlling judicial interpretations and pronouncements issued by the staff of the SEC).

 

SECTION 3.2.            Procedures for Transfer.

 

(a)          In order to ensure compliance with the provisions of this Article III, prior to any proposed Transfer, the Investor shall give written notice to the Company of the Investor’s intention to effect such Transfer. Each such notice shall describe the manner and circumstances of the proposed Transfer in reasonable detail and, unless such Securities are to be sold pursuant to an effective registration statement, shall be accompanied by either: (i) an opinion of legal counsel reasonably acceptable to the Company that such Transfer is exempt from the registration requirements of Section 5 of the Securities Act, a seller’s representation letter and, if such Transfer is proposed to be executed through a broker, a broker’s representation letter, in each case, in customary form, confirming that such sale will be or has been effected pursuant to Rule 144 under the Securities Act; or (ii) a “no action” letter from the staff of the SEC addressed to the Investor to the effect that the Transfer without registration would not result in a recommendation by the staff to the SEC that action be taken with respect thereto.

(b)          The Company shall use its commercially reasonable efforts to cooperate with the Investor to process, as promptly as reasonably practicable, any Transfer of any or all of its Securities as permitted by, and in compliance with, the provisions of this Article III, including by delivering applicable instruction letters to the Company’s transfer agent to cooperate with the Investor and process, as promptly as is reasonable practicable, any such Transfer.

(c)           Any attempted or purported Transfer in violation of this Agreement shall be null and void, regardless of whether the purported transferee has any actual or constructive knowledge of the provisions hereof.  The Company shall not record on its stock transfer books or otherwise any attempted or purported Transfer in violation of this Agreement.

 

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SECTION 3.3.            Applicability to Other Securities.

 

If, following the date hereof, the Company issues any shares of Company Common Stock or any other securities in respect of or in substitution or exchange for the Securities in connection with any stock split, dividend or combination, or any recapitalization, reclassification or similar transaction, such shares or securities shall be subject to the same restrictions and rights set forth in Article II, Article III and Article IV hereof as are then applicable to the Securities with respect to which such shares or securities have been issued in respect of or in substitution or exchange for.  In such an event, the Company and the Investor hereby agree to make such amendments or modifications to this Agreement as may be appropriate to reflect such treatment of such shares or other securities.

SECTION 3.4.            Lockup Period.

 

(a)           During the Lockup Period, the Investor shall not, and shall not authorize, permit or direct its Subsidiaries or Affiliates to Transfer any of the Securities without approval by the Board except to (a) another corporation, partnership, limited liability company, trust or other business entity that is an Affiliate of the Investor or (b) as part of a distribution without consideration by the Investor to its stockholders, partners, members of other equity holders (such Transfer and such Persons described in this Section 3.4(a) and (b) the “Permitted Transfer” and the “Permitted Transferees,” respectively); provided, however, such Permitted Transferee delivers a written instrument to the Company in form and substance reasonably satisfactory to the Company agreeing to be bound by and subject to the terms and conditions of this Agreement and the Purchase Agreement (including, without limitation, Article VI and Article VII) during such Lockup Period. The Company and its transfer agent shall not register any Transfer of the Securities in violation of this Section 3.4.  The Company may, and may instruct any transfer agent for the Company to, place such stop transfer orders during the Lockup Period as may be required on the transfer books of the Company in order to ensure compliance with the provisions of this Section 3.4 and the Investor consents to such action.

Investor further agrees that any time after the expiration of the Lockup Period, without approval by the Board and the prior written consent of the Company, such Investor or Permitted Transferee, if applicable, shall not, and shall not authorize, permit or direct its Subsidiaries or Affiliates to, directly or indirectly, effect any Transfer to any Person who (a) holds, or will hold after such Transfer, more than five percent (5%) of the outstanding shares of Company Common Stock, (b) the Company reasonably determines to be a competitor or an officer, employee, director or holder of more than ten percent (10%) of a competitor or (c) is, or is an Affiliate of the entities listed on Annex A hereto. For avoidance of doubt, any Transfer during the Lockup Period or otherwise shall be made in compliance with the transfer restrictions set forth in Section 3.1.

 

 

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SECTION 4.2.            Market Standoff.

 

(a)          For so long as Investor holds more than one percent (1%) of the outstanding Company Common Stock, Investor hereby agrees that Investor will not, without the prior written consent of the Company and managing underwriter or initial purchaser, during the period commencing on the date of the final prospectus or offering memorandum relating to a registration by the Company of shares of Company Common Stock or any other equity securities or securities convertible into or exercisable or exchangeable into equity securities of the Company under the Securities Act on a registration statement on Form S-1 or Form S-3 or any sales under Rule 144 and/or Regulation S of the Securities Act, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred twenty (120) days, which period may be extended upon the request of the managing underwriter), (i) lend, offer, pledge, sell, contract to sell (including, without limitation, any short sale), sell or any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, or otherwise transfer or dispose of (other than to donees who agree in writing to be similarly bound), directly or indirectly, any shares of Company Common Stock or any securities convertible into or exercisable or exchangeable (directly or indirectly) for such common stock held immediately before the effective date of the registration statement for such offering, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of common stock or other securities, in cash, or otherwise.  The foregoing provisions of this Section 4.2 shall not apply to the sale of any shares to an underwriter or initial purchaser pursuant to an underwriting or purchase agreement and shall be applicable to the Investor only if all Section 16 officers and directors of the Company are subject to substantially the same restrictions.  The underwriters or initial purchasers in connection with such registration or sale are intended third party beneficiaries of this Section 4.2 and shall have the right, power, and authority to enforce the provisions hereof as though they were a party hereto. The obligations described in this Section 4.2 shall not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions and may stamp each relevant stock certificate with the legend set forth in Section 3.1(c) with respect to the Securities of the Company subject to the foregoing restriction until the end of such one hundred twenty (120) day (or other) period. The Investor agrees to execute a market standoff agreement with the underwriters in customary form consistent with the provisions of this Section 4.2.

 

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SECTION 4.3.            Stop Transfer Instructions. To ensure compliance with the restrictions referred to herein, Investor agrees that the Company may issue appropriate “stop transfer” certificates or instructions and that, if the Company transfers its own Stock, it may make appropriate notations to the same effect in its records.

SECTION 4.4.            Non-Circumvention. The Investor shall not engage in any actions that have the effect of circumventing the intent of any the restrictions set forth in Article II, III or IV of this Agreement, including by way of doing or causing to occur any action indirectly that would be prohibited by any such provisions if directly taken by the Investor, and any such actions in circumvention of any such restrictions shall be deemed to be a violation of such restrictions.

ARTICLE V

TERMINATION

SECTION 5.1.            Termination. Other than the termination provisions applicable to particular sections of this Agreement that are specifically provided elsewhere in this Agreement, this Agreement shall terminate upon the mutual written agreement of the Company and Investor and its Permitted Transferees holding a majority of the Capital Stock of the Company then held by Investor and its Permitted Transferees in the aggregate.

ARTICLE VI

MISCELLANEOUS

SECTION 6.1.            Amendment and Modification.

 

(a)           This Agreement may be amended, modified and supplemented, and any of the provisions contained herein may be waived, only by a written instrument signed by the Company and Investor and its Permitted Transferees holding a majority of the Capital Stock of the Company then held by Investor and its Permitted Transferees in the aggregate.

(b)          No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement.

SECTION 6.2.            Assignment; No Third-Party Beneficiaries.

 

(a)           Neither this Agreement, nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of Law or otherwise); provided, however, that Investor may assign its rights, interests and obligations under this Agreement to a Permitted Transferee in a Permitted Transfer of a type described in clauses (i)-(v) of the definition thereof.

 

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(b)          Unless otherwise expressly contemplated elsewhere in this Agreement, this Agreement shall not confer any rights or remedies upon any Person other than the parties to this Agreement and their respective permitted successors and assigns.

SECTION 6.3.            Binding Effect; Entire Agreement. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns and executors, administrators and heirs. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them.

SECTION 6.4.            Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable Law, such provision(s) shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms so long as the economic or legal substance of the transactions contemplated by this Agreement are not affected in any manner materially adverse to any party.

SECTION 6.5.            Notices and Addresses.  Any notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to be given when delivered in person or by private courier with receipt, if telefaxed when verbal or email confirmation from the recipient is received, or three (3) days after being deposited in the United States mail, first-class, registered or certified, return receipt requested, with postage paid and:

(a)            If to the Company, addressed as follows:

 

308 Dorla Ct.

Zephyr Cove, NV 89448

Attention: Kendall Larsen, Chief Executive Officer

Facsimile: (775) 580-7527

E-mail: Kendall_Larsen@virnetx.com

with a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Attention: Bradley L. Finkelstein

E-mail: bfinkelstein@wsgr.com

(b)           If to the Purchaser, at the Purchaser’s address, facsimile number or electronic mail address as provided by Purchaser to the Company prior to the Closing Date (as defined in the Purchase Agreement).

Any Person may change the address to which notices and communications to it are to be addressed by notification as provided for herein.

 

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SECTION 6.6.            Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the Law of any jurisdiction other than the State of Delaware.

SECTION 6.7.            Assistance of Counsel. Each of the parties hereto acknowledges that it has been represented by counsel of its choice throughout all negotiations that have preceded the execution of this Agreement, and that it has executed this Agreement with the advice of such counsel. Each party hereto and its counsel cooperated and participated in the drafting and preparation of this Agreement, and any and all drafts of this Agreement exchanged among the parties will be deemed the work product of all of the parties and may not be construed against any party by reason of its drafting or preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted or prepared it is of no application and is expressly waived by each of the parties, and any controversy over interpretations of this Agreement will be decided without regard to events of drafting or preparation.

SECTION 6.8.            Headings. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect.

SECTION 6.9.            Counterparts. This Agreement may be executed via facsimile and in any number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument.

SECTION 6.10.          Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby.

SECTION 6.11.          Remedies. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by Law, it being agreed by the parties that the remedy at Law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief for which a remedy at Law would be adequate is waived.

 

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SECTION 6.12.          Jurisdiction and Venue. The parties hereto hereby irrevocably submit to the jurisdiction of the Delaware Court of Chancery or, in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the District of Delaware in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in the Delaware Court of Chancery, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the District of Delaware, or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in the Delaware Court of Chancery, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, in the United States District Court for the District of Delaware. The parties hereto hereby consent to and grant the Delaware Court of Chancery, or in the event (but only in the event) that such court does not have subject matter jurisdiction over such action or proceeding, the United States District Court for the District of Delaware, jurisdiction over the person of such parties and, to the extent permitted by Law, over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 6.5 or in such other manner as may be permitted by Law shall be valid and sufficient service thereof.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.

 

[Signature Page to Stockholders Agreement]

 

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Annex A

Other Prohibited Transferees

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Exhibit A

Proxy

This Proxy is effective as of the date first written below and is made by the undersigned with respect to the voting of shares of capital stock of VirnetX Holding Corporation, a Delaware corporation (the “Company”).

WHEREAS, the undersigned and the Company are parties to that certain Stockholders Agreement dated as of [_______], 2017 (the “Stockholders Agreement”);

WHEREAS, the undersigned is a holder of shares of the Company’s Common Stock and wishes to appoint Kendall Larsen (“Proxy Holder”) as proxy and attorney in fact with respect to the exercise of all voting, consent and similar rights of the undersigned with respect to the undersigned’s shares of Company’s Common Stock on all matters submitted to the Company’s stockholders subsequent to the date hereof with respect to which the holders of the capital stock of the Company are entitled to vote or take action (a “Stockholder Matter”), subject to certain exceptions and in accordance with the terms and conditions contained herein; and

WHEREAS, the undersigned wishes to make such appointment, and Proxy Holder wishes to accept such appointment, upon and subject to the terms and conditions contained herein.

NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:

The undersigned hereby represents and warrants that it is the legal owner of 5,494,505 shares of Common Stock (the “Shares”) as of the date hereof, and with respect to such stock ownership, the undersigned hereby appoints Proxy Holder as proxy and attorney-in-fact, with full power of substitution, on behalf and in the name of the undersigned to vote or act on behalf of the Shares as Proxy Holder deems advisable and in all cases in accordance with the recommendations of the Company’s Board of Directors on any Stockholder Matter from the date hereof, for which the undersigned would be entitled to vote or act but for this Proxy.