ITEM 1.01.
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ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
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Stock Purchase Agreement
On May 31, 2017, VirnetX Holding Corporation (the “Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Public Intelligence Technology Associates (“Investor”), kk (Japanese Corporation), pursuant to which the Company will issue and sell to Investor 5,494,505 shares of Common Stock (the “Shares”) as promptly as practicable following the satisfaction or waiver of certain closing conditions, but in any case no later than June 19, 2017, in a private placement pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”) for a total purchase price of approximately $20,000,000, or $3.64 per share. The Purchase Agreement contained customary representations and warranties by the parties. The Company intends to use the net proceeds from the private placement primarily for general corporate purposes.
During the
eighteen (18) month period following the date of the Purchase Agreement
(the “Lockup Period”)
, the
Company has an irrevocable and exclusive option to repurchase any and all of the Shares acquired by Investor that have not
otherwise been surrendered
in the manner described below, at prices set forth in a schedule set forth
in the Purchase Agreement.
In addition, pursuant to the terms of the Purchase Agreement, the Company will make quarterly payments to
Investor of a percentage of the revenues
described in the Purchase Agreement
recognized from cash or cash equivalents received
by Network Research Corporation Japan Ltd., the Company’s Japanese subsidiary
,
from a Japanese company
that is incorporated
or otherwise created under the laws of Japan and is headquartered in Japan (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 a Japanese
Company
sold in Japan, (ii) licensing of the Gabriel Collaboration Suite to a Japanese
Company
for end use in Japan, or (iii) provision of other commercial services by the Company to a Japanese
Company
in Japan, such as the Company’s Secure Domain Name services (the “Company Japan Revenues,” and each
such payment, the “
Priority
Quarterly Revenue Share Payment”). Upon each
Priority
Quarterly Revenue Share Payment made by
the Company to Investor, the Shares purchased by Investor pursuant to the Purchase Agreement will be
automatically
surrendered
for no consideration in accordance with
a
schedule
set forth in
the Purchase Agreement. The
Priority
Quarterly
Revenue Share Payments shall be made until the earliest to occur of (i) when Investor no longer holds or owns any Shares
acquired pursuant to the Purchase Agreement, (ii) when the Company has made aggregate
Priority Quarterly Revenue
Share Payments
equal to $20,000,000 pursuant to the Purchase Agreement or (iii) the end of the
Lockup Period (the
“Priority Revenue Sharing Period”). The aggregate Priority Quarterly Revenue Share Payments made
during the
Priority Revenue Sharing
Period shall not exceed $20,000,000. After the Priority Revenue Sharing Period, the Company will continue to make quarterly payments to Investor pursuant to the terms of the Revenue Sharing Agreement described below.
Upon the issuance and sale of the Shares, the Company and Investor will enter into a Stockholders Agreement (the “Stockholders Agreement”). The Stockholders Agreement will contain specific obligations and agreements of Investor as owner of the Shares, including (a) customary standstill restrictions, including restrictions on the acquisition of additional securities of the Company, through the date that is sixty (60) months after the date of the Stockholders Agreement (unless earlier terminated)
,
(b) restrictions on transferring the Shares during the Lockup Period without the consent of the Company, subject to customary exceptions, (c) after the Lockup Period, restrictions on transferring the Shares to (i) any holder of more than 5% of the outstanding shares of the Company’s common stock (after such transfer), (ii) any competitor of the Company or an officer, employee, director or more than 10% holder of a competitor or (iii) specified entities listed in the Stockholders Agreement, (d) the grant by Investor of an irrevocable proxy to the Company whereby Investor appoints the designated proxy holder as proxy and attorney-in-fact, to vote and act on behalf of Investor as such proxy holder deems advisable and in all cases in accordance with the recommendations of the Company’s board of directors on any matters submitted to the Company’s stockholders and (e) for so long as Investor owns more than one percent (1%) of the outstanding stock of the Company, Investor shall not directly or indirectly lend, offer, pledge, sell, contract to sell, sell 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 any shares of the Company’s common stock for period not to exceed 120 days following the completion of any underwritten public offering or private placement of the Company’s equity securities, provided however that all directors and Section 16 officers shall be subject to the same restrictions.
Revenue Sharing Agreement
Concurrently with the Purchase Agreement, the Company and Investor also entered into a Revenue Sharing Agreement
(the “Revenue Sharing Agreement”). Under the Revenue Sharing Agreement,
after the Priority Revenue Sharing Period
(i)
Investor shall make quarterly payments to the Company equal to a percentage
set forth in the Revenue Sharing Agreement
of the
worldwide revenues of Investor and its affiliates, including without limitation the amounts received from the licensing or sale of any products, services or intellectual property rights or received in rent, returns and other distributions from real estate and real
estate investment trusts; and (ii) the Company shall make quarterly payments to Investors of a percentage
set forth in the
Revenue Sharing Agreement
of the Company Japan Revenues, such percentage payable under the Revenue Sharing Agreement is lower than the percentage payable during the Priority Revenue Sharing Period under the Purchase Agreement. The Company’s payment obligations under the Revenue Sharing
Agreement shall start only after the end of its obligations to pay Priority Quarterly Revenue Share Payments under the Purchase Agreement.
Gabriel License Agreement
Concurrently with the Purchase Agreement, the Company and Investor also entered into a Gabriel License Agreement (the “Gabriel License Agreement”) for the marketing and promotion of the Company’s products and services by Investor in Japan. Investor’s sole compensation for the services provided under the Gabriel License Agreement are the payments made to Investor under the Revenue Sharing Agreement.