EXHIBIT 10.1
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SECURITIES PURCHASE AGREEMENT
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AGREEMENT, dated as of April 16, 2007, by and between Network-1
Security Solutions, Inc., a Delaware corporation with principal offices at 000
Xxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000 (the "Company"), and the
Investors signatory hereto (collectively, the "Investors").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to each of the Investors and
each Investor severally and not jointly desires to purchase (i) up to an
aggregate of 3,333,333 shares of common stock, par value $.01 per share (the
"Common Stock") at a purchase price of $1.50 per share (the "Purchase Price"),
and five (5) year warrants to purchase up to an aggregate of 1,666,667 shares of
common stock, at an exercise price of $2.00 per share, on the terms and subject
to the conditions set forth herein. The shares of common stock issuable upon
exercise of the Warrants (as defined below) are collectively referred to herein
as the "Warrant Shares."
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
Issuance of Common Stock and Warrants
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Section 1.1 Agreement to Purchase and Sell. At the closing provided for
in Section 1.2(a), the Company will issue and sell to each Investor and, subject
to the terms and conditions of this Agreement, each Investor will purchase from
the Company, severally and not jointly, (i) the Common Stock, and (ii) the
Warrants in the form of Exhibit A attached hereto, in the amounts opposite such
Investor's name and in consideration for payment by each Investor to the Company
of the Purchase Price as indicated on Schedule 1.1 hereto. The Investors will be
afforded registration rights with respect to the Common Stock and the Warrant
Shares in accordance with the Registration Rights Agreement in the form attached
hereto as Exhibit B.
Section 1.2 The Closing. The closing of the issuance of the Common
Stock and Warrants (the "Closing") shall take place at the offices of Xxxxxxx
Xxxxxx Xxxxxxxxx & Kakoyiannis, P.C., 000 Xxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx
00000, on the date that this Agreement is executed by the parties hereto (the
time and date of the Closing being herein referred to as the "Closing Date"). On
the Closing Date the Company will instruct its transfer agent to deliver to each
of the Investors the certificates for the Common Stock and the Company will
deliver the Warrants to be purchased hereunder in accordance with Schedule 1.1
hereto and the other terms hereof against delivery by each such Investor of a
wire transfer to the Company in accordance with instructions provided by the
Company (or by certified check) in the full amount of the Purchase Price payable
by such Investor.
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ARTICLE II
Representations, Warranties, and Agreements of the Company
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Except for the exceptions set forth on the Disclosure Schedule attached
hereto as Schedule 1.2 and furnished to Investors, the Company represents and
warrants to, and agrees with, the Investors as follows:
Section 2.1 Corporate Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and is qualified to transact business and
is in good standing as a foreign corporation in every jurisdiction in which its
ownership, leasing, licensing or use of property or assets or the conduct of its
business makes such qualification necessary, except in such jurisdictions where
the failure to be so qualified or in good standing would not have a material
adverse effect on the business, results of operations, financial condition or
prospects of the Company. The Company has no subsidiaries except for Network-1
Acquisition Corp. (which does not conduct any business or own any material
assets) and has no investment, whether by way of ownership of stock or other
securities or by loan, advance or otherwise, in any corporation, partnership,
firm, association or other business entity. The Company has all required power
and authority to own its property and to carry on its business as now conducted
and proposed to be conducted.
Section 2.2 Validity of Transaction. The Company has all requisite
power and authority to execute, deliver and perform this Agreement, the
Registration Rights Agreement and the Warrants, and to issue the Common Stock
and Warrants to the Investors. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution, delivery and
performance of this Agreement, the Registration Rights Agreement and the
Warrants and to authorize the issuance and sale of the Common Stock and
Warrants, and upon exercise of the Warrants, to authorize the issuance of the
Warrant Shares to the Investors. The Common Stock and Warrants, when issued in
accordance with the terms of this Agreement, will be validly issued, fully paid,
and non-assessable and will be free and clear of all pledges, liens,
encumbrances and restrictions, other than under applicable federal and state
securities laws. This Agreement, the Registration Rights Agreement and the
Warrants have been duly authorized, executed and delivered by the Company, are
the legal, valid and binding obligations of the Company, and are enforceable as
to the Company in accordance with their respective terms, except as may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws or by legal or equitable principles relating to or limiting
creditors' rights generally or as rights to indemnification may be limited by
applicable securities laws. Except as to filings which may be required under
applicable state securities regulations, no consent, authorization, approval,
order, license, certificate, or permit of or from, or declaration or filing
with, any Federal, state, local or other governmental authority or of any court
or other tribunal is required by the Company in connection with the transactions
contemplated hereby. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company is
a party, or by which any of its properties or assets is bound, is required for
the execution, delivery or performance by the Company of this Agreement, the
Registration Rights Agreement, the Warrants and the issuance of the Warrant
Shares. The execution, delivery, and performance of this Agreement, the
Registration Rights Agreement and the Warrants by the Company will not violate,
result in a breach
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of, conflict with or (with or without the giving of notice or the passage of
time or both) entitle any party to terminate or call a default under any such
contract, agreement, instrument, lease, license, arrangement or understanding,
or violate or result in a breach of any term of the Certificate of Incorporation
or By-laws of the Company, or violate, result in a breach of, or conflict with
any law, rule, regulation, order, judgment or decree binding on the Company or
to which any of its operations, business, properties or assets is subject. The
registration rights granted to the Investors, in accordance with the
Registration Rights Agreement, do not violate any of the terms and conditions of
the registration rights previously granted by the Company to other holders of
the Company's securities or any other agreements to which the Company is a
party. The Warrant Shares issuable upon exercise of the Warrants are duly
authorized, have been reserved for issuance and upon exercise of the Warrants in
accordance with the terms thereof, will be validly issued, fully paid, and
nonassessable, will not have been issued in violation of any preemptive right of
stockholders or rights of first refusal and the Investors, upon exercise, will
have good title to the Warrant Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders agreements and voting
trusts.
Section 2.3 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock, par value $.01 per share. Immediately prior to the Closing, the Company
shall have 19,839,724 shares of Common Stock outstanding and no outstanding
shares of preferred stock. All issued and outstanding shares of Common Stock
have been validly issued and are fully paid and nonassessable and have not been
issued in violation of any Federal or state securities laws. Except for the
obligation of the Company to issue (a) the Warrant Shares upon exercise of the
Warrants, (b) upon the exercise of the options and warrants that are currently
outstanding to purchase an aggregate of 5,664,111 shares of Common Stock
(excluding the options issued under the Company's Stock Option Plan as set forth
in the following clause (c)), (c) upon the exercise of options to purchase
3,917,370 shares of Common Stock issued under the Company's 1996 Amended and
Restated Stock Option Plan (the "Stock Option Plan"), there are not, as of the
date hereof, any outstanding or authorized subscriptions, options, warrants,
calls, rights, commitments or any other agreements obligating the Company to
issue (i) any additional shares of its capital stock or (ii) any securities
convertible into, or exercisable or exchangeable for, or evidencing the right to
subscribe for, any shares of its capital stock except as set forth in the
Disclosure Schedule. Other than the Company's Stock Option Plan, the Company has
not adopted or authorized any plan for the benefit of its officers, employees,
or directors which requires or permits the issuance, sale, purchase, or grant of
any shares of the Company's capital stock, any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for any
shares of the Company's capital stock or any phantom shares or any stock
appreciation rights. The Company is under no obligation (contingent or
otherwise) to purchase or otherwise acquire or retire any shares of its capital
stock.
Section 2.4 Financial Statements. The financial statements of the
Company, including the notes thereto, as they appear in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2006 (the "Financial
Statements"), fairly present, in all material respects, the financial position
and results of operations of the Company at the dates thereof and for the
periods covered thereby. The Financial Statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"), consistently
applied throughout the periods involved. The Company has no material liabilities
or obligations, contingent, direct, indirect or otherwise except (i) as set
forth in the latest balance sheet included in the Financial Statements or the
notes thereto (the date of such balance sheet being referred to as the "Balance
Sheet Date"), and (ii) those incurred in the ordinary course of business since
the Balance Sheet Date.
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Section 2.5 No Undisclosed Liabilities. The Company does not have any
liabilities or obligations of any nature required to be set forth in the
Financial Statements under GAAP, whether or not accrued, contingent or
otherwise, and there is no existing condition, situation or set of circumstances
which may result in such a liability or obligation, except (a) liabilities or
obligations of the Company reflected in its Securities and Exchange Commission
(the "SEC") filings and in the Financial Statements or incurred in the ordinary
course of the Company's business, or (b) liabilities and obligations which are
not, individually or in the aggregate, reasonably expected to have a material
adverse effect on the Company.
Section 2.6 Legal Proceedings. Except as set forth in the Disclosure
Schedule annexed hereto as Schedule 1.2, there are no actions, suits,
proceedings, claims or hearings of any kind or nature existing or pending or, to
the knowledge of the Company, threatened and, to the knowledge of the Company,
no investigations or inquiries, before or by any court, or other governmental
authority, tribunal or instrumentality (or, to the Company's best knowledge, any
state of facts that would give rise thereto), pending or threatened against the
Company, or involving the properties of the Company, that, individually or in
the aggregate as to any matter covered by this Section 2.6, are reasonably
likely to result in any material adverse effect on the Company or that might
adversely affect the transactions or other acts contemplated by this Agreement
or the validity or enforceability of this Agreement.
Section 2.7 SEC Filings. The Company has filed all forms, reports,
statements and other documents required to be filed with (i) the SEC including,
without limitation, (A) all Annual Reports on Form 10-KSB, (B) all Quarterly
Reports on Form 10-QSB, (C) all Reports on Form 8-K, (D) all other reports or
registration statements and (E) all amendments and supplements to all such
reports and registration statements (collectively referred to as the "SEC
Reports") and (ii) any other applicable state securities authorities (all such
forms, reports, statements and other documents in (i) and (ii) of this Section
2.7 being referred to herein, collectively, as the "Reports"). The Reports (i)
were prepared in all material respects in accordance with the requirements of
applicable law (including, with respect to the SEC Reports, the Securities Act
of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as the case may be, and the rules and
regulations of the SEC thereunder applicable to such SEC Reports) and (ii) did
not at the time they were filed contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In addition, since the last annual report
of the Company on Form 10-KSB filed with the SEC on April 11, 2007, there have
been no material events that require disclosure under the Exchange Act.
Section 2.8 Patents and Other Intellectual Property. The Company owns
all right, title and interest in all patents, trademarks or other intellectual
property necessary or material for use in connection with its business as
disclosed in the SEC Reports and which the failure to so have would reasonably
be expected to have a material adverse effect on the Company's assets, business
or financial condition.
Section 2.9 Finder or Broker. Except as set forth in the Disclosure
Schedule, neither the Company nor anyone acting on behalf of the Company has
negotiated with any finder, broker or intermediary or similar person in
connection with the transactions contemplated herein.
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Section 2.10 Taxes. The Company has filed all federal tax returns and
all state and municipal and local tax returns (whether relating to income,
sales, franchise, withholding, real or personal property or other types of
taxes) required to be filed under the laws of the United States and applicable
states, and has paid in full all taxes which have become due pursuant to such
returns or claimed to be due by any taxing authority or otherwise due and owing;
provided, however, that the Company has not paid any tax, assessment, charge,
levy or license fee that it is contesting in good faith and by proper
proceedings and adequate reserves for the accrual of same are maintained if
required by GAAP. The Company believes that each of the tax returns heretofore
filed by the Company correctly and accurately reflects the amount of its tax
liability thereunder. The Company has withheld, collected and paid all levies,
assessments, license fees and taxes to the extent required.
ARTICLE III
Representations, Warranties, and Agreements of the Investors
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Each of the Investors, severally and not jointly, represents and
warrants to, and agrees with, the Company as follows:
Section 3.1 Organization. Such Investor (if not an individual) is duly
organized under the laws of the state of its jurisdiction of organization and
has full power and authority to enter into this Agreement and to consummate the
transactions set forth herein. The address set forth on Schedule 1.1 hereof is
such Investor's true and correct business, residence or domicile address.
Section 3.2 Accredited Investor, Experience, Access to Information,
etc.
(a) Such Investor and, to the knowledge of such Investor, each limited
partner of such Investor in the case of an Investor which is a limited
partnership, and each partner of such Investor in the case of an Investor which
is a general partnership, is an "accredited investor," as that term is defined
in Rule 501 of Regulation D promulgated under the Securities Act;
(b) Such Investor and, to the knowledge of such Investor, each of its
general partners, officers and other affiliates of such Investor and its general
partners, if any, have had substantial experience in investing in private
transactions like this one, are capable of evaluating the merits and risks of an
investment in the Company and understand that an investment in the Common Stock
and Warrants is speculative and involves a high degree of risk and should not be
purchased by anyone who cannot afford the loss of their entire investment. Such
Investor has also carefully considered the Risk Factors set forth in Exhibit C
hereof;
(c) Such Investor acknowledges that it has had a full opportunity to
discuss the business, management and financial affairs of the Company with the
Company's management. Such Investor has reviewed the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2006 as well as additional SEC
Reports of the Company that it deemed appropriate, and any additional requested
documents from the Company and has had a full opportunity to ask questions of,
and receive answers from, the officers of the Company concerning the terms and
conditions of this Agreement, the purchase of the Common Stock and Warrants, the
business, operations, market potential, capitalization, financial condition and
prospects of the Company, and all other matters deemed relevant by the Investor.
Such Investor acknowledges that it has had an opportunity to evaluate all
information regarding the Company as it has deemed necessary or
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desirable in connection with the transactions contemplated by this Agreement,
has independently evaluated the transactions contemplated by this Agreement and
has reached its own decision to enter into this Agreement; and
(d) Such Investor acknowledges that it fully understands the risks of
the Company's litigation with D-Link Corporation and D-Link Systems,
Incorporated pending in the United States District Court for the Eastern
District of Texas (the "D-Link Litigation"). Such Investor has had access to all
publicly available documents pertaining to the D-Link Litigation, a full
opportunity to ask questions of, and receive answers from, officers of the
Company concerning the litigation and such Investor understands and acknowledges
that an adverse outcome of the D-Link Litigation would have a material adverse
effect on the Company. Such Investor has carefully considered the Risk Factors
pertaining to the D-Link Litigation and related matters set forth in Exhibit C.
Section 3.3 Investment Intent. Such Investor is acquiring the Common
Stock and Warrants and the Warrant Shares for its own account for investment and
not with a view to, or for sale in connection with, any public distribution
thereof in violation of the Securities Act. Such Investor understands that none
of the shares of Common Stock and Warrants or the Warrant Shares have been
registered for sale under the Securities Act or qualified under applicable state
securities laws and that the shares of Common Stock, the Warrants and the
Warrant Shares are being offered and sold to such Investor pursuant to one or
more exemptions. Such Investor understands that it must bear the economic risk
of its investment in the Company for an indefinite period of time, as the Common
Stock, the Warrants and the Warrant Shares cannot be sold unless subsequently
registered under the Securities Act and qualified under state securities laws,
unless an exemption from such registration and qualification is available. Such
Investor acknowledges that no public market for the Warrants of the Company
presently exists and none may develop in the future.
Section 3.4 Transfer of Securities. Such Investor will not sell or
otherwise dispose of any shares of Common Stock, Warrants or Warrant Shares
unless (a) a registration statement with respect thereto has become effective
under the Securities Act and such Warrants and Warrant Shares have been
qualified under applicable state securities laws or (b) there is presented to
the Company notice of the proposed transfer and, if it so requests, a legal
opinion reasonably satisfactory to the Company that such registration and
qualification is not required; provided, however, that no such registration or
qualification or opinion of counsel shall be necessary for a transfer by such
Investor (i) to any entity controlled by, or under common control with, such
Investor, (ii) to a shareholder, partner or officer of such Investor, (iii) to a
shareholder, partner or officer of the general partner of such Investor, (iv) to
the spouse, lineal descendants, estate or a trust or for the benefit of any of
the foregoing or (v) by operation of law, provided the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he were such
Investor. Such Investor consents that any transfer agent of the Company may be
instructed not to transfer any Common Stock, Warrants or Warrant Shares unless
it receives satisfactory evidence of compliance with the foregoing provisions,
and that there may be endorsed upon any certificate (or other instrument)
representing such securities (and any certificates issued in substitution
therefor) the following legend calling attention to the foregoing restrictions
on transferability of such shares, stating in substance:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH
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REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SUCH ACT AND
LAWS, IF APPLICABLE. THE COMPANY, PRIOR TO PERMITTING A
TRANSFER OF THESE SECURITIES, MAY REQUIRE AN OPINION OF
COUNSEL OR OTHER ASSURANCES SATISFACTORY TO IT AS TO
COMPLIANCE WITH OR EXEMPTION FROM SUCH ACT AND LAWS"
The Company shall, upon the request of any holder of Common Stock, Warrants or
Warrant Shares and the surrender of such securities, issue a new stock
certificate and Warrants without such legend if (A) the Warrants or stock
evidenced by such certificate has been effectively registered under the
Securities Act and qualified under any applicable state securities law and sold
by the holder thereof in accordance with such registration and qualification, or
(B) such holder shall have delivered to the Company a legal opinion reasonably
satisfactory to the Company to the effect that the restrictions set forth herein
are no longer required or necessary under the Securities Act or any applicable
state law.
Section 3.5 Authorization. All actions on the part of such Investor
necessary for the authorization, execution, delivery and performance by such
Investor of this Agreement have been taken. This Agreement has been duly
authorized, executed and delivered by such Investor, is the legal, valid and
binding obligations of such Investor, and are enforceable as to such Investor in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws or by
legal or equitable principles relating to or limiting creditors' rights
generally or as rights to indemnification may be limited by applicable
securities laws.
Section 3.6 Finder or Broker. Neither such Investor nor any person
acting on behalf of such Investor has negotiated with any finder, broker,
intermediary or similar person in connection with the transactions contemplated
herein.
ARTICLE IV
Indemnification
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Section 4.1 Indemnification by the Company. The Company agrees to
indemnify and hold harmless the Investors, their officers and directors,
employees, agents, representatives and affiliates and each other person, if any,
who controls any thereof, against any loss, liability, claim, damage and expense
whatsoever (including, but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any untruth, inaccuracy, or breach of any of the representations,
warranties, covenants or agreements of the Company contained in this Agreement
or in any other document furnished by the Company to any of the foregoing in
connection with this transaction.
Section 4.2 Indemnification by Investors. (a) Each Investor, severally
and not jointly, agrees to indemnify and hold harmless the Company, its officers
and directors, employees, agents and representatives and affiliates and each
other person, if any, who controls any thereof, against any loss, liability,
claim, damage and expense whatsoever (including, but not limited to, any and all
expenses whatsoever reasonably incurred in investigating, preparing or defending
against any
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litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any untruth, inaccuracy, or breach of any of the representations,
warranties, covenants or agreements of such Investor contained in this Agreement
or in any other document furnished by such Investor to any of the foregoing in
connection with this transaction.
Section 4.3 Notices of Claims. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in Section 4.1 and 4.2, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under Article
IV hereof, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an indemnified party, the indemnifying party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if the indemnified party reasonably
believes it is advisable for it to be represented by separate counsel because
there exists a conflict of interest between its interests and those of the
indemnifying party with respect to such claim, or there exist defenses available
to such indemnified party which may not be available to the indemnifying party,
or if the indemnifying party shall fail to assume responsibility for such
defense, the indemnified party may retain counsel satisfactory to it and the
indemnifying party shall pay all fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement of any action or
proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation or which requires action
other than the payment of money by the indemnifying party. Each indemnified
party shall furnish such information regarding itself or the claim in question
as an indemnifying party may reasonably request in writing and as shall be
reasonably requested in connection with the defense of such claim and litigation
resulting therefrom.
Section 4.4 Contribution. If the indemnification provided for in
Section 4.1 and 4.2 shall for any reason be held by a court of competent
jurisdiction to be unavailable to an indemnified party in respect of any loss,
claim, damage or liability, or any action in respect thereof, then, in lieu of
the amount paid or payable under Section 4.1 or 4.2 hereof, the indemnified
party and the indemnifying party shall contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating the same), (a) in such proportion as
is appropriate to reflect the relative fault of the Company and the Investors in
connection with the statement or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable consideration (the relative fault of the Company and such Investors to
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Investors
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission) or (b) if the
allocation provided by clause (a) above is not permitted by applicable law, in
such proportion as shall
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be appropriate to reflect the relative benefits received by the Company and the
Investors from the offering of the securities. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. In addition, no person shall be obligated to
contribute hereunder any amounts in payment of any settlement of any action or
claim effected without such person's consent, which consent shall not be
unreasonably withheld or delayed.
ARTICLE V
Additional Provisions
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Section 5.1 Legal Opinion. Xxxxxxx Xxxxxx Xxxxxxxxx & Kakoyiannis P.C.,
counsel to the Company, will deliver at the Closing a legal opinion covering the
matters set forth in Exhibit D.
Section 5.2 Communications. All notices or other communications
hereunder shall be in writing and shall be given by registered or certified mail
(postage prepaid and return receipt requested), by an overnight courier service
which obtains a receipt to evidence delivery or by telex or facsimile
transmission (provided that written confirmation of receipt is provided),
addressed as set forth below:
If to the Company:
Network-1 Security Solutions, Inc.
000 Xxxx Xxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx X. Xxxxxxxx, Chairman and Chief Executive
Officer
With a copy to:
Xxxxxxx Xxxxxx Xxxxxxxxx & Kakoyiannis P.C.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxx Xxxxxxxx, Esq.
If to the Investors, at their respective addresses as set forth on
Schedule 1.1 hereto, or such other address as any party may designate to the
other in accordance with the aforesaid procedure. As to Hound Partners, L.P., a
copy of such notice shall be sent to its counsel, Akin Gump Xxxxxxx Xxxxx & Xxxx
LLP, Attention: Xxxxxxx X. Xxxxxxxxx, Esq. All notices and other communications
sent by overnight courier service shall be deemed to have been given as of the
next business day after delivery thereof to such courier service, those given by
telex or facsimile transmission shall be deemed given when sent, and all notices
and other communications sent by mail shall be deemed given as of the third
business day after the date of deposit in the United States mail.
Section 5.3 Successors and Assigns. The Company may not sell, assign,
transfer or otherwise convey any of its rights or delegate any of its duties
under this Agreement, except to a corporation which has succeeded to
substantially all of the business and assets of the Company and has assumed in
writing its obligations under this Agreement, and this Agreement shall be
binding on the Company and such successor. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the Investors and their
successors and assigns.
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Section 5.4 Amendments and Waivers. Neither this Agreement nor any term
hereof may be changed or waived (either generally or in a particular instance
and either retroactively or prospectively) absent the written consent of the
Investors owning a majority-in-interest of the securities purchased pursuant to
this Agreement.
Section 5.5 Survival of Representations, etc. The representations,
warranties, covenants and agreements made herein or in any certificate or
document executed in connection herewith shall survive the Closing for a period
of 12 months and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
Section 5.6 Delays or Omissions; Waiver. No delay or omission to
exercise any right, power or remedy accruing to either the Company or the
Investors upon any breach or default by the other under this Agreement shall
impair any such right, power or remedy nor shall it be construed to be a waiver
of any such breach or default, or any acquiescence therein or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring.
Section 5.7 Entire Agreement. This Agreement (together with the
exhibits and schedules attached hereto) contains the entire understanding of the
parties with respect to their respective subject matter and all prior
negotiations, discussions, commitments and understandings heretofore had between
them with respect thereto are merged herein and therein.
Section 5.8 Expenses. Each party hereto shall pay its own expenses
(including legal fees) in connection with this Agreement and the transactions
contemplated hereby.
Section 5.9 Counterparts; Governing Law. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, without giving effect to conflict of laws.
Section 5.10 Further Actions. At any time and from time to time, each
party agrees, without further consideration, to take such actions and to execute
and deliver such documents as may be reasonably necessary to effectuate the
purposes of this Agreement.
Section 5.11 Gender. As the context so requires, terms herein in the
masculine form shall be construed to include the feminine form as well as
neuter.
10
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
herein above set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Xxxxx X. Xxxxxxxx
-------------------------------------------
Name: Xxxxx X. Xxxxxxxx
Title: Chairman and Chief Executive Officer
INVESTORS:
HOUND PARTNERS, L.P.
By: /s/ Xxxxxxxx Xxxxxxxx
-------------------------------------------
Name: Xxxxxxxx Xxxxxxxx
Title: Managing Member of X.X.
XXXXXX PARTNERS, L.P.
By: /s/ Xxxxxx X. Xxxxx
-------------------------------------------
Name: Xxxxxx X. Xxxxx
Title: General Partner
AURELIAN PARTNERS, L.P.
By: /s/ Xxxxx X. Xxxxx
-------------------------------------------
Name: Xxxxx X. Xxxxx
Title: General Partner
XXXXX X. XXXXX, SEP-XXX, XXXXXXX XXXXXX & CO.
CUSTODIAN
By: /s/ Xxxxx X. Xxxxx
-------------------------------------------
Xxxxx X. Xxxxx
11
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
/s/ Xxxxxx Xxxxxxxxx
-----------------------------------------------
XXXXXX XXXXXXXXX
XXXXXXXXX LIMITED PARTNERS, L.P.
By: /s/ Xxxx Xxxxxxxxx
-------------------------------------------
Name: Xxxx Xxxxxxxxx
Title: Managing Member, PRZ Holdings LLC,
General Partner
XXXXXXXXX QUALIFIED PARTNERS, L.P.
By: /s/ Xxxx Xxxxxxxxx
-------------------------------------------
Name: Xxxx Xxxxxxxxx
Title: Managing Member PRZ Holdings LLC,
General Partner
XXXXX OPPORTUNITY FUND, L.P.
By: /s/ X. Xxxxxx Xxxxx XX
-------------------------------------------
Name: X. Xxxxxx Xxxxx XX
Title: General Partner
XXX FUND, LTD.
By: /s/ X. Xxxxxx Xxxxx XX
-------------------------------------------
Name: X. Xxxxxx Xxxxx XX
Title: General Partner
12
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
herein above set forth.
HOUND PARTNERS OFFSHORE FUND, L.P.
By: /s/ Xxxxxxxx Xxxxxxxx
-------------------------------------------
Name: Xxxxxxxx Xxxxxxxx
Title: General Partner of the Managing
Member
13
SCHEDULES AND EXHIBITS
----------------------
Schedule1.1 Investors, Number of Common Stock, Number of Warrants and
Purchase Price
Schedule 1.2 Disclosure Schedule
Exhibit A: Form of Warrant
Exhibit B: Risk Factors
Exhibit C Registration Rights Agreement
14
SCHEDULE 1.1
Number of
Name and Address Shares of Number of Purchase
of Investor Common Stock Warrants Price
----------- ------------ -------- -----
Hound Partners, L.P. 1,081,817 540,909 $1,622,725
000 Xxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Hound Partners Offshore Fund, L.P. 1,084,850 542,425 $1,627,275
x/x Xxxxx Xxxx Xxxxxxxx (Xxxxxx
Xxxxxxx) Limited Xxxxxxx Xxxxxx Xxxx,
Xxxxxxxx Xxx Xxxx Xxx Xxxx, X.X. Xxx
00000 SMB Grand Cayman, Cayman Islands
Xxxxxx Partners, L.P. 333,333 166,667 $500,000
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Aurelian Partners, L.P. 333,333 166,667 $500,000
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Xxxxx X. Xxxxx SEP-XXX, 66,667 33,333 $100,000
Xxxxxxx Xxxxxx & Co. Custodian
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Xxxxxx Xxxxxxxxx 133,333 66,667 $200,000
000 Xxxxx Xxxx Xxxx
Xxxx Xxxxxx Xxxxxx, Xxx Xxxx 00000
Xxxxxxxxx Limited Partners, L.P. 66,667 33,333 $100,000
00 Xxxxxxxxxxxx Xxxxxx
Xxxxxxxx, Xxx Xxxx 00000
Xxxxxxxxx Qualified Partners, L.P. 66,667 33,333 $100,000
00 Xxxxxxxxxxxx Xxxxxx
Xxxxxxxx, Xxx Xxxx 00000
Xxxxx Opportunity Fund, L.P. 141,666 70,833 $212,500
00 Xxxxxxxxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
XXX Fund, Ltd. 25,000 12,500 $ 37,500
00 Xxxxxxxxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
---------- --------- ----------
Total 3,333,333 1,666,667 $5,000,000
15
SCHEDULE 1.2
DISCLOSURE SCHEDULE
This Disclosure Schedule (this "Schedule") is attached to and forms a part of
the Securities Purchase Agreement, dated as of April 16, 2007 (the "Securities
Purchase Agreement"), by and among Network-1 Security Solutions, Inc., a
Delaware corporation (the "Company"), and the investors named on Schedule 1.1
thereto. Section references contained in this Schedule are for reference
purposes only and correspond to the same numbered sections of the Securities
Purchase Agreement, and the disclosure of any matter in any such section of this
Schedule is deemed to be disclosed in response to or in connection with the
other provisions of the Securities Purchase Agreement to the extent that such
disclosure relates or is responsive to such other provisions of the Securities
Purchase Agreement. Capitalized terms used and not defined in this Schedule have
the meanings ascribed to them in the Securities Purchase Agreement.
2.3 Capitalization.
o In accordance with Section 6(b) of the Employment Agreement, dated
February 28, 2007, between the Company and Xxxxx X. Xxxxxxxx, Chairman and Chief
Executive Officer, Xx. Xxxxxxxx has certain limited anti-dilution rights which
provide that if at anytime during the period ended December 31, 2008, in the
event that the Company completes a financing (either a single transaction or
series of transactions) consisting of the issuance of common stock or any other
securities convertible or exercisable into common stock, Xx. Xxxxxxxx shall
receive (at the closing of such financing) from the Company, at the same price
as the securities issued in the financing, such number of additional options to
purchase Common Stock so that he maintains the same derivative ownership
percentage (21.47%) of the Company (based upon options and warrants owned by Xx.
Xxxxxxxx and CMH Capital Management Corp. ("CMH"), an affiliated entity, and
exclusive of shares of Common Stock owned by him or CMH) as he or CMH owned at
the time of execution of his employment agreement; provided, that, the
aforementioned anti-dilution protection shall be afforded to Xx. Xxxxxxxx up to
maximum future financing(s) of $2.5 million. Accordingly, in connection with the
Closing pursuant to the Securities Purchase Agreement, Xx. Xxxxxxxx will be
issued a 5 year option to purchase 732,709 shares of Common Stock at an exercise
price of $1.67 per share.
2.6. Legal Proceedings.
D-LINK LITIGATION
On August 10, 2005, the Company commenced patent litigation against
D-Link Corporation and D-Link Systems, Incorporated in the United States
District Court for the Eastern District of Texas, Tyler division (Civil Action
No. 6:05W291), for infringement of the Company's remote power patent (U.S.
Patent No. 6,218,930) (the "Remote Power Patent"). The complaint seeks, among
other things, a judgment that the Remote Power Patent is enforceable and has
been infringed by the defendants. The Company also seeks a permanent injunction
restraining the defendants from continued infringement, or active inducement of
infringement by others, of the
16
Company's Remote Power Patent. On February 27, 2006, the D-Link defendants filed
answers and asserted counterclaims. In their answers, the D-Link defendants
asserted that they did not infringe any valid claim of the Remote Power Patent,
and further asserted that the asserted patent claims are invalid and/or
unenforceable. In addition to these defenses, the D-Link defendants also
asserted counterclaims for, among other things, non-infringement, invalidity and
unenforceability of the Remote Power Patent. In February 2006, all outstanding
motions by the D-Link defendants to dismiss or transfer the case to the Eastern
District of Texas were denied. In March 2006, the D-Link defendants filed a writ
of mandamus to overturn the Court's decision to maintain the action in the
Eastern District of Texas. On June 2, 2006, the court issued an order denying
the D-Link defendants' request for a writ of mandamus.
In November, 2006, the Court issued its ruling on the "Xxxxxxx
hearing", a special proceeding under U.S. patent law, where both sides present
their arguments to the court as to how they believe certain claim terms
pertaining to the patent at issue in the lawsuit should be interpreted. In March
2007, the Company and the D-Link Defendants made motions for summary judgment. A
trial date is presently scheduled for May 2007. In the event the Court
determines that the Company's Remote Power Patent was not valid or enforceable
and/or that the defendants did not infringe, any such determination would have a
material adverse effect on the Company.
POWERDSINE SETTLEMENT
On November 16, 2005, the Company entered into a Settlement Agreement
with PowerDsine, Inc. (NASDAQ: PDSN) and PowerDsine Ltd. (collectively,
"PowerDsine") which dismissed, with prejudice, patent litigation brought by
PowerDsine against the Company in March 2004 in the United States District Court
for the Southern District of New York that sought a declaratory judgment that
the Remote Power Patent (U.S. Patent No. 6,218,930) was invalid and not
infringed by PowerDsine and/or its customers.
Under the terms of the Settlement Agreement, the Company agreed that it
will not initiate litigation against PowerDsine for its sale of Power over
Ethernet (XxX) integrated circuits. In addition, the Company agreed that it will
not seek damages for infringement from customers that incorporate PowerDsine
integrated circuit products in XxX capable Ethernet switches manufactured on or
before April 30, 2006. PowerDsine has agreed that it will not initiate, assist
or cooperate in any legal action relating to the Remote Power Patent. The
Company also agreed that we will not initiate litigation against PowerDsine or
its customers for infringement of the Remote Power Patent arising from the
manufacture and sale of PowerDsine Midspan products for three years following
the dismissal date. Following such three year period, the Company may seek
damages for infringement of the Remote Power Patent from PowerDsine or its
customers with respect to the purchase and sale of Midspan products beginning 90
days following the dismissal date of the litigation. The benefits afforded to
PowerDsine under the Settlement Agreement will cease in the event PowerDsine
institutes, assists or cooperates in any legal proceeding related to the Remote
Power Patent adverse to us (unless otherwise required by law to do so) and
PowerDsine customers will also forfeit benefits under the Settlement Agreement
if they engage in similar action.
No licenses to use the technologies covered by the Remote Power Patent
were granted to PowerDsine or its customers under the terms of the settlement.
The Settlement Agreement further provides that PowerDsine is obligated to
provide each of its customers with written notice of the
17
settlement which notice shall disclose that no license for the Remote Power
Patent has been provided to PowerDsine's customers and that in order to combine,
modify or integrate any PowerDsine product with or into any other device or
software, PowerDsine's customers may need to receive patent license(s) for such
third party patents which is the customer's responsibility. For the full text of
the Company's Settlement Agreement with PowerDsine, see Exhibit 10.1 of the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 17, 2005.
2.8 Patents and Other Intellectual Property.
On November 18, 2003, the Company entered into an agreement (the
"Agreement") with Merlot Communications, Inc. ("Merlot"), a broadband
communications solutions provider, pursuant to which the Company acquired six
patents (the "Patent Portfolio") relating to various telecommunications and data
networking technologies from Merlot, for a purchase price of $100,000 and
contingent future payments equal to 20% of the net income (as defined in the
Agreement) of the Company from the sale or licensing of the Patents after the
Company achieves $4.0 million of net income for each patent comprising the
Patent Portfolio ("Future Contingent Payments"). On January 18, 2005, the
Company and Merlot entered into an amendment to the Agreement (the "Amendment")
pursuant to which the Company paid $500,000 to Merlot in consideration for the
restructuring of the Future Contingent Payments to Merlot from the licensing or
sale of the Patent Portfolio. The Amendment provides for future contingent
payments by the Company to Merlot of $1.0 million upon achievement of $25
million of Net Royalties (as defined), an additional $1.0 million upon
achievement of $50 million of Net Royalties and an additional $500,000 upon
achievement of $62.5 million of Net Royalties from licensing or sale of the
patents acquired from Merlot.
2.9 Finder or Broker.
In connection with the Closing, Pali Capital, Inc. and Brimberg & Co.,
L.P. will receive placement agent fees from the Company in the amount of 5.5% of
the gross proceeds of the securities sold at the Closing and 5 year common stock
purchase warrants to purchase an aggregate of 360,000 shares of the Company's
common stock (240,000 shares at an exercise price of $1.50 per share and 120,000
shares at an exercise price of $2.00 per share). The shares underlying the
placement agent warrants shall be registered for resale in the Registration
Statement filed with respect to the securities sold to the Investors at the
Closing.
18
EXHIBIT A
FORM OF WARRANT
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED
IN VIOLATION OF SUCH ACT OR LAWS, THE RULES AND REGULATIONS THEREUNDER OR THE
PROVISIONS
OF THIS WARRANT CERTIFICATE
April __, 2007
WARRANTS TO PURCHASE AN AGGREGATE OF ______ SHARES
OF COMMON STOCK OF
NETWORK-1 SECURITY SOLUTIONS, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
ISSUED TO
-------------------------
DATED: April __, 2007
THIS IS TO CERTIFY that, for value received, _________________ or its
registered assigns (herein collectively referred to as the "Warrantholder"), is
entitled to the number of Warrants (together with any subsequent Warrants issued
pursuant to the terms hereof, the "Warrants") set forth above, each of which
represents the right, upon the due exercise hereof, at any time commencing on
the date hereof (the "Commencement Date") and ending on the fifth anniversary of
the Commencement Date (the "Expiration Date"), to purchase from Network-1
Security Solutions, Inc., a Delaware corporation (the "Company"), one fully paid
and nonassessable share, free from tax liens and charges, of common stock, par
value $.01 per share (the "Common Stock"), of the Company upon surrender hereof,
with the form of election to purchase included herein (the "Election to
Purchase") completed and duly executed, at the office of the Company, and upon
simultaneous payment therefor of an exercise price per share equal to the
Purchase Price (as defined in Section 1 below) in cash payable to the order of
the Company. The number of shares of Common Stock issuable upon exercise of the
Warrants (individually, a "Share" and collectively, the "Shares") and the
Purchase Price therefor are subject to adjustment as provided herein.
1
1. Purchase Price
The purchase price for each of the Shares purchasable hereunder (the
"Purchase Price") shall be equal to $2.00 per Share, subject to adjustment as
hereinafter described.
2. Definition of Market Price
Unless otherwise provided herein, for purposes of any computations made
hereunder, "Market Price" per share of Common Stock on any date shall be: (i) if
the Common Stock is listed or admitted for trading on any national securities
exchange, the last reported sales price as reported on such national securities
exchange; (ii) if the Common Stock is not listed or admitted for trading on any
national securities exchange, the average of the last reported closing bid and
asked quotation for the Common Stock as reported on the Nasdaq Stock Market's
National Market ("NNM") or Nasdaq Stock Market's Small Cap Market ("NSM") or a
similar service if NNM or NSM are not reporting such information; (iii) if the
Common Stock is not listed or admitted for trading on any national securities
exchange, NNM or NSM or a similar service, the average of the last reported bid
and asked quotation for the Common Stock as quoted by a market maker in the
Common Stock (or if there is more than one market maker, the bid and asked
quotation shall be obtained from two market makers and the average of the lowest
bid and highest asked quotation shall be the "Market Price"); or (iv) if the
Common Stock is not listed or admitted for trading on any national securities
exchange or NNM or quoted by NSM and there is no market maker in the Common
Stock, the fair market value of such shares as determined in good faith by the
Board of Directors of the Company.
3. Transfer
The Warrants may be transferred, sold or assigned in whole or in part,
subject to the provisions of the Securities Act of 1933, as amended. Concurrent
with any transfer of the Warrants, the Warrantholder shall notify the Company of
such transfer, indicating the circumstances of the transfer and, upon request,
furnish the Company with an opinion of its counsel, in form and substance
reasonably satisfactory to counsel for the Company, to the effect that the
proposed transfer may be made without registration under the Securities Act or
qualification under any applicable state securities laws; provided, however, no
legal opinion shall be required if the transferee is an affiliate, stockholder
or limited partner of the Warrantholder. Transfer of the Warrants shall be made
by delivery of the warrant certificate accompanied by a duly executed notice of
assignment, in the form annexed hereto. In the event of the transfer of less
than all of the Warrants, a new warrant certificate shall be issued to the
Warrantholder for the remaining number of Warrants not transferred.
4. Issuance of Shares
Subject to the restrictions set forth in Section 5 below, upon
surrender of the Warrants and payment of the Purchase Price as aforesaid, the
Company shall issue and deliver with all reasonable dispatch the certificate(s)
for the Shares to or upon the written order of the Warrantholder and in such
name or names as the Warrantholder may designate. Such certificate(s) shall
represent the number of Shares issuable upon the exercise of the Warrants so
surrendered, together with a cash amount in respect of any fraction of a Share
otherwise issuable upon such exercise.
2
Certificates representing the Shares shall be deemed to have been
issued and the person so designated to be named therein shall be deemed to have
become a holder of record of such Shares as of the date of the surrender of the
Warrants and payment of the Purchase Price as aforesaid, notwithstanding that
the transfer books for the Shares or other classes of stock purchasable upon the
exercise of the Warrants shall then be closed or the certificate(s) for the
Shares in respect of which the Warrants is then exercised shall not then have
been actually delivered to the Warrantholder. As soon as practicable after each
such exercise of the Warrants, the Company shall issue and deliver the
certificate(s) for the Shares issuable upon such exercise, registered as
requested. The Warrants shall be exercisable, at the election of the registered
holder hereof, either as an entirety or from time to time for part of the number
of Shares specified herein, but in no event shall fractional Shares be issued
with regard to the exercise of the Warrants. In the event that only a portion of
the Warrants are exercised at any time prior to the close of business on the
Expiration Date, a new warrant certificate shall be issued to the Warrantholder
for the remaining number of Shares purchasable pursuant hereto.
Prior to due presentment for registration of transfer of the Warrants,
the Company shall deem and treat the Warrantholder as the absolute owner of the
Warrants (notwithstanding any notation of ownership or other writing on this
warrant certificate made by anyone other than the Company) for the purpose of
any exercise hereof or any distribution to the Warrantholder and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
5. Payment of Expenses, Taxes, etc. upon Exercise
The Company shall pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Shares issuable upon the exercise of the
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any certificates for Shares in a name other than that of
the Warrantholder upon the exercise of the Warrants, and in such case the
Company shall not be required to issue or deliver any certificates for Shares
until or unless the person or persons requesting the issuance have paid to the
Company the amount of such tax or have established to the Company's satisfaction
that such tax has been paid or is not required to be paid.
6. Lost, Stolen or Mutilated Warrant Certificate
In case this warrant certificate shall be mutilated, lost, stolen or
destroyed, the Company shall issue and deliver, in exchange and substitution for
and upon cancellation of the mutilated warrant certificate, or in lieu of and
substitution for the warrant certificate lost, stolen or destroyed, a new
warrant certificate of like tenor and representing an equivalent number of
Shares purchasable upon exercise, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction of such warrant
certificate and reasonable indemnity, if requested, also reasonably satisfactory
to the Company. Upon providing an appropriate indemnification, no bond or other
security shall be required from the original Warrantholder in connection with
the replacement by the Company of a lost, stolen or mutilated warrant
certificate.
3
7. Covenants of Company
(a) The Company shall at all times through the Expiration Date reserve
and keep available, out of its aggregate authorized but unissued shares of
Common Stock, the number of Shares deliverable upon the exercise of the
Warrants.
(b) Before taking any action which would cause an adjustment pursuant
to the terms set forth herein reducing the portion of the Purchase Price
attributable to the Shares below the then par value (if any) of such Shares, the
Company shall take any corporate action which may, in the opinion of its counsel
(which may be counsel regularly engaged by the Company), be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
Shares at the Purchase Price as so adjusted.
(c) The Company covenants that all Shares issued upon exercise of the
Warrants shall, upon issuance in accordance with the terms hereof, be fully paid
and nonassessable and free from all pre-emptive rights and taxes, liens,
encumbrances, charges and security interests created by the Company with respect
to the issuance and holding thereof.
8. Rights Upon Expiration
Unless the Warrants are surrendered and payment made for the Shares as
herein provided before the close of business on the Expiration Date, this
warrant certificate will become wholly void and all rights evidenced hereby will
terminate after such time.
9. Exchange of Warrant Certificate
Subject to the provisions of Section 3 above, this warrant certificate
may be exchanged for a number of warrant certificates of the same tenor as this
warrant certificate for the purchase in the aggregate of the same number of
Shares of the Company as are purchasable upon the exercise of this warrant
certificate, upon surrender hereof at the office of the Company with written
instructions as to the denominations of the warrant certificates to be issued in
exchange.
10. Adjustment for Certain Events
(a) In case the Company shall at any time after the date the Warrants
are first issued (i) declare a dividend on the Common Stock payable in shares of
the Company's capital stock (whether in shares of Common Stock or of capital
stock of any other class), (ii) subdivide the outstanding Common Stock, (iii)
reverse split the outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of the Company's capital stock in a reclassification of
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such subdivision, reverse split or
reclassification, and/or the number and kind of shares of capital stock issuable
upon exercise of the Warrants on such date, shall be proportionately adjusted so
that the holder of any Warrant exercised after such time shall be entitled to
receive the aggregate number and kind of securities which, if such Warrant had
been exercised immediately prior to such date, such holder would have owned upon
4
such exercise and been entitled to receive by virtue of such dividend,
subdivision, reverse split or reclassification. Any such adjustment shall become
effective immediately after the record date of such dividend or the effective
date of such subdivision, reverse split or reclassification made successively
whenever any event listed above shall occur.
(b) In case the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness or assets (other than cash
dividends or cash distributions payable out of earnings, consolidated earnings,
if the Company shall have one or more subsidiaries, or earned surplus, or
dividends payable in Common Stock for which adjustment is made under Section
10(a) above) or rights, options or warrants to subscribe for or purchase Common
Stock, then, in each case, the Purchase Price per Share to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, of which the numerator
shall be the current Market Price for a share of Common Stock on such record
date less the fair market value of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights, options or
warrants applicable to one share of Common Stock, and of which the denominator
shall be the current Market Price for a share of Common Stock. In the event that
the Company and the Warrantholder cannot agree as to such fair market value,
such determination of fair market value shall be made by an appraiser who shall
be mutually selected by the Company and the Warrantholder, and the reasonable
costs of such appraiser shall be borne by the Company. Any such adjustment shall
become effective immediately after the record date for such distribution and
shall be made successively whenever such a record date is fixed, and in the
event that such distribution is not so made, the Purchase Price shall again be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) No adjustment in the Purchase Price shall be required unless such
adjustment would require a decrease of at least one cent ($0.01) in such price;
provided, however, that any adjustment which by reason of this Section 10(c) is
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 10 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be,
but in no event shall the Company be obligated to issue fractional shares of
Common Stock or fractional portions of any securities upon the exercise of the
Warrants.
(d) In the event that at any time, as a result of an adjustment made
pursuant to Section 10 hereof, the holder of any Warrant thereafter exercised
shall become entitled to receive any shares of capital stock or warrants or
other securities of the Company other than the Shares, thereafter the number of
such other shares of capital stock or warrants or other securities so receivable
upon exercise of this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Shares contained in this Section 10, and the provisions of
this warrant certificate with respect to the Shares shall apply, to the extent
applicable, on like terms to any such other shares of capital stock or warrants
or other securities.
(e) Upon each adjustment of the Purchase Price as a result of
calculations made in this Section 10, each Warrant outstanding immediately prior
to the making of such adjustment shall
5
thereafter evidence the right to purchase, at the adjusted Purchase Price, that
number of Shares (calculated to the nearest hundredth), obtained by (i)
multiplying the number of Shares purchasable upon exercise of a Warrant
immediately prior to such adjustment of the Purchase Price by the Purchase Price
in effect immediately prior to such adjustment and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
(f) In case of any capital reorganization of the Company or of any
reclassification of the Common Stock (other than a change in par value or from a
specified par value to no par value or from no par value to a specified par
value or as a result of subdivision or combination) or in case of the
consolidation of the Company with, or the merger of the Company into, any other
corporation (other than a consolidation or merger in which the Company is the
continuing corporation) or of the sale of the properties and assets of the
Company as, or substantially as, an entirety, each Warrant shall, after such
reorganization, reclassification, consolidation, merger or sale, be exercisable,
upon the terms and conditions specified herein, for the number of shares of
Common Stock or other capital stock or warrants or other securities or property
to which a holder of the number of shares of Common Stock purchasable (at the
time of such reorganization, reclassification, consolidation, merger or sale)
upon exercise of such Warrant would have been entitled upon such reorganization,
reclassification, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Section 10(f) with respect to the
rights and interests thereafter of the registered holders of all Warrants shall
be appropriately adjusted so as to be applicable, as nearly as may reasonably
be, to any shares of Common Stock or other capital stock or warrants or other
securities or property thereafter deliverable on the exercise of the Warrants.
The subdivision, reverse split or combination of shares of Common Stock at any
time outstanding into a greater or lesser number of shares shall not be deemed
to be a reclassification of the Common Stock for the purposes of this Section
10(f).
(g) In any case in which this Section 10 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event issuing to the Warrantholder, if such Warrantholder exercised any Warrant
after such record date, shares of capital stock or warrant or other securities
of the Company, if any, issuable upon such exercise over and above the Shares
issuable, on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to the holder a due xxxx or
other appropriate instrument evidencing such holder's right to receive such
shares of capital stock or warrants or other securities upon the occurrence of
the event requiring such adjustment.
(h) The Shares and any other shares of capital stock or warrants or
other securities now or hereafter receivable upon exercise of this Warrant shall
be entitled to registration under the Securities Act of 1933 pursuant to the
terms of the Registration Rights Agreement attached to the Purchase Agreement as
Exhibit C thereto.
11. Fractional Shares
Upon exercise of the Warrants the Company shall not be required to
issue fractional shares of Common Stock or other capital stock. In lieu of such
fractional shares, the Warrantholder shall receive an amount in cash equal to
the same fraction of the (i) current Market Price of one whole Share if clause
(i), (ii) or (iii) in the definition of Market Price in Section 2 above is
applicable
6
or (ii) book value of one whole Share as reported in the Company's most recent
audited financial statements if clause (iv) in the definition of Market Price in
Section 2 above is applicable. All calculations under this Section 11 shall be
made to the nearest cent.
12. Securities Act Legend
The Warrantholder shall not be entitled to any rights of a stockholder
of the Company with respect to any Shares purchasable upon the exercise hereof,
including voting, dividend or dissolution rights, until such Shares have been
paid for in full. As soon as practicable after such exercise, the Company shall
deliver a certificate or certificates for the securities issuable upon such
exercise, all of which shall be fully paid and nonassessable, to the person or
persons entitled to receive the same; provided, however, that, if applicable,
such certificate or certificates delivered to the holder of the surrendered
Warrant shall bear a legend reading substantially as follows:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SUCH ACT
AND LAWS, IF APPLICABLE. THE COMPANY, PRIOR TO PERMITTING A
TRANSFER OF THESE SECURITIES, MAY REQUIRE AN OPINION OF
COUNSEL OR OTHER ASSURANCES SATISFACTORY TO IT AS TO
COMPLIANCE WITH OR EXEMPTION FROM SUCH ACT AND LAWS."
13. Notice of Adjustment
(a) Upon any adjustment of the Purchase Price, the number of Shares
issuable, or the securities or other property deliverable, upon exercise of this
Warrant, pursuant to Section 10 above, the Company, within 30 calendar days
thereafter, shall have on file for inspection by the Warrantholder a certificate
of the Board of Directors of the Company setting forth the Purchase Price after
such adjustment, the method of calculation thereof in reasonable detail, the
facts upon which such calculations were based and the number of Shares issuable,
or the securities or other property deliverable, upon exercise of the Warrants
after such adjustment in the Purchase Price, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein, and
(ii) send a copy of such certificate to the Warrantholder.
(b) In case:
(i) the Company shall authorize the issuance to any holders of Common
Stock of rights, options or warrants to subscribe for or purchase capital stock
of the Company or of any other subscription rights, options or warrants; or
(ii) the Company shall authorize the payment of cash or stock dividends
to any holders of Common Stock, or other outstanding securities of the Company,
or the distribution to
7
any holders of Common Stock, or other outstanding securities of the Company, of
evidences of its indebtedness or assets; or
(iii) of any consolidation or merger to which the Company is a party or
the conveyance or transfer of all or substantially all of the properties and
assets of the Company or any capital reorganization or any reclassification of
the Common Stock (other than a change in par value or from a specified par value
to no par value or from no par value to a specified par value or as a result of
a subdivision or combination); or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any other action, which would require
an adjustment of the Purchase Price pursuant to Section 10 above or require the
vote of any of the Company's stockholders;
then, in each such case, the Company shall give to the Warrantholder at its
address appearing below at least 20 calendar days prior to the applicable record
date hereinafter specified in (A), (B), or (C) below, by first class mail,
postage prepaid, a written notice stating (A) the date as of which the holders
of record of shares of Common Stock entitled to receive any such rights,
options, warrants or distribution are to be determined or (B) the date on which
any such consolidation, merger, conveyance, transfer, reorganization,
reclassification, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such consolidation, merger,
conveyance, transfer, reorganization, reclassification, dissolution, liquidation
or winding up or (C) the date of such action which would require an adjustment
of the Purchase Price or the vote of the Company's stockholders. The failure to
give the notice required by this Section 13(b) or any defect therein shall not
affect the legality or validity of any such issuance, distribution,
consolidation, merger, conveyance, transfer, reorganization, reclassification,
dissolution, liquidation, winding up or other action or the vote upon any such
action.
Except as provided herein, nothing contained herein shall be construed
as conferring upon the Warrantholder the right to vote on any matter submitted
to the stockholders of the Company for their vote or to receive notice of
meetings of stockholders or the election of directors of the Company or any
other proceedings of the Company, or any rights whatsoever as a stockholder of
the Company.
14. Notices
Any notice, request, demand or other communication pursuant to the
terms of the Warrants shall be in writing and shall be sufficiently given or
made when delivered or mailed by first class or registered mail,
postage-prepaid, to the following addresses:
8
If to the Company:
Network-1 Security Solutions, Inc.
000 Xxxx Xxxxxx, Xxxxx 0000
Xxx Xxxx, XX 00000
Attention: Xxxxx X. Xxxxxxxx, Chairman and Chief Executive
Officer
with a copy to:
Xxxxxxx Xxxxxx Xxxxxxxxx & Kakoyiannis, P.C.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxx Xxxxxxxx, Esq.
If to the Warrantholder, to the address of such Warrantholder provided
to the Company by such Warrantholder for the purpose of notices, or to such
other address or such other counsel as the Company or the Warrantholder may
designate by written notice to the other party.
15. Amendment and Modification
Unless otherwise provided herein, this warrant certificate may not be
amended, modified or supplemented in any respect unless by a written agreement
executed by the Company and a majority-in-interest of the Warrantholders issued
warrants pursuant to the Securities Purchase Agreement, dated April __, 2007
(based upon the aggregate number of Warrants held), provided that no such
amendment or modification shall unfairly discriminate against a particular
Warrantholder relative to other Warrantholders.
3Section 5. 16. Miscellaneous
(a) All the covenants and provisions herein by or for the benefit of
the Company shall bind and inure to the benefit of its successors or assigns and
all of the covenants and provisions herein for the benefit of the Warrantholder
hereof shall inure to the benefit of its successors or assigns.
(b) This warrant certificate shall be deemed to be a contract
made under the laws of the State of New York for all purposes and shall be
construed in accordance with the laws of such without regard to principles of
conflict of laws.
(c) Nothing in this warrant certificate shall be construed to give any
person or corporation other than the Company and the Warrantholder and its
permitted transferees any legal or equitable right, remedy or claim under this
warrant certificate; but this warrant certificate shall be for the sole and
exclusive benefit of the Company and the Warrantholder and its permitted
transferees.
9
IN WITNESS WHEREOF, an authorized office of the Company has signed and
delivered to the Warrantholder this warrant certificate as of the date first
written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By:
---------------------------------------
Xxxxx X. Xxxxxxxx, Chairman and Chief Executive Officer
10
ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires to exercise the
within Warrants)
To: NETWORK-1 SECURITY SOLUTIONS, INC.
000 Xxxx Xxxxxx, Xxxxx 0000,
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx X. Xxxxxxxx, Chairman and Chief Executive Officer
The undersigned hereby (1) irrevocably elects to exercise his or its rights to
purchase _____ shares of Common Stock covered by the within Warrants, (2) makes
payment in full of the Purchase Price by enclosure of a certified check, (3)
requests that certificates for such shares be issued in the name of:
Please print name, address and Social Security or Tax Identification Number:
------------------------------------------------
------------------------------------------------
------------------------------------------------
and (4) if said number of shares shall not be all the shares evidenced by the
within Warrants, requests that a new warrant certificate for the balance of the
shares covered by the within Warrants be registered in the name of, and
delivered to:
Please print name and address:
------------------------------------------------
------------------------------------------------
------------------------------------------------
In lieu of receipt of a fractional share of Common Stock, the
undersigned will receive a check representing payment therefor.
Dated: _____________________ _________________________________
By: _____________________________
_____________________________
11
Assignment
FOR VALUE RECEIVED hereby sells, assigns and transfers
------------------------
unto
-----------------------------------------------------------------------
[Please print or typewrite name, address and federal tax identification
-------------------
number of Assignee] the within Warrants representing the right to purchase
___________ shares of common stock of Network-1 Security Solutions, Inc. (the
"Company"), and does hereby irrevocably constitute and appoint its attorney to
transfer the within Warrants on the books of the within named Company with full
power of substitution in the premises. In the event that less than all of the
within Warrants are assigned hereby, the Company is directed to issue in the
name of the undersigned a certificate for the Warrants not so assigned.
Dated:
-------------------------------------
In the Presence of:
-----------------------------------
12
EXHIBIT B
RISK FACTORS
We operate in a highly competitive environment that involves a number
of risks, some of which are beyond our control. The following discussion
highlights the most material of the risks.
WE HAVE A HISTORY OF LOSSES AND NO REVENUE FROM CURRENT OPERATIONS.
We have incurred substantial operating losses since our inception,
which have resulted in an accumulated deficit of $(46,273,000) as of December
31, 2006. For the years ended December 31, 2006 and 2005, we incurred net losses
of $(1,952,000) and $(1,332,000), respectively. We have financed our operations
primarily by sales of equity securities. Since December 2002, when we
discontinued our security software products and following the commencement of
our patent technology licensing business in November 2003, we have had no
revenue from operations for the years ended December 31, 2005 and December 31,
2006. Our ability to achieve revenue and generate positive cash flow from
operations is dependent upon consummating licensing agreements with respect to
our patented technologies. We may not be successful in achieving licensing
agreements with third parties and our failure to do so would have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to achieve revenue or generate positive cash flow from
operations from our licensing business.
WE COULD BE REQUIRED TO STOP OPERATIONS IF WE ARE UNABLE TO DEVELOP OUR
TECHNOLOGY LICENSING BUSINESS OR RAISE CAPITAL WHEN NEEDED.
We anticipate, based on our currently proposed plans and assumptions
relating to our operations (including the timetable of, costs and expenses
associated with our continued operations), that our cash position of $1,797,000
at December 31, 2006 will more likely than not be sufficient to satisfy our
operations and capital requirements until December 2007. However, we may expend
our funds prior thereto. In the event our plans change, or our assumptions
change or prove to be inaccurate (due to unanticipated expenses, difficulties,
delays or otherwise), we could have insufficient funds to support our operations
prior to December 2007. We are currently seeking additional financing to fund
our operations. Our inability to obtain additional financing when needed, absent
generating sufficient cash from licensing arrangements, would have a material
adverse effect on us, requiring us to curtail or possibly cease our operations.
In addition, any additional equity financing may involve substantial dilution to
the interests of our then existing stockholders.
OUR LICENSING BUSINESS MAY NOT BE SUCCESSFUL.
In November 2003, we entered the technology licensing business
following our acquisition of six patents relating to various telecommunications
and data networking technologies including, among others, patents covering the
delivery of remote power over Ethernet and the transmission of audio, video and
data over computer and telephony networks. Accordingly, we have a limited
history in the technology licensing business upon which an evaluation of our
prospects and future performance can be made. Our prospects must be considered
in light of the risks, expenses and difficulties frequently encountered in the
development, operation and expansion of a new business based on patented
technologies in a highly specialized and competitive market. We may not be able
to achieve revenue or profitable operations from our licensing business.
1
OUR FUTURE SOURCE OF LICENSING REVENUE IS UNCERTAIN.
In February 2004, we initiated our first licensing efforts relating to
the technologies in our remote power patent (U.S. Patent No. 6,218,930) (the
"Remote Power Patent"). To date, we have not entered into any licensing
agreements with third parties with respect to our Remote Power Patent or our
other patented technologies. Our inability to consummate licensing agreements
and achieve revenue from our patented technologies would have a material adverse
effect on our operations and our ability to continue our business. In addition,
in the event we consummate license arrangements with third parties, such
arrangements are not likely to produce a stable or predictable stream of revenue
in the foreseeable future. Furthermore, the success of our licensing efforts
depends upon the strength of our intellectual property rights.
WE FACE UNCERTAINTY AS TO THE OUTCOME OF LITIGATION WITH D-LINK.
On August 10, 2005, we commenced litigation against D-Link Corporation
and D-Link Systems, Incorporated in the United States District Court for the
Eastern District of Texas, Tyler division (Civil Action No. 6:05W291), for
infringement of our Remote Power Patent. Our complaint seeks, among other
things, a judgment that our Remote Power Patent is duly enforceable and has been
infringed by the defendants. We also seek a permanent injunction restraining
defendants from continued infringement, or active inducement of infringement by
others, of our Remote Power Patent. On February 27, 2006, the D-Link defendants
filed answers and asserted counterclaims. In their answers, the D-Link
defendants asserted that they did not infringe any valid claim of our Remote
Power Patent, and further asserted that our asserted patent claims are invalid
and/or unenforceable. In addition to these defenses, the D-Link defendants also
asserted counterclaims for, among other things, non-infringement, invalidity and
unenforceability of our Remote Power Patent. In November, 2006, the Court issued
its ruling on the "Xxxxxxx hearing", a special proceeding under U.S. patent law,
where both sides present their arguments to the court as to how they believe
certain claim terms pertaining to the patent at issue in the lawsuit should be
interpreted. In the ruling, we believe that the Court's constructions on 5 of
the 6 claim terms at issue were consistent with the constructions sought by us
in our proposed constructions. With respect to the 6th claim term, the Court's
construction was consistent with agreed upon portions of the constructions
submitted by us and D-Link but was also modified by the Judge in a manner that
we believe is consistent with our overall position on the claim term. There is,
however, no assurance that our view of the Xxxxxxx hearing claim constructions
will in fact be consistent with subsequent court rulings. In the event the Court
determines that our Remote Power Patent was not valid or enforceable, and/or
that the defendants do not infringe any such determination would have a material
adverse effect on us.
WE ARE CURRENTLY RELYING UPON THE EFFORTS OF THINKFIRE TO CONSUMMATE
LICENSING AGREEMENTS FOR OUR REMOTE POWER PATENT WITH CERTAIN SELECT POTENTIAL
LICENSEES.
On November 30, 2004, we entered into a Master Services Agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
we granted ThinkFire the exclusive (except for us and related companies)
worldwide rights to negotiate license agreements for our Remote Power Patent
with respect to certain potential licensees agreed to between the parties.
Either we or ThinkFire can terminate the Agreement upon 60 days notice for any
reason or upon 30 days notice in the event of a material breach. We have agreed
to pay ThinkFire a fee not to exceed 20% of the royalty
2
payments received from license agreements consummated by ThinkFire on our
behalf. ThinkFire may not be successful in consummating license agreements on
our behalf and even if such agreements are consummated they may not result in
significant royalty payments to us.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGIES.
Our success is substantially dependent upon our proprietary
technologies and our ability to protect our intellectual property rights. We
currently hold 6 patents issued by the U.S. Patent Office that relate to various
telecommunications and data networking technologies and include among other
things, patents covering the transmission of audio, voice and data over computer
and telephony networks and the delivery of remote XxX networks. We rely upon our
patents and trade secret laws, non-disclosure agreements with our employees,
consultants and third parties to protect our intellectual property rights. The
complexity of patent and common law, combined with our limited resources, create
risk that our efforts to protect our proprietary technologies may not be
successful. We cannot assure you that our patents will be upheld or that third
parties will not invalidate our patent rights. In the event our intellectual
property rights are not upheld, such an event would have a material adverse
effect on us.
WE ARE CURRENTLY RELYING UPON OUR CONTINGENCY FEE AGREEMENT WITH BLANK ROME.
In August 2005, we entered into an agreement with Blank Rome, LLP
("Blank Rome"), a national law firm, pursuant to which Blank Rome has been
engaged to represent us in connection with all litigation involving our Remote
Power Patent. Blank Rome has agreed to represent us with respect to each
litigation pertaining to our Remote Power Patent on a full contingency basis
(except for any proceeding before the International Trade Commission). As
compensation for its services on a full contingency basis, Blank Rome will
receive from us percentages of Net Consideration (as defined in the agreement)
ranging from 12.5% to 35% received by us by way of settlement or judgment in
connection with each litigation matter. We have also agreed to compensate Blank
Rome in an amount equal to 10% of the Net Consideration received by us from
certain designated parties mutually agreed upon by us and Blank Rome (the
"Designated Parties") in the event that prior to commencement of litigation such
Designated Parties enter into license agreements or similar agreements with us
during the period of Blank Rome's engagement.
The agreement may be terminated by either Blank Rome or us upon 30 days
notice. If we elect to terminate the Agreement, we will compensate Blank Rome in
an amount equal to 5% of the Net Consideration received by us from the
Designated Parties with whom Blank Rome has not commenced litigation on our
behalf, provided that such parties had substantive licensing or settlement
discussions with us related to our Remote Power Patent during the term of the
agreement and entered into a license agreement or similar agreement with us
providing for Net Consideration within the 12 month period following
termination. In addition, in the event of termination, Blank Rome will receive
its pro-rata share of Net Consideration based upon its hourly time charges with
respect to parties against whom Blank Rome commenced litigation (or defended) on
our behalf. In the event our agreement with Blank Rome is terminated, depending
upon our financial resources at the time, we may need to enter into a contingent
fee agreement with a new law firm in order to enforce and/or defend our Remote
Power Patent and our inability to secure such an arrangement on satisfactory
terms and on a timely basis may have a material adverse effect on us.
3
ANY LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY OR ANY THIRD PARTY
CLAIMS TO INVALIDATE OUR PATENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Our success depends on our ability to protect our intellectual property
rights. In August 2005, we commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated for infringement of our Remote
Power Patent (see below Risk Factors - "We face uncertainty of outcome of
litigation with D-Link"). In the future, it may be necessary for us to commence
patent litigation against additional third parties whom we believe require a
license to our patents. In addition, we may be subject to claims seeking to
invalidate our patents, as has been asserted by D-Link as a defense in the
pending litigation. These types of claims, with or without merit, may subject us
to costly litigation and diversion of management's focus. If we are unsuccessful
in enforcing and validating our patents and/or if third parties making claims
against us seeking to invalidate our patents are successful, they may be able to
obtain injunctive or other equitable relief, which effectively could block our
ability to license or otherwise capitalize on our proprietary technologies.
Successful litigation against us resulting in a determination that our patents
are invalid or that third parties do not infringe our patents would have a
material adverse effect on us.
MATERIAL LICENSING REVENUES FROM OUR REMOTE POWER PATENT MAY BE
DEPENDENT UPON THE APPLICABILITY OF THE IEEE STANDARD.
The Institute of Electrical and Electronic Engineers (IEEE) is a
non-profit, technical professional association of more than 360,000 individual
members in approximately 175 countries. The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries. In 1999, the IEEE formed a task force to facilitate the
adoption of a standardized methodology for the delivery of remote power over
Ethernet networks which would insure interoperability among vendors of switches
and terminal devices. In June 2003, the IEEE Standards Association approved the
802.3af Power Over Ethernet standard (the "Standard"), which covers technologies
deployed in delivering power over Ethernet cables including whether deployed in
switches or as standalone midspan hubs both of which provide power to remote
devices including wireless access points, IP phones and network based cameras.
The technology is commonly referred to as Power Over Ethernet ("XxX"). We
believe our Remote Power Patent covers several of the key technologies covered
by the Standard. However, there is a risk that as a result of litigation a court
may determine otherwise and such a determination would have a material adverse
effect on our ability to enter into license agreements and achieve revenue and
profits from our Remote Power Patent.
WE FACE INTENSE COMPETITION AND WE MAY NOT BE ABLE TO SUCCESSFULLY
COMPETE.
The telecommunications and data networking market is characterized by
intense competition and rapidly changing business conditions, customer
requirements and technologies. Our current and potential competitors have longer
operating histories, greater name recognition and possess substantially greater
financial, technical, marketing and other competitive resources than us.
Although we believe that we have rights to enforceable patents relating to
telecommunications and data networking, there can be no assurance that third
parties will not invalidate any or all of our patents or that such parties may
not be deemed to infringe any or all of our patents. In addition, the
telecommunications and data networking industries may develop technologies that
may be more effective than our proprietary technologies or that render our
technologies less marketable or obsolete.
4
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND OUR
TECHNOLOGIES FACE POTENTIAL TECHNOLOGY OBSOLESCENCE.
The telecommunications and data networking technology market including,
transmission of audio, video and data over computer and telephony networks and
the delivery of remote power over Ethernet markets, are characterized by rapid
technological changes, changing customer requirements, frequent new product
introductions and enhancements, and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards may render our technologies obsolete or less marketable. To
the extent we are able to achieve revenue in the future, such revenue will be
derived from licensing our technologies based on existing and evolving industry
standards.
DEPENDENCE UPON CEO AND CHAIRMAN.
Our success is largely dependent upon the personal efforts of Xxxxx X.
Xxxxxxxx, our Chairman and Chief Executive Officer and Chairman of the Board of
Directors. The loss of the services of Xx. Xxxxxxxx would have a material
adverse effect on our business and prospects. In February 2007, we entered into
a new two (2) year employment agreement with Xx. Xxxxxxxx, pursuant to which he
has agreed to continue to serve as our Chairman and Chief Executive Officer.
(See our Form 8-K filed with the SEC on March 6, 2007). We do not maintain
key-man life insurance on the life of Xx. Xxxxxxxx.
RISKS RELATED TO LOW PRICED STOCKS.
Our common stock currently trades on the OTC Bulletin Board under the
symbol NSSI. Since the trading price of our common stock is below $5.00 per
share, our common stock is considered a xxxxx stock. SEC regulations generally
define a xxxxx stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market value of less than $5.00 per
share, subject to certain exceptions. SEC regulations require broker-dealers to
deliver to a purchaser of our common stock a disclosure schedule explaining the
xxxxx stock market and the risks associated with it. Various sales practice
requirements are also imposed on broker-dealers who sell xxxxx stocks to persons
other than established customers and accredited investors (generally
institutions). Broker-dealers must also provide the customer with current bid
and offer quotations for the xxxxx stock, the compensation of the broker-dealer
and monthly account statements disclosing recent price information for the xxxxx
stock held in the customer's account.
5
THE SIGNIFICANT NUMBER OF OPTIONS AND WARRANTS OUTSTANDING MAY
ADVERSELY EFFECT THE MARKET PRICE FOR OUR COMMON STOCK.
As of April 1, 2007, there are outstanding options and warrants to
purchase an aggregate of 9,581,481 shares of our common stock at exercise prices
ranging from $.13 to $10.00. To the extent that outstanding options and warrants
are exercised, stockholder percentage ownership will be diluted and any sales in
the public market of the common stock underlying such options may adversely
affect prevailing market prices for our common stock.
WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED
STOCK, WHICH MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.
Our Board of Directors has the authority, without further action by the
stockholders, to issue 10,000,000 shares of our preferred stock on such terms
and with such rights, preferences and designations as our Board of Directors may
determine. Such terms may include restricting dividends on our common stock,
dilution of the voting power of our common stock or impairing the liquidation
rights of the holders of our common stock. Issuance of such preferred stock,
depending on the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control. In addition,
certain "anti-takeover" provisions in Delaware law may restrict the ability of
our stockholders to authorize a merger, business combination or change of
control.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock is likely to be highly volatile
and could fluctuate widely in price in response to various factors, many of
which are beyond our control, including the following:
o our ability to successfully enforce and/or defend our Remote Power
Patent;
o our ability to enter into favorable license agreements with third
parties with respect to our Remote Power Patent;
o our ability to achieve revenues and profits;
o our ability to raise capital when needed;
o sales of our common stock;
o our ability to execute our business plan;
o technology changes;
o legislative, regulatory and competitive developments; and
o economic and other external factors.
In addition, the securities markets have from time to time experienced
significant price and
6
volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.
As of April 1, 2007, we have registered for resale 22,453,987 shares of
common stock, including shares issuable upon exercise of outstanding options and
warrants that are not currently freely tradable. If our stockholders sell
substantial amounts of our common stock in the public market, including shares
issued upon the exercise of outstanding options and warrants, the market price
of our common stock could fall. These sales also may make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem reasonable or appropriate.
ADDITIONAL STOCK OFFERINGS MAY DILUTE CURRENT STOCKHOLDERS.
We may need to issue additional shares of our capital stock or
securities convertible or exercisable for shares of our capital stock, including
preferred stock, options or warrants. The issuance of additional capital stock
may dilute the ownership of our current stockholders.
7
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 16,
2007, among Network-1 Security Solutions, Inc., a Delaware corporation (the
"Company"), and the Persons (as hereinafter defined) identified on Schedule 1
hereto (the "Investors"). This Agreement is made pursuant to the Securities
Purchase Agreement dated April 16. 2007, by and among the Company and the
Investors (the "Securities Purchase Agreement"). The Company has agreed to
provide the Investors and any transferees and subsequent purchasers of
Registrable Securities (as hereinafter defined) that may be issued, from time to
time, the registration rights with respect to the Registrable Securities, as set
forth in this Agreement. Capitalized terms used herein without definition shall
have the meanings set forth in the Securities Purchase Agreement.
The parties hereto agree as follows:
1. Definitions.
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"Common Stock" means the common stock, $.01 par value per share, of
the Company.
"Effectiveness Date" means, with respect to the Registration Statement
required to be declared effective hereunder, 180 days following the earlier of
(i) the actual Filing Date or (ii) the required Filing Date.
"Effectiveness Period" shall have the meaning ascribed thereto in
Section 3(a) hereof.
"Fair Market Value" shall have the meaning as ascribed thereto in
Section 3(b) hereof.
"Filing Date" means, with respect to the Registration Statement
required to be filed hereunder, June 16, 2007.
"Holder" shall mean an Investor or its respective transferee, who is
the owner of Registrable Securities.
"Person" shall mean an individual, partnership, corporation, limited
liability company, business trust, joint state company trust, unincorporated
organization, joint venture, a government authority or other entity of whatever
nature.
"Prospectus" shall mean the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with respect
to the terms of the offering of any
1
portion of the Registrable Securities covered by such Registration Statement,
and all other amendments and supplements to the Prospectus, including
post-effective amendments to the Registration Statement of which such Prospectus
is a part, and all material incorporated by reference in such Prospectus.
"Registrable Securities" shall mean (i) the Securities as defined in
this Section 1, or (ii) stock issued in respect of securities referred to in
clause (i) in any reorganization; or (iii) stock issued in respect of the
securities referred to in clauses (i) or (ii) as a result of a stock split,
stock dividend, recapitalization or combination.
"Registration Expenses" shall have the meaning ascribed thereto in
Section 5 hereof.
"Registration Statement" means any registration statement of the
Company that covers any of the Registrable Securities pursuant to the provisions
of this Agreement, including the Prospectus, amendments and supplements to such
Registration Statement, including post-effective amendments, all exhibits, and
all material incorporated by reference in such Registration Statement.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean any and all shares of Common Stock, issued or
to be issued, to Investors pursuant to the Securities Purchase Agreement
including shares of Common Stock to be issued upon the exercise of Warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
2. Securities Subject to this Agreement. The Securities entitled to the
benefits of this Agreement are the Registrable Securities.
3. Registration.
(a) On or prior to the Filing Date, the Company shall prepare and file
with the SEC the Registration Statement covering the resale of all of the
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement required hereunder shall be on Form SB-2
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case the Registration shall be on
another appropriate form in accordance herewith). Subject to the terms of this
Agreement, the Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, and shall use its best efforts to keep the
Registration Statement continuously effective under the Securities Act until the
date when all Registrable Securities covered by the Registration Statement have
been sold or may be sold without volume restrictions pursuant to Rule 144(k) as
determined by the counsel to the Company pursuant to a written opinion to such
effect, addressed and acceptable to the Company's transfer agent and the
affected Holders (the "Effectiveness Period").
(b) If the Registration Statement is not (i) filed on or before 60 days
after the Filing Date or (ii) declared effective on or before 60 days after the
Effectiveness Date (the Filing
2
Date and the Effectiveness Date are each, a "Required Date"), the Company shall
issue, as liquidated damages and not as a penalty, to each Holder on or before
the fifth business day immediately following such date and at each 30 day period
thereafter in which Registration Statement is not filed or declared effective,
as the case may be (each such date, a "Payment Date"), such number of shares of
its common stock (the "Liquidated Damages Shares") having a Fair Market Value
(as defined below) equal to the percentage of the aggregate purchase price paid
by such Holder for the securities such Holder acquired from the Company pursuant
to the Securities Purchase Agreement as set forth below:
Percentage of Purchase Price
Payment Date to be Paid as Liquidated Damages
------------ --------------------------------
60 days after the Required Date 1%
90 days after the Required Date 1%
120 days after Required Date 1%
150 days after Required Date 2%
180 days after Required Date 2%
210 days after the Required Date 2%
240 days after the Required Date 3%
270 days after the Required Date and each 30 day 3%
period thereafter
In any case where the Liquidated Damages Shares are to be issued under this
Section 3(b), the Fair Market Value per share of common stock used to determine
the number of such shares issuable to any Holder on any date shall equal the
average closing price of the Company's common stock for the 30 trading days
immediately preceding such date. Notwithstanding anything to the contrary
contained in this Section 3(b), in the event the Company is unable to obtain
effectiveness of the Registration Statement by any Payment Date as a result of
comments from the SEC pertaining to Rule 415(a)(1)(i) of the Securities Act of
1933, as amended, or any comparable or successor rule or regulation, then the
Company shall not be required to pay any liquidated damages (or any other
damages) to any Holder in accordance with this Section 3(b) or otherwise under
this Agreement.
4. Registration Procedures. In connection with the Company's
registration obligations hereunder, the Company shall:
(a) In accordance with the Securities Act and the rules and regulations
of the SEC, prepare and file with the SEC a Registration Statement in the form
of an appropriate registration statement with respect to the Registrable
Securities and use its best efforts to cause such Registration Statement to
become and remain continuously effective for the Effectiveness Period;
(b) Furnish to each Holder participating in such registration (each of
such Persons being referred to herein as a "Participant" in such registration)
such reasonable number of copies of
3
the Registration Statement and Prospectus and such other documents as such
Participant may reasonably request in order to facilitate the public offering of
the Registrable Securities;
(c) Use its best efforts to register or qualify the Securities covered
by such Registration Statement under such state securities or blue sky laws of
such jurisdictions as such Participants may reasonably request; provided,
however, that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation in any jurisdiction in
which it is not so qualified or to subject itself to taxation in connection with
any such registration or qualification of such Securities;
(d) Notify the Participants in such registration, promptly after it
shall receive notice thereof, of the date and time when such Registration
Statement and each post-effective amendment thereto has become effective or a
supplement to any Prospectus forming a part of such Registration Statement has
been filed;
(e) Notify the Participants in such registration promptly of any
request by the SEC for the amending or supplementing of such Registration
Statement or Prospectus or for additional information;
(f) Prepare and file with the SEC, promptly upon the request of any
Participant in such registration, the Registration Statement and any amendments
or supplements to such Registration Statement or Prospectus that, in the
reasonable opinion of counsel for such Participants, is required under the
Securities Act or the rules and regulations thereunder in connection with the
distribution of the Securities by such Participants or to otherwise comply with
the requirements of the Securities Act and such rules and regulations;
(g) Prepare and promptly file with the SEC and promptly notify the
Participants in such registration of the filing of such amendments or
supplements to such Registration Statement or Prospectus as may be necessary to
correct any statements or omissions if, at the time when a Prospectus relating
to such Securities is required to be delivered under the Securities Act, any
event has occurred as the result of which any such Prospectus or any other
Prospectus then in effect may include an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading;
(h) Advise the Participants in such registration, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the SEC suspending the effectiveness of such Registration Statement or
the initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
(i) Otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make generally available to the Company's
security holders earnings statements satisfying the provisions of Section 11(a)
of the Securities Act, no later than forty-five (45) days after the end of any
twelve (12) month period (or ninety (90) days, if such a period is a fiscal
year) beginning with the first month of the Company's first fiscal quarter
commencing after the effective date of a Registration Statement;
4
(j) Not file any amendment or supplement to such Registration Statement
or Prospectus to which a majority in interest of the Participants in such
registration has reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements of the
Securities Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least three (3) business days prior to the
filing thereof unless the Company shall have been advised in writing by its
counsel that such amendment is required under the Securities Act or the rules or
regulations adopted thereunder in connection with the distribution of Securities
by the Company or the Participants.
5. Expenses of Registration. Except as provided in the following
sentence, all expenses of the Company incident to the Company's performance of
or compliance with the provisions of Sections 3 and 4 of this Agreement shall be
borne by the Company including without limitation:
(a) All registration and filing fees (exclusive of underwriting
discounts and commissions);
(b) Fees and expenses of compliance with all securities or blue sky
laws (including fees and disbursements of counsel for the Company in connection
with blue sky qualifications of the Registrable Securities); provided, however,
that the Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation in any jurisdiction in which
it is not so qualified or to subject itself to taxation in connection with any
such registration or qualification of such Registrable Securities;
(c) Printing, messenger, telephone and delivery expenses; and
(d) Fees and disbursements of the Company's counsel and independent
auditors; and
(e) All other expenses of registration, including fees and
disbursements of one counsel for the Holders of the Registrable Shares with
respect to each registration of such securities pursuant to this Agreement.
Nothing in this Section 8 shall be deemed to require the Company to pay
or bear any expenses of more than one counsel for the Participants or
accountants for the Participants or any other personal expenses or any
underwriting discounts, selling commissions or similar fees of the Participants,
except as otherwise set forth herein.
6. Indemnification and Contribution.
(a) Indemnification by the Company. Whenever, pursuant to Section 3 a
Registration Statement relating to the Registrable Securities is filed under the
Securities Act, the Company will (except as to matters covered by Section 10(b)
hereof) indemnify and hold harmless each Participant in the registration, each
of their partners, members, shareholders, officers, directors and employees,
each underwriter of Registrable Securities, and each Person, if any, who
controls any such Person (collectively, the "Participant Indemnitees" and,
individually, a "Participant Indemnitee"), against any losses, claims, damages
or liabilities, joint or several, to which such Participant Indemnitees may
become subject under the Securities Act or otherwise, insofar as such
5
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such Registration Statement, or Prospectus contained
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
unless any such statement or omission is based on written information provided
by the Participant Indemnitee, or a representation of a Participant Indemnitee
made in writing, that such Participant Indemnitee has requested be included in
such Registration Statement or Prospectus, and will reimburse each Participant
Indemnitee for all legal or other expenses reasonably incurred by it in
connection with investigating or defending against such loss, claim, damage,
liability or action.
(b) Indemnification by Participants. Each Participant in such
registration will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration Statement and
each other Person, if any, who controls the Company, within the meaning of the
Securities Act, each underwriter of Registrable Securities and each Person, if
any, who controls any such underwriter within the meaning of the Securities Act
(collectively, the "Company Indemnitees" and, individually, a "Company
Indemnitee") and each other Participant Indemnitee against all losses, claims,
damages or liabilities, joint or several, to which any of the Company
Indemnitees or the other Participant Indemnitees may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or Prospectus contained therein, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only if, and to the
extent that, such statement or omission was in reliance upon and in conformity
with written information furnished to the Company by such participant
specifically for use in the preparation thereof. Notwithstanding the foregoing,
the indemnification obligation of each Participant herein shall be limited to
the net proceeds received by such Participant in the offering of the Registrable
Securities effected by the Registration Statement.
(c) Indemnification Procedures. Promptly after receipt by a Participant
Indemnitee or a Company Indemnitee (collectively, "Indemnitees" and,
individually, an "Indemnitee") under Section 6(a) or 6(b) hereof of notice of
the commencement of any action, such Indemnitee will, if a claim in respect
thereof is to be made against the indemnifying party under such clause, notify
the indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party will not relieve the indemnifying party from
any liability that it may have to any Indemnitee except to the extent such
omission resulted in actual detriment to the indemnifying party, nor shall such
omission relieve the indemnifying party from any liability it may have to any
Indemnitee otherwise than under such clauses. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party a release from all liability in
respect of such claim or litigation. In case any such action shall be brought
against any Indemnitee, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such Indemnitee, and after notice
6
from the indemnifying party to such Indemnitee of its election to assume the
defense thereof, the indemnifying party shall not be liable to such Indemnitee
under such clause for any legal or other expenses subsequently incurred by such
Indemnitee in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that the Indemnitee shall have the right to
employ one counsel to represent such Indemnitee if, in the reasonable judgment
of such Indemnitee, it is advisable for such party to be represented by separate
counsel because separate defenses are available, or because a conflict of
interest exists between such indemnified and indemnifying party in respect of
such claim, and in that event the fees and expenses of such separate counsel
shall be paid by the indemnifying party. Notwithstanding the foregoing, if the
Company is an Indemnitee, the Company shall designate the one counsel, and in
all other circumstances, the one counsel shall be designated by a majority in
interest based upon the aggregate amount of Registrable Securities of the
Indemnitees. For purposes of this Section 6 the terms "control," and
"controlling person" have the meanings that they have under the Securities Act.
(d) Contribution. If for any reason the foregoing indemnity is
unavailable, or is insufficient to hold harmless an Indemnitee, then the
indemnifying party shall contribute to the amount paid or payable by the
Indemnitee as a result of such losses, claims, damages, liabilities or expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the indemnifying party on the one hand and the Indemnitee on the
other from the registration or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, or provides a lesser sum to the
Indemnitee than the amount hereinafter calculated, in such proportion as is
appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the Indemnitee on the other but also the
relative fault of the indemnifying party and the Indemnitee as well as any other
relevant equitable considerations. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(e) Survival of Indemnification Obligations. The indemnification
provided by this Section 6 shall be a continuing right to indemnification and
shall survive the registration and sale of any Registrable Securities by any
person entitled to indemnification hereunder and the expiration or termination
of this Agreement.
7. Amendment and Modification. This Agreement may be amended, modified
or supplemented in any respect only by written agreement by the Company and
Holders owning a majority of the issued and outstanding Registrable Securities
(provided that no such amendment shall unfairly discriminate against a
particular Holder relative to the other Holders).
8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York, without giving effect to the
choice of law principles thereof.
9. Invalidity of Provision. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of this Agreement, including that provision, in any
other jurisdiction.
7
10. Notices. All notices and other communications hereunder shall be in
writing and, unless otherwise provided herein, shall be deemed duly given if
delivered personally or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses or (at such other address
for the party as shall be specified by like notice):
(a) If to the Company:
Network-1 Security Solutions, Inc.
000 Xxxx Xxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxxxx X. Xxxxxxxx, Chairman and Chief Executive Officer
with a copy to:
Xxxxxxx Xxxxxx Xxxxxxxxx & Kakoyiannis, P.C.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxx Xxxxxxxx, Esq.
or as the Company shall designate to the Investors in writing,
(b) If to a Holder, as listed on the signature pages attached hereto or
as such Holder shall designate to the Company in writing,
11. Headings; Execution in Counterparts. The headings and captions
contained herein are for convenience of reference only and shall not control or
affect the meaning or construction of any provision hereof. This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an original and all of which together shall constitute one and the same
instrument.
12. Entire Agreement. This Agreement, including any exhibits hereto and
the documents and instruments referred to herein and therein, embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
13. Attorneys' Fees. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover such reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to which
it or they may be entitled, as may be ordered in connection with such
proceeding.
8
14. Successors and Assigns. This Agreement shall be binding upon the
parties hereto and their successors and assigns.
[Signatures begin on the following page.]
9
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
herein above set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By:
------------------------------------------
Name: Xxxxx X. Xxxxxxxx
Title: Chairman and Chief Executive Officer
INVESTORS:
HOUND PARTNERS, L.P.
By:
------------------------------------------
Name:
Title:
XXXXXX PARTNERS, L.P.
By:
------------------------------------------
Name:
Title:
AURELIAN PARTNERS, L.P.
By:
------------------------------------------
Name:
Title:
XXXXX X. XXXXX, SEP-XXX, XXXXXXX XXXXXX & CO.
CUSTODIAN
By:
------------------------------------------
Xxxxx X. Xxxxx
10
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
XXXXXX XXXXXXXXX
XXXXXXXXX LIMITED PARTNERS, L.P.
By:
------------------------------------------
Name:
Title:
XXXXXXXXX QUALIFIED PARTNERS, L.P.
By:
------------------------------------------
Name:
Title:
XXXXX OPPORTUNITY FUND, L.P.
By:
------------------------------------------
Name:
Title:
XXX FUND, LTD.
By:
------------------------------------------
Name:
Title:
11
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
herein above set forth.
HOUND PARTNERS OFFSHORE FUND, L.P.
By:
------------------------------------------
Name: Xxxxxxxx Xxxxxxxx
Title: General Partner of the Managing Member
12
SCHEDULE 1
Name and Address of Investor
----------------------------
Aurelian Partners, L.P.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Xxxxxx Partners, L.P.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Hound Partners, L.P.
000 Xxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Hound Partners Offshore Fund, L.P.
x/x Xxxxx Xxxx Xxxxxxxx (Xxxxxx Xxxxxxx) Limited
Xxxxxxx Xxxxxx Xxxx, Xxxxxxxx Xxx,
Xxxx Xxx Xxxx
X.X. Xxx 00000 SMB
Grand Cayman, Cayman Islands
Xxxxx X. Xxxxx SEP-XXX,
Xxxxxxx Xxxxxx & Co. Custodian
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Xxxxxx Xxxxxxxxx
000 Xxxxx Xxxx Xxxx
Xxxx Xxxxxx Xxxxxx, Xxx Xxxx 00000
Xxxxxxxxx Limited Partners, L.P.
00 Xxxxxxxxxxxx Xxxxxx
Xxxxxxxx, Xxx Xxxx 00000
Xxxxxxxxx Qualified Partners, L.P
00 Xxxxxxxxxxxx Xxxxxx
Xxxxxxxx, Xxx Xxxx 00000
Xxxxx Opportunity Fund, L.P.
00 Xxxxxxxxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
XXX Fund, Ltd.
00 Xxxxxxxxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
13
EXHIBIT D
FORM OF LEGAL OPINION
Xxxxxxx Xxxxxx Xxxxxxxxx & Kakoyiannis P.C., counsel to the Company, will
provide a legal opinion substantially covering the following matters:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
2. The Common Stock has been duly authorized, and when issued and paid
for, will be validly issued, fully paid and non-assessable. The Warrants have
been duly authorized, and when issued and paid for, will be validly issued and
the Company has reserved the Warrant Shares for issuance upon exercise of the
Warrants. Upon issuance and delivery and payment therefor of the Warrant Shares
upon exercise of the Warrants, the Warrant Shares will be duly authorized,
validly issued, fully paid and non-assessable.
3. The Company has the corporate power and authority to execute,
deliver and perform its obligations under the Transaction Documents. Each of the
Transaction Documents has been duly authorized, executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with their respective terms.
The execution, delivery and performance of the Transaction Documents
and issuance of the Common Stock, Warrants and Warrant Shares by the Company
will not: (a) violate any federal or state law or regulation applicable to the
Company; (b) violate or be in conflict with the Certificate of Incorporation or
Bylaws of the Company; or (c) to counsel's knowledge, (i) violate any order of
any court or other agency of government binding on the Company, (ii) violate or
constitute (with or without due notice and/or lapse of time) a default under the
terms of any agreement, indenture, or other instrument to which the Company is a
party or by which it or its property is bound, or (iii) result in the creation
or imposition of any lien, charge or encumbrance of any nature upon any of the
property or assets of the Company.
