ITEM 2
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MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Company Overview
We are an Internet security software and technology company with industry-leading, patented technology for various types ofZero Trust Network Access (“ZTNA”) based secure network communications, including 5G and 4G LTE network security. Ourcommunications. VirnetX’s patented Secure Domain Name Registry and GABRIEL Connection Technology™, are the foundation for our GABRIEL Secure Communication Platform™ that protects communications using Zero Trust Network Access (ZTNA). Ourits VirnetX OneTM, software-as-a-services (SaaS) platform. VirnetX’s technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communicationnetwork security solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 201205 total patents and pending applications, including 7072 U.S. patents/patent applications and 131133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, and related services, and is used in all our technology and products, some of which were acquired by our principal operating subsidiary;subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006.
Our product portfolio includes sophisticated technologies, products and services that are available for sale worldwide. On March 1, 2022, we launched War Room™ software, and on April 7, 2022, we launched VirnetX Matrix™ software on our next-generation, VirnetX One™ platform. This new platform builds upon our patented Secure Domain Names and GABRIEL Connection Technology™ to further enhance the security and efficiency of our patented secure communication links. Our GABRIEL Secure Communication Platform™ includesVirnetX One™ platform is a setsecurity-as-a-service platform that protects enterprise applications, services, and infrastructure from cyber-attacks.
Our new War Room™ software product provides an industry leading, safe, and secure video conferencing meeting environment where sensitive communications and data is invisible to those not authorized to view it. War Room™ validates permissions of all the users, and devices requesting access to any secure meeting room prior to granting access. We believe our War Room™ will be an attractive solution for government agencies as well as all professional sectors such as legal, financial, and medical where limiting access to confidential data is a critical requirement.
Our VirnetX Matrix™ product provides industry's best safeguards for applications and contemporary remote workforce from sophisticated hackers and mitigates threats by enabling corporate applications to be invisible from unauthorized users. We believe our VirnetX Matrix™ software libraries withwill be an attractive solution for all businesses, cloud and on-premise application interfaces availableservice providers, and OEMs, looking to improve visibility and management of their networks to mitigate morphing attacks on their networks and for securing third-party applications seamlessly across multiple operating systems. It enables individuals and organizations to maintain complete ownershipreal time access and control overof their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time.users.
Our GABRIEL Gateway product extends our Secure Communication Platform™ by allowing existing networked devices and services to seamlessly join the “GABRIEL SECURED” network without requiring any modifications. All these devices or services, including on-premise or cloud-based services, can now be assigned a VirnetX Secure Domain Name and use fully authenticated, secure communication channels for its communications.
Our GABRIEL Collaboration Suite™ is a set of communication applications and tools that use our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platformcross platform communications between devices that are enrolled in our “GABRIEL“VIRNETX SECURED” network and have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux, and Mac OS X platforms, at https://virnetx.com.
We continue to enhance our products and add new functionality. We will provide updates to new and existing customers as they are released to the public. Many small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.
We have an ongoing GABRIEL Licensing Programlicensing program under which we offer licenses to a portion of our patent portfolio, technology, and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to OEMoriginal equipment manufacturer (“OEM”) customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain names within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK)(“SDK”) to assist with rapid integration of these techniques into existing software implementations. Customers who want to develop their own implementation of the VirnetX patented techniques for supporting secure domain names, or other techniques that are covered by our patent portfolio for establishing secure communication links, can purchase a patent license. The number of patents licensed, and therefore the cost of the patent license to the customer, will depend upon which of the patents are used in a particular product or service. These licenses will typically include an initial license fee, as well as an ongoing royalty.
We expect to continue to launch new and enhanced security platforms, software products, and services based on our GABRIEL Connection Technology™. We expect to provide updates to new and existing customers as they are released to the public. Many small and medium businesses have installed our software products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.
Our employees include the core development team behind our patent portfolio, technology, and software. Some members of this team have worked together for over twenty years and were on same team that invented and developed this technology while working at Leidos. The team has continued its research and development work and expanded the set of patents we acquired in 2006 from Leidos, into a larger patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing business. It is expected to generate most of our future revenue in license fees and royalties. We intend to continue our efforts to develop new products and technologies and further strengthen and expand our patent portfolio. We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents.
New Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 with no material impact on our financial position, results of operations or cash flows.
Results of Operation
Three and Nine Months Ended September 30, 20212022
Compared with the Three and Nine Months Ended September 30, 20202021
(in thousands, except per share amounts)
Revenue
ForWe recognized revenue of $4 and $4, and $43 and $24 in the three and nine months ended September 30, 2022 and 2021 we recognized revenue of $4 and $24, respectively, and revenues of $26 and $302,620, for the three and nine months ended September 30, 2020, respectively. During the nine months ended September 30, 2020, we collected a lump sum payment of $454,034 from Apple, Inc. as a result of a favorable court decision relating to a patent infringement case. The payment includes past royalties, damages for willful infringement, interest, court costs and attorneys’ fees. The elements of the payment were recognized in our condensed consolidated statement of operations as follows:
Classification in the Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2020 | |
Revenue (royalties) | | $ | 302,428 | |
Operating expenses: selling, general and administrative (reimbursed litigation costs) | | | 2,114 | |
Other income: gain (willful infringement) | | | 41,271 | |
Other income: interest income (pre and post judgment interest) | | | 108,221 | |
Total cash received | | $ | 454,034 | |
Licensing Costs
Licensing costs for the nine months ended September 30, 2020, include $90,101 accrued in conjunction with the proceeds received from Apple, Inc., pursuant to the favorable court decision relating to a patent infringement case. Accrued licensing costs of $9,438 were reversed during the nine months ended September 30, 2021, as a result of the McKool awardaward; these licensing costs were reduced an additional $4, during the nine months ended September 30, 2022. (See Note 7 — Litigation).
Research and Development Expenses
Our research and development expenses increased by $60$65 to $1,151$1,216 for the three months ended September 30, 2021,2022. And increased by $246 for the nine months ended September 30, 2022. Our research and decreased by $3,347 todevelopment expenses were $3,698 and $3,452 for the nine months ended September 30, 2021. Our research2022 and development expenses were $1,091 and $6,799 for the three and nine months ended September 30, 2020,2021, respectively. The decreaseincrease in 20212022 was primarily due to lowerthe addition of staff and higher engineering employee benefits.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased by $1,054 to $4,143 for the three months ended September 30, 2022, and decreased by $1,181 to $3,089 and increased by $9,693 to$37,666 from $48,040 for the three and nine months ended September 30, 2021, from $4,270 and $38,347 for the three and nine months ended September 30, 2020, respectively. The increasedecrease is primarily due to $38,284 disputed legal fees accrued to McKool in 2021 (See Note — 7 Litigation), offset by a $24,104 decrease in other attorney fees..
Gain on Settlement
For the nine months ended September 30, 2020, we recorded a gain of $41,271 pursuant to the favorable court ruling in the case regarding Apple, Inc. discussed above.
Interest and other income, net
For the nine months ended September 30, 2020, we recognized interest income of $108,272 largely related to the favorable ruling against Apple, Inc. discussed above.
Liquidity and Capital Resources
As of September 30, 2021,2022, our cash and cash equivalents totaled approximately $148,042$105,805 and our short-term investments totaled approximately $24,450,$53,195, compared to cash and cash equivalents of approximately $192,908$142,018 and short-term investments of approximately $28,348$27,254 at December 31, 2020,2021, respectively. Working capital was $175,164$157,490 at September 30, 2021,2022, and $214,076$168,471 at December 31, 2020. The decrease in cash and investments during the nine months ended September 30, 2021 was primarily attributed to operating expenses.2021.
We expect that our cash and cash equivalents and short-term investments as of September 30, 2021,2022, will be sufficient to fund our current level of operating expense, including legal expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the world.
Universal Shelf Registration Statement and ATM Offering
On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $50,000.
We use the ATM proceeds for GABRIEL product development, marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses, and acquisitions of complementary products, technologies, or businesses. This registration statement expired on August 13, 2021.
We sold no shares under the ATM during 2021. During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average sales price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627 during the period. Sales commissions, fees and other costs associated with the ATM totaled $139. This registration expired on August 13, 2021.
Income Taxes
For the three months ended September 30, 2021,2022, we recognized an income tax benefit of $895$486 on loss before income taxes of $4,226,$4,766, which is an effective tax rate of 21.18%10.3%. For the nine months ended September 30, 2021,2022, we recognized an income tax benefit of $8,697$1,171 on loss before income taxes of $41,994$13,208, which is an effective rate of 8.3%. The effective tax rate was lower than the statutory federal income tax rate primarily due to the effect of 20.71%.stock-based compensation and expiring options, requiring us to reduce our deferred tax asset. During the nine months ended September 30, 2022, our deferred tax asset increased to $17,122.
For the three and nine months ended September 30, 2020,2021, we hadrecognized an income tax benefit of $1,293$895 and an$5,369. For the three months, income tax expense of $29,036, respectively. The effective tax rate for the three-month period ended September 30, 2021, was favorably impactedprimarily affected by the net operating loss generated infor the quarter.period; for the nine months, income tax was primarily affected by expiring options and research and development credits.
As of December 31, 2020, we had deferred tax assets of $9,049. As of September 30, 2021, we had net deferred tax assets of $17,749.20
Contractual Obligations
There have been no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K10-K/A for the fiscal year ended December 31, 2020.2021.
Off-Balance Sheet Arrangements
None.
ITEM
3 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Interest Rate Risk
We invest our excess cash primarily in highly liquid instruments including time deposits, money market, and U.S. agency and treasury securities. We seek to limit the amount of our credit exposure to any one issuer.
Investments in fixed rate instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, our income from investments may decrease in the future.
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term but would have an immaterial impact in the fair value of our marketable securities, which generally mature within eighteen months of September 30, 2021.2022.
Other Market Risks
We considered the historical volatility of our stock prices and determined that it was reasonably possible that the fair market value of our stock price could increase or decrease substantially in the near term and could have a material impact to our consolidated balance sheets and statement of operations with respect to future stock-based compensation costs and other equity transactions.
ITEITEM 4 M 4 — CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2021.2022.
The purpose of this evaluation was to determine whether as of September 30, 20212022 our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2021,2022, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting.
There were no changesUpon identification of our material weakness that resulted in the restatement of our December 31, 2021 consolidated financial statements, we immediately began remediating our internal control over financial reporting. Specifically, we modified our supervisory review procedures over our tax professionals who perform the accounting and reporting during the quarter ended September 30, 2021of deferred taxes, to include detailed discussions with our tax professionals of current operations and changes in accounting standards and tax law that have materially affected, or are reasonably likely to materiallycould affect our internalcalculations, and detailed review including walkthrough of infrequent transactions and complex matters affecting deferred tax calculations. We have tested these procedures and believe the enhanced control over financial reporting.is operating effectively. Additionally, our accounting professionals participated in deferred tax training to further enhance the technical ability of our personnel.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. Weremotely; we are continually monitoring and assessing the impact of the COVID-19 outbreak on our internal controls to minimize the impact on their design and operating effectiveness.
PARPART IIT II — OTHER INFORMATION
ITEM
1 — LEGAL PROCEEDINGS
– (See Note 7 — Litigation in the “Notes to Condensed Consolidated Financial Statements”)
ITEMITEM 1A — RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. You should carefully consider the risks and uncertainties described below in addition to the other information set forth in this Quarterly Report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making any investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of these risk factors occur, you could lose substantial value or your entire investment in our shares.
Risks Related to Our BusinessSummary Risk Factors
An investment in our common stock involves a high degree of risk, and Our Financial Reportingthe following is a summary of key risk factors when considering an investment. You should read this summary together with the more detailed description of each risk factor contained in the subheadings further below.
We may not generate significant sales revenues from our new software products and services.
We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming and costly, and we cannot anticipate the results.
We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.
If we are not able to adequately protect our patent rights, our business would be negatively impacted.
Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subject to various developments in regulation, law, and consumer preferences to which we may not be able to adapt successfully.
Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the USPTO could adversely affect our licensing and enforcement activities and results of operations.
New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
Privacy and data security concerns, and data collection and transfer restrictions and related domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
If we are unable to expand our revenue sources or establish, sustain, grow, or replace relationships with a diversified customer base, our revenues may be limited.
We have limited technical resources and are at an early stage in commercialization of our software products.
Our international expansion will subject us to additional costs and risks, and our plans may not be successful.
We have had to restate our previously issued financial statements and in connection with such process identified a material weakness in our internal control over financial reporting.
We may face litigation over the restatement of our previously issued financial statements.
Risks Related to Our Business and Our Financial Reporting
We may not generate significant sales revenues from our new software products and services.
In March and April 2022, we launched War Room™ and VirnetX Matrix™ on our VirnetX One™ platform. During this year, we expect to launch these products in Asia Pacific and Europe. We also intend to continue to introduce new products on our VirnetX One™ platform in the future. The introduction and launch of new products is subject to significant costs, risks of slow market acceptance, and variable costs of customer acquisition. While we believe our software products will be attractive to all businesses, government agencies, cloud and on-premise application service providers, and OEMs, if we are unable to overcome these risks, we may never generate significant revenue from the sales of these products.
We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming and costly, and we cannot anticipate the results.
We spend a significant amount of our financial and management resources to pursue our current litigation. We believe that this litigation and others that we may pursue in the future could continue for years and consume significant financial and management resources. The counterparties to our litigation include large, well-financed companies with substantially greater resources than us. Patent litigation is risky, and the outcome is uncertain, and we cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts, they may be inconsistent with the ultimate resolution of the dispute. Furthermore, any awards we receive may be subject to obligations to Leidos and fee arrangements with outside counsel. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects, which could encumber our ability to develop and commercialize our products.
We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.
OurA large part of our business strategy includes licensing our patents and technology to other companies in order to reach a larger end-user base than we could reach through direct sales and marketing efforts; as such, our business strategy and revenues may depend on intellectual property licensing fees and royalties for the majority of our revenues. We currently derive minimal revenue from licensing activities, and royalties, and we cannot assure you that we will successfully capitalize on our market opportunities or that this portion of our current business strategy will succeed.
Although to date we have entered into a limited number of settlement and license agreements, we may not be successful in entering into further licensing relationships, or if we are successful in entering into such relationships, the acquisition of them may be expensive, and they, as well as our existing settlement and our existing and pending license agreements may not generate the financial results, we expect.
Factors that may affect our ability to execute our current business strategy include, but are not limited to, the following:
Third parties may challenge the validity of our patents;
The pendency of our various litigations may cause potential licensees not to do business with us;
Our patents may expire before we can make our business strategy successful;
We face, and we expect to continue to face, intense competition from new and established competitors who may have superior products and services or better marketing, financial or other capacities than we do; and
It is possible that one or more of our potential customers or licensees develops or otherwise sources products or technologies similar to, competitive with or superior to ours.
If we are not able to adequately protect our patent rights, our business would be negatively impacted.
We believe our patents are valid, enforceable, and valuable. Notwithstanding this belief, third parties may make claims of infringement or invalidity claims with respect to our patents and such claims could give rise to material cost for defense or settlement or both, jeopardize or substantially delay a successful outcome of litigation we are or may become involved in, divert resources away from our other activities, limit or cease our revenues related to such patents, or otherwise materially and adversely affect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Additionally, several of our patents are currently, and other patents may in the future be, subject to United States Patent and Trademark Office (“USPTO”)USPTO post-grant inter partes review proceedings (“IPR”) which may result in all, or part of these patents being invalidated, or the claims of our patents being limited. Unfavorable or adverse outcomes in our litigation or IPRs may result in losses, exhaustion of financial resources, reduction in our ability to enforce our intellectual property rights, or other adverse effects, which could encumber our ability to develop and commercialize our products. Even if we are successful in enforcing our intellectual property rights, our patents may not ultimately provide us with any competitive advantages and may be less valuable than we currently expect. These risks may be heightened in countries other than the United States where laws regarding patent protection are less developed and may be negatively affected by the fact that legal standards in the United States and elsewhere for protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of United States and foreign patents and patent applications in our areas of interest, and we expect that significant litigation in these areas will continue and will add uncertainty to the value of certain patents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value from them, our business would be negatively affected.
We can provide no assurances that the licensing of our essential security patents under FRAND will be successful.
At the request of the European Telecommunications Standards Institute (“ETSI”), and the Alliance for Telecommunications Industry Solutions (“ATIS”), we agreed to update our licensing declaration to ETSI and ATIS under their respective Intellectual Property Rights policies. This was in response to our Statement of Patent Holder identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3rd3rd Generation Partnership Project Long Term Evolution (“LTE”), Systems Architecture Evolution project. We will make available a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatorynon- discriminatory terms, and conditions, with compensation) for the patents identified by us that are or become essential to applicants desiring to implement the Technical Specifications identified by us, as set forth in the updated licensing declaration under the ATIS and ETSI Intellectual Property Rights policies. Our licensing declarations under the ATIS and ETSI Intellectual Property Rights policies may limit our flexibility in determining royalties and license terms for certain of our patents. Consequently, we cannot assure you that the licensing of the essential security patents will be successful or that third parties will be willing to enter into licenses with us on reasonable terms or at all, which could have an adverse effect on our business and harm our competitive position.
Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subject to various developments in regulation, law, and consumer preferences to which we may not be able to adapt successfully.
The current regulatory environment for our products and services remains unclear. We can give no assurance that our planned product offerings will be in compliance with laws and regulations of local, state, United States federal or foreign authorities. Further, we can give no assurance that we will not unintentionally violate such laws or regulations or that such laws or regulations will not be modified, or that new laws or regulations will be enacted in the future which would cause us to be in violation of such laws or regulations. For example, Voice-Over-Internet Protocol (“VoIP”) services are not currently subject to all the same regulations that apply to traditional telephony, but it is possible that similar regulations may be applied to VoIP in the future and that these could result in substantial costs to us which could adversely affect the marketability of our products and planned products related to VoIP. For further example, the use of the Internet and private Internet Protocol (“IP”) networks for communication is largely unregulated within the United States, but may become regulated in the future; additionally, several foreign governments have enacted measures that could restrict or prohibit voice communications services over the Internet or private IP networks.
Our business depends on the growth of instant messaging, VoIP, mobile services, streaming video, file transfer and remote desktop and other next-generation Internet-based applications. A decline in the use of these applications due to complexity or cost relative to alternate traditional or newly developed communications channels, or development of alternative technologies, could cause a material decline in the number of users in these areas.
More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and services specifically may materially and adversely affect our business, financial condition, operating results, and future prospects.
Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the United States Patent and Trademark Office,USPTO, could adversely affect our licensing and enforcement activities and results of operations.
Our licensing and enforcement activities are subject to numerous risks from outside influences, including the following:
New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue. For instance, the United States Supreme Court has modified some tests used by the USPTO in granting patents during the past 20 years which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, in 2012 the United States enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act, including changes that transition the United States from a “first-to-invent” system to a “first to file” system and alter the processes for challenging issued patents;
More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO;
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer; and
As patent enforcement becomes more prevalent, it may become more difficult for us to voluntarily license our patents.
New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
Intellectual property is the subject of intense scrutiny by the courts, legislatures, and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process, or the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition, and results of operations.
We may need to raise additional capital to support our business growth, and this capital will be dilutive, may cause our stock price to drop or may not be available on acceptable terms, if at all.26
We may need to raise additional capital, which may not be available to us when needed or may not be available on terms acceptable to us, to support our business growth or to respond to business opportunities, challenges, or unforeseen circumstances, including sales under our past and any future shelf registration statements. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, the terms of our current contractual obligations and other factors.