RISK
FACTORS
There
are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually
occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading
price of our Common Stock could decline and investors could lose all or part of their investment.
Risks
Related to Our Company
We
may not be able to successfully monetize Non-Designated IP and thus we may fail to realize all of the anticipated benefits of
such acquisitions
.
There
is no assurance that we will be able to continue to successfully acquire, develop or monetize our patent portfolio. The acquisition
of patents could fail to produce anticipated benefits or there could be other adverse effects that we do not currently foresee.
Failure to successfully monetize our patents would have a material adverse effect on our business, financial condition and results
of operations.
In
addition, the acquisition of patent portfolios is subject to a number of risks, including, but not limited to the following:
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There
is a significant time lag between acquiring a patent portfolio and recognizing revenue from such patent asset. During such
time lag, substantial amounts of costs are likely to be incurred that could have a negative effect on our results of operations,
cash flows and financial position;
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The
monetization of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our monetization
efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies
or other benefits from such acquisition; and
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We
may encounter unforeseen difficulties with our business or operations in the future that may deplete our capital resources
more rapidly than anticipated. As a result, we may be required to obtain additional working capital in the future through
public or private debt or equity financings, borrowings or otherwise. If we are required to raise additional working capital
in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders.
If we fail to obtain additional working capital, as and when needed, such failure could have a material adverse impact on
our business, results of operations and financial condition.
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Therefore,
there is no assurance that the monetization of our patent portfolios will generate enough revenue to recoup our investment.
On
August 3, 2017, the Company
and certain of our operating subsidiaries (such subsidiaries,
together with any future guarantor subsidiaries, and the Parent, the “
Company
”) entered into a First Amendment
to Amended and Restated Revenue Sharing and Securities Purchase Agreement and Restructuring Agreement (the “
First Amendment
and Restructuring Agreement
”) with DBD Credit Funding LLC (“
DBD
”) to restructure and replace the
obligations of the Company under that certain Amended and Restated Revenue Sharing and Securities Purchase Agreement, dated January
10, 2017, which was originally entered into by the Company and DBD on January 29, 2015.
Pursuant to the First Amendment
and Restructuring Agreement, certain intellectual property owned by the Company (“
IP
”) and originally purchased
by the Company from various parties (the “
Designated IP
”) is to be assigned to one or more newly created special
purpose entity (the “
SPE
”) elected by DBD, which SPE is under the management and control of an affiliate of
DBD. Once the Designated IP is assigned to the SPE, DBD will have full, direct control over the Patents under through the SPE
structure. Of the Company’s sole remaining interest in the Designated IP, or the Monetization Revenues, 15% will be paid
to the owner of the Designated IP to be contributed to the SPE. As a result, the Company’s Monetization Revenues will be
reduced to 30% from 45%. Regardless of the success of the monetization of the Designated IP, the Company will have no control
over, ownership of, or recourse to, the Designated IP. As a result, it may take longer to generate income off of the Patents.
We
presently rely upon the patent assets we acquire from other patent owners. If we are unable to monetize such assets and generate
revenue and profit through those assets or by other means, there is a significant risk that our business would fail
.
When
we commenced our current line of business in 2012, we acquired a portfolio of patent assets from Sampo IP, LLC (“
Sampo
”),
a company affiliated with our Chief Executive Officer, Douglas Croxall, from which we have generated revenue from enforcement
activities and for which we plan to continue to generate enforcement related revenue. On April 16, 2013, we acquired a patent
from Mosaid Technologies Incorporated, a Canadian corporation. On April 22, 2013, we acquired a patent portfolio through a merger
between our wholly-owned subsidiary, CyberFone Acquisition Corp., a Texas corporation and CyberFone Systems LLC, a Texas limited
liability company (“
CyberFone Systems
”). In June 2013, in connection with the closing of a licensing agreement
with Siemens Technology, we acquired a patent portfolio from that company. In September 2013, we acquired a portfolio from TeleCommunication
Systems and an additional portfolio from Intergraph Corporation. In October 2013, we acquired a patent portfolio from TT IP, LLC.
In December 2013 we engaged in three transactions: (i) in connection with a licensing agreement with Zhone, we acquired a portfolio
of patents from that company; (ii) we acquired a patent portfolio from Delphi Technologies, Inc.; and (iii) in connection with
a settlement and license agreement, we agreed to settle and release a defendant for past and future use of our patents, whereby
the defendant agreed to assign and transfer two U.S. patents and rights to us. In May 2014, we acquired ownership rights of Dynamic
Advances, LLC, a Texas limited liability company, IP Liquidity Ventures, LLC, a Delaware limited liability company and Sarif Biomedical,
LLC, a Delaware limited liability company, all of which hold patent portfolios or contract rights to the revenue generated from
patent portfolios. In June 2014, we acquired Selene Communication Technologies, LLC, which holds multiple patents in the search
and network intrusion field. In August 2014, we acquired patents from Clouding IP LLC, with such patents related to network and
data management technology. In September 2014, we acquired TLI Communications, which owns a single patent in the telecommunication
field. In October 2014, we acquired three patent portfolios from MedTech Development, LLC, which owns medical technology patents.
In June 2016, one of our subsidiaries, Munitech S.a.r.l. (“Munitech”), acquired two patent portfolios from Siemens
covering W-CDMA and GSM cellular technology. In July 2016, one of our subsidiaries, Magnus GmbH (“Magnus”), acquired
a patent portfolio from Siemens covering internet-of-things technology. In August 2016, we entered into two transactions. In the
first, we acquired a patent portfolio from CPT IP Holdings, LLC covering battery technology and in the second, we entered into
a Patent Funding and Exclusive License Agreement with a Fortune 50 company to monetize more than 10,000 patents in a single industry
vertical. In September 2016, one of our subsidiaries, Motheye Technologies, LLC (“Motheye”), acquired a patent from
Cirrex Systems, LLC, covering LED technology; however, in June 2017, following a decision by the Company not to enforce such patent,
Motheye entered into an agreement whereby such patent held by the subsidiary was assigned back to Cirrex Systems, LLC. In September
2017, the Company sold Munitech, which included both its assets and its liabilities, in a private transaction to a third party.
We
plan to generate revenues from our acquired patent portfolios. However, if our efforts to generate revenue from these assets fail,
we will have incurred significant losses and may be unable to acquire additional assets. If this occurs, our business would likely
fail.
We
have economic interests in patent portfolios that the Company does not control and the decision regarding the timing and amount
of licenses are held by third parties, which could lead to outcomes materially different than what the Company intended.
The
Company owns contract rights to two patent portfolios over which it does not exercise control and cannot determine when and if,
and if so, for how much, the patent owner licenses the patents. This could lead to situations where we have dedicated resources,
time and money to portfolios that, despite the best interests of the Company, provide little or no return on our investment. In
these situations, the Company would record a loss on its investment and incur losses that contribute to the overall performance
of the Company and could have a material adverse impact on its financial condition.
Failure
to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely
affect our business and operating results
.
Our
growth has placed, and is expected to continue to place, a strain on our limited managerial, operational and financial resources
and systems. Further, as our subsidiary companies’ businesses grow, we will be required to continue to manage multiple relationships.
Any further growth by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional
strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to
manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business
and financial results would be materially harmed.
We
initiate legal proceedings against potentially infringing companies in the normal course of our business and we believe that extended
litigation proceedings would be time-consuming and costly, which may adversely affect our financial condition and our ability
to operate our business
.
To
monetize our patent assets, we generally initiate legal proceedings against potential infringing companies, pursuant to which
we may allege that such companies infringe on one or more of our patents. Our viability could be highly dependent on the outcome
of the litigation, and there is a risk that we may be unable to achieve the results we desire from such litigation, which failure
would substantially harm our business. In addition, the defendants in the litigations are likely to be much larger than us and
have substantially more resources than we do, which could make our litigation efforts more difficult and impact the duration of
the litigation which would require us to devote our limited financial, managerial and other resources to support litigation that
may be disproportionate to the anticipated recovery.
We
anticipate that these legal proceedings may continue for several years and may require significant expenditures for legal fees
and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and
technical. Once initiated, we may be forced to litigate against others to enforce or defend our patent rights or to determine
the validity and scope of other party’s patent rights. The defendants or other third parties involved in the lawsuits in
which we are involved may allege defenses and/or file counterclaims or commence re-examination proceedings by patenting issuance
authorities in an effort to avoid or limit liability and damages for patent infringement, or declare our patents to be invalid
or non-infringed. If such defenses or counterclaims are successful, they may preclude our ability to derive monetization revenue
from the patents we own. A negative outcome of any such litigation, or an outcome which affects one or more claims contained within
any such litigation, could materially and adversely impact our business. Additionally, we anticipate that our legal fees and other
expenses will be material and will negatively impact our financial condition and results of operations and may result in our inability
to continue our business.
Variability
in intellectual property laws may adversely affect our intellectual property position.
Intellectual
property laws, and patent laws and regulations in particular, have been subject to significant variability either through administrative
or legislative changes to such laws or regulations or changes or differences in judicial interpretation, and it is expected that
such variability will continue to occur. Additionally, intellectual property laws and regulations differ among countries. Variations
in the patent laws and regulations or in interpretations of patent laws and regulations in the United States and other countries
may diminish the value of our intellectual property and may change the impact of third-party intellectual property on us. Accordingly,
we cannot predict the scope of patents that may be granted to us, the extent to which we will be able to enforce our patents against
third parties, or the extent to which third parties may be able to enforce their patents against us.
We
may seek to internally develop additional new inventions and intellectual property, which would take time and be costly. Moreover,
the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in
such activities.
We
may in the future seek to engage in commercial business ventures or seek internal development of new inventions or intellectual
property. These activities would require significant amounts of financial, managerial and other resources and would take time
to achieve. Such activities could also distract our management team from its present business initiatives, which could have a
material and adverse effect on our business. There is also the risk that such initiatives may not yield any viable new business
or revenue, inventions or technology, which would lead to a loss of our investment in such activities.
In
addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete
effectively, we would need to develop and maintain, and we would be heavily reliant upon, a proprietary position with respect
to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property
we may develop principally including the following:
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patent
applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;
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we
may be subject to interference proceedings;
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we
may be subject to opposition proceedings in the U.S. or foreign countries;
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any
patents that are issued to us may not provide meaningful protection;
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we
may not be able to develop additional proprietary technologies that are patentable;
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other
companies may challenge patents issued to us;
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other
companies may have independently developed and/or patented (or may in the future independently develop and patent) similar
or alternative technologies, or duplicate our technologies;
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other
companies may design around technologies we have developed; and
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enforcement
of our patents would be complex, uncertain and very expensive.
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We
cannot be certain that patents will be issued as a result of any future patent applications, or that any of our patents, once
issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged,
declared invalid or unenforceable or narrowed in scope. In addition, since publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions
or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents
that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant
fees or royalties in order to enable us to conduct our business. As to those patents that we may acquire, our continued rights
will depend on meeting any obligations to the seller and we may be unable to do so. Our failure to obtain or maintain intellectual
property rights for our inventions would lead to the loss of our investments in such activities, which would have a material adverse
effect on us.
Moreover,
patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to
miss opportunities to license patents before other competing technologies are developed or introduced into the market.
Our
future success depends on our ability to expand our organization to match the growth of our activities
.
As
our operations grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those
demands. We are organized as a holding company, with numerous subsidiaries. Both the parent company and each of our subsidiaries
require certain financial, managerial and other resources, which could create challenges to our ability to successfully manage
our subsidiaries and operations and impact our ability to assure compliance with our policies, practices and procedures. These
demands include, but are not limited to, increased executive, accounting, management, legal services, staff support and general
office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent
in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our
staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating
results.
Potential
acquisitions may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential
acquisition.
Our
future growth depends in part on our ability to acquire patented technologies, patent portfolios or companies holding such patented
technologies and patent portfolios. Accordingly, we have engaged in acquisitions to expand our patent portfolios and we intend
to continue to explore such acquisitions. Such acquisitions are subject to numerous risks, including, but not limited to the following:
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our
inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into
such agreement, our inability to consummate the potential acquisition;
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difficulty
integrating the operations, technology and personnel of the acquired entity including achieving anticipated synergies;
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our
inability to achieve the anticipated financial and other benefits of the specific acquisition;
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difficulty
in maintaining controls, procedures and policies during the transition and monetization process;
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diversion
of our management’s attention from other business concerns; and
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failure
of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent
portfolios and other legal and financial contingencies.
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If
we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.
Our
revenues are unpredictable, and this may harm our financial condition
.
From
November 12, 2012 to the present, our operating subsidiaries have executed our business strategy of acquiring patent portfolios
and accompanying patent rights and monetizing the value of those assets. As of October 4, 2017, on a consolidated basis and taking
into account the
execution of the First Amendment and Restructuring Agreement with DBD,
as further described below
, our operating subsidiaries owned 95 patents and had economic rights to over 10,000 additional
patents, both of which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of
industries. These acquisitions continue to expand and diversify our revenue generating opportunities. However, due to the nature
of our patent monetization business and uncertainties regarding the amount and timing of the receipt of funds from the monetization
of our patent assets resulting in part from uncertainties regarding the outcome of enforcement actions, rates of adoption of our
patented technologies, outlook for the businesses for defendants, and certain other factors, our revenues may vary substantially
from quarter to quarter, which could make our business difficult to manage, adversely affect our business and operating results,
cause our quarterly results to fall below expectations and adversely affect the market price of our Common Stock.
Our
patent monetization cycle is lengthy and costly, and our marketing, legal and administrative efforts may be unsuccessful.
We
expect significant marketing, legal and administrative expenses prior to generating revenue from monetization efforts. We will
also spend considerable time and resources educating defendants on the benefits of a settlement, prior to or during litigation,
that may include issuing a license to our patents and patent rights. As such, we may incur significant losses in any particular
period before revenue streams commence.
If
our efforts to convince defendants of the benefits of a settlement arrangement prior to litigation are unsuccessful, we may need
to continue with the litigation process or other enforcement action to protect our patent rights and to realize revenue from those
rights. We may also need to litigate to enforce the terms of existing license agreements, protect our trade secrets or determine
the validity and scope of the proprietary rights of others. Enforcement proceedings are typically protracted and complex. The
costs are typically substantial, and the outcomes are unpredictable. Enforcement actions will divert our managerial, technical,
legal and financial resources from business operations.
Our
exposure to uncontrollable risks, including new legislation, court rulings or actions by the United States Patent and Trademark
Office (“USPTO”), could adversely affect our activities including our revenues, expenses and results of operations
.
Our
patent acquisition and monetization business is subject to numerous risks including new legislation, regulations and rules. If
new legislation, regulations or rules are implemented either by Congress, the U.S. Patent and Trademark Office, the executive
branch, or the courts, that impact the patent application process, the patent enforcement process, the rights of patent holders,
or litigation practices, such changes could materially and negatively affect our revenue and expenses and, therefore, our results
of operations and the overall success of our Company. On March 16, 2013 the Leahy-Smith America Invents Act or the America Invents
Act became effective. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation
attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things,
establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined
in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual allegedly-infringing
parties by their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes
review, or IPR, process at the USPTO which can be used by defendants, and other individuals and entities, to separately challenge
the validity of any patent. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation
of our patent monetization and enforcement business. However, the America Invents Act and its implementation could increase the
uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on
our business and financial condition. Patents from nine of our portfolios are currently the subject of inter-partes reviews.
In
addition, the U.S. Department of Justice, or the DOJ, has conducted reviews of the patent system to evaluate the impact of patent
assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ
could impact the ability to effectively monetize and enforce standards-essential patents and could increase the uncertainties
and costs surrounding the enforcement of any such patented technologies. Also, the Federal Trade Commission, or FTC, has published
its intent to initiate a proposed study under Section 6(b) of the Federal Trade Commission Act to evaluate the patent assertion
practice and market impact of Patent Assertion Entities, or PAEs. The FTC’s notice and request for public comment relating
to the PAE study appeared in the Federal Register on October 3, 2013. The FTC solicited information from the Company regarding
its portfolios and activities, and the Company complied with the FTC request for such information. The results of the PAE study
by the FTC were provided to Congress and other agencies, such as the DOJ, who could take action, including legislative proposals,
based on the results of the study.
Finally,
new rules regarding the burden of proof in patent enforcement actions could substantially increase the cost of our enforcement
actions and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from
such enforcement actions.
The
report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue
as a going concern.
Our
auditors have indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2016
that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses
from operations and substantial decline in our working capital. A “going concern” opinion could impair our ability
to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue
as a going concern will depend upon the availability and terms of future funding, continued growth in product orders and shipments,
improved operating margins and our ability to profitably meet our after-sale service commitments with existing customers. If we
are unable to achieve these goals, our business would be jeopardized and the Company may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which
those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of
their investment.
Changes
in patent laws could adversely impact our business.
Patent
laws may continue to change and may alter the historically consistent protections afforded to owners of patent rights. Such changes
may not be advantageous for us and may make it more difficult for us to obtain adequate patent protection to enforce our patents
against infringing parties. Increased focus on the growing number of patent-related lawsuits may result in legislative changes
that increase our costs and related risks of asserting patent enforcement actions. For instance, in December 2013, the United
States House of Representatives passed a bill that would require non-practicing entities that bring patent infringement lawsuits
to pay defendants’ legal fees if the lawsuits are unsuccessful and certain standards are not met. In May 2017, the U.S.
Supreme Court reversed a ruling by a federal appeals court that handles patent cases, which had ruled since 1990 that suits could
be filed essentially anywhere a business sold products, and held that patent suits should be filed in the state where the defendant
is incorporated for patent infringement venue purposes. This could make it more difficult to seek damages for infringement.
Trial
judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to
appeal adverse decisions by lower courts in order to successfully enforce our patent rights.
It
is difficult to predict the outcome of litigation, particularly patent enforcement litigation. It is often difficult for juries
and trial judges to understand complex, patented technologies and, as a result, there is a higher rate of successful appeals in
patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting
in increased costs and delayed final non-appealable judgments that can require payment of damages to the Company. Although we
diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions that may be made by juries
and trial courts.
More
patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.
We
hold and continue to acquire pending patents in the application or review phase. We believe there is a trend of increasing patent
applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The
application delays could cause delays in monetizing such patents which could cause us to miss opportunities to license patents
before other competing technologies are developed or introduced into the market.
The
length of time required time to litigate an enforcement action is increasing.
Our
patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement
actions also hear criminal and other cases. Criminal cases always take priority over our actions. As a result, it is difficult
to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing
numbers of civil and criminal proceedings and, as a result, we believe that the risk of delays in our patent enforcement actions
has grown and will continue to grow and will increasingly affect our business in the future unless this trend changes.
Any
reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and
the value of those pending patent applications.
Our
ownership or acquisition of pending patent applications before the USPTO is subject to funding and other risks applicable to a
government agency. The value of our patent portfolio is dependent, in part, on the issuance of patents in a timely manner, and
any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from
Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase
in our expenses.
Our
acquisitions of patent assets may be time consuming, complex and costly, which could adversely affect our operating results
.
Acquisitions
of patent or other intellectual property assets, are often time consuming, complex and costly to consummate. We may utilize many
different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated.
As a result, we expect to incur significant operating expenses and may be required to raise capital during the negotiations even
if the acquisition is ultimately not consummated. Even if we are able to acquire particular patent assets, there is no guarantee
that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to
conduct sufficient due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a
seller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend
our ownership interest in the patent assets and, if we are not successful, our acquisition may be invalid, in which case we could
lose part or all of our investment in the assets.
We
may also identify patent or other patent assets that cost more than we are prepared to spend. We may incur significant costs to
organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if
consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results and, if we incur
losses, the value of our securities will decline.
In
addition, we may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer
markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at
which our companies may adopt our patented technologies in their products and services. As a result, there can be no assurance
as to whether technologies we acquire or develop will have value that we can monetize.
In
certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach
may put us at a competitive disadvantage and could result in harm to our business
.
We
have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer
payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not
be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the
acquisition. As a result, we might not compete effectively against other companies in the market for acquiring patent assets,
many of whom have substantially greater cash resources than we have. In addition, any failure to satisfy any debt repayment obligations
that we may incur, may result in adverse consequences to our operating results.
Any
failure to maintain or protect our patent assets could significantly impair our return on investment from such assets and harm
our brand, our business and our operating results
.
Our
ability to operate our business and compete in the patent market largely depends on the superiority, uniqueness and value of our
acquired patent assets. To protect our proprietary rights, we rely on and will rely on a combination of patent, trademark, copyright
and trade secret laws, confidentiality agreements, common interest agreements and agreements with our employees and third parties,
and protective contractual provisions. No assurances can be given that any of the measures we undertake to protect and maintain
the value of our assets will be successful.
Following
the acquisition of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness
of such assets by paying maintenance fees and making filings with the USPTO. We may acquire patent assets, including patent applications
that require us to spend resources to prosecute such patent applications with the USPTO. Moreover, there is a material risk that
patent related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability
claims or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and
adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending such
claims could cause us to incur significant costs and could divert resources away from our core business activities.
Despite
our efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our
intellectual property:
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our
patent applications, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
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issued
trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing
other properties;
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our
efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
or
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our
efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or
superior to those we acquire and/or prosecute.
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Moreover,
we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business
in the future or from which competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the
value of those assets would be reduced or eliminated, and our business would be harmed.
Weak
global economic conditions may cause infringing parties to delay entering into settlement and licensing agreements, which could
prolong our litigation and adversely affect our financial condition and operating results
.
Our
business depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced
weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response
to tighter credit, negative financial news and declines in income or asset values. This response could have a material adverse
effect on the willingness of parties infringing on our assets to enter into settlements or other revenue generating agreements
voluntarily. Entering into such agreements is critical to our business and our failure to do so could cause material harm to our
business.
If
we are unable to adequately protect our patent assets, we may not be able to compete effectively
.
Our
ability to compete depends in part upon the strength of the patents and patent rights that we own or may hereafter acquire. We
rely on a combination of U.S. and foreign patents, copyrights, trademark, trade secret laws and other types of agreements to establish
and protect our patent, intellectual property and proprietary rights. The efforts we take to protect our patents, intellectual
property and proprietary rights may not be sufficient or effective at stopping unauthorized use of our patents, intellectual property
and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or
cost-effective in every country in which our services are made available. There may be instances where we are not able to fully
protect or utilize our patent and other intellectual property in a manner that maximizes competitive advantage. If we are unable
to protect our patent assets and intellectual property and proprietary rights from unauthorized use, the value of those assets
may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual
property may also allow competitors to enter markets and produce or sell the same or similar products. In addition, protecting
our patents and patent rights is expensive and diverts critical managerial resources. If any of the foregoing were to occur, or
if we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial results could
be adversely affected.
If
we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome
and expensive. In addition, our patent rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings.
We also rely on trade secrets and contract law to protect some of our patent rights and proprietary technology. We will enter
into confidentiality and invention agreements with our employees and consultants. Nevertheless, these agreements may not be honored
and they may not effectively protect our right to our un-patented trade secrets and know-how. Moreover, others may independently
develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
We
expect that we will be substantially dependent on a concentrated number of customers. If we are unable to establish, maintain
or replace our relationships with customers and develop a diversified customer base, our revenues may fluctuate and our growth
may be limited.
A
significant portion of our revenues will be generated from a limited number of customers and licenses to such customers. For the
year ended December 31, 2016, the five largest licenses accounted for approximately 97% of our revenue. There can be no guarantee
that we will be able to obtain additional licenses for the Company’s patents, or if we able to do so, that the licenses
will be of the same or larger size allowing us to sustain or grow our revenue levels, respectively. If we are not able to generate
licenses from the limited group of prospective customers that we anticipate may generate a substantial majority of our revenues
in the future, or if they do not generate revenues at the levels or at the times that we anticipate, our ability to maintain or
grow our revenues and our results of operations will be adversely affected.
We
acquired the rights to market and license a patent analytics tool from IP Navigation Group, LLC and will dedicate resources and
incur costs in an effort to generate revenues. We may not be able to generate revenues and there is a risk that the time spent
marketing and licensing the tool will distract management from the enforcement of the Company’s patent portfolios.
We
expect to dedicate resources and incur costs in the marketing and licensing of Opus Analytic, the patent analytics tool, in order
to generate revenue, but there are no assurances that our efforts will be successful. We may not generate any revenues from the
licensing of Opus Analytic or may not generate enough license revenue to exceed our costs. Our efforts therefore could lead to
losses and could have a material adverse effect on our income, expenses or results of operations.
In
addition, the time and effort spent marketing and licensing Opus Analytics could distract the Company and its officers from the
management of the balance of the Company’s business and have a deleterious effect on results from the enforcement of the
Company’s patents and patent rights. This could lead to either sub-par returns from the patent and patent right enforcement
efforts or even total losses of the value of such patents and patent rights, leading to considerable losses.
Risks
Related to Our Indebtedness
Our
cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.
As
of June 30, 2017, we have $17,121,896 of indebtedness outstanding, net of discounts. Our indebtedness could have important consequences
to our shareholders. For example, it could:
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make
it difficult for us to satisfy our debt obligations;
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make
us more vulnerable to general adverse economic and industry conditions;
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limit
our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate
requirements;
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expose
us to interest rate fluctuations because the interest rate on the debt under our existing credit facility is variable;
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require
us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our
cash flow for operations and other purposes;
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limit
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
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place
us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.
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In
addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating
performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial,
business and other factors, many of which are beyond our control. These factors include, among others:
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economic
and demand factors affecting our industry;
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pricing
pressures;
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increased
operating costs;
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competitive
conditions; and
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other
operating difficulties.
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If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that
we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized
on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not,
among other things, be for a sufficient dollar amount. Our obligations pursuant to our loan agreement with DBD (as defined below)
are secured by a security interest in all of our assets, exclusive of intellectual property. The foregoing encumbrances may limit
our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable
economic terms, if at all.
We
may incur additional indebtedness in the future, including pursuant to the DBD Documents (as defined herein). Our incurrence of
additional indebtedness would intensify the risks described above.
The
DBD Documents contain various covenants limiting the discretion of our management in operating our business.
On
January 29, 2015, the Company and certain of its subsidiaries entered into a series of agreements including a Securities Purchase
Agreement (the “
DBD Purchase Agreement
”) and a Subscription Agreement with DBD Credit Funding, LLC (“
DBD
”),
pursuant to which the Company sold to the purchasers: (i) $15,000,000 original principal amount of Senior Secured Notes (the “
DBD
Notes
”), (ii) a right to receive a portion of certain proceeds from monetization net revenues received by the Company
(after receipt by the Company of $15,000,000 of monetization net revenues and repayment of the DBD Notes), (iii) a five-year warrant
(the “
DBD Warrant
”) to purchase 100,000 shares of the Company’s Common Stock exercisable at $7.44 per
share, subject to adjustment; and (iv) 134,409 shares of the Company’s Common Stock. Pursuant to the DBD Purchase Agreement,
as security for the payment and performance in full of the secured obligations, the Company and certain subsidiaries executed
and delivered in favor of the purchasers a Security Agreement and a Patent Security Agreement, including a pledge of the Company’s
interests in certain of its subsidiaries (together with the DBD Purchase Agreement, the DBD Notes and the DBD Warrant, the “
DBD
Documents
”). On February 12, 2015, the Company exercised its right to require the purchasers to purchase an additional
$5,000,000 of Notes from the Company.
On
January 10, 2017, the Company and certain of its subsidiaries (each a “
Subsidiary
” and collectively with the
Issuer, the “
Company
”) entered into an amended and restated revenue sharing and securities purchase agreement
(the “
ARRSSPA
”) with DBD, under which the Company and DBD amended and restated the Revenue Sharing and Securities
Purchase Agreement dated January 29, 2015 (the “
Original Agreement
”) pursuant to which (i) DBD purchased $20,000,000
in promissory notes, (ii) an interest in the Company’s revenues from certain activities and (iii) warrants to purchase 100,000
shares of the Company’s common stock. As of the close of the restructuring on January 10, 2017, there was $20,131,351 in
outstanding principal and PIK interest accrued.
The
DBD Documents contain, subject to certain carve-outs, various restrictive covenants that limit our management’s discretion
in operating our business. In particular, these instruments limit our ability to, among other things:
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incur
additional debt;
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grant
liens on assets;
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dispose
assets outside the ordinary course of business; and
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make
fundamental business changes.
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On
August 3, 2017, the Company
entered into the First Amendment and Restructuring Agreement
with DBD to restructure and replace the obligations of the Company under the
ARRSSPA
.
Pursuant to the First Amendment and Restructuring Agreement, certain Designated IP is to be assigned to one or more newly
created SPE elected by DBD, which SPE is under the management and control of an affiliate of DBD. Once the Designated IP is assigned
to the SPE, DBD will have full, direct control over the Company’s patents under through the SPE structure. Of the Company’s
sole remaining interest in the Designated IP, or the Monetization Revenues, 15% will be paid to the owner of the Designated IP
to be contributed to the SPE. As a result, the Company’s Monetization Revenues will be reduced to 30% from 45%. Regardless
of the success of the monetization of the Designated IP, the Company will have no control over, ownership of, or recourse to,
the Designated IP.
The
First Amendment and Restructuring Agreement requires the Company to contribute and assign the Designated IP to the SPE. At such
time, DBD shall continue to have the sole and absolute discretion to make any and all decisions with respect to the Designated
IP including by way of example and not limitation (x) the initiation, direction, termination, conclusion or negotiation of any
assignment, sale or license (whether directly or through multiple tiers or sub-licensees) of any of the Company’s patent
or any other type of a monetization activity of any nature or description; (y) the maintenance or abandonment, in whole or in
part, of any one or more of the Designated IP; or (z) the discretion to make or to decline to make cash advances.
The
First Amendment and Restructuring Agreement is subject to certain events of default, including, among other things, liquidation
or dissolution, change of control, bankruptcy, the Company’s failure to make payments pursuant to the terms of the First
Amendment and Restructuring Agreement, the Company’s failure to secure necessary consents to permit completion of the structure
of the SPE or the Company’s failure to perform or observe certain covenants. Upon the occurrence of an event of default,
DBD may proceed to protect and enforce its rights through seeking the Company’s specific performance of any covenant or
condition, as set forth in the First Amendment and Restructuring Agreement, or may declare the remaining unpaid balance owed under
the ARRSSPA, as amended, and any other amounts owed pursuant to the First Amendment and Restructuring Agreement to be immediately
due and payable.
The
rights of the holders of the Company’s Common Stock will be subordinate to our creditors.
On
October 16, 2014, we issued convertible notes in the aggregate principal amount of $5,550,000, which mature on October 16, 2018,
of which, $500,000 remains outstanding as of June 30, 2017. On January 29, 2015 and February 12, 2015, we issued to DBD Notes
in the principal amounts of $15,000,000 and $5,000,000, respectively, and on January 10, 2017, we entered into an amendment of
the agreement with DBD whereby we restructured the principal amortization scheduled. At the close of the restructuring, the outstanding
principal and accrued PIK interest was $15,630,103.
If
the First Amendment and Restructuring Agreement is approved by the Company’s shareholders and implemented by the Company,
it will eliminate the requirement for the Company to make monthly principal and interest payments on the DBD Notes and to pay
the DBD Notes at maturity or upon acceleration, will eliminate the liquidity covenant, and will replace the DBD Note obligations
and current revenue share with comprehensive revenue share through the structure of the SPE.
If
the First Amendment and Restructuring Agreement is not approved by the Company’s shareholders, the Company will be in default
and an Event of Default under the DBD Notes and the ARRSSPA will occur. In this situation, all of the obligations, including the
DBD Note and other amounts payable to DBD under the First Amendment and Restructuring Agreement will then become due and payable,
and DBD will have the ability to take control of and dispose of the patent assets to pay the amounts due.
Accordingly,
the holders of Common Stock will rank junior to such indebtedness, as well as to other non-equity claims on the Company and our
assets, including claims upon liquidation.
Risks
Relating to Our Stock
Exercise
or conversion of warrants and convertible securities will dilute stockholders’ percentage of ownership.
We
have issued convertible securities, options and warrants to purchase shares of our Common Stock to our officers, directors, consultants
and certain shareholders. In the future, we may grant additional options, warrants and convertible securities. The exercise or
conversion of options, warrants or convertible securities will dilute the percentage ownership of our stockholders. The dilutive
effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders
of these securities may be expected to exercise or convert such options, warrants and convertible securities at a time when we
would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading
at a price higher than the exercise or conversion price of the securities. The exercise or conversion of outstanding warrants,
options and convertible securities will have a dilutive effect on the securities held by our stockholders.
Our
Common Stock may be delisted from The NASDAQ Capital Market (“NASDAQ”) if we fail to comply with continued listing
standards.
Our
Common Stock is currently traded on NASDAQ under the symbol “MARA”. If we fail to meet any of the continued listing
standards of NASDAQ, our Common Stock could be delisted from NASDAQ. These continued listing standards include specifically enumerated
criteria, such as:
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a
$1.00 minimum closing bid price;
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stockholders’
equity of $2.5 million;
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500,000
shares of publicly-held Common Stock with a market value of at least $1 million;
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300
round-lot stockholders; and
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compliance
with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied
in the exercise of NASDAQ’s discretionary authority.
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On
May 17, 2017, the Company received a written notification from NASDAQ indicating that the Company was not in compliance with the
minimum bid price requirement set forth in NASDAQ Rules for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule
5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A)
provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive
business days. Based on the closing bid price of the Company’s common stock for the 30 consecutive business days from April
3, 2017 to May 16, 2017, the Company did not meet the minimum bid price requirement. On July 17, 2017, the Company received a
second written notification from NASDAQ granting the Company an extension to regain compliance with Nasdaq Listing Rule 5550(b)(1),
which requires companies to maintain stockholders’ equity of at least $2.5 million. If the Company fails to evidence compliance
upon filing its periodic report for the year ending December 31, 2017, with the SEC and NASDAQ, the Company may be subject to
delisting.
We
could fail in future financing efforts or be delisted from NASDAQ if we fail to receive stockholder approval when required.
Under
the NASDAQ rules, we are required to obtain stockholder approval for any issuance of additional equity securities that would comprise
20% or more of the total shares of our Common Stock outstanding before the issuance of such securities sold at a discount to the
greater of book or market value in an offering that is not deemed to be a “public offering” by NASDAQ. Funding of
our operations and acquisitions of assets may require issuance of additional equity securities at a discount that would comprise
20% or more of the total shares of our Common Stock outstanding, but we might not be successful in obtaining the required stockholder
approval for such an issuance. If we are unable to obtain financing due to stockholder approval difficulties, such failure may
have a material adverse effect on our ability to continue operations.
Our
Common Stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our Common
Stock.
There
has been limited trading in our Common Stock and there can be no assurance that an active trading market in our Common Stock will
either develop or be maintained. Our Common Stock has experienced, and is likely to experience in the future, significant price
and volume fluctuations, which could adversely affect the market price of our Common Stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy
or the condition of the financial markets could cause the price of our Common Stock to fluctuate substantially. These fluctuations
may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot
predict the actions of market participants and, therefore, can offer no assurances that the market for our will be stable or appreciate
over time.
Holders
of the Company’s Common Stock will experience immediate and substantial dilution upon the conversion of the Company’s
outstanding preferred stock, convertible notes, for which the underlying shares are registered herein, and the exercise of the
Company’s outstanding options and warrants, for which the underlying shares are not being registered herein
.
As
of October 4, 2017:
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2,388,194
shares of our common stock issuable upon the exercise of outstanding stock options having a weighted average exercise price
of $3.44 per share;
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29,951,573
shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.45;
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782,004
shares of common stock issuable upon conversion of 782,004 outstanding shares of Series B Preferred Stock;
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55,000,000
shares of common stock issuable upon conversion of $5,500,000 in outstanding convertible notes.
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Assuming
full conversion of the Series B and the convertible notes and exercise of all outstanding options and warrants, including those
pursuant to the registration statement herein, the number of shares of our Common Stock outstanding will increase 88,121,771 shares
from 31,104,062 shares of Common Stock outstanding as of October 4, 2017, to 119,225,833 shares of Common Stock outstanding.
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:
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changes
in our industry;
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competitive
pricing pressures;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel;
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sales
of our Common Stock;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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loss
of any strategic relationship;
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regulatory
developments; and
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economic
and other external factors.
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In
addition, the securities markets have from time to time experienced significant price and 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.
We
have never paid nor do we expect in the near future to pay cash dividends.
On
November 19, 2014, we declared a stock dividend pursuant to which holders of our common stock as of the close of business on December
15, 2014 received one additional share of Common Stock for each share of common stock held by such holders. Other than as described
herein, we have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock
for the foreseeable future. While it is possible that we may declare a dividend after a large settlement, investors should not
rely on such a possibility, nor should they rely on an investment in us if they require income generated from dividends paid on
our capital stock. Any income derived from our Common Stock would only come from rise in the market price of our Common Stock,
which is uncertain and unpredictable.
Offers
or availability for sale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline.
If
our stockholders sell substantial amounts of our Common Stock in the public market upon the expiration of any statutory holding
period or lockup agreements, under Rule 144, or issued upon the exercise of outstanding warrants or other convertible securities,
it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price
of our Common Stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could
make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate. The shares of our restricted Common Stock will be freely tradable
upon the earlier of: (i) effectiveness of a registration statement covering such shares and (ii) the date on which such shares
may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act.
Because
we became a public company by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There
may be risks associated with us becoming a public company through a reverse merger. Securities analysts of major brokerage firms
may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our Common Stock. No
assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf.
Investor
relations activities, nominal “float” and supply and demand factors may affect the price of our stock.
We
expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to generate investor
awareness. These campaigns may include personal, video and telephone conferences with investors and prospective investors in which
our business practices are described. We may provide compensation to investor relations firms and pay for newsletters, websites,
mailings and email campaigns that are produced by third parties based upon publicly-available information concerning us. We do
not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own
research or methods. Investor relations firms should generally disclose when they are compensated for their efforts, but whether
such disclosure is made or complete is not under our control. In addition, investors may, from time to time, also take steps to
encourage investor awareness through similar activities that may be undertaken at the expense of the investors. Investor awareness
activities may also be suspended or discontinued which may impact the trading market our Common Stock.
If
we lose key personnel or are unable to attract and retain additional qualified personnel, we may not be able to successfully manage
our business and achieve our objectives.
We
believe our future success will depend upon our ability to retain our key management and attract new key personnel. On August
30, 2017, the Company entered into an Amended and Restated Retention Agreement with Doug Croxall, the Company’s Chief Executive
Officer, (the “
Amended and Restated Agreement
”) amending the Retention Agreement dated August 22, 2017. Pursuant
to the Amended and Restated Agreement, the employment agreements between Mr. Croxall and the Company were terminated and Mr. Croxall
shall continue to serve as Chief Executive Officer and Chairman of the Board until no later than September 30, 2017. The Company
intends to seek a replacement Chief Executive Officer and there can be no assurance that a suitable individual can be retained.
On
August 31, 2017, the Company entered into a Consulting Termination Agreement and Release Agreement with Erich Spangenberg and
as of such date, the Consulting Agreement dated August 3, 2017, between the Company and Mr. Spangenberg was deemed terminated
and of not further force or effect. On such date, the Company entered into a new Consulting Agreement with
Page
Innovations, LLC (“
Page
”), an entity designated by
Mr. Spangenberg, pursuant to which Mr. Spangenberg
would provide advice and consulting services to the Company, as an independent contractor, with respect to the restructuring of
the Company as may be requested by the Company from time to time.
On
August 30, 2017, the Company entered into a Retention Agreement with Mr. Francis Knuettel, II (the “
Knuettel Retention
Agreement
”), pursuant to which the employment agreement between Mr. Knuettel and the Company was terminated, and Mr.
Knuettel shall continue to serve as Chief Financial Officer t
hrough March 31, 2017, unless
earlier terminated in accordance with the Knuettel Retention Agreement
. After that date, the Company may seek to enter
into a new agreement with Mr. Knuettel or with an alternative suitable individual to serve as Chief Financial Officer and there
can be no assurance that the Company will be able to retain a qualified individual for this position.
On
August 30, 2017, the Company entered into a revised employment agreement with James Crawford, the Company’s Chief Operating
Officer (the “
Crawford Agreement
”), pursuant to which the employment agreements between Mr. Crawford and the
Company were terminated, and Mr. Crawford shall continue to serve as the Chief Operating Officer until such time as provided in
the Crawford Agreement.
We
may not be successful in attracting, assimilating and retaining our employees in the future. We are competing for employees against
companies that are more established than we are and that have the ability to pay more cash compensation than we do. As of the
date hereof, we have not experienced problems hiring employees.
If
we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results
accurately and timely or to prevent fraud. Any inability to report and file our financial results accurately and timely could
harm our reputation and adversely impact the trading price of our Common Stock.
Effective
internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment
existed, and our business and reputation with investors may be harmed. As a result, our small size and any future internal control
deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an
in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover
areas of our internal control that need improvement.
As
a result of its internal control assessment, the Company determined there is a material weakness with respect to segregation of
duties.
The
Company determined that there is a material weakness in its internal controls with respect to the financial reporting and closing
process, resulting from a lack of segregation of duties and evidence of control review. Since the Company has few employees, most
of whom have no involvement in our financial controls and reporting, we are unable to sufficiently distribute reporting and accounting
to tasks across enough individuals to insure that the Company does not have a material weakness in its financial reporting system.