NetSpend 2011 Annual Report Download - page 19

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of asserting patent infringement claims against us from time to time in the past and we are currently the defendant in three ongoing disputes
related to patents held by others.
In 2003, Alexsam, Inc. asserted a claim of patent infringement against us. Alexsam dismissed the claim without prejudice pursuant to the
parties' agreement to negotiate a patent license agreement. We subsequently entered into a license agreement with Alexsam that gave us the
option to begin using Alexsam's patents (if we so chose) in exchange for royalties, but provided that we would not owe Alexsam royalties for
the use of our existing systems. Alexsam has subsequently sued us for violating this license agreement and has asserted that we fraudulently
induced them to enter into it.
In October 2011, Integrated Technological Systems, Inc. ("ITS") filed a patent infringement case against NetSpend. ITS asserts in its
complaint that NetSpend has been infringing a patent issued to ITS in March of 2011 as a result of providing services that utilize the system
described in the patent to transfer funds from NetSpend Reload Packs to NetSpend GPR cards and to transfer funds between NetSpend GPR
cards. ITS is seeking a declaration that NetSpend has infringed its patent, an injunction prohibiting NetSpend from continuing the alleged
infringement of its patent; damages for NetSpend's prior alleged infringing activity; and attorneys' fees and costs.
In February 2012, TQP Development, LLC ("TQP") filed a patent infringement case against NetSpend. TQP asserts in its complaint that
NetSpend has been infringing a patent issued in May of 1995 to Telequip Corporation based on the operation of encrypted portions of
NetSpend's website. TQP is seeking a judgment that NetSpend has infringed its patent, an injunction prohibiting NetSpend from continuing to
infringe its patent, damages for NetSpend's alleged prior infringing activity and attorneys' fees and costs.
Whether or not an infringement or misappropriation claim is valid or successful, it could adversely affect our business by diverting
management's attention and involving us in costly and time-consuming litigation. In the event a claim of infringement against us is successful,
we may be required to pay past and future royalties to use technology or other intellectual property rights then in use, enter into a license
agreement and pay license fees or stop using the technology or other intellectual property rights then in use. We may be unable to obtain the
necessary licenses from third parties at a reasonable cost or within a reasonable time. In addition, our distributors may be subject to
infringement or misappropriation claims that, if successful, could preclude them from distributing our products and services or cause them to
increase the fees they charge us. In addition, if claims made against our distributors arise out of their distribution of our products and services,
we are required to indemnify them against any losses. We may not be fully protected against all losses associated with an infringement or
misappropriation claim involving the licensors and suppliers who provide us with the software and technology that we use in our business. In
addition, any such suppliers may refuse to, or may be unable to, pay any damages or honor their defense and indemnification obligations to us,
which may result in us having to bear such losses.
The majority of our revenues result from GPR cards marketed pursuant to agreements we have entered into with retail distributors. If we
are unable to maintain relationships with our retail distributors on terms that are favorable to us, our business, financial condition and
operating results may be materially adversely affected.
Our business model substantially depends on establishing agreements with our retail distributors, which primarily consist of alternative
financial services providers, as well as grocery and convenience stores and other traditional retailers. While we continually seek to diversify the
sources of our revenues and card distribution, the majority of our revenue streams have historically depended on cards distributed through these
channels. In 2011, GPR cards distributed through our largest retail distributor, ACE, accounted for approximately 37.9% of our revenues. Our
current contract with ACE expires in March 2016.
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