ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE STATEMENTS THAT INCLUDE INFORMATION BASED UPON BELIEF OF OUR MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO MANAGEMENT. STATEMENTS CONTAINING TERMS SUCH AS “BELIEVES”, “EXPECTS”, “ANTICIPATES”, “INTENDS” OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED BEGINNING ON PAGES 10-2113-24 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR 2012.2013.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property.property assets. We presently own twenty (20)twenty-one (21) patents issued by the U.S. Patent and Trademark Office that relate to various technologies including patents covering (i) the delivery of power over Ethernet (“PoE”) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras, over Ethernet networks;cameras; (ii) foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii) enabling technology for identifying media content on the Internet and taking further action to be performed based on such identification including, among others, the insertion of advertising and the facilitation of the purchase of goods and services related to the updatedsuch content; and (iv) systems and methods for the transmission of audio, video and data in order to achieve high quality of service (QoS) over computer and telephony networks. In addition, we continually review opportunities to acquire or license additional intellectual property. Our strategy is to pursue licensing and strategic alliances with companies in industries that manufacture and sell products that make use of the technologies underlying our intellectual property as well as with other users of the technologies who benefit directly from the technologies including corporate, educational and governmental entities.
We have been actively engaged in the licensing of our patent (U.S. Patent No. 6,218,930) covering delivery of power over Ethernet cables (the “Remote Power Patent”). As of September 30, 2013,March 31, 2014, we had entered into sixteen (16) license agreements with respect to our Remote Power Patent which, among others, include license agreements with Cisco Systems, Inc. and Cisco Linksys, LLC, Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc. and NEC Corporation and several other major data networking equipment manufacturers (See(see Note D to our financial statements included in this quarterly report). Our current strategy includes continuing to pursueour licensing opportunities forefforts with respect to our Remote Power Patent from vendors of PoE equipmentand our efforts to monetize the two patent portfolios (the Cox Patent Portfolio and the Mirror Worlds Patent Portfolio) we acquired in order to resolve possible infringement of the Remote Power Patent by such vendors.2013. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize such intellectual property. Our strategy includes working with inventors and patent owners to assist in the development and monetization of their patented technologies. We may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. The formOur acquisition strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as we have achieved with respect to our Remote Power Patent. Our Remote Power Patent has generated licensing revenue in excess of such relationships may differ depending upon the opportunity and may include, among other things, a strategic investment in such third party, the provision of financing to such third party or the formation of a joint venture with such third party for the purpose of monetizing their intellectual property assets.$60,000,000 from May 2007 through March 31, 2014.
On February 28, 2013, as part of our acquisition strategy, we acquired from Dr. Ingemar Cox, a technology leader in digital watermarking content identification, digital rights management and related technologies, four (4) patents (as well as a pending patent application) (the “Cox Patent Portfolio”) for a purchase price of $1,000,000 in cash and 403,226 shares of our common stock. In addition, we are obligated to pay Dr. Cox 12.5% of the net proceeds generated by us from licensing, sale or enforcement of the patents (See(see Note B[2] to our financial statements included in this quarterly report). As of September 30, 2013,In January 2014 and February 2014, we filed seven (7) patent applications withwere issued two additional patents (U.S. Patent No. 8,640,179 and U.S. Patent No. 8,656,441) by the United States Patent and Trademark Office seeking patent protection based uponrelated to the original patent application filed in 2000 and we anticipate further issuances of additional claims for this portfolio.Cox Patent Portfolio.
On May 21, 2013, our newly formed subsidiary, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, acquired all of the patents previously owned by Mirror Worlds, LLC (which subsequently changed its name to Looking Glass LLC) including nine (9) issued United States patents and five (5) pending applications covering foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system (the “MW“Mirror Worlds Patent Portfolio”). The consideration we paid Mirror Worlds, LLC for the MWMirror Worlds Patent Portfolio consisted of (i) $3,000,000 in cash, (ii) 5-year warrants to purchase 875,000 shares of our common stock at $1.40 per share, and (iii) 5-year warrants to purchase 875,000 shares of our common stock at $2.10 per share. (Seeshare (see Note B[2] to our financial statements included in this quarterly report). As part of the acquisition of the MWMirror Worlds Patent Portfolio, we also entered into an agreement with Recognition Interface, LLC (“Recognition”), an entity that financed the commercialization of the MWMirror Worlds Patent Portfolio prior to its sale to Mirror Worlds, LLC and also retained an interest in the licensing proceeds of the patent portfolio held by Mirror Worlds, LLC. Pursuant to the terms of our agreement with Recognition, Recognition received (i) 5-year warrants to purchase 250,000 shares of our common stock at $1.40 per share, and (ii) 5-year warrants to purchase 250,000 shares of our common stock at $2.10 per share. Recognition also received from us an interest in the net proceeds realized from the monetization of the MWMirror Worlds Patent Portfolio as follows: (i) 10% of the first $125 million of net proceeds,proceeds; (ii) 15% of the next $125 million of net proceeds,proceeds; and (iii) and 20% of any portion of the net proceeds in excess of $250 million. In addition, Abacus and Associates, Inc., an entity affiliated with Recognition, received a 60-day warrant to purchase 500,000 shares of our common stock at $2.05 per share which it exercised in full on July 22, 2013 resulting in proceeds to us of $1,025,000. As a result of such warrant exercise and in accordance with our agreement with Recognition, we issued additional warrants to Recognition to purchase an aggregate of 250,000 shares of our common stock (125,000 shares at an exercise price of $2.10 per share and 125,000 shares at an exercise price of $1.40 per share) of our common stock (See(see Note B[2] to our financial statements included in this quarterly report).
The inventions described in the MW Patent Portfolio resulted from the work done by Yale University computer scientist, Profession David Gelernter, and his then graduate student, Dr. Eric Freeman, in the mid-1990s. Both Professor Gelernter and Dr. Freeman entered into consulting agreements with us as part of our acquisition of the MW Patent Portfolio. Professor Gelernter and Dr. Freeman are currently associated with Lifestreams Technologies Corporation (“Lifestreams”), a company that develops next generation applications and methodologies aimed at organizing and displaying digital data. Lifestreams is a licensee of the MW Patent Portfolio. In connection with the acquisition of the MW Patent Portfolio, we also acquired an equity interest in Lifestreams. In addition, in July 2013 we made an additional equity investment in Lifestreams and, as part of an amended license agreement with Lifestreams related to the MW Patent Portfolio, we received a warrant to purchase 7.5% of the outstanding common stock of Lifestreams on a fully diluted basis.
On May 22, 2013, through our newly formedwholly-owned subsidiary, Mirror Worlds Technologies, LLC, we initiated patent litigation against Apple, Inc., Microsoft, Inc., Hewlett-Packard Company, Lenovo Group Ltd., Lenovo (United States), Inc., Dell, Inc., Best Buy Co., Inc., Samsung Electronics America, Inc. and Samsung Telecommunications America L.L.C., in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of U.S. Patent No. 6,006,227 (part of the MWMirror Worlds Patent Portfolio we acquired) (See(see “Legal Proceedings” at page 28pages 26-28 hereof).
On April 4, 2014, we initiated litigation against Google and YouTube in the United States District Court for the Southern District of New York for infringement of several of our patents within the Cox Portfolio relating to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s Content ID system.
In September 2011, we initiated patent litigation against sixteen (16) data networking equipment manufacturers in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power Patent. Named as defendants in the lawsuit (excluding related parties) were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc. Network-1 seeks monetary damages based upon reasonable royalties.Patent (see “Legal Proceedings” at page 27 hereof). During the year ended December 31, 2012 we reached settlement agreements with defendants Motorola Solutions, Inc. ("Motorola"), Transition Networks, Inc. ("Transition Networks") and GarretCom, Inc. In February 2013 we reached settlement agreements with Allied Telesis, Inc. (“Allied Telesis”) and NEC Corporation (“NEC”). As partsettled the litigation against five (5) of the settlements, Motorola, Transition Networks, GarretCom, Allied Telesis and NEC each entered into a non-exclusive license agreement for our Remote Power Patent pursuant to which each such defendant agreed to license our Remote Power Patent for its full term (which expires in March 2020) and pay a license initiation fee and quarterly or annual royalties based on their sales of PoE products. defendants. On January 25, 2013, certain defendants in the aforementioned litigation filed a motion to stay the litigation pending completion or termination of the Inter Partes Review proceedings at the United States Patent and Trademark Office (see below and Note D(5)Notes D[2] and D[5] to the financial statements included in this quarterly report). On March 5, 2012,2013, the Court granted certain defendants’ motion and stayed the litigation pending the disposition of the Inter Partes Review proceedings.
As a result of a settlement in July 2010 of certain patent litigation we had initiated against Cisco Systems, Inc. and Cisco-Linksys, LLC (collectively “Cisco”), we entered into non-exclusive licenses for our Remote Power Patent with Cisco and the other defendants. For the nine month periodsyears ended September 30,December 31, 2013 and September 30,December 31, 2012, our royalty revenue from Cisco constituted 81%77% of our revenue. For the three month period ended March 31, 2014 and 80%March 31, 2013, our royalty review from Cisco constituted 91% and 86% of our revenue, respectively. ForIn accordance with our Settlement and License Agreement, dated May 25, 2011 (the “Agreement”), which expanded upon the years ended 2012July 2010 agreement, Cisco is obligated to pay us royalties (which began in the first quarter of 2011) based on its sales of PoE products up to maximum royalty payments per year of $8 million through 2015 and 2011, our$9 million per year thereafter for the remaining term of the patent. The royalty revenue from Cisco constituted 77% and 87%payments are subject to certain conditions including the continued validity of our revenue, respectively.Remote Power Patent. Due to our annual royalty rate structure with Cisco which includes declining rates as the volume of PoE product sales increase during the year, royalties from Cisco are anticipated to be highest in the first quarter of the calendar year and decline for each of the remaining calendar quarters of the year.
In late December 2013 we exercised our right to audit the royalties paid to us by Cisco for the years 2012 and 2013 in accordance with our May 2011 license agreement with Cisco. Royalty revenue from Cisco, our largest customer, constituted 77% of our revenue for the years ended December 31, 2013 and December 31, 2012. While the Cisco audit has not been completed, as a result of the work of our auditors to date we believe it is likely that Cisco has not included all licensed products in their quarterly royalty reports to us as required by the license agreement. Accordingly, we believe there will be additional royalties due us for 2012 and 2013 as well as the three months ended March 31, 2014, although we cannot be certain of this because the audit is not complete. In addition, the amount of such additional royalties cannot be determined at this time. Notwithstanding the aforementioned, since the audit has not been completed the final results of the audit are uncertain and it is possible that our auditors may obtain information inconsistent or contrary to the information they have obtained to date. In general, under the terms of our license agreement with Cisco adjustments to royalty revenue (including under-payments or over-payments) from Cisco will be included in our financial statements for the period in which we receive such adjustments. In accordance with the terms of our license agreement with Cisco, any additional royalty revenue we receive from Cisco as a result of the audit is limited to the difference between the annual cap ($8.0 million) and the actual royalties previously paid to us by Cisco for each such year.
On July 20, 2012, an unknown third party filed with the United States Patent and Trademark Office (“USPTO”) a request for ex parte reexamination of certain claims of our Remote Power Patent. On September 5, 2012, the USPTO issued an order granting the reexamination. The request for reexamination was stayed by the USPTO on December 21, 2012 pending the termination or completion of the Inter Partes Review proceedings at the USPTO involving our Remote Power Patent.At September 30, 2013, Avaya Inc., Dell Inc., Sony Corporation of America and Hewlett Packard Co. wereare petitioners (and continue to be petitioners) in Inter Partes Review proceedings (which have beenwere joined together) (the “IPR Proceeding”) pending at the United States Patent and Trademark OfficeUSPTO before the Patent Trial and Appeal Board (the “Patent Board”). (See(see “Legal Proceedings” at page 28pages 27-28 of this quarterly report). A trial beforehearing on the Patent Board with respect tomerits of the IPR Proceeding was held on January 9, 2014 and a decision is scheduled for January 17, 2014.pending. Petitioners in the IPR Proceeding seek to cancel certain claims of the Remote Power Patent as unpatentable. In the event that the USPTO reaches a final determination in the IPR Proceeding or the ex parte reexamination (referenced above) that certain of our claims related to the Remote Power Patent are unpatentable,is invalid, such a determination (unless overturned by the United States Court of Appeals for the Federal Circuit) would have a material adverse effect on our business, financial condition and results of operations as our entire current revenue stream is dependent upon the continued validity of our Remote Power Patent.
At September 30, 2013,March 31, 2014, we had net operating loss carryforwards (NOLs) totaling approximately $24,317,000$23,145,000 expiring through 2029, with a future tax benefit of approximately $8,268,000.$7,869,000. At DecemberMarch 31, 20122014 and March 31, 2013, $4,948,000 and $5,579,000, respectively, was recorded as a deferred tax asset on our balance sheet. During the three months ended March 31, 2014, as a result of income (before taxes) for the quarter of $2,152,000, $756,000 was recorded as income tax expense and the deferred tax asset was reduced by $711,000 to $4,948,000. To the extent that we earn income in the future, we will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. Utilization of NOL credit carryforwards can be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 Compared To Three Months Ended March 31, 2013
Revenue. We had revenue of $4,491,000 for the three months ended March 31, 2014 as compared to revenue of $4,064,000 for the three months ended March 31, 2013, which was related to the receipt of royalties pursuant to license agreements for our Remote Power Patent. The increase of $427,000 or 10.5% in revenue for the three months ended March 31, 2014 was primarily due to increased royalty revenue from Cisco, our largest licensee.
Cost of Revenue. We had a cost of revenue of $1,314,000 and $1,225,000 for the three months ended March 31, 2014 and March 31, 2013, respectively. Included in the cost of revenue for the three months ended March 31, 2014 were contingent legal fees of $1,048,000 payable to our patent litigation counsel (See Note B[1] to our financial statements included in this quarterly report) and $225,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (See Note C[1] to our financial statements included in this quarterly report). Included in the cost of revenue for the three months ended March 31, 2013 were contingent legal fees of $995,000 payable to our patent litigation counsel and $203,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
Gross Profit. The gross profit for the three months ended March 31, 2014 was $3,177,000 as compared to $2,839,000 for the three months ended March 31, 2013. The increased gross profit of $338,000 or 11.9% for the three months ended March 31, 2014 was primarily due to increased royalty revenue from Cisco, our largest licensee.
Operating Expenses. Operating expenses for the three months ended March 31, 2014 were $1,034,000 as compared to $790,000 for the three months ended March 31, 2013. General and administrative expenses include overhead expenses, and finance, accounting, legal and other professional services incurred by us. General and administrative expenses decreased by $64,000 from $662,000 for the three months ended March 31, 2013 to $598,000 for the three months ended March 31, 2014, due primarily to decreased legal fees and costs. Amortization of patents was $409,000 for the three months ended March 31, 2014 as compared to $16,000 for the three months ended March 31, 2013. The increased cost of amortization of patents for the three months ended March 31, 2014 was due to our acquisition of thirteen (13) additional patents in 2013.
Interest Income. Interest income for the three months ended March 31, 2014 was $9,000 as compared to interest income of $6,000 for the three months ended March 31, 2013.
Operating Income. We had an operating income of $2,143,000 for the three months ended March 31, 2014 compared with an operating income of $2,049,000 for the three months ended March 31, 2013.
Income Taxes (Benefit). A provision for federal, state and local income taxes of $756,000 and $663,000, which included a $711,000 and $615,000 reduction in our deferred tax asset, were recorded for the three months ended March 31, 2014 and March 31, 2013, respectively.
Deferred Tax Benefit/NOLs. At March 31, 2014, we had net operating loss carryforwards (NOLs) totaling approximately $25,255,000$23,145,000 expiring through 2029, with a future tax benefit of approximately $8,840,000. During the second quarter of 2011, as a result of the Company’s recent results$7,869,000. At March 31, 2014 and projected future operating results, management determined that a portion of the NOL was more likely than not to be utilized resulting in the recording of a one-time, non-cash, income tax benefit of $7,000,000 (income) or $0.29 per share (basic) for the three month period ended June 30, 2011. At DecemberMarch 31, 20122013, $4,948,000 and September 30, 2013, $6,194,000 and $6,002,000,$5,579,000, respectively, were recorded as a deferred tax asset on our balance sheet. During the ninethree month period ended September 30, 2013,March 31, 2014 as a result of income (before
(before taxes) for the period of $2,181,000, $215,000$2,152,000, $756,000 was recorded as income tax expense and the deferred tax asset was reduced by $192,000$711,000 to $6,002,000.$4,948,000. To the extent that we earn income in the future, we will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. Utilization of NOL credit carryforwards can be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 Compared To Three Months Ended September 30, 2012
Revenue. We had revenue of $1,227,000 for the three months ended September 30, 2013 as compared to revenue of $1,418,000 for the three months ended September 30, 2012, which was related to the receipt of royalties pursuant to license agreements for our Remote Power Patent. The decrease in revenue of $191,000 for the three months ended September 30, 2013 was due to decreased royalty revenue from our licensees.
Cost of Revenue. We had a cost of revenue of $345,000 and $393,000 for the three months ended September 30, 2013 and September 30, 2012, respectively. Included in the cost of revenue for the three months ended September 30, 2013 were contingent legal fees of $241,000 payable to our patent litigation counsel (See Note B[1] to our financial statements included in this quarterly report) and $58,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (See Note C[1] to our financial statements included in this quarterly report). Included in the cost of revenue for the three months ended September 30, 2012 were contingent legal fees of $297,000 payable to our patent litigation counsel and $71,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
Gross Profit. The gross profit for the three months ended September 30, 2013 was $882,000 as compared to $1,025,000 for the three months ended September 30, 2012. The decrease in gross profit of $143,000 or 14% for the three months ended September 30, 2013 was primarily due to decreased royalty revenue from our licensees.
Operating Expenses. Operating expenses for the three months ended September 30, 2013 were $1,226,000 as compared to $682,000 for the three month period ended September 30, 2012. General and administrative expenses include overhead expenses, and finance, accounting, legal
and other professional services incurred by us. General and administrative expenses increased by $116,000 from $622,000 for the three months ended September 30, 2012 to $738,000 for the three months ended September 30, 2013, due primarily to increased legal fees relating to our patent litigations. Amortization of patents increased by $416,000 from $2,000 for the three months ended September 30, 2012 to $418,000 for the three months ended September 30, 2013. The increased cost of amortization of patents was due to our acquisition of thirteen (13) additional patents in 2013. Non-cash compensation expense related to the issuance of stock options was $70,000 for the three months ended September 30, 2013 as compared to $58,000 for the three months ended September 30, 2012.
Interest Income. Interest income for the three months ended September 30, 2013 was $9,000 as compared to interest income of $3,000 for the three months ended September 30, 2012.
Operating Income. We had an operating (loss) of $(344,000) for the three months ended September 30, 2013 compared with an operating income of $343,000 for the three months ended September 30, 2012. The decrease in operating income of $687,000 was primarily due to increased patent amortization expense, increased non-cash compensation expenses and legal costs and a decrease in revenue.
Income Taxes (Benefit). A provision (benefit) for federal, state and local income taxes of $(127,000) and $152,000, which included a $124,000 increase and $141,000 reduction in our deferred tax asset, were recorded for the three months ended September 30, 2013 and September 30, 2012, respectively.
Deferred Tax Benefit/NOLs. At September 30, 2013, we had net operating loss carryforwards (NOLs) totaling approximately $24,317,000 expiring through 2029, with a future tax benefit of approximately $8,268,000. During the second quarter of 2011, as a result of our recent results and projected future operating results, management determined that a portion of the NOL was more likely than not to be utilized resulting in the recording of a one-time, non-cash, income tax benefit of $7,000,000 (income) or $.29 per share (basic) for the three month period ended June 30, 2011 (See Note A[5] to our financial statements included in this quarterly report). At September 30, 2013 and September 30, 2012, $6,002,000 and $6,194,000, respectively, has been recorded as a deferred tax benefit on our balance sheet. During the three month period ended September 30, 2013, as a result of a loss (before taxes) for the period of $(355,000), the deferred tax asset was increased by $124,000 to $6,002,000. To the extent that we earn income in the future, we will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. Utilization of NOL credit carryforwards can be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.
Net Income (Loss). As a result of the foregoing, we realized a net (loss) of $(208,000) or $(0.01) per share (basic) and $(0.01) (diluted) for the three months ended September 30, 2013 compared with net income of $194,000 or $0.01 per share (basic) and $0.01 per share (diluted) for the three months ended September 30, 2012.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2013 Compared To Nine Months Ended September 30, 2012
Revenue. We had revenue of $7,198,000 for the nine months ended September 30, 2013 as compared to revenue of $7,809,000 for the nine months ended September 30, 2012, which was related to the receipt of royalties pursuant to license agreements for our Remote Power Patent. The decrease in revenue of $611,000 or 8% for the nine months ended September 30, 2013 was primarily due to decreased royalties from our licensees and greater license initiation fees achieved from patent litigation settlements of $565,000 for the nine months ended September 30, 2012 as compared with $258,000 of such license initiation fees for the nine months ended September 30, 2013.
Cost of Revenue. We had a cost of revenue of $2,117,000 and $2,341,000 for the nine months ended September 30, 2013 and September 30, 2012, respectively. Included in the cost of revenue for the nine months ended September 30, 2013 were contingent legal fees of $1,660,000 payable to our patent litigation counsel (See Note B[1] to our financial statements included in this quarterly report) and $356,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (See Note C[1] to our financial statements included in this quarterly report). Included in the cost of revenue for the nine months ended September 30, 2012 were contingent legal fees of $1,878,000 payable to our patent litigation counsel and $390,000 of incentive (royalty bonus) compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement from our licensees.
Gross Profit. The gross profit for the nine months ended September 30, 2013 was $5,081,000 as compared to $5,468,000 for the nine months ended September 30, 2012. The decline in gross profit of $387,000 or 7% for the nine months ended September 30, 2013 was primarily due to decreased revenue from our licensees.
Operating Expenses. Operating expenses for the nine month period ended September 30, 2013 were $2,927,000 as compared to $1,883,000 the nine month period ended September 30, 2012. General and administrative expenses include overhead expenses and finance, accounting, legal and other professional services incurred by us. General and administrative expenses increased by $1,926,000 from $1,653,000 for the nine months ended September 30, 2012 to $1,933,000 for the nine months ended September 30, 2013 due primarily to increased legal fees related to our patent litigations. Amortization of patents increased by $661,000 from $7,000 for the nine months ended September 30, 2012 to $668,000 for the nine months ended September 30, 2013. The increased costs of amortization of patents was due to our acquisition of thirteen (13) additional patents in 2013. Non-cash compensation expense related to the issuance of stock options was $326,000 for the nine months ended September 30, 2013 as compared to $223,000 for the nine months ended September 30, 2012.
Interest Income. Interest income for the nine months ended September 30, 2013 was $27,000 as compared to interest income of $22,000 for the nine months ended September 30, 2012.
Operating Income. We had operating income of $2,154,000 for the nine months ended September 30, 2013 compared with operating income of $3,585,000 for the nine months ended September 30, 2012. The decrease in operating income of $1,431,000 was due to increased patent amortization expense, increased non-cash compensation expenses and increased legal fees and decreased revenue.
Income Taxes (Benefit). A provision for federal, state and local income taxes of $215,000 and $753,000, which included a $192,000 and $709,000 reduction in our deferred tax asset, were recorded for the nine months ended September 30, 2013 and September 30, 2012, respectively.
Deferred Tax Benefit/NOLs. At September 30, 2013, we had net operating loss carryforwards (NOLs) totaling approximately $24,317,000 expiring through 2029, with a future tax benefit of approximately $8,268,000. During the second quarter of 2011, as a result of the Company’s recent results and projected future operating results, management determined that a portion of the NOL was more likely than not to be utilized resulting in the recording of a one-time, non-cash, income tax benefit of $7,000,000 (income) or $.29 per share (basic) for the six month period ended June 30, 2011 (See Note A[5] to our financial statements included in this quarterly report). At September 30, 2013 and September 30, 2012, $6,002,000 and $6,194,000 and were recorded as a deferred tax asset on our balance sheet. During the nine month period ended September 30, 2013 as a result of income (before taxes) for the period of $2,181,000, the deferred tax asset was reduced by $192,000 to $6,002,000. To the extent that we earn income in the future, we will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. Utilization of NOL credit carryforwards can be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.
Net Income. As a result of the foregoing, we realized net income of $1,966,000$1,396,000 or $0.08$0.05 per share (basic) and $0.07$0.05 per share (diluted) for the ninethree months ended September 30, 2013March 31, 2014 compared with net income of $2,854,000$1,392,000 or $0.11$0.06 per share (basic) and $0.10$0.05 per share (diluted) for the ninethree months ended September 30, 2012.March 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from royalty revenue from licensing our Remote Power Patent and cash on hand.Patent. In accordance with our patent litigation settlement achieved in July 2010, we received aggregate upfront payments of approximately $32 million (net proceeds of $22 million after payment of legal fees and expenses and bonus compensation) and Cisco Systems, Inc. agreed to pay us quarterly royalties (which began for the first quarter of 2011). (See Note D[2]3] to our financial statements included in this quarterly report). At September 30, 2013March 31, 2014 our principal sources of liquidity consisted of cash and cash equivalents of approximately $19,584,000$18,362,000 and working capital of approximately $20,874,000.$21,982,000. We believe based on our current cash position and projected licensing revenue from our existing license agreements that we will have sufficient cash to fund our operations for the foreseeable future, although this may not be the case.
Working capital decreasedincreased by $1,828,000$2,188,000 to $20,874,000$21,982,000 at September 30, 2013March 31, 2014 as compared to working capital of $22,702,000$19,794,000 at December 31, 2012.2013. The decreaseincrease in working capital was primarily due to the cost of patent acquisitions which included cash payments to the sellers of an aggregate of $4,000,000 offset by proceeds from the exercise of warrants of $1,076,000 (See Note B[2] to our financial statements includedincrease in this quarterly report).royalty receivables.
We maintain our cash primarily in money market accounts. We do not have any derivative financial instruments. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities except for the lease obligations set forth in Note B[5] to our financial statements included in this quarterly report.
Critical Accounting Policies:
Patents:
We own patents that relate to various telecommunications and data networking technologies. We capitalize the costs associated with acquisition, registration and maintenance of the patents and amortize these assets over their remaining useful lives on a straight-line basis. Any further payments made to maintain or develop the patents would be capitalized and amortized over the balance of the useful life for the patents.
Revenue Recognition:
We recognize revenue received from the licensing of our intellectual property in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB No. 104") and related authoritative pronouncements. Under this guidance, revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the terms of the license agreement, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured.
Income Taxes:
We utilize the liability method of accounting for income taxes. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect at the balance sheet date. The resulting asset or liability is adjusted to reflect enacted changes in tax law. Deferred tax assets are reduced, if necessary, by a valuation allowance when the likelihood of realization is not assured.
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operation Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 is a new accounting standard on the financial statement presentation of unrecognized tax benefits. The new standard provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new standard becomes effective for us on January 1, 2014 and will be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. We are currently assessing the impacts of this new standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) of the Company as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this review, these officers concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2013March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 4, 2014, we initiated litigation against Google and YouTube in the United States District Court for the Southern District of New York for infringement of several of our patents within our Cox Patent Portfolio which relate to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s Content ID system.
On May 23, 2013, through our wholly-owned subsidiary Mirror Worlds Technologies, LLC, we initiated patent litigation in the United States District Court for the Eastern District of Texas, Tyler Division, against Apple, Inc., Microsoft, Inc., Hewlett-Packard Co.,Company, Lenovo Group Ltd., Lenovo (United States), Inc., Dell, Inc., Best Buy Co., Inc., Samsung Electronics America, Inc. and Samsung Telecommunications America L.L.C., for infringement of the ‘227 Patent (one of the patents we acquired as part of the acquisition of the Mirror Worlds patent portfolioPatent Portfolio – Seesee Note B[2]D[1] to our financial statements included in this quarterly report). We seek, among other things, monetary damages based upon reasonable royalties. The lawsuit alleges that the defendants have infringed and continue to infringe the claims of the ‘227 Patent by making, selling, offering to sell and using infringing products including Mac OS and Windows operating systems and personal computers and tablets that include versions of those operating systems, and by encouraging others to make, sell, and use these products. In September 2013 and October 2013, the defendants filed their Answersanswers to our Complaint.complaint. Defendants Apple Inc. and Microsoft, Inc. also filed counterclaims for a declaratory judgment of non-infringement ofnon infringement or our ‘227 Patent and invalidity of our ‘227 Patent. On December 10, 2013, the litigation was severed into two consolidated actions, Mirror Worlds v. Apple, et al. (case no. 6:13-cv-419), and Mirror Worlds v. Microsoft, et., al., (case no. 6:13-cv-941). On September 12, 2013, certain defendants filed a motion to transfer the litigation to the Western District of Washington. The court has not yet ruled on this motion.
Several patents in the portfolio of patents that we acquired from Mirror Worlds LLC (now Looking Glass LLC)Patent Portfolio acquired on May 21, 2013 were the subject of prior litigation in Mirror Worlds, LLC v. Apple, Inc. (“Apple”) (No. 6:08-cv-00088). On October 1, 2010, a jury returned a verdict in that action in favor of Mirror Worlds, LLC upholding the validity of the three patents tried in the case (U.S. Patent Nos. 6,006,227, 6,638,313, and 6,725,427), and finding that Apple had willfully infringed each of these patents. Further, the jury awarded Mirror Worlds $208.5 million in damages for each of these patents. After the trial, the district court vacated the jury verdict on infringement, and concluded that Mirror Worlds failed to present sufficient evidence of direct or indirect infringement. While the infringement, willfulness and damages verdicts were vacated at the trial level, the jury’s validity verdicts were not overturned. The validity of the ‘227 Patent has also been reaffirmed by the U.S. Patent and Trademark Office since the trial in reexamination proceedings initiated by Apple resulting in two re-examination certificates which further validatevalidates that patent. On appeal, a divided panel of the Federal Circuit Court of Appeals upheld the district court ruling overturning the jury verdict on direct and indirect infringement.
On March 23, 2013 Mirror Worlds, LLC filed a Petition for Certiorari to the Supreme Court of the United States appealing the decisions of the district court and Federal Circuit Court of Appeals. Following our acquisition of the Mirror Worlds patentsPatent Portfolio in May 2013, on June 3, 2013, we filed a petition to intervene, as the new owner of the Mirror Worlds patents,Patent Portfolio, in the petition for a writ of certiorari to the Supreme Court of the United States previously filed by Mirror Worlds, LLC. On the June 24, 2013 the petition for a writ of certioriticertiorari was denied by the Supreme Court of the United States.
In September 2011, we initiated patent litigation against 16 data networking equipment manufacturers in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power Patent. Named as defendants in the lawsuit, excluding relatedaffiliated parties, were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc. Network-1 seeksWe seek monetary damages based upon reasonable royalties. In March 2012, we reached settlement agreements with defendants Motorola Solutions, Inc. ("Motorola") and Transition Networks, Inc. ("Transition Networks"). In October 2012, we reached a settlement with defendant GarretCom, Inc (“GarretCom”) and in. In February 2013, we reached settlement agreements with Allied Telesis, Inc. (“Allied Telesis”) and NEC Corporation (“NEC”). As part of the settlements, Motorola, Transition Networks, GarretCom, Allied Telesis and NEC each entered into a non-exclusive license agreement for our Remote Power Patent pursuant to which each such defendant agreed to license our Remote Power Patent for its full term (which expires in March 2020) and pay a license initiation fee and quarterly or annual royalties based on their sales of PoE products. On June 27, 2012, defendant Axis Communications made a motion to dismiss, or alternatively to sever, on the grounds of misjoinder. Several defendants joined in the motion. On July 16, 2012 we filed our opposition to the motion. On January 17, 2013, the Court granted in part defendants’ motion by granting severance and consolidating all the actions for pre-trial issues, except venue. On January 25, 2013, certain defendants filed a motion to stay the litigation pending completion or termination of the Inter Partes Reviewreview proceedings pending at the United States Patent and Trademark Office (see below and Note D(5)Notes D[2] and D[5] to theour financial statements included in this quarterly report). On March 5, 2013, the Court granted thecertain defendants’ motion and stayed the litigation pending the disposition of the Inter Partes Review proceedingsreview proceeding described below.
On July 20, 2012, an unknown third party filed with the United States Patent and Trademark Office (“USPTO”) a request for ex parte reexamination of certain claims of our Remote Power Patent. On September 5, 2012, the USPTO issued an order granting the reexamination. The request for reexamination was stayed by the USPTO on December 21, 2012 pending the termination or completion of the Inter Partes Review proceedingsreview proceeding described below. The initial grant of the reexamination by USPTO is not unusual as the majority of such applications are initially granted. While Management believes that the reexamination proceeding will further validate and strengthen our Remote Power Patent, shouldShould the USPTO reach a final determination that the Remote Power Patent is invalid (unless overturned by the USPTO Board of Patent Appeals and Interference or the United States Court of Appeals for the Federal Circuit), such a determination would have a material adverse effect on us as our entire current revenue stream is dependent upon the continued validity of our Remote Power Patent.
Avaya Inc., Dell Inc., Sony Corporation of America and Hewlett Packard Co. are petitioners in Inter PartesReview proceedings (which have been joined together) (the “IPR Proceeding”) pending at the United States Patent and Trademark Office before the Patent Trial and Appeal Board (the “Patent Board”) involving our Remote Power Patent. Petitioners in the IPR Proceeding seek to cancel certain claims of our Remote Power as unpatentable. TheA hearing on the merits of the IPR Proceeding is scheduled for a trial before the Patent Boardwas held on January 17, 2014.9, 2014 and a decision is pending. In the event that the Patent Board reachesrenders a final determinationdecision in the IPR Proceeding that certain of the Company’s claims related to the Remote Power Patent are unpatentable,is invalid, such a determination (unless overturned by the United States Court of Appeals for the Federal Circuit) would have a material adverse effect on the Company’sour business, financial condition and results of operations as our entire current revenue stream is dependent upon the continued validity of the Company’sour Remote Power Patent.
ITEM 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock.
Our Annual Report on Form 10-K for the year ended December 31, 20122013 includes a detailed discussion of our risk factors and should be carefully considered by investors. An additional risk factor has been added as set forth below.
It may be difficult for us to verify royalty amounts owed to us under our license agreement with Cisco and our other licensees, and this may cause us to lose potential revenue.
The standard terms of our royalty bearing license agreements require our licensees to report the sale of licensed products and report this data to us in most cases on a quarterly basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, incomplete and subject to dispute. From time to time, we may audit certain of our licensees (as is currently the case with Cisco as referenced below) to verify independently the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty revenues to which we are entitled under the terms of our license agreements. However, we cannot give assurances that these audits will be frequent enough and/or effective to that end. There is no certainty that we will receive additional royalty revenue from an audit and in some cases there may be an over-payment which will be credited against future royalties under our license agreements.
In late December 2013 we exercised our right to audit the royalties paid to us by Cisco for the years 2012 and 2013 in accordance with our May 2011 license agreement with Cisco. Royalty revenue from Cisco, our largest customer, constituted 77% of our revenue for the years ended December 31, 2013 and December 31, 2012. While the Cisco audit has not been completed, as a result of the work of our auditors to date we believe it is likely that Cisco has not included all licensed products in their quarterly royalty reports to us as required by the license agreement. Accordingly, we believe there will be additional royalties due us for 2012 and 2013 as well as the three months ended March 31, 2014, although we cannot be certain of this because the audit is not complete. In addition, the following updated risk factor should alsoamount of such additional royalties cannot be carefully considereddetermined at this time. Notwithstanding the aforementioned, since the audit has not been completed the final results of the audit are uncertain and it is possible that our auditors may obtain information inconsistent or contrary to the information they have obtained to date. In general, under the terms of our license agreement with Cisco adjustments to royalty revenue (including under-payments or over-payments) from Cisco will be included in our financial statements for the period in which we receive such adjustments. In accordance with the terms of our license agreement with Cisco, any additional royalty revenue we receive from Cisco as a result of the audit is limited to the difference between the annual cap ($8.0 million) and the actual royalties previously paid to us by investors:Cisco for each such year.
An Adverse Ruling by the USPTO (which is not subsequently overturned) with respect to the pending Inter Partes Review proceeding relating to our Remote Power Patent would have a material adverse effect on the Company.
Avaya Inc., Dell Inc., Sony Corporation of America and Hewlett Packard Co. are petitioners in Inter Partes Review proceedings (which have been joined together) (the “IPR Proceeding”) pending at the United States Patent and Trademark Office before the Patent Trial and Appeal Board (the “Patent Board”) involving our Remote Power Patent. Petitioners in the IPR Proceeding seek to cancel certain claims of our Remote Power as unpatentable (See “Legal Proceedings” at page 29 of this quarterly report). The IPR Proceeding is scheduled for a trial before the Patent Board on January __, 2014. In the event that the Patent Board reaches a final determination in the IPR Proceeding that certain of the Company’s claims related to the Remote Power Patent are unpatentable, such a determination (unless overturned by the United States Court of Appeals for the Federal Circuit) would have a material adverse effect on the Company’s business, financial condition and results of operations as our entire current revenue stream is dependent upon the continued validity of the Company’s Remote Power Patent.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Issuances of Unregistered SecuritiesSecurities.
● | On July 22, 2013, Abacus & Associates, Inc. (“Abacus”) exercised a warrant to purchase 500,000 shares of our common stock at an exercise price of $2.05 per share and we issued (at the instructions of Abacus) 500,000 shares of our common stock to Sucaba LLC (440,000 shares) and Sucaba CRUT, LLC (60,000 shares), both affiliates of Abacus. |
● | On July 26, 2013, we issued to Recognition Interface, LLC (“Recognition”) an additional 5-year warrant to purchase an aggregate of 250,000 shares of our common stock consisting of (i) warrants to purchase 125,000 shares at an exercise price of $2.10 per share and (ii) warrants to purchase 125,000 shares at an exercise price of $1.40 per share. These warrants were issued, pursuant to our agreement, dated May 21, 2013, with Recognition (an affiliate of Abacus) as a result of the above referenced warrant exercise by Abacus. |
Each ofThere were no such issuances during the above issuances of securities were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”) and a legend restricting the sale, transfer, or other disposition of these shares other than in compliance with the Act was imprinted on any stock certificates evidencing the above shares. three month period ended March 31, 2014.
Stock Repurchases
On August 22, 2011, we announced that our Board of Directors approved a share repurchase program to repurchase up to $2,000,000 of shares of our common stock over the next 12 months ("Share Repurchase Program"). The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. On January 31, 2012, the Board of Directors increased the Share Repurchase Program to purchase up to an additional $2,000,000 (or an aggregate of $4,000,000) of our common stock forover the next 12 months.month period. On January 24, 2013, the Board of Directors further increased the Share Repurchase Program to purchase up to an additional $1,000,000 (or an aggregate of $5,000,000) of our common stock over the next twelve12 months. On December 10, 2013, the Board of Directors further increased the Share Repurchase Program up to an additional $2,000,000 of shares of common stock over the next 12 months (for a total of up to $7,000,000 since inception of the Share Repurchase Program). During the three month period ended March 31, 2014, we repurchased 123,500 shares at an average price per share of $1.62 or an aggregate cost of approximately $200,221.
During the months of July, AugustJanuary, February and September 2013,March 2014, we repurchased an aggregate of 97,812 shares of our common stock at an average price of $1.78 per share, pursuant to our Share Repurchase Program as indicated below:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| 49,500 | 1.70 | 49,500 | $2,166,162 |
August 1 to August 31, 2013(1) | 27,712 | 1.72 | 27,712 | |
September 1 to September 30, 2013 | 20,600 | 1.63 | 20,600 | |
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs1 |
January 1 to January 31, 2014 | 123,500 | $1.62 | 123,500 | $2,482,161 |
February 1 to February 29, 2014 | -0- | — | -0- | $2,482,161 |
March 1 to March 31, 2014 | -0- | — | -0- | $2,482,161 |
_________________
(1) | Includes 15,112 shares of our common stock repurchased from Laurent Ohana, a former director, on August 17, 2013 at $1.775 per share or aggregate consideration of $26,824. |
Since the end of the third quarter (September 30, 2013) until November 12, 2013, we repurchased an aggregate of 248,760 shares of our common stock at an average price of $1.71 per share, pursuant to our Share Repurchase Program.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits
(a) Exhibits
| 3(i)(a) | Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Registration Statement on Form SB-2 (Registration No. 333-59617), declared effective by the SEC on November 12,1998 (the "1998 Registration Statement"), and incorporated herein by reference. |
| 3(i)(b) | Certificate of Amendment to the Certificate of Incorporation dated November 27, 2001. Previously filed as Exhibit 3.1.1 to the Company's Registration Statement on Form S-3 (Registration No. 333-81344) declared effective by the SEC on February 12, 2002, and incorporated herein by reference (the "February 2002 Form S-3"). |
| 3(i)(c) | Certificate of Amendment to the Certificate of Incorporation dated October 9, 2013. Previously filed as Exhibit 3.1 to the Company’s report on Form 8-K filed on October 10, 2013, and incorporated by reference. |
| | 31.1 | Controls and Procedure Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 31.2 | Controls and Procedure Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 99.1 | Temporary Hardship Exemption Provided by Rule 201.* |
| 101 | Interactive data files:** |
| | 101.INS | XBRL Instance Document |
| | 101.SCH | XBRL SchemaScheme Document |
| | 101.CAL | XBRL Calculation Linkbase Document |
| | 101.DEF | XBRL Definition Linkbase Document |
| | 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| ** | To be furnished by amendment pursuant to the Temporary Hardship Exemption provided by Rule 201 of Regulation S-T. |