UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to__________ |
Commission File Number 1-15288
NETWORK-1 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 11-3027591 | |
(State or incorporation or | ( Identification No.) |
65 Locust Avenue New | 06840 | |
| (Address of | (Zip Code) |
203-920-1055
(Registrant'sRegistrant’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | NTIP | NYSE American |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§S-T (§223.405) of this chapter)chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer”, "smaller“smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | ||
Non-accelerated filer☐ | Smaller reporting company ☒ | ||
| Emerging growth | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant'sregistrant’s common stock, $.01 par value per share, outstanding as of November 13, 2017August 8, 2022 was 24,131,012.
-1-
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
| Page No. | ||||
| PART I. | Financial Information | |||
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | |||
Condensed Consolidated Balance Sheets as of | 4 | |||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 8 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 | ||
| Item 4. | Controls and Procedures | 30 | ||
| PART II. | Other Information | |||
| Item 1. | Legal Proceedings | 31 | ||
| Item 1A. | Risk Factors | 31 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 | ||
| Item 3. | Defaults Upon Senior Securities | 32 | ||
| Item 5. | Other Information | 32 | ||
| Item 6. | 32 | |||
| Signatures | 33 |
-2-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future performance and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Factors that could cause or contribute to such differences include various risks and uncertainties described below and elsewhere in this Quarterly Report on Form 10-Q as well as in our Annual Report on Form 10-K for the year ended December 31, 2021 (filed with the SEC on March 30, 2022). Furthermore, such forward-looking statements speak only as of the date of this report. Such risks and uncertainties include, but are not limited to, the following:
| • | our uncertain revenue; |
| • | uncertainty of the outcome of our pending litigations; |
| • | our ability to achieve future revenue from our patent portfolios; |
| • | our ability to protect our patents; |
| • | our ability to execute our strategy to acquire or make investments in high quality patents with significant licensing opportunities; |
| • | our ability to enter into strategic relationships with third parties to license or otherwise monetize their intellectual property; |
| • | our ability to achieve a return on our investment in ILiAD Biotechnologies, LLC; |
| • | our ability to continue to acquire additional intellectual property; |
| • | uncertainty as to whether cash dividends will continue to be paid; |
| • | variations in our quarterly and annual operating results; |
| • | the risk that we may be determined to be a personal holding company in 2022 or future years which may result in our issuing a special cash dividend to our stockholders to the extent we have undistributed personal holding company income resulting in less cash available for our operations and strategic transactions; and |
| • | legislative, regulatory and competitive developments. |
-3-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2017 | December 31, 2016 | |||||||
| ASSETS: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 52,265,000 | $ | 50,918,000 | ||||
| Marketable securities, available for sale | 1,064,000 | 1,065,000 | ||||||
| Royalty receivables, net | 3,570,000 | 2,879,000 | ||||||
| Prepaid taxes | 300,000 | 1,195,000 | ||||||
| Other current assets | 18,000 | 83,000 | ||||||
| Total Current Assets | 57,217,000 | 56,140,000 | ||||||
| OTHER ASSETS: | ||||||||
| Deferred tax assets | 168,000 | 207,000 | ||||||
| Patents, net of accumulated amortization | 1,131,000 | 1,231,000 | ||||||
| Security deposits | 19,000 | 19,000 | ||||||
| Total Other Assets | 1,318,000 | 1,457,000 | ||||||
| TOTAL ASSETS | $ | 58,535,000 | $ | 57,597,000 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 70,000 | $ | 171,000 | ||||
| Income taxes payable | 930,000 | — | ||||||
| Accrued contingency fees and related costs | 1,789,000 | 2,681,000 | ||||||
| Accrued payroll | 240,000 | 1,748,000 | ||||||
| Other accrued expenses | 87,000 | 125,000 | ||||||
| TOTAL LIABILITIES | 3,116,000 | 4,725,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
| none issued and outstanding at September 30, 2017 and December 31, 2016 | — | — | ||||||
| Common stock, $0.01 par value; authorized 50,000,000 shares; | ||||||||
| 24,131,012 and 23,744,829 shares issued and outstanding at | ||||||||
| September 30, 2017 and December 31, 2016, respectively | 241,000 | 238,000 | ||||||
| Additional paid-in capital | 64,141,000 | 62,367,000 | ||||||
| Accumulated deficit | (8,931,000 | ) | (9,702,000 | ) | ||||
| Accumulated other comprehensive loss | (32,000 | ) | (31,000 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 55,419,000 | 52,872,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 58,535,000 | $ | 57,597,000 | ||||
June 30, 2022 | December 31, 2021 | |||||||
ASSETS
| ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 25,532,000 | $ | 44,497,000 | ||||
| Marketable securities, at fair value | 26,593,000 | 15,126,000 | ||||||
| Other current assets | 239,000 | 150,000 | ||||||
| TOTAL CURRENT ASSETS | 52,364,000 | 59,773,000 | ||||||
| OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | 1,757,000 | 1,384,000 | ||||||
| Equity investment | 1,863,000 | 2,651,000 | ||||||
| Convertible note investment | 1,000,000 | 1,000,000 | ||||||
| Operating leases right of - use asset | 194,000 | — | ||||||
| Security deposits | 13,000 | 13,000 | ||||||
Total other assets | 4,827,000 | 5,048,000 | ||||||
TOTAL ASSETS | $ | 57,191,000 | $ | 64,821,000 | ||||
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Income taxes payable | $ | 119,000 | $ | 2,952,000 | ||||
| Accounts payable | 527,000 | 459,000 | ||||||
| Accrued contingency fees and related costs | 147,000 | 137,000 | ||||||
| Accrued payroll | 56,000 | 380,000 | ||||||
| Other accrued expenses | 158,000 | 180,000 | ||||||
| Operating lease obligation, current | 66,000 | — | ||||||
Total current liabilities | 1,073,000 | 4,108,000 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | — | 554,000 | ||||||
| Operating lease obligation, noncurrent | 128,000 | — | ||||||
| TOTAL LIABILITIES | $ | 1,201,000 | $ | 4,662,000 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at June 30, 2022 and December 31, 2021 | — | — | ||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 238,000 | 238,000 | ||||||
| Additional paid-in capital | 66,593,000 | 66,361,000 | ||||||
| Accumulated deficit | (10,825,000 | ) | (6,428,000 | ) | ||||
| Accumulated other comprehensive loss | (16,000 | ) | (12,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 55,990,000 | 60,159,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 57,191,000 | $ | 64,821,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUE | $ | 3,237,000 | $ | 34,326,000 | $ | 14,320,000 | $ | 59,963,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | 964,000 | 16,943,000 | 4,339,000 | 24,183,000 | ||||||||||||
| Professional fees and related costs | 534,000 | 633,000 | 1,154,000 | 1,458,000 | ||||||||||||
| General and administrative | 434,000 | 428,000 | 1,358,000 | 1,256,000 | ||||||||||||
| Amortization of patents | 50,000 | 49,000 | 150,000 | 760,000 | ||||||||||||
| Stock-based compensation | 237,000 | 189,000 | 711,000 | 233,000 | ||||||||||||
| Contingent patent cost | — | — | — | 500,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 2,219,000 | 18,242,000 | 7,712,000 | 28,390,000 | ||||||||||||
| OPERATING INCOME | 1,018,000 | 16,084,000 | 6,608,000 | 31,573,000 | ||||||||||||
OTHER INCOME: | �� | |||||||||||||||
| Interest income, net | 55,000 | 24,000 | 89,000 | 50,000 | ||||||||||||
| INCOME BEFORE INCOME TAXES | 1,073,000 | 16,108,000 | 6,697,000 | 31,623,000 | ||||||||||||
| INCOME TAXES: | ||||||||||||||||
| Current | 425,000 | 3,817,000 | 2,198,000 | 4,198,000 | ||||||||||||
| Deferred taxes, net | — | 1,459,000 | 39,000 | 4,543,000 | ||||||||||||
| Total income taxes | 425,000 | 5,276,000 | 2,237,000 | 8,741,000 | ||||||||||||
| NET INCOME | $ | 648,000 | $ | 10,832,000 | $ | 4,460,000 | $ | 22,882,000 | ||||||||
| Net Income Per Share | ||||||||||||||||
| Basic | $ | 0.03 | $ | 0.46 | $ | 0.18 | $ | 0.98 | ||||||||
| Diluted | $ | 0.02 | $ | 0.43 | $ | 0.17 | $ | 0.93 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 24,150,388 | 23,320,514 | 24,185,129 | 23,291,408 | ||||||||||||
| Diluted | 26,412,139 | 25,198,142 | 26,480,084 | 24,700,784 | ||||||||||||
| Cash dividends declared per share | $ | 0.05 | $ | — | $ | 0.10 | $ | — | ||||||||
| NET INCOME | $ | 648,000 | $ | 10,832,000 | $ | 4,460,000 | $ | 22,882,000 | ||||||||
| OTHER COMPREHENSIVE INCOME: | ||||||||||||||||
| Unrealized holding gain (loss) on securities available-for-sale arising during the period | (2,000 | ) | (4,000 | ) | (1,000 | ) | 39,000 | |||||||||
| COMPREHENSIVE INCOME | $ | 646,000 | $ | 10,828,000 | $ | 4,459,000 | $ | 22,921,000 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | $ | — | $ | — | $ | — | $ | 18,692,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | — | — | — | 5,420,000 | ||||||||||||
| Professional fees and related costs | 157,000 | 308,000 | 407,000 | 663,000 | ||||||||||||
| General and administrative | 423,000 | 461,000 | 940,000 | 974,000 | ||||||||||||
| Amortization of patents | 76,000 | 73,000 | 151,000 | 147,000 | ||||||||||||
| Stock-based compensation | 178,000 | 59,000 | 233,000 | 118,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 834,000 | 901,000 | 1,731,000 | 7,322,000 | ||||||||||||
| OPERATING (LOSS) INCOME | (834,000 | ) | (901,000 | ) | (1,731,000 | ) | 11,370,000 | |||||||||
| OTHER (LOSS) INCOME: | ||||||||||||||||
| Interest and dividend income, net | 131,000 | 68,000 | 211,000 | 118,000 | ||||||||||||
| Net realized and unrealized (loss) gain on marketable securities | (576,000 | ) | 49,000 | (1,090,000 | ) | 8,000 | ||||||||||
| Total other (loss) income, net | (445,000 | ) | 117,000 | (879,000 | ) | 126,000 | ||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | (1,279,000 | ) | (784,000 | ) | (2,610,000 | ) | 11,496,000 | |||||||||
| INCOME TAXES PROVISION (BENEFIT): | ||||||||||||||||
| Current | — | (180,000 | ) | — | 710,000 | |||||||||||
| Deferred taxes, net | (102,000 | ) | (52,000 | ) | (554,000 | ) | 1,672,000 | |||||||||
| Total income tax expense (benefit) | (102,000 | ) | (232,000 | ) | (554,000 | ) | 2,382,000 | |||||||||
| (LOSS) INCOME BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | (1,177,000 | ) | $ | (552,000 | ) | $ | (2,056,000 | ) | $ | 9,114,000 | |||||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (355,000 | ) | $ | (231,000 | ) | $ | (788,000 | ) | $ | (446,000 | ) | ||||
| NET (LOSS) INCOME | $ | (1,532,000 | ) | $ | (783,000 | ) | $ | (2,844,000 | ) | $ | 8,668,000 | |||||
| Net (loss) income per share: | ||||||||||||||||
| Basic | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | 0.36 | |||||
| Diluted | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | 0.35 | |||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 23,854,438 | 23,839,455 | 23,864,053 | 24,106,169 | ||||||||||||
| Diluted | 23,854,438 | 23,839,455 | 23,864,053 | 24,878,257 | ||||||||||||
| Cash dividends declared per share | — | — | $ | 0.05 | $ | 0.05 | ||||||||||
| NET (LOSS) INCOME | $ | (1,532,000 | ) | $ | (783,000 | ) | $ | (2,844,000 | ) | $ | 8,668,000 | |||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Net unrealized holding (loss) gain on corporate bonds and notes during the period, net of tax | (1,000 | ) | (3,000 | ) | (4,000 | ) | 8,000 | |||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (1,533,000 | ) | $ | (786,000 | ) | $ | (2,848,000 | ) | $ | 8,676,000 | |||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-5-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income | $ | 4,460,000 | $ | 22,882,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of patents | 150,000 | 760,000 | ||||||
| Stock-based compensation | 711,000 | 233,000 | ||||||
| Deferred tax provision | 39,000 | 4,543,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Royalty receivables | (691,000 | ) | 123,000 | |||||
| Prepaid Taxes | 895,000 | — | ||||||
| Other current assets | 65,000 | 176,000 | ||||||
| Accounts payable | (101,000 | ) | 323,000 | |||||
| Accrued expenses | (2,521,000 | ) | 4,020,000 | |||||
| Income taxes payable | 930,000 | 4,080,000 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,937,000 | 37,140,000 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of patents | (50,000 | ) | (4,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends | (2,421,000 | ) | — | |||||
| Value of shares delivered to fund withholding taxes on exercise of options | (56,000 | ) | (44,000 | ) | ||||
| Repurchases of common stock, net of commissions | (1,131,000 | ) | (1,000 | ) | ||||
| Proceeds from exercise of options and warrants | 1,068,000 | 60,000 | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (2,540,000 | ) | 15,000 | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,347,000 | 37,151,000 | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 50,918,000 | 20,608,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 52,265,000 | $ | 57,759,000 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| CASH PAID DURING THE PERIOD FOR: | ||||||||
| Interest | $ | — | $ | — | ||||
| Taxes | 440,000 | $ | — | |||||
| NON-CASH FINANCING ACTIVITY | ||||||||
| Accrued dividend rights on restricted stock units | 84,000 | — | ||||||
THREE AND SIX MONTHS ENDED JUNE 30, 2022
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Additional | Comprehensive | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Income | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Equity | |||||||||||||||||||
| Balance – December 31, 2021 | 23,792,212 | $ | 238,000 | $ | 66,361,000 | $ | (6,428,000 | ) | $ | (12,000 | ) | $ | 60,159,000 | |||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,190,000 | ) | — | (1,190,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 55,000 | — | — | 55,000 | ||||||||||||||||||
| Vesting of restricted stock units | 136,250 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (45,438 | ) | — | — | (112,000 | ) | — | (112,000 | ) | |||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | — | — | — | (3,000 | ) | (3,000 | ) | ||||||||||||||||
| Net loss | — | — | — | (1,312,000 | ) | — | (1,312,000 | ) | ||||||||||||||||
| Balance – March 31, 2022 | 23,883,024 | $ | 239,000 | $ | 66,415,000 | $ | (9,042,000 | ) | $ | (15,000 | ) | $ | 57,597,000 | |||||||||||
| Dividend equivalents rights paid | — | — | — | (5,000 | ) | — | (5,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 178,000 | — | — | 178,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Treasury stock purchased and retired | (103,080 | ) | (1,000 | ) | — | (246,000 | ) | — | (247,000 | ) | ||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | — | — | — | (1,000 | ) | (1,000 | ) | ||||||||||||||||
| Net loss | — | — | — | (1,532,000 | ) | — | (1,532,000 | ) | ||||||||||||||||
| Balance – June 30, 2022 | 23,791,194 | $ | 238,000 | $ | 66,593,000 | $ | (10,825,000 | ) | $ | (16,000 | ) | $ | 55,990,000 | |||||||||||
THREE AND SIX MONTHS ENDED JUNE 30, 2021
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Additional | Comprehensive | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Income | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | (Loss) | Equity | |||||||||||||||||||
| Balance – December 31, 2020 | 24,105,879 | $ | 241,000 | $ | 66,124,000 | $ | (17,193,000 | ) | $ | (10,000 | ) | $ | 49,162,000 | |||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,216,000 | ) | — | (1,216,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 59,000 | — | — | 59,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Net unrealized gain on corporate bonds and notes | — | — | — | — | 11,000 | 11,000 | ||||||||||||||||||
| Net income | — | — | — | 9,451,000 | — | 9,451,000 | ||||||||||||||||||
| Balance – March 31, 2021 | 24,117,129 | $ | 241,000 | $ | 66,183,000 | $ | (8,958,000 | ) | $ | 1,000 | $ | 57,467,000 | ||||||||||||
| Stock-based compensation | — | — | 59,000 | — | — | 59,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Treasury shares purchased and retired | (40,000 | ) | — | — | (131,000 | ) | — | (131,000 | ) | |||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | — | — | — | (3,000 | ) | (3,000 | ) | ||||||||||||||||
| Net loss | — | — | — | (783,000 | ) | — | (783,000 | ) | ||||||||||||||||
| Balance – June 30, 2021 | 24,088,379 | $ | 241,000 | $ | 66,242,000 | $ | (9,872,000 | ) | $ | (2,000 | ) | $ | 56,609,000 | |||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
-6-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (2,844,000 | ) | $ | 8,668,000 | |||
| Adjustments to reconcile net (loss) income to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of patents | 151,000 | 147,000 | ||||||
| Stock-based compensation | 233,000 | 118,000 | ||||||
| Loss from equity method investment | 788,000 | 446,000 | ||||||
| Unrealized (gain) loss on marketable securities | 808,000 | (29,000 | ) | |||||
| Amortization of right of use asset | 10,000 | — | ||||||
| Deferred tax (benefit) expense | (554,000 | ) | 1,672,000 | |||||
| Changes in operating asset and liabilities: | ||||||||
| Other current assets | (89,000 | ) | 62,000 | |||||
| Income taxes payable | (2,833,000 | ) | 710,000 | |||||
| Security deposit | — | 8,000 | ||||||
| Accounts payable | 68,000 | (200,000 | ) | |||||
| Operating lease obligations | (10,000 | ) | — | |||||
| Accrued expenses | (336,000 | ) | (332,000 | ) | ||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (4,608,000 | ) | 11,270,000 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | 4,004,000 | 9,020,000 | ||||||
| Purchases of marketable securities | (16,283,000 | ) | (4,341,000 | ) | ||||
| Development of patents | (524,000 | ) | (67,000 | ) | ||||
| Convertible note investment | — | (1,000,000 | ) | |||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (12,803,000 | ) | 3,612,000 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (1,195,000 | ) | (1,206,000 | ) | ||||
| Value of shares delivered to fund withholding taxes | (112,000 | ) | — | |||||
| Repurchases of common stock, inclusive of commissions | (247,000 | ) | (131,000 | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES: | (1,554,000 | ) | (1,337,000 | ) | ||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (18,965,000 | ) | 13,545,000 | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 44,497,000 | 25,505,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 25,532,000 | $ | 39,050,000 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | 3,000,000 | $ | — | ||||
| NON-CASH FINANCING ACTIVITIES | ||||||||
| Accrued dividend rights on restricted stock units | $ | — | $ | 10,000 | ||||
| Right of use asset obtained in exchange for lease liability | $ | 204,000 | $ | — | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-7-
NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS:
[1] BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the "Company"“Company”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company'sCompany’s financial position as of SeptemberJune 30, 2017,2022, and the results of its operations and comprehensive (loss) income for the three and ninesix month periods ended SeptemberJune 30, 20172022 and SeptemberJune 30, 20162021, changes in stockholders’ equity for the three and six month periods ended June 30, 2022 and June 30, 2021, and its cash flows for the ninesix month periods ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016.2021. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 20162021 included in the Company'sCompany’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2017.30, 2022. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172022 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiary,subsidiaries, Mirror Worlds Technologies, LLC.
On March 17, 2022, the Company formed HFT Solutions, LLC for the purpose of acquiring its HFT patent portfolio (see Note G[2] hereof). All intercompany balances and transactions have been eliminated on consolidation.
[2] BUSINESS:
The Company is engaged in the development,
licensing and protection of its intellectual property assets. The Company presently owns-8-
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
The Company hashad been actively engaged in licensingdependent upon its Remote Power Patent (U.S. Patent No. 6,218,930) covering the controlfor a significant portion of power delivery over Ethernet cables. As of September 30, 2017, theits revenue. The Company has entered into twenty-six (26) license agreements with respect tono longer receives licensing revenue for its Remote Power Patent. Patent for any period subsequent to March 7, 2020 (the expiration date of the patent). Except for the Company’s pending legal proceeding against NETGEAR, Inc. involving its Remote Power Patent, the Company’s future revenue is dependent on its ability to monetize its other patent assets.
The Company has also entered into two license agreements with respect to its Mirror Worlds Patent Portfolio. The Company'sCompany’s current strategy includes continuing to pursue licensing opportunities for its patent portfolios. In addition, the Company reviews opportunities to acquire or license additional intellectual property assets.as well as other strategic alternatives. The Company'sCompany’s patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds Patent Portfolio. The Company's Remote Power Patent has generated licensing revenue in excess of $119,000,000 from May 2007 through September 30, 2017. As a result of the Company's acquisition of the Mirror Worlds Patent Portfolio in May 2013, the Company achieved licensing and other revenue of $47,150,000 through September 30, 2017.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| [1] | Use of Estimates and Assumptions |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP 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 unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company'sCompany’s unaudited condensed consolidated financial statements include revenue recognition,legal fees and related costs, income taxes, valuation of patents and stock-based compensation.equity method investments, including evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based.
| [2] | Cash and Cash Equivalents |
The Company owns patents that relatemaintains cash deposits in high quality financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). Accounts at each institution are insured by the FDIC up to various technologies. $250,000. At June 30, 2022, the Company maintained a cash balance of $4,404,000 in excess of the FDIC insured limit.
The Company capitalizesconsiders all highly liquid short-term investments, including certificates of deposit and money market funds, that are purchased with an original maturity of three months or less to be cash equivalents.
-9-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [3] | Marketable Securities |
The Company’s marketable securities are comprised of certificates of deposit, with original maturity greater than three months from date of purchase, government securities, fixed income mutual funds, and a corporate bond. The Company’s marketable securities are measured at fair value and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on certificates of deposit, government securities, and fixed income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the costs associated with acquisition, registrationunaudited condensed consolidated statements of operations and maintenance of its acquired patentscomprehensive (loss) income.
Unrealized holding gains and amortizes 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 balancelosses, net of the useful liferelated tax effect, on corporate bonds and notes are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the patents.
| [4] | Revenue Recognition |
Under ASC 606, revenue is recognized when the Company recognizes revenue received fromcompletes the licensing of its intellectual property and other relatedto its licensees, in an amount that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property activities. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant toproperty.
The Company determines revenue recognition through the terms of the license or other applicable agreement, (iii) amounts are fixed or determinable, and (iv) collectability of amounts is reasonably assured. following steps:
| • | identification of the license agreement; |
| • | identification of the performance obligations in the license agreement; |
| • | determination of the consideration for the license; |
| • | allocation of the transaction price to the performance obligations in the contract; and |
| • | recognition of revenue when the Company satisfies its performance obligations. |
The Company relies on royalty reports received from third party licensees to record its revenue. From time to time, the Company may audit or otherwise dispute royalties reported from licensees. Any adjusted royalty revenue as a result of such audits or dispute is recorded by the Company in the period in which such adjustment is agreed to by the Company and the licensee or otherwise determined.
Revenue from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of a litigation settlement related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license, or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent.
-10-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [5] | Stock-Based Compensation |
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation ― Stock Compensation (“ASC 718”). ASC 718 requires all stock-based compensation to employees, including grants of Revenue
| [6] | Equity Method Investments |
Equity method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount of the equity investment is recognized in profit or loss.
| [7] | Costs of Revenue |
The Company includes in costs of revenue for the three and nine months ended September 30, 2017 and 2016 contingent legal fees payable to patent litigation counsel (see Note H[G[1] hereof), any other contractual payments to third parties related to net proceeds from monetization of patents (see Note G[2] hereof) and incentive bonus compensation payable to its Chairman and Chief Executive Officer (see Note I[H[1] hereof) and payments of certain percentages of net proceeds to Recognition Interface, LLC and others with respect to monetization of the Company's Mirror Worlds Patent Portfolio (see Note H[2] hereof).
| [8] | Income Taxes |
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, "Income Taxes"Income Taxes (ASC 740), which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary (timing) differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards.
-11-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASC 740-10, "AccountingAccounting for Uncertainty in Income Taxes", defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company had no uncertain tax positions as of SeptemberJune 30, 2017 and December 31, 2016.
U.S. federal, state and local income tax returns prior to 20142018 are not subject to examination by any applicable tax authorities, except that tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent they generated loss carry-forwards that are available for those future years.
The personal holding company ("PHC"(“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC'sPHC’s undistributed personal holding company income ("PHC Income"(“UPHCI”), which means, in general, taxable income subject to certain adjustments.adjustments and reduced by certain distributions to shareholders. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by 5five or fewer individuals at anytimeany time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the "Ownership Test"“Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the "Income Test"“Income Test”). InAt June 30, 2022, based on available information concerning the second half of 2017 (as well as during the second half of prior years),Company’s shareholder ownership, the Company did not meetsatisfy the Ownership Test. Due to the significant number of shares held by the Company's largest shareholders,However, the Company continually assesses its share ownershipmay subsequently be determined to determine whether it meets the Ownership Test.be a PHC in 2022 or in future years. If the Ownership Test were met and the income generated by the Company were determined to constitute "royalties" within the meaning of the Income Test, the Company would constitutebecome a PHC and the Companyin 2022 or any future year, it would be subject to athe 20% tax on its UPHCI. In such event, the amount of any PHC Income that it does not distributeCompany may issue a special cash dividend to its shareholders.shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
-12-
NOTE B -– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [9] | Leases |
Under ASC 842, the Company determines if an arrangement is a lease at inception. Right-of-Use (“ROU”) assets with finite livesand related lease obligations are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Accordingly, we record impairment losses on long-lived assets used in operations or expected to be disposed of when indicators of impairment exist and the undiscounted cash flows expected to be derived from those assets are less than carrying amounts of these assets. At September 30, 2017, there was no impairment to the Company's patents.
NOTE C - – PATENTS
The Company'sCompany’s intangible assets at SeptemberJune 30, 20172022 include patents with estimated remaining economic useful lives ranging from 3.00.75 to 4.017 years. For all periods presented, all of the Company'sCompany’s patents were subject to amortization. The gross carrying amounts and accumulated amortization related to acquired intangible assets as of SeptemberJune 30, 20172022 and December 31, 20162021 were as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| Gross carrying amount – patents | $ | 6,477,000 | $ | 6,427,000 | ||||
| Accumulated amortization – patents | (5,346,000 | ) | (5,196,000 | ) | ||||
| Patents, net | $ | 1,131,000 | $ | 1,231,000 | ||||
| Schedule of patent | ||||||||
| June 30, 2022 | December 31, 2021 | |||||||
| Gross carrying amount – patents | $ | 8,473,000 | $ | 7,949,000 | ||||
| Accumulated amortization – patents | $ | (6,716,000 | ) | (6,565,000 | ) | |||
| Patents, net | $ | 1,757,000 | $ | 1,384,000 | ||||
Amortization expense for the three months ended SeptemberJune 30, 20172022 and September 30, 20162021 was $50,000$76,000 and $49,000,$73,000, respectively. Amortization expense for the ninesix months ended SeptemberJune 30, 20172022 and September 30, 20162021 was $150,000$151,000 and $760,000,$147,000, respectively. Future amortization of current intangible assets, net is as follows:
| Twelve Months Ended September 30, | ||||
| 2018 | $ | 200,000 | ||
| 2019 | $ | 193,000 | ||
| 2020 | $ | 193,000 | ||
| 2021 | $ | 193,000 | ||
| 2022 and thereafter | $ | 352,000 | ||
| Total | $ | 1,131,000 | ||
| Schedule of future amortization of current intangible | |||||
| Twelve Months Ended June 30, | |||||
| 2023 | $ | 328,000 | |||
| 2024 | 158,000 | ||||
| 2025 | 118,000 | ||||
| 2026 | 118,000 | ||||
| 2027 | 118,000 | ||||
| Thereafter | 917,000 | ||||
| Total | $ | 1,757,000 | |||
All of the patents within the Cox Patent Portfolio expired in September 2021 except for two patents which expire in July 2023 and November 2023. The expiration dates of patents within the Company’s M2M/IoT Patent Portfolio range from September 20212033 to May 2034. The expiration dates within the Company’s HFT Patent Portfolio range from October 31, 2039 to November 2023 and the expiration date1, 2039. All of the QoS Patents is June 2019.
-13-
Restricted Stock Units
The 2013 Stock Incentive Plan (“2013 Plan”) provides for the nine months ended September 30, 2017,grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock units. Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as provided, the 2013 Plan provides for an aggregate of 2,600,000 shares of the Company’s common stock to be available for distribution. The Company’s Compensation Committee generally has the authority to administer the 2013 Plan, determine participants who will be granted awards, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2013 Plan may be granted to employees, directors and consultants of the Company issued 13,500 restricted stock units to eachand its subsidiaries. As of its three non-management directors as an annual grant for 2017 for service on the Company's Board of Directors. Each restricted stock unit represents a contingent right to receive one share of the Company's common stock. The restricted stock units vest in four equal quarterly installments of 3,375June 30, 2022, there were shares of common stock on March 15, 2017, June 15, 2017, September 15, 2017 and December 15, 2017, subject to continued service onavailable for issuance under the Board of Directors.
A summary of restricted stock unit activity for the ninesix months ended SeptemberJune 30, 20172022 is as follows (each restricted stock unit issued by the Company represents the right to receive one share of the Company'sCompany’s common stock):
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2016 | 890,000 | $ | 2.29 | |||||
| Grants of restricted stock units | 40,500 | $ | 3.80 | |||||
| Vested restricted stock units | (100,375 | ) | $ | (2.87 | ) | |||
| Balance of unvested restricted stock units at September 30, 2017 | 830,125 | $ | 2.30 | |||||
| Schedule of restricted stock unit activity | ||||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2021 | 12,500 | $ | 3.36 | |||||
| Grants of restricted stock units | 670,000 | 1.92 | ||||||
| Vested restricted stock units | (22,500 | ) | (2.55 | ) | ||||
| Balance of restricted stock units outstanding at June 30, 2022 | 660,000 | $ | 1.93 | |||||
Restricted stock unit compensation expense was $237,000$ and $711,000$ for the three and nine months ended SeptemberJune 30, 2017,2022 and 2021, respectively. Restricted stock unit compensation expense was $189,000$ and $221,000$ for the three and ninesix months ended SeptemberJune 30, 2016, respectively.
The Company has an aggregate of $1,097,000$ of unrecognized restricted stock unit compensation expense as of SeptemberJune 30, 20172022 to be expensed over a weighted average period of 1.6 years.
All of the Company's 830,125Company’s outstanding (unvested) restricted stock units at September 30, 2017 have dividend equivalent rights.
| Weighted | ||||||||
| Weighted | Average | |||||||
| Range of | Average | Remaining | ||||||
| Exercise | Options | Exercise | Life in | Options | ||||
| Price | Outstanding | Price | Years | Exercisable | ||||
| $0.83 - $2.34 | 2,110,000 | $1.28 | 2.25 | 2,110,000 |
-14-
Basic Earningsincome (loss) per share is calculated by dividing the net income (loss) by the weighted average number of outstanding common shares during the period. Diluted per share data includes the dilutive effects of options warrants and restricted stock units. PotentialPotentially dilutive shares of 2,940,125 and 4,061,250 at SeptemberJune 30, 20172022 and September 30, 2016,2021, respectively, consisted of options warrants and restricted stock units.
Computations of basic and diluted weighted average common shares outstanding were as follows:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Weighted-average common shares outstanding – basic | 24,185,129 | 23,291,408 | 24,150,388 | 23,320,514 | ||||||||||||
| Dilutive effect of options, warrants and restricted stock units | 2,294,955 | 1,409,376 | 2,261,751 | 1,877,628 | ||||||||||||
| Weighted-average common shares outstanding – diluted | 26,480,084 | 24,700,784 | 26,412,139 | 25,198,142 | ||||||||||||
| Options and warrants excluded from the computation of diluted income per share because the effect of inclusion would have been anti-dilutive | — | 141,304 | — | 423,913 | ||||||||||||
| Schedule of Earnings per share | ||||||||||||||||
Six Months Ended | Three Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| Weighted-average common shares outstanding – basic | 23,864,053 | 24,106,169 | 23,854,438 | 23,839,455 | ||||||||||||
| Dilutive effect of options and restricted stock units | — | 772,088 | — | — | ||||||||||||
| Weighted-average common shares outstanding – diluted | 23,864,053 | 24,878,257 | 23,854,438 | 23,839,455 | ||||||||||||
| Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | 1,160,000 | — | 1,160,000 | 685,000 | ||||||||||||
NOTE F – CASH AND CASH EQUIVALENTS
Marketable securities as of SeptemberJune 30, 20172022 and December 31, 20162021 were composed of:
| Schedule of Marketable Securities June 30, 2022 |
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | 3,000,000 | $ | — | $ | — | $ | 3,000,000 | ||||||||
| Government securities | 9,998,000 | 3,000 | — | 10,001,000 | ||||||||||||
| Fixed income mutual funds | 14,221,000 | — | (805,000 | ) | 13,416,000 | |||||||||||
| Corporate bond | 192,000 | — | (16,000 | ) | 176,000 | |||||||||||
| Total marketable securities | $ | 27,411,000 | $ | 3,000 | $ | (821,000 | ) | $ | 26,593,000 | |||||||
| December 31, 2021 |
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Fixed income mutual funds | $ | 14,462,000 | $ | — | $ | (137,000 | ) | $ | 14,325,000 | |||||||
| Corporate bonds and notes | 813,000 | — | (12,000 | ) | 801,000 | |||||||||||
| Total marketable securities | $ | 15,275,000 | $ | — | $ | (149,000 | ) | $ | 15,126,000 | |||||||
-15-
| September 30, 2017 | December 31, 2016 | |||||||
| Cash | $ | 9,395,000 | $ | 9,452,000 | ||||
| Money market fund | 42,870,000 | 41,466,000 | ||||||
| Total | $ | 52,265,000 | $ | 50,918,000 | ||||
NOTE G - MARKETABLE SECURITIES
| [1] | Legal Fees |
Russ, August & Kabat provides legal services to the Company with respect to its pending patent litigation filed in May 2017 against Facebook, Inc. in the United StatesU.S. District Court for the Southern District of New York relating to several patents within the Company'sCompany’s Mirror Worlds Patent Portfolio (see Note J[4]I[3] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between 15% and 24% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Russ, August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014 and December 2014 against Google Inc. and YouTube, LLC in the United StatesU.S. District Court for the Southern District of New York relating to certain patents within the Company'sCompany’s Cox Patent Portfolio (see Note J[3]I[2] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for legal fees on a full contingency basis ranging from 15% to 30% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
| [2] | Patent Acquisitions |
On February 28, 2013,March 25, 2022, the Company completed the acquisition of foura new patent portfolio (HFT Patent Portfolio) consisting of six U.S. patents (as well as aand two pending patent application) from Dr. Ingemar Cox (theseU.S. patents togethercovering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with subsequent related patent issuances comprisespeed and latency and provide critical latency gains in trading systems where the Cox Patent Portfolio), a technology leaderdifference between success and failure may be measured in digital watermarking content identification, digital rights managementnanoseconds. The Company paid the seller $500,000 at the closing and related technologies, for a purchase price of $1,000,000has an obligation to pay the seller an additional $500,000 in cash and 403,226 shares$375,000 of the Company'sCompany’s common stock. stock (up to a maximum of 375,000 shares) upon achieving certain milestones with respect to the patent portfolio. The Company also has an additional obligation to pay the seller 15% of the first $50 million of net proceeds (after deduction of expenses) generated by the patent portfolio and 17.5% of net proceeds greater than $50 million. On May 10, 2022, the Company received an additional patent issuance from the U.S. Patent and Trademark Office related to the HFT Patent Portfolio.
In addition,connection with the Company’s acquisition of its Cox Patent Portfolio, the Company is obligated to pay Dr. Cox 12.5%12.5% of the net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the patents. Since the acquisition of the patent portfolio from Dr. Cox, the Company has been issued sixteen (16) additional related patents by the USPTO resulting in an aggregate of twenty (20) patents within the Cox Patent Portfolio. Professional fees and filing fees of $169,000 were capitalized as patent cost.
As part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition Interface, LLC ("Recognition"(“Recognition”), an entity that financed the commercialization of the patent portfolio prior pursuant 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.
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NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
In connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as defined) related to the patent portfolio. In addition, Recognition (and an affiliated entity) also received warrantsM2M will be entitled to purchase an aggregatereceive from the Company $250,000 of 1,250,000 sharesadditional consideration upon the occurrence of the Company's common stock (500,000 shares at an exercise price of $2.05 per share, 375,000 shares at an exercise price of $2.10 per share and 375,000 shares at an exercise price of $1.40 per share). All such warrants were exercised by Recognition (and its affiliate) as of January 2017, resulting in aggregate proceedscertain future events related to the Company of $2,337,500. As part of the acquisition of the Mirror Worlds Patent Portfolio, professional fees and filing fees of $409,000 were capitalized as patent cost.
| [3] | Leases |
The Company leaseshas one operating lease for its principal office space in New York City at a monthly base rentCanaan, Connecticut that will expire on April 30, 2025.
There are no material residual guarantees associated with any of the Company’s leases and there are no significant restrictions or covenants included in the Company’s lease agreements.
The calculated incremental borrowing rate was approximately $3,8004.2%, which was calculated based on remaining lease expires onterm of 3 years as of May 31, 2018.
There was no sublease rental income for the three and six months ended June 30, 2022, and the Company entered into an agreement to extendis not the lessor in any lease for a four year period (expiring September 30, 2019) at a base rentarrangement, and there were no related-party lease agreements.
Right of $7,000 per monthuse lease assets and related lease obligations for the first year (increasing $100 per month each year), which is subjectCompany’s operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
| Schedule of operating leases obligations | ||||||||
| As of | As of | |||||||
| June 30, 2022 | December 31, 2021 | |||||||
| Operating lease right-of-use assets | $ | 194,000 | $ | — | ||||
| Operating lease obligations – current | $ | 66,000 | $ | — | ||||
| $ | — | |||||||
| Operating lease obligations – non-current | 128,000 | $ | — | |||||
| Total lease obligations | 194,000 | $ | — | |||||
The table below presents certain information related to annual adjustments to reflect increasesthe Company’s lease costs for the period ended:
| Schedule of leases cost | ||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost | $ | 12,000 | $ | — | $ | 12,000 | $ | — | ||||||||
| Short-term lease cost | 12,000 | 28,000 | 36,000 | 56,000 | ||||||||||||
| Total lease cost | $ | 24,000 | $ | 28,000 | $ | 48,000 | $ | 56,000 | ||||||||
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NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
Future lease payments included in real estate taxes and operating expenses.
| Schedule of future minimum leases payments | |||||
| Operating Leases | |||||
| 2022 – remaining period | $ | 36,000 | |||
| 2023 | 73,000 | ||||
| 2024 | 73,000 | ||||
| 2025 | 24,000 | ||||
| Total future minimum lease payments | 206,000 | ||||
| Less imputed interest | (12,000 | ) | |||
| Total operating lease liability | $ | 194,000 | |||
NOTE IH - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
[1]
OnIn addition, pursuant to the Agreement, the Company granted to the Chairman and Chief Executive Officer, under its 2013 Stock Incentive Plan, 750,000600,000 restricted stock units (the "RSUs")“RSUs”, each RSU awarded by the Company to its officers, directors and consultants represents a contingent right to receive one share of the Company’s common stock) which vestterms provided for vesting in threefour tranches, as follows: (i) 250,000(1) RSUs of which RSUs shall vest on July 14, 2018,March 22, 2023 and RSUs shall vest on March 22, 2024, subject to the Chairman and Chief Executive Officer'sOfficer’s continued employment by the Company through theeach such vesting date (the "Employment Condition"“Employment Condition”) (“Tranche 1”); (ii) 250,000(2) RSUs shall vest if at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments forduring the remaining term of employment, subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2)Agreement that the Company'sCompany’s common stock achieving(the “Common Stock”) achieves a closing price (for 20for twenty (20) consecutive trading days)days (“Closing Price”) of a minimum of $3.25$ per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 2”); (3) RSUs shall vest if at any time during the term of
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
Under the terms of the Agreement, so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal to 5% of the Company'sCompany’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less than 6.25% of the gross recovery) of the Company'sCompany’s royalties and other payments relating to Licensing Activities with respect to patents other than the Remote Power Patent (including all of the Mirror Worlds Patent PortfolioCompany’s patent portfolios and the Cox Patent Portfolio)its investment in ILiAD Biotechnologies) (collectively, the "Incentive Compensation"“Incentive Compensation”). During the three and six months ended SeptemberJune 30, 20172022, the Chairman and SeptemberChief Executive Officer did 0t earn any Incentive Compensation. During the three and six months ended June 30, 2016,2021, the Chairman and Chief Executive Officer earned Incentive Compensation of $162,000 and $2,029,000, respectively. During the nine months ended September 30, 2017 and September 30, 2016, the Chairman and Chief Executive Officer earned incentive compensation of $716,000 and $3,996,000, respectively. As of September 30, 2017 and December 31, 2016, $239,000 and $748,000 of such compensation were included in accrued expenses, respectively. $935,000.
The Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer for the life of each of the Company'sCompany’s patents with respect to licenses entered into with third parties during the term of his employment or at anytimeany time thereafter, whether he is employed by the Companyus or not; provided,, that,, the employment of the Chairman and Chief Executive Officer's employmentOfficer has not been terminated by the Company "For Cause"“For Cause” (as defined) or terminated by him without "Good Reason"“Good Reason” (as defined). In the event of a merger or sale of substantially all of the Company’s assets, of the Company, the Company has the option to extinguish the right of the Chairman and Chief Executive Officer to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to such value. In the event that the Chairman and Chief Executive Officer'sOfficer’s employment is terminated by the Company "Other“Other Than For Cause"Cause” (as defined) or by him for "Good Reason"“Good Reason” (as defined), the Chairman and Chief Executive Officer shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated portion of the $175,000$175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and (iii) accelerated vesting of all unvested options, warrants, RSUs andor other awards.
In connection with the Agreement, the Chairman and Chief Executive Officer has also agreed not to compete with the Company as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated "Other“Other Than For Cause"Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two years
[2]
The[3]
The-19-
NOTE I – LEGAL PROCEEDINGS AND DISPUTES
[1] On June 9, 2016,March 30, 2021, the Company granted 50,000 restricted stock units to its Executive Vice President which vested 25,000 restricted stock units on June 9, 2017 and 25,000 restricted stock units will vest on June 9, 2018, subject to his continued employment.
[3]
[4]
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Facebook. In its ruling the Court (i) denied Facebook’s motion that the asserted patents were invalid by concluding that all asserted claims were patent eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Facebook and dismissed the case. The Company strongly disagrees with the decision of the District Court on non-infringement and on April 4, 2022, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Facebook filed a notice of cross-appeal with respect to the Court’s ruling on validity.
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NOTE I – LEGAL PROCEEDINGS AND DISPUTES (continued)
[4] On December 15, 2020, the Company filed a lawsuit against NETGEAR, Inc. (“Netgear”) in the Supreme Court of the State of New York, County of New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with the Company (the “Agreement”) for failure to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of Netgear’s PoE products. On October 22, 2021, Netgear filed a Demand for Arbitration at the American Arbitration Association (AAA) seeking to arbitrate certain issues raised in the litigation. The Company has objected to jurisdiction at the AAA and the dispute is pending. On April 1, 2022, the Court denied Netgear’s motion to compel arbitration. On April 22, 2022, Netgear filed a counterclaim in the Court action alleging that the Company breached the Agreement by not offering Netgear lower royalties.
NOTE J – INVESTMENT
During the period December 2018 – March 2021, the Company made an aggregate investment of $6,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held clinical stage biotechnology company dedicated to the prevention and treatment of human disease caused by Bordetella pertussis. ILiAD is developing key technologies that focus on validating its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). The aggregate investment of $6,000,000 by the Company includes a $5,000,000 equity investment and a $1,000,000 investment in a convertible note (see below). At June 30, 2022, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis and 7.2% of the outstanding units on a fully diluted basis (after giving effect to the exercise or conversion of all outstanding options, warrants and convertible notes). In connection with its investment, the Company’s Chairman and Chief Executive Officer obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members.
On March 12, 2021, the Company invested $1,000,000 in ILiAD as part of its private offering of up to $23,500,000 of convertible notes (the “Notes”). The Notes have a maturity of three years with interest accruing at 6% per annum. The Notes are required to be converted into a Qualified Financing (minimum financing of $15 million) at the lesser of (i) 80% of the price paid per unit in such offering or (ii) a price based on an enterprise value of $176,000,000. In addition, the Notes shall convert in the event of a merger at the lower of an enterprise value of $176,000,000 or the stated valuation of ILiAD in the merger transaction. In the event of a change-in-control, noteholders will also have the option to have the Notes repaid except in a Qualified Financing or a stock-for-stock merger.
For the three months ended June 30, 2022 and 2021, the Company recorded a net loss from its equity investment in ILiAD of $355,000 and $231,000, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded a net loss from its equity investment in ILiAD totaling $788,000 and $446,000, respectively.
The difference between the Company’s share of equity in ILiAD’s net assets and the equity investment carrying value reported on the Company’s unaudited condensed consolidated balance sheet at June 30, 2022 is due to an excess amount paid over the book value of the investment totaling approximately $5,000,000 which is accounted for as equity method goodwill.
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On June 14, 2017,8, 2021, the Board of Directors authorized an extension and increase of the Company'sCompany’s share repurchase program (the "Share“Share Repurchase Program"Program”) to repurchase up to $5,000,000$5,000,000 of common stock over the subsequent 24 month period (for a total authorization of approximately $17,000,000 since inception of the program in August 2011).period. The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in the Company'sCompany’s 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 June 8, 2022, the Company entered into, a written trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”). Adopting a trading plan that satisfies the conditions of Rule 10b5-1 allows a company to repurchase its shares at times when it might otherwise be prevented from doing so due to self-imposed trading black-outs or pursuant to insider trading laws. Purchases under the Company’s 10b5-1 trading plan were permitted to commence on July 1, 2022 and the plan expires two trading days after the Company issues a press release announcing its financial results for the quarter ended June 30, 2022. Under the 10b5-1 trading plan, the Company’s third party broker may purchase up to $500,000 of the Company’s common stock, subject to certain price, market, volume and timing constraints, in accordance with the terms of the plan and subject to Rule 10b5-1 and Rule 10b-18 under the Exchange Act.
NOTE L – CONCENTRATIONS
The Company had no revenue for both the three and nine months ended September 30, 2017. For the three months ended September 30, 2017, one licensee with a fully-paid license constituted approximately 30% of the Company's revenue and two other licensees with ongoing royalty bearing licenses constituted approximately 45% of the Company's revenue. Revenue from three licensees constituted approximately 96% and 90% for the three and ninesix months ended SeptemberJune 30, 2016 (exclusive of revenue2022. Revenue from our professional liability settlement – see Note M), respectively. At September 30, 2017, royalty receivables from three licenseesone licensee constituted approximately 36%, 27% and 21%100% of the Company's netCompany’s revenue of the three and six months ended June 30, 2021. At June 30, 2022 and December 31, 2021, the Company had 0 royalty receivables. At December 31, 2016, royalty receivables from three licenses constituted approximately 29%, 45% and 11% of the Company's net royalty receivables.
NOTE M – REVENUE FROM PROFESSIONAL LIABILITY SETTLEMENT
The Company, through MWT, acquired the claim in May 2013 as part of its acquisition of the patent portfolio of Mirror Worlds, LLC.
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NOTE N – RELATED PARTY TRANSACTION
On June 1, 2022, the Company declaredrepurchased from a director, in a privately negotiated transaction, shares of its common stock at a purchase price of $ per share or an initial semi-annual cash dividendaggregate consideration of $0.05 per common share with a payment date of March 24, 2017 to all common stockholders of record as of March 3, 2017.
NOTE O – SUBSEQUENT EVENTS
On July 25, 2017,2022, the Company’s Board of Directors approved the Company’s 2022 Stock Incentive Plan (the “Plan”) which provides for awards of up to an aggregate of shares of the Company declared a semi-annual cash dividendCompany’s common stock to employees, directors and consultants. The Plan is subject to shareholder approval at the Company’s Annual Meeting of $0.05 per annum share with a payment date ofStockholders to be held on September 20, 2017 to all common stockholders of record as of September 1, 2017.2022.
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ITEM 2: MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own thirty-six (36)ninety-six (96) patents includingincluding: (i) our Remote PowerCox Patent Portfolio relating to enabling technology for identifying media content on the Internet and taking further action to be performed after such identification; (ii) our M2M/IoT Patent Portfolio relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim technology in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; (iii) our HFT Patent Portfolio covering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with speed and latency and provide critical latency gains in trading systems where the delivery of power over Ethernet cables for the purpose of remotely powering network devices, such as wireless access ports, IP phonesdifference between success and network based cameras; (ii)failure may be measured in nanoseconds; (iv) our Mirror Worlds Patent Portfolio relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii)and (v) our CoxRemote Power Patent Portfolio relating to enabling technology for identifying media content oncovering the Internet and taking further action to be performed based on such identification; and (iv) our QoS Patents covering systems and methodsdelivery of power over Ethernet (PoE) cables for the transmissionpurpose of audio, videoremotely powering network devices, such as wireless access ports, IP phones and data in order to achieve high quality of service (QoS) over computer and telephony networks.network based cameras. In addition, we continually review opportunities to acquire or license additional intellectual property.
At June 30, 2022, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,125,000 and working capital of $51,291,000. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
During the period December 2018 through March 2021, we made an aggregate investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to sixty-one (61) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment in ILiAD involves significant risk.
We have been actively engaged in the licensing ofdependent upon our Remote Power Patent (U.S.for a significant portion of our revenue. Our Remote Power Patent No. 6,218,930).generated licensing revenue in excess of $187,000,000 from May 2007 through June 30, 2022. We currently have twenty-seven (27) licenseesno longer receive licensing revenue for our Remote Power Patent which, among others, include license agreements with Cisco Systems,for any period subsequent March 7, 2020 (the expiration date of the patent). Except for our pending legal proceeding against NETGEAR, Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd., Dell, Inc., Huawei Technologies Co., Ltd., ShoreTel, Inc., Polycom, Inc. and Avaya, Inc. and several involving our Remote Power Patent, our future revenue is entirely dependent on our ability to monetize our other major data networking equipment manufacturers. In addition, we have license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror Worlds Patent Portfolio. patent assets.
Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets.assets and the monetization of our patent portfolios. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize such intellectual property.monetize. 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.
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On March 25, 2022, we completed the acquisition of a new patent portfolio (the HFT Patent generatedPortfolio) consisting of six U.S. patents and two pending U.S. patents (see Note G[2] to our consolidated financial statements included in this Quarterly Report). On May 10, 2022, we received an additional patent issuance from the U.S. Patent and Trademark Office related to the HFT Patent Portfolio.
We had no revenue for the three and six months ended June 30, 2022. All of our revenue for the six months ended June 30, 2021 resulted from the resolution of our contractual dispute with Cisco in which we received $18,692,000 (see Note I[1] to our unaudited condensed consolidated financial statements included herein). While we have pending litigation involving certain patents within our Cox Patent Portfolio against Google and YouTube and have appealed the judgment of the District Court dismissing our litigation against Facebook on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio, we may not achieve successful outcomes of the litigation or the appeal. Accordingly, our future revenue is uncertain.
The significant components of expenses impacting our net income include contingent legal fees and expenses related to our patent litigation (see Note B[7] to our unaudited condensed consolidated financial statements included herein) and incentive compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H[1] to our unaudited condensed consolidated financial statements included herein), both such components of expenses are based on a percentage of the licensing revenue in excess of $119,000,000 from May 2007 through September 30, 2017. Asreceived by us as a result of litigation or otherwise.
Our quarterly and annual operating and financial results may fluctuate significantly from period to period as a result of a variety of factors that are outside our acquisitioncontrol, including the timing and our ability to achieve successful outcomes of patent litigation, our ability and timing of consummating future license agreements for our intellectual property, and whether we will achieve a return on our investment in ILiAD Biotechnologies, LLC (“ILiAD”) and the timing of any such returns.
Our future operating results may also be materially impacted by our ability to acquire high quality patents which management believes have the potential to generate significant licensing opportunities. In the future, we may not be able to identify or consummate such patent acquisitions or achieve significant licensing revenue with respect to such patent acquisitions.
In 2022 and future years we could be classified as a Personal Holding Company. If this is the case, we would be subject to a 20% tax on the amount of any PHC Income (as defined) for such year that we do not distribute to our shareholders (see Note B[8] to our unaudited condensed consolidated financial statements included in this Quarterly Report).
As to the impact of the Mirror Worlds Patent Portfolioglobal COVID-19 pandemic on us, COVID-19 has and continues to cause some delays in May 2013, we achieved licensing and other revenue from the portfoliocourts including the scheduling of an aggregatetrial dates, which could adversely affect the timing of $47,150,000 through September 30, 2017.our consummation of future license agreements.
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On December 7, 2016,June 9, 2021, our Board of Directors approved the initiationcontinuation of aour dividend policy. The policy provides for the paymentconsisting of regular semi-annual cash dividends of $0.05 per common share ($0.10 per common share annually) which are anticipated to be paid in March and September of each year. It is anticipated thatIn 2021 and the first quarter of 2022, we paid semi-annual cash dividends in accordance with our dividend will continue to be paid through March 2020 (expiration of our Remote Power Patent) provided that we continue to receive royalties from licensees of our Remote Power Patent. On February 2, 2017,policy. Our dividend policy undergoes a periodic review by our Board of Directors declared an initial semi-annual cash dividend of $0.05 per common share with a payment date of March 24, 2017and is subject to all shareholders of record on March 3, 2017. On July 25, 2017,change at any time depending upon our Board of Directors declared a semi-annual cash dividend of $0.05 per common share with a payment date of September 20, 2017 to all shareholders of record on September 1, 2017.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2022 Compared to pay quarterly or monthly royalties to us for the life of the licensed patent (a "Royalty Bearing License")Three Months Ended June 30, 2021
Revenue.
Operating Expenses. Operating expenses for the three months ended June 30, 2022 were $834,000 as compared to $901,000 for the three months ended June 30, 2021. The decrease in operating expenses for the three months ended June 30, 2022 was primarily due to a decrease in professional fees and related costs of $151,000.
General and administrative expenses were $423,000 for the three months ended June 30, 2022 as compared to $461,000 for the three months ended June 30, 2021. Stock-based compensation expense related to the issuance of restricted stock units was $178,000 for the three months ended June 30, 2022 as compared to $59,000 for the three months ended June 30, 2021 as a result of increased expense due to the issuance of additional restricted stock units in March 2022 to our annual royalty rate structureChairman and Chief Executive Officer in accordance with Cisco, which includes declining rates as the volume of PoE products sales increase during the year, royalties from Cisco are typically highest in the first quarter of the calendar yearhis new employment agreement (see Note H[1] to our unaudited condensed consolidated financial statements included herein). Professional fees and decline for each of the remaining calendar quarters of the year.
Operating Loss. We had an operating loss of $834,000 for the three months ended June 30, 2022 compared with an operating loss of $901,000 for the three months ended June 30, 2021. The decreased operating loss of $67,000 for the three months ended June 30, 2022 was primarily due to decreases in professional fees and nine month periodsrelated costs of $151,000 and general and administrative expenses of $38,000, offset by increased stock based compensation of $119,000 as a result of the additional grant of restricted stock units.
Interest and Dividend Income. Interest and dividend income for the three months ended SeptemberJune 30, 2016,2022 was $131,000 as compared to $68,000 for the three months ended June 30, 2021 primarily as a result of a change in the mix of our short term fixed income investments and cash equivalents.
Income Taxes. For the three months ended June 30, 2022, we had revenue of $32,900,000 and $33,800,000, respectively, from Fully-Paid Licenses and license initiation fees related to patent litigation settlements. In addition, during the nine month period ended September 30, 2016, we received $17,500,000 in connection with settlement of a professional liability claim which we had acquired as part of our acquisition of the Mirror Worlds Patent Portfolio in May 2013.
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Share of Net Losses of Equity Method Investee. We incurred a net loss of $355,000 during the three month period ended June 30, 2022 related to our equity share in ILiAD Biotechnologies, LLC a clinical stage biotechnology company, as compared to a net loss of $231,000 for the three months ended June 30, 2021 (see Note J to our unaudited condensed consolidated financial statements included herein).
Net Loss. As a result of the foregoing, we realized a net loss of $1,532,000 or $0.06 per share basic and diluted for the three months ended June 30, 2022 compared with net loss of $783,000 or $0.03 per share basic and diluted for the three months ended June 30, 2021. The increase in our net loss was primarily due to our net realized and unrealized loss from investments of $576,000.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Revenue. We had no revenue for the six months ended June 30, 2022 as compared to revenue of $34,326,000$18,692,000 for the threesix months ended SeptemberJune 30, 2016. The decrease in revenue of $31,089,0002021. Revenue for the threesix months ended SeptemberJune 30, 2017 was primarily due to revenue2021 entirely resulted from our resolution of $32,900,000 for the three months ended September 30, 2016 from Fully-Paid Licenses and license initiation fees related to patent litigation settlementsa contractual dispute with Apple Inc. ($25,000,000), Dell, Inc. ($6,000,000), and Alcatel and ALE USA Inc. ($1,900,000) (see "Legal Proceedings" at page 33Cisco concerning licensing of this quarterly report). Excluding revenue from Fully-Paid Licenses and license initiation fees related to litigation settlements, revenue for the three months ended September 30, 2017 increased $837,000 or 59% as compared to the three months ended September 30, 2016 due primarily to increased revenue from Royalty Bearing Licenses for our Remote Power Patent.
Operating Expenses.
General and administrative expenses increased by $6,000 from $428,000were $940,000 for the threesix months ended September June 30, 2016 to $434,000 for the three months ended September 30, 2017. Amortization of patents was $50,000 for the three months ended September 30, 20172022 as compared to $49,000$974,000 for the threesix months ended SeptemberJune 30, 2016.2021. Stock-based compensation expense related to the issuance of restricted stock units was $237,000$233,000 for the threesix months ended SeptemberJune 30, 20172022 as compared to $189,000$118,000 for the issuance of restricted stock units and the vesting of stock options for the threesix months ended SeptemberJune 30, 2016.2021. Professional fees and related costs were $534,000$407,000 for the threesix months ended SeptemberJune 30, 20172022 as compared to $633,000$663,000 for the threesix months ended SeptemberJune 30, 2016.
Operating (Loss) Income
.Interest and Dividend Income. Interest and dividend income for the threesix months ended SeptemberJune 30, 20172022 was primarily due$211,000 as compared to operating income associated with revenue of $32,900,000 from Fully-Paid Licenses and license initiation fees related to patent litigation settlements$118,000 for the threesix months ended SeptemberJune 30, 2016.2021 primarily as a result of a change in the mix of our short term fixed income investments and cash equivalents.
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Income Taxes
.Share of Net Losses of Equity Method Investee. We incurred a net loss of $788,000 during the six month period ended June 30, 2022 related to our net-operatingequity share in ILiAD Biotechnologies, a clinical stage biotechnology company, as compared to a net loss carry-forwards and temporary (timing) differences with respectof $446,000 for the six months ended June 30, 2021 (see Note J to outstanding stock options and restricted stock units. We have no remaining net operating loss carry-forwards as of September 30, 2017.
Net Income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At SeptemberJune 30, 2017,2022, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,265,000$52,125,000 and working capital of $54,101,000. We believe based$51,291,000. Based on our current cash position, and projected licensing revenue from our existing license agreementswe believe that we will have sufficient cash to fund our operations for the next twelve months and the foreseeable future.
Working capital increaseddecreased by $2,686,000$4,374,000 at June 30, 2022 to $54,101,000 at September 30, 2017$51,291,000 as compared to working capital of $51,415,000$55,665,000 at December 31, 2016.2021. The increasedecrease in working capital of $4,374,000 for the ninesix months ended SeptemberJune 30, 20172022 was primarily due to increases inour net loss of $2,844,000, cash dividends of $1,195,000 and cash equivalents of $1,347,000 and royalty receivables of $691,000, decreases in accrued payroll of $1,508,000 and accrued contingency fees and relatedpatent acquisition costs of $892,000, offset by an increase in income taxes payable of $930,000 and a decrease in prepaid taxes of $895,000.
Net cash (used in) provided by operating activities for the ninesix months ended SeptemberJune 30, 20172022 decreased by $33,203,000$15,878,000 from $37,140,000 for the nine months ended September 30, 2016 to $3,937,000 for the nine months ended September 30, 2017. The decrease in net cash$11,270,000 provided by operating activities for the ninesix months ended SeptemberJune 30, 2017 compared with2021 to $(4,608,000) used in operating activities for the same period in 2016 wassix months ended June 30, 2022, primarily due to decreasesrevenue of $18,692,000 from resolution of our contractual dispute with Cisco during the six months ended June 30, 2021.
Net cash (used in) provided by investing activities during the six months ended June 30, 2022 was $(12,803,000) as compared to $3,612,000 for the three months ended June 30, 2021 primarily as a result of the differential of purchases and sales of marketable securities and partially offset by our $1,000,000 convertible note investment in net income of $18,422,000, accrued expenses of $6,541,000, deferred taxes of $4,504,000 and income taxes payable of $3,150,000.
Net cash used in investing activities for the nine months ended September 30, 2017 and September 30, 2016 was $50,000 and $4,000, respectively, related to the purchase of patents.
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We maintain our cash primarily in money market accounts.funds, government securities, certificate of deposit, and short-term fixed income securities. 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 theour lease obligations set forth infor our principal office space (see Note H[G[3] to our unaudited condensed consolidated financial statementsstatement included in this quarterly report.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidatedour financial statements included in this Quarterly Report on Form 10-Q requires usmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue, costsand disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of our unaudited condensed consolidated financial statements include revenue recognition, contingent legal fees and related disclosures. Theseexpenses, income taxes, valuation of patents and equity method investments, including the evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, form the basis for judgments we make aboutupon which the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with revenue recognition, patents, income taxes, and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.were based. See also Note B to our unaudited condensed consolidated financial statements included in this quarterly report.
We believe our most critical accounting policies and estimates to be the FASB issued Accounting Standards Update ("ASU") No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversityfollowing:
Equity Method Investments
Equity method investments are equity securities in practice exists. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. Weentities that we do not believe thatcontrol but over which we have the adoptionability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. Our proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When our carrying value in an equity method investment is reduced to zero, no further losses are recorded in our financial statements unless we guaranteed obligations of the investee company or have committed additional funding. When the investee company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount of the equity investment is recognized in profit or loss. In determining whether an equity method investment is impaired, we take into consideration a variety of factors including the operating and financial performance of the investee, the investee’s future business plans and projections, discussions with the investee’s management, and our intent and ability to hold the investment until it recovers in value. Accordingly, we make assumptions and estimates in assessing whether an impairment has occurred and if, in the future, our assumptions and estimates made in assessing the fair value of these investments change, this ASU willcould result in a material decrease in the carrying value of the investment. This would cause us to write-down the carrying value of the investment and could have a material impactadverse effect on our consolidated financial statements.
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Income Taxes
We account for income taxes in Topic 718. The new standard is effective beginning after December 15, 2017accordance with early adoption permitted. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
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) 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 SeptemberJune 30, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1:1. LEGAL PROCEEDINGS
For a description of our legal proceedings see Note I to our unaudited condensed consolidated financial statements included in this Quarterly Report and Item 1. Legal Proceedings
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. In addition toInvestors should carefully consider the risks described
ITEM 2.2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended SeptemberJune 30, 2017.
Stock Repurchases
On June 14, 2017,8, 2021, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of shares of our common stock over the subsequent 1224 month period. 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. Since inception of the Share Repurchase Program in August 2011 through SeptemberJune 30, 2017,2022, we have repurchased an aggregate of 7,201,5979,087,214 shares of our common stock at an aggregate cost of $12,589,253$17,473,100 (exclusive of commissions) or an average per share price of $1.75.$1.92. During the three months ended SeptemberJune 30, 2017,2022, we repurchased 39,872an aggregate of 103,080 shares of our common stock at an aggregate cost of $149,253 (exclusive of commissions)$247,824 or an average per share price of $3.74.$2.40. During the three months ended March 31, 2022, we did not repurchase any shares of our common stock. At SeptemberJune 30, 2017,2022, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $3,875,050.$3,682,905.
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| 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(1) |
| July 1 to July 31, 2017 | -0- | — | — | $ 4,024,303 |
| August 1 to August 31, 2017 | 25,022 | $3.77 | 25,022 | $ 3,929,875 |
| September 1 to September 30, 2017 | 14,850 | $3.69 | 14,850 | $ 3,875,050 |
| Total | 39,872 | $3.74 | 39,872 |
During the months of April, May and increase of theJune 2022, we purchased common stock pursuant to our Share Repurchase Program approved by the Board of Directors on June 14, 2017 to repurchase up to $5,000,000 shares of common stock over the subsequent 24 month period.
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 |
| April 1 to April 30, 2022 | — | — | — | $3,930,729 |
| May 1 to May 31, 2022 | 23,431 | 2.39 | 23,431 | $3,874,729 |
| June 1 to June 30, 2022 | 79,649 (1) | 2.41 | 79,649 | $3,682,775 |
| Total | 103,080 | 2.40 | 103,080 |
| (1) | Includes 41,500 shares of our common stock repurchased from a director by us, in a privately negotiated transaction, on June 1, 2022, at a price of $2.42 per share or an aggregate purchase price of $100,430. |
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits
(a) Exhibits
| 101 | Interactive data files:** |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Scheme 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 |
_____________________________
*
Filed herewith** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETWORK-1 TECHNOLOGIES, INC. | |||
| Date: | By: | /s/ Corey M. Horowitz | |
Corey M. Horowitz | |||
Chairman and Chief Executive Officer | |||
(Principal Executive Officer) | |||
| Date: | By: | /s/ David C. Kahn | |
David C. Kahn | |||
Chief Financial Officer | |||
(Principal Financial Officer) | |||
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