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 March 31, 2024 |
| ☐ | 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, 2017May 3, 2024 was 24,131,012.
1
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
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, 2023 (filed with the SEC on March 8, 2024). 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 from licensing our intellectual property; |
| • | 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 increasing development of artificial intelligence could materially impact our business; |
| • | the risk that we may be determined to be a personal holding company in 2024 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
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 | ||||
March 31, 2024 | December 31, 2023 | |||||||
ASSETS
CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 18,105,000 | $ | 16,896,000 | ||||
| Marketable securities, at fair value | 25,289,000 | 28,571,000 | ||||||
| Other current assets | 218,000 | 206,000 | ||||||
TOTAL CURRENT ASSETS | 43,612,000 | 45,673,000 | ||||||
OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | 1,296,000 | 1,326,000 | ||||||
| Equity investment | 4,621,000 | 5,249,000 | ||||||
| Operating leases right-of-use asset | 75,000 | 16,000 | ||||||
| Security deposit | 13,000 | 13,000 | ||||||
Total Other Assets | 6,005,000 | 6,604,000 | ||||||
TOTAL ASSETS | $ | 49,617,000 | $ | 52,277,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 306,000 | $ | 125,000 | ||||
| Accrued payroll | — | 378,000 | ||||||
| Other accrued expenses | 182,000 | 297,000 | ||||||
| Operating lease obligation, current | 57,000 | 23,000 | ||||||
| Total Current Liabilities | 545,000 | 823,000 | ||||||
LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | 615,000 | 762,000 | ||||||
| Operating lease obligation, non-current | 24,000 | — | ||||||
TOTAL LIABILITIES | 1,184,000 | 1,585,000 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at March 31, 2024 and December 31, 2023 | — | — | ||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively | 235,000 | 235,000 | ||||||
| Additional paid-in capital | 67,560,000 | 67,446,000 | ||||||
| Accumulated deficit | (19,362,000 | ) | (16,989,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 48,433,000 | 50,692,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 49,617,000 | $ | 52,277,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| REVENUE | $ | — | $ | 537,000 | ||||
| OPERATING EXPENSES: | ||||||||
| Costs of revenue | — | 151,000 | ||||||
| Professional fees and related costs | 219,000 | 298,000 | ||||||
| General and administrative | 669,000 | 781,000 | ||||||
| Amortization of patents | 30,000 | 83,000 | ||||||
| TOTAL OPERATING EXPENSES | 918,000 | 1,313,000 | ||||||
| OPERATING LOSS | (918,000 | ) | (776,000 | ) | ||||
OTHER INCOME: | ||||||||
| Interest and dividend income, net | 431,000 | 310,000 | ||||||
| Net realized and unrealized gain on marketable securities | 48,000 | 364,000 | ||||||
| Total other income, net | 479,000 | 674,000 | ||||||
| LOSS BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | (439,000 | ) | (102,000 | ) | ||||
| INCOME TAX PROVISION: | ||||||||
| Current | — | — | ||||||
| Deferred taxes | (147,000 | ) | (153,000 | ) | ||||
| Total income tax benefit | (147,000 | ) | (153,000 | ) | ||||
| (LOSS) INCOME BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | (292,000 | ) | 51,000 | |||||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | (628,000 | ) | (674,000 | ) | ||||
| NET LOSS | $ | (920,000 | ) | $ | (623,000 | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | (0.04 | ) | $ | (0.03 | ) | ||
| Diluted | $ | (0.04 | ) | $ | (0.03 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic | 23,540,468 | 23,866,821 | ||||||
| Diluted | 23,540,468 | 23,866,821 | ||||||
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 MONTHS ENDED MARCH 31, 2024
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||
| Balance – January 1, 2024 | 23,553,908 | $ | 235,000 | $ | 67,446,000 | $ | (16,989,000 | ) | — | $ | 50,692,000 | |||||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,207,000 | ) | — | (1,207,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 115,000 | — | — | 115,000 | ||||||||||||||||||
| Vesting of restricted stock units | 111,250 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (28,853 | ) | — | — | (61,000 | ) | — | (61,000 | ) | |||||||||||||||
| Treasury stock purchased and retired | (83,744 | ) | (1,000 | ) | — | (185,000 | ) | — | (186,000 | ) | ||||||||||||||
| Net loss | — | — | — | (920,000 | ) | — | (920,000 | ) | ||||||||||||||||
| Balance – March 31, 2024 | 23,552,561 | $ | 235,000 | $ | 67,560,000 | $ | (19,362,000 | ) | — | $ | 48,433,000 | |||||||||||||
THREE MONTHS ENDED MARCH 31, 2023
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance – January 1, 2023 | 23,863,639 | $ | 239,000 | $ | 66,939,000 | $ | (12,055,000 | ) | $ | (14,000 | ) | $ | 55,109,000 | |||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,196,000 | ) | — | (1,196,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 161,000 | — | — | 161,000 | ||||||||||||||||||
| Vesting of restricted stock units | 123,750 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (39,099 | ) | — | — | (83,000 | ) | — | (83,000 | ) | |||||||||||||||
| Treasury stock purchased and retired | (136,785 | ) | (1,000 | ) | — | (305,000 | ) | — | (306,000 | ) | ||||||||||||||
| Net loss | — | — | — | (623,000 | ) | — | (623,000 | ) | ||||||||||||||||
| Balance – March 31, 2023 | 23,811,505 | $ | 239,000 | $ | 67,099,000 | $ | (14,262,000 | ) | $ | (14,000 | ) | $ | 53,062,000 | |||||||||||
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)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (920,000 | ) | $ | (623,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of patents | 30,000 | 83,000 | ||||||
| Stock-based compensation | 115,000 | 161,000 | ||||||
| Loss allocated from equity method investment | 628,000 | 674,000 | ||||||
| Unrealized (gain) loss on marketable securities | 20,000 | (270,000 | ) | |||||
| Deferred tax (benefit) expense | (147,000 | ) | (153,000 | ) | ||||
| Amortization of operating leases – right of use assets | 16,000 | 16,000 | ||||||
| Changes in operating asset and liabilities: | ||||||||
| Other current assets | (12,000 | ) | 229,000 | |||||
| Other assets | — | (13,000 | ) | |||||
| Accounts payable | 181,000 | 94,000 | ||||||
| Operating lease obligations | (17,000 | ) | (17,000 | ) | ||||
| Accrued expenses | (490,000 | ) | (471,000 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (596,000 | ) | (290,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | 5,756,000 | 7,671,000 | ||||||
| Purchases of marketable securities | (2,494,000 | ) | (9,330,000 | ) | ||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 3,262,000 | (1,659,000 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (1,210,000 | ) | (1,191,000 | ) | ||||
| Value of shares delivered to fund payment of withholding taxes | (61,000 | ) | (83,000 | ) | ||||
| Repurchases of common stock, inclusive of commissions | (186,000 | ) | (306,000 | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES: | (1,457,000 | ) | (1,580,000 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,209,000 | (3,529,000 | ) | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 16,896,000 | 13,448,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 18,105,000 | $ | 9,919,000 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | — | — | ||||||
| Income taxes | — | — | ||||||
| NON-CASH FINANCING ACTIVITIES | ||||||||
| Accrued dividend rights on restricted stock units | $ | 32,000 | $ | 8,000 | ||||
| Right of use asset and lease liability | $ | 75,000 | — | |||||
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 September 30, 2017,March 31, 2024, and the results of its operations, and comprehensive income for the three and nine month periods ended September 30, 2017 and September 30, 2016changes in stockholders’ equity, and its cash flows for the ninethree month periods ended September 30, 2017March 31, 2024 and September 30, 2016.March 31, 2023. 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, 20162023 included in the Company'sCompany’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2017.8, 2024. The results of operations for the three and nine months ended September 30, 2017March 31,2024 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary,subsidiaries, Mirror Worlds Technologies, LLC and HFT Solutions, LLC.
[2] BUSINESS:
The Company is engaged in the development,
licensing and protection of its intellectual property assets. The Company presently owns8
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
The Company has been actively engaged in licensing its Remote Power Patent (U.S. Patent No. 6,218,930) covering the control of power delivery over Ethernet cables. As of September 30, 2017, the Company has entered into twenty-six (26) license agreements with respect to its Remote Power Patent. 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.
The Company has also made equity investments totaling $7,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a clinical stage biotechnology company (see Note J hereof).
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, income taxes,costs related to the Company’s assertion of litigation, valuation of patentsthe Company’s patent portfolios, stock-based compensation, the recoverability of deferred tax assets and stock-based compensation.the carrying value of the Company’s equity method investments. Actual results could be materially different from those estimates upon which the carrying values were based.
Certain amounts recorded to reflect the Company’s share of income or losses of its equity method investee, accounted for under the equity method, are based on estimates and the unaudited results of operations of the equity method investee and may require adjustment in the future when the audit of the equity method investee is complete. The Company owns patents that relate to various technologies. The Company capitalizesreports its share of the costs associated with acquisition, registration and maintenanceresults of its acquired patents and amortizes these assets over their remaining useful livesequity method investee on a straight-lineone quarter lag basis. Any further payments made to maintain or develop
| [2] | Revenue Recognition |
Under ASC 606, revenue is recognized when the patents would be capitalized and amortized over the balance of the useful life for the patents.
The Company determines revenue recognition through the following steps:
| • | identification of the license agreement, the final judgment or the litigation settlement agreement; |
| • | identification of the performance obligations in the license agreement, the final judgment or the litigation settlement agreement; |
| • | determination of the consideration for the license, final judgment or settlement; |
| • | allocation of the transaction price to the performance obligations in the contract; and |
| • | recognition of revenue when the Company satisfies its performance obligations. |
9
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue disaggregated by source is as follows:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Litigation settlements | $ | — | $ | 537,000 | ||||
| Total Revenue | $ | — | $ | 537,000 | ||||
During the three months ended March 31, 2024, the Company had no revenue. During the three months ended March 31, 2023, the Company entered into settlement agreements with three defendants with respect to patent infringement litigation involving its Remote Power Patent, resulting in aggregate settlements paid of $537,000 which were recognized as revenue and a conditional payment of $150,000 which has not been performed pursuant torecognized as revenue as of March 31, 2024, because the terms of the conditional payment have not yet been satisfied.
Revenue from the Company’s patent licensing and enforcement business is typically generated from negotiated license agreements or other applicablesettlement agreements with respect to any of the Company’s patents. The timing and amount of revenue recognized from each licensee or such settlement agreement 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 may either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license, (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, or (iii) a lump sum settlement payment with respect to litigation involving the Company’s expired patents.
Fully-paid licenses provide for a non-refundable up-front payment for which the Company has no future obligations or performance requirements, revenue is generally recognized when the Company has obtained the signed license agreement, all performance obligations have been substantially performed, amounts are fixed orand determinable, and (iv) collectability of amounts is reasonably assured. Revenue from fully-paid licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
| [3] | Equity Method Investments |
Equity method investments are equity securities in entities the Company reliesdoes 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 royaltya 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 has guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports received from third party licensees toincome, the Company will not record its revenue. From time to time the Company may audit royalties reported from licensees. Any adjusted royalty revenue as a resultshare of such audits is recorded byincome until it equals the Company in the period in which such adjustment is agreed to by the Company and the licensee or otherwise determined.amount of its share of losses not previously recognized.
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NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [4] | 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.
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“UPHCI”), which means, in general, taxable income subject to certain 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 five or fewer individuals at any 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”) 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”). During the second half of 2023, based on available information concerning the Company’s shareholder ownership, the Company did not satisfy the Ownership Test. In addition, the Company did not satisfy the Income Test in the second half of 2023. Thus, the Company was not a PHC in 2023. However, the Company may subsequently be determined to be a PHC in 2024 or in future years if it satisfies both the Ownership Test and Income Test. If the Company were to become a PHC in 2024 or any future year, it would be subject to the 20% tax on its UPHCI. In such event, the Company may issue a special cash dividend to its shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
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 September 30, 2017March 31, 2024.
The Company recognizes interest and December 31, 2016.penalties, if any, related to income tax in the income tax provision in the unaudited condensed consolidated statements of operations.
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NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
U.S. federal, state and local income tax returns prior to 20142020 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.
| [5] | New Accounting Standards |
Segments
In November 2023, the Company adopted FASB issued ASU 2016-09,2023-07, Segment Reporting (Topic 280): Improvements to Employee Share Based Accounting, which impacts the Company's presentation of certain taxes. See "Accounting Standards Adopted in Period" section of this Note B for further details.
Income Tax Disclosure
In February 2016,December 2023, the FASB issued ASU No. 2016-02, Leases (Topic 842)ASU 2023-09, Improvements to Income Tax Disclosures. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on the previously issued ASU 2016-02 Leases (Topic 842). ASU No. 2016-02 isincome taxes paid. The new requirements will be effective for annual periods beginning after December 15, 2018, and requires2024. The guidance will be applied on a lesseeprospective basis with the option to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to useapply the leased asset (the underlying asset) for the lease term.standard retrospectively. Early applicationadoption is permitted. The Company does not believe that the adoption of this accounting standard will have a materialis currently evaluating ASU 2023-09 to determine its impact on its consolidated financial statements.
NOTE C - – PATENTS
The Company'sCompany’s intangible assets at September 30, 2017March 31, 2024 include patents with estimated remaining economic useful lives ranging from 3.09 to 4.015 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 September 30, 2017March 31, 2024 and December 31, 20162023 were as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| Gross carrying amount – patents | $ | 8,473,000 | $ | 8,473,000 | ||||
| Accumulated amortization – patents | (7,177,000 | ) | (7,147,000 | ) | ||||
| Patents, net | $ | 1,296,000 | $ | 1,326,000 | ||||
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| 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 | ||||
NOTE C – PATENTS (continued)
Amortization expense for the three months ended September 30, 2017March 31, 2024 and September 30, 20162023 was $50,000$30,000 and $49,000, respectively. Amortization expense for the nine months ended September 30, 2017 and September 30, 2016 was $150,000 and $760,000,$83,000, respectively. Future amortization of current intangible assets netfor the next five years and thereafter 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 | ||
| For the years ended December 31, | ||||||
| 2024 – remaining | $ | 90,000 | ||||
| 2025 | 120,000 | |||||
| 2026 | 120,000 | |||||
| 2027 | 119,000 | |||||
| 2028 | 116,000 | |||||
| Thereafter | 731,000 | |||||
| Total | $ | 1,296,000 | ||||
The expiration dates of patents within the Company’s M2M/IoT Patent Portfolio range from September 2033 to May 2034. The expiration dates within the Company’s HFT Patent Portfolio range from October 2039 to November 2039. All of the patents within the Company'sCompany’s Mirror Worlds Patent Portfolio, range from April 2018 to February 2020 (six
Restricted Stock Units
The Company adopted the nine months ended2022 Stock Incentive Plan, (the “2022 Plan”), approved by its Board of Directors on July 25, 2022 and its stockholders on September 30, 2017,20, 2022. The 2022 Plan provides for the Company issued 13,500grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, units to each of its three non-management directors as an annual grant for 2017 for service on the Company's Board of Directors. Each(c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock unit represents a contingent right to receive one shareunits.
As of the Company's common stock. The restricted stock units vest in four equal quarterly installments of 3,375March 31, 2024, there were 121,250 shares of common stock on March 15, 2017, June 15, 2017, September 15, 2017 and December 15, 2017, subject to continued service onoutstanding awards under the Board2022 Plan and shares of Directors.
A summary of restricted stock unit activity for the ninethree months ended September 30, 2017March 31, 2024 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 | |||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2023 | 587,500 | $ | 1.81 | |||||
| Grants of restricted stock units | 70,000 | 2.17 | ||||||
| Vested restricted stock units | (111,250 | ) | (2.45 | ) | ||||
| Balance of restricted stock units outstanding at March 31, 2024 | 546,250 | $ | 1.72 | |||||
Restricted stock unit compensation expense was $237,000$ and $711,000$ for the three and nine months ended September 30, 2017,March 31, 2024 and 2023, respectively. Restricted stock unitStock-based compensation expense was $189,000is included in general and $221,000 foradministrative expenses in the three and nine months ended September 30, 2016, respectively.
The Company hashad an aggregate of $1,097,000$ of unrecognized restricted stock unit compensation expense as of September 30, 2017March 31, 2024 to be expensed over a weighted average period of 1.6 years.
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| 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 |
NOTE D – STOCK-BASED COMPENSATION (continued)
All of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. During the ninethree months ended September 30, 2017,March 31, 2024, the Company's Chief Financial Officer and threeCompany paid a total of his children exercised stock options to purchase an aggregate$35,000 of 75,000 shares of the Company's common stock at an exercise price of $1.40 per share. In addition, during the nine months ended September 30, 2017, a former director exercised a stock option to purchase 125,000 shares of the Company's common stock at an exercise price of $1.40 per share.
Basic Earningsloss per share is calculated by dividing the net incomeloss 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 September 30, 2017March 31, 2024 and September 30, 2016,2023, respectively, consisted of options, warrants andoutstanding restricted stock units. and stock options. However, since the Company generated a net loss in 2024 and 2023, all potentially dilutive shares were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
Computations of basic and diluted weighted average common shares outstanding were as follows:
Three Months Ended | ||||||||
2024 | 2023 | |||||||
Weighted-average common shares outstanding – basic | 23,540,468 | 23,866,821 | ||||||
Dilutive effect of restricted stock units and stock options | — | — | ||||||
Weighted-average common shares outstanding – diluted | 23,540,468 | 23,866,821 | ||||||
Restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | 546,250 | 571,250 | ||||||
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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 | ||||||||||||
NOTE F – CASH AND CASH EQUIVALENTS
Marketable securities as of September 30, 2017March 31, 2024 and December 31, 20162023 were composed of:
| 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 | ||||
| March 31, 2024 | ||||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
| Certificates of deposit | $ | 6,170,000 | $ | — | $ | (17,000 | ) | $ | 6,153,000 | |||||||
| Government securities | 11,357,000 | 63,000 | (21,000 | ) | 11,399,000 | |||||||||||
| Fixed income mutual funds | 7,610,000 | 127,000 | — | 7,737,000 | ||||||||||||
| Total marketable securities | $ | 25,137,000 | $ | 190,000 | $ | (38,000 | ) | $ | 25,289,000 | |||||||
| December 31, 2023 | ||||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
| Certificates of Deposit | $ | 6,112,000 | $ | ― | $ | (35,000 | ) | $ | 6,077,000 | |||||||
| Government Securities | 14,701,000 | 127,000 | (10,000 | ) | 14,818,000 | |||||||||||
| Fixed income mutual funds | 7,585,000 | 91,000 | — | 7,676,000 | ||||||||||||
| Total marketable securities | $ | 28,398,000 | $ | 218,000 | $ | (45,000 | ) | $ | 28,571,000 | |||||||
The Company’s marketable securities are classified as available-for-sale and are recorded atwithin Level 1 of the fair market value. Unrealized gains and losses are reported as other comprehensive income or loss. Realized gains and losses are reclassified from other comprehensive income or loss to net income or loss in the periodvalue hierarchy because they are realized. At September 30, 2017 and December 31, 2016, the Company's marketable securities consisted of two corporate bonds (aggregate face value $1,000,000) with a 3.9% and 4.5% coupon and term of greater than three months when purchased. The Company's marketable securities maturevalued using quoted market prices in 2021 and it is not the intention of the Company to hold such securities until maturity.
NOTE HG – COMMITMENTS AND CONTINGENCIES
[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. (now Meta Platforms, 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[2] 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%15% and 24%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 theapproved 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[1] 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%15% to 30%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 approved expenses incurred with respect to this litigation.
Dovel & Luner, LLP (“Dovel”) provides legal services to the Company with respect to its patent litigation filed in September 2011 against sixteen (16) data networking equipment manufacturers inrelated to the United States District Court for the Eastern District of Texas, Tyler (seeRemote Power Patent (See Note J[1]I[4] hereof). The terms of the Company'sCompany’s agreement with Dovel & Luner LLP essentially provide, among other things, for legal fees on a full contingency basis ranging from 12.5%15% to 35% (with certain exceptions)40% of the net recovery (after deduction for expenses)of expenses where applicable) depending on the stage of the precedingproceeding in which athe result (settlement or judgment) is achieved. For the three months ended September 30, 2017 and September 30, 2016, the Company incurred aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $523,000 and $2,348,000, respectively. For the nine month period ended September 30, 2017 and September 30 2016, the Company incurred aggregate contingent legal
15
NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
[2] Patent Acquisitions:
On February 28, 2013,March 25, 2022, the Company completed the acquisition of foura new patent portfolio (HFT Patent Portfolio) currently consisting of nine 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. No such payments were made by the Company during the three months ended March 31, 2024 and 2023.
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,portfolio. No such payments were made by the Company has been issued sixteen (16) additional related patents byduring the USPTO resulting in an aggregate of twenty (20) patents within the Cox Patent Portfolio. Professional feesthree ended March 31, 2024 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.
In connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M14% 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 patent portfolio. No such payments were made by the Company of $2,337,500. As part ofduring the acquisition of the Mirror Worlds Patent Portfolio, professional feesthree months ended March 31, 2024 and filing fees of $409,000 were capitalized as patent cost.
[3] Lease Agreements:
The Company leaseshas one operating lease for its principal office space in New York City atCanaan, Connecticut that expires on April 30, 2025. The Company pays a monthly base rent of approximately $3,800$5,500 for such office space. On September 29, 2023, the Company exercised its early termination right under the lease effective December 31, 2023 which was subsequently extended to March 31, 2024. On March 28, 2024, the Company agreed to revoke its exercise of its early termination right and the lease expires on April 30, 2025.
16
NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
The calculated incremental borrowing rate was approximately 4.2%, which was calculated based on the remaining lease term of 3 years as of May 1, 2022. There are no material residual guarantees associated with the Company’s lease and there are no significant restrictions or covenants included in the Company’s lease agreement.
The remaining lease term as of March 31, 2018.2024 is thirteen (13) months.
Right of use lease assets and related lease obligations for the Company’s operating leases were recorded in the unaudited condensed consolidated balance sheets as follows:
As of March 31, 2024 | As of December 31, 2023 | |||||||
| Operating lease right-of-use assets | $ | 75,000 | $ | 16,000 | ||||
| Operating lease obligations – current | $ | 57,000 | $ | 23,000 | ||||
| Operating lease obligations – non-current | 24,000 | — | ||||||
| Total lease obligations | $ | 81,000 | $ | 23,000 | ||||
The table below presents certain information related to the Company’s lease costs for the period ended:
| For the Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
| Operating lease cost | $ | 17,000 | $ | 19,000 | ||||
| Short-term lease cost | — | — | ||||||
| Total lease cost | $ | 17,000 | $ | 19,000 | ||||
Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2024, were as follows:
| Operating Leases | ||||
| 2024 – remaining period | $ | 59,000 | ||
| 2025 | 26,000 | |||
| Total future minimum lease payments | 85,000 | |||
| Less imputed interest | (4,000 | ) | ||
| Total operating lease liability | $ | 81,000 | ||
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NOTE H – EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
On March 22, 2022, the Company entered into an agreement to extend the lease for a four year period (expiring September 30, 2019) at a base rent of $7,000 per month for the first year (increasing $100 per month each year), which is subject to annual adjustments to reflect increases in real estate taxes and operating expenses.
Under the Company granted toterms of the Agreement (which terms are substantially the same as the prior employment agreement with the Chairman and Chief Executive Officer, under its 2013 Stock Incentive Plan, 750,000 restricted stock units (the "RSUs") which vest in three tranches, as follows: (i) 250,000 RSUs shall vest on July 14, 2018, subject to the Chairman and Chief Executive Officer's continued employment by the Company through the vesting date (the "Employment Condition"); (ii) 250,000 RSUs shall vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment, subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2) the Company's common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $3.25 per share (subject to adjustment for stock splits) at any time during the term of
NOTE I - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
[1]
[4]
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NOTE I – LEGAL PROCEEDINGS (continued)
On August 11, 2018, the Court issued an order granting Meta’s motion for summary judgment of non-infringement and dismissed the case. On August 17, 2018, the Company filed a Notice of Appeal to appeal the summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit ruled in the Company’s favor and reversed the summary judgment finding of the District Court and remanded the litigation to the Southern District of New York for further proceedings.
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Meta. In its ruling the Court (i) denied Meta’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 Meta 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, Meta filed a notice of cross-appeal with respect to the Court’s ruling on validity. The appeal is pending.
[3] 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 objected to jurisdiction at the AAA. 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. On September 22, 2022, the arbitration brought by Netgear was dismissed by the AAA on jurisdiction grounds. On August 27, 2023, the Court granted Netgear’s cross-motion for summary judgment and dismissed the Company’s claims and also denied the Company’s summary judgment motion with respect to Netgear’s counterclaim for breach of the license agreement. The Company appealed the Court decision. On February 20, 2024, the Appellate Division of the Supreme Court, State of New York, First Department, upheld the lower court ruling dismissing the Company’s complaint and granted the Company’s motion to dismiss Netgear’s counterclaim for breach of the most favored license provision concerning two licensees, but said there was a triable issue as to a third licensee. On March 17, 2024, the Company and Netgear settled the litigation and exchanged general releases ending the litigation.
[4] In October and November 2022, the Company initiated nine separate litigation against ten defendants for infringement of its Remote Power Patent seeking monetary damages based upon reasonable royalties, as follows: (i) On October 6, 2022, the Company initiated such litigation against Arista Networks, Inc., Fortinet, Inc., Honeywell International Inc. and Ubiquity Inc. in the United States District Court, District of Delaware; (ii) On October 27, 2022, and November 3, 2022, the Company initiated such litigation against TP-Link USA Corporation and Hikvision USA, Inc. in the United States District Court for the Central District of California; (iii) On November 4, 2022, the Company initiated such litigation against Panasonic Holdings Corporation and Panasonic Corporation of North America in the United States District Court for the Eastern District of Texas (Marshall Division); and (iv) On November 8, 2022 and November 16, 2022, the Company initiated such litigation against Antaira Technologies, LLC and Dahua Technology USA in the United States District Court for the Central District of California.
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NOTE I – LEGAL PROCEEDINGS (continued)
The Company has entered into settlement agreements with all of the defendants in the above referenced litigations except Ubiquity Inc. and Honeywell International Inc. which remain pending. A conditional payment of $150,000 in one settlement has not yet been recognized as revenue because the terms of the conditional payment have not been satisfied.
NOTE J – INVESTMENT
During the period December 2018 through August 2022, the Company made aggregate investments of $7,000,000 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 focused on validating its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). At March 31, 2024, the Company owned approximately 6.7% of the outstanding units of ILiAD on a non-fully diluted basis and 5.4% of the outstanding units on a fully diluted basis (after giving effect to the exercise all outstanding options and warrants). In connection with its initial 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.
For the three months ended March 31, 2024 and 2023, the Company recorded an allocated net loss from its equity method investment in ILiAD of $628,000 and $674,000, respectively.
The difference between the Company’s share of equity in ILiAD’s net assets and the purchase price of the investment is due to an excess amount paid over the book value of the investment of $6,054,000, which is accounted for as equity method goodwill.
The following table provides certain summarized financial information for ILiAD (the equity method investee) for the periods presented and has been compiled from ILiAD’s unaudited financial statements, reported on one quarter lag.
| Three Months Ended | ||||||||
| December 31, | ||||||||
2023 | 2022 | |||||||
| Loss from continuing operations | $ | (10,091,000 | ) | $ | (3,466,000 | ) | ||
| Comprehensive loss | $ | (9,470,000 | ) | $ | (9,911,000 | ) | ||
– STOCK
On June 14, 2017,13, 2023, 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 inat 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.
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NOTE K – STOCK REPURCHASES (continued)
During the three months ended September 30, 2017,March 31, 2024, the Company repurchased an aggregate of 39,872 shares of its common stock at an aggregate cost of $149,253$182,070 (exclusive of commissions) or an average per share price of $3.74. During$.
On December 27, 2023, the nineCompany entered into a written trading plan (the “10b5-1 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 10b5-1 Plan may be made during the following periods: (1) beginning on January 9,2024 until two trading days after the Company issues a press release announcing its financial results for the year ended December 31, 2023, and (2) beginning on April 1, 2024 until two trading days after the Company issues a press release announcing its financial results for the quarter ended March 31, 2024. Under the 10b5-1 Plan, the Company’s third party broker may purchase up to 1,0000,000 shares 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 of the Exchange Act.
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations occurring on or after January 1, 2023. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. The excise tax applies in cases where the total value of the stock repurchase during the taxable year exceeds $1,000,000. As such, the Company did not incur the 1% excise tax during the three months ended September 30, 2017, the Company repurchased an aggregate of 275,593 shares of its common stock at an aggregate cost of $1,125,087 (exclusive of commissions) or an average per share price of $4.08. March 31, 2024.
At September 30, 2017,March 31, 2024, the dollar value of remaining shares that may be repurchased under the Share Repurchase Program was $3,875,050.
NOTE L – CONCENTRATIONS
The Company maintains cash and certificates of deposit in accounts at financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. At March 31, 2024, the Company had $1,153,000 cash and certificates of deposit in excess of the Company's revenue for bothFDIC insured limit. The Company maintains cash equivalents in brokerage accounts at financial institutions. At March 31, 2024, 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%Company had cash equivalents 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 nine months ended September 30, 2016 (exclusive of revenue from our professional liability settlement – see Note M), respectively. At September 30, 2017, royalty receivables from three licensees constituted approximately 36%, 27% and 21% of the Company's net 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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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)one-hundred two (102) U.S. patents including and fifteen (15) foreign patents relating to:(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 and using eSim (embedded Subscriber Identification Module) technology in IoT, Machine-to-Machine and other mobile devices, including smartphones, tablets and computers as well as automobiles; (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 Remote Power Patent covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras.
With respect to our one-hundred two (102) U.S. patents, fifty-four (54) of such patents have expired. However, we can assert expired patents against third parties but only for past damages up to the patent expiration date. We currently have pending litigation involving expired patents including our Remote Power Patent and certain patents within our Cox and Mirror Worlds Patent Portfolio relatingPortfolios (see Note I to enabling technology for identifying media content on the Internet and taking further action to be performed based on such identification; and (iv) our QoS Patents covering systems and methods for the transmission of audio, video and data in orderunaudited condensed consolidated financial statements included herein). Our revenue is largely dependent upon our ability to achieve high qualitysuccessful litigation outcomes.
At March 31, 2024, our principal sources of service (QoS) over computerliquidity consisted of cash and telephony networks. In addition,cash equivalents and marketable securities of $43,394,000 and working capital of $43,067,000. Based on our cash position, we continually review opportunities to acquire or license additional intellectual property.
To date we have invested $7,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to seventy (70) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment continues to involve significant risk and the outcome is uncertain.
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).has generated licensing revenue in excess of $188,000,000 from May 2007 through March 31, 2024. We currently have twenty-seven (27) licenseesno longer receive licensing revenue for our Remote Power Patent which, among others, include license agreementsfor any period subsequent to March 7, 2020 (the expiration date of the patent). During the fourth quarter of 2022, we commenced nine separate litigations against ten defendants involving our Remote Power Patent for patent infringement for the period prior to March 7, 2020. During the year ended December 31, 2023, we entered into settlements with Cisco Systems, 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.eight defendants with respect to the aforementioned litigation resulting in aggregate settlement payments made to us of $2,601,000 and Avaya, Inc.a future conditional payment of $150,000 (see Note I[4] hereof). All of our revenue for 2023 was from these settlements involving our Remote Power Patent. If we are unable to successfully monetize our other patent portfolios or achieve a successful outcome of our investment in ILiAD, our business, financial condition and several other major data networking equipment manufacturers. results of operations will be negatively impacted.
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In addition, we have license agreements with Apple Inc.pending litigation involving certain patents within our Cox Patent Portfolio and Microsoft Corporation with respect tohave appealed the judgment of the District Court dismissing our litigation against Meta (Facebook) on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio. We also intend to commence efforts to monetize certain patents within our M2M/IoT Patent Portfolio and HFT Patent Portfolio. We may not achieve successful outcomes of such litigation, the appeal, or future litigation involving our 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.
The significant components of expenses, when revenue in excess of $119,000,000 from May 2007 through September 30, 2017. As a result ofis recorded, that may impact our acquisition of the Mirror Worlds Patent Portfolio in May 2013, we achieved licensing and other revenue from the portfolio of an aggregate of $47,150,000 through September 30, 2017.
Our annual and quarterly operating and financial results may fluctuate significantly from period to period as a result of a variety of factors that are outside our control, including the timing and our ability to achieve successful outcomes of our 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 and the timing of any such return.
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, if consummated, achieve significant licensing revenue with respect to such acquisitions.
In 2024 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 undistributed personal holding company income (as defined) for such year that we do not distribute to our shareholders (see Note J[1]B[4] to our unaudited condensed consolidated financial statements included in this quarterly report)Quarterly Report).
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RESULTS OF OPERATIONS
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Revenue. Included in the costs ofWe had no revenue for the three months ended September 30, 2016March 31, 2024 and revenue of $537,000 for the three months ended March 31, 2023. Our revenue for the three months ended March 31, 2023 was from litigation settlements involving our Remote Power Patent (see Note I[4] and Note B[2] to our unaudited condensed consolidated financial statements).
Operating Expenses. Operating expenses for the three months ended March 31, 2024 were contingent$918,000 as compared to $1,313,000 for the three months ended March 31, 2023. The decrease in operating expenses of $395,000 was primarily as a result of decreases in costs of revenue of $151,000 due to no litigation settlements, professional fees of $79,000 due to decreased legal fees, general and administrative expenses of $13,273,000, $2,029,000$112,000 and patent amortization of incentive bonus$53,000 due to patents expiring in 2023.
General and administrative expenses were $669,000 for the three months ended March 31, 2024 as compared to $781,000 for the three months ended March 31,2023. The decrease in general and administrative expenses of $112,000 was primarily due to a decrease in compensation payableexpense of $121,000 in 2024 as a result of severance payments accrued in the comparable period of 2023 and lower stock-based compensation expense of $46,000 as a result of increased restricted stock units vesting in 2023, offset by an increase in state franchise and capital taxes of $60,000.
Interest and Dividend Income. Interest and dividend income for the three months ended March 31, 2024 was $431,000 as compared to $310,000 for the three months ended March 31, 2023 primarily as a result of moderately higher interest rates in 2024 compared to 2023.
Realized and Unrealized Loss on Marketable Securities. For the three months ended March 31, 2024, we recorded realized and unrealized gains on marketable securities of $48,000, as compared to $364,000 for the three months ended March 31, 2023 largely due to the timing of the maturities of fixed income investments and a relatively stable interest rate environment.
Income Taxes. For the three months ended March 31, 2024, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $147,000. For the three months ended March 31, 2023, we had no current tax expense for federal, state and local income taxes and a deferred tax expense of $153,000.
Share of Net Losses of Equity Method Investee. We recognized $628,000 of net losses during the three month period ended March 31, 2024 related to our Chairman and Chief Executive Officer pursuantequity share of ILiAD net losses, as compared to his employment agreement and other contractual paymentsa recognized net loss of $1,641,000 of certain percentages of net proceeds from$674,000 for the monetization of our Mirror Worlds Patent Portfoliothree months ended March 31, 2023. ILiAD, as a clinical stage biotechnology company, is anticipated to continue to incur losses (see note H[2]Note J to our unaudited condensed consolidated financial statements included in this quarterly report)herein).
Net Income.
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At September 30, 2017,March 31, 2024, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,265,000$43,394,000 and working capital of $54,101,000. We believe based$43,067,000. 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$1,783,000 at March 31, 2024 to $54,101,000 at September 30, 2017$43,067,000 as compared to working capital of $51,415,000$44,850,000 at December 31, 2016.2023. The increasedecrease in working capital for the nine months ended September 30, 2017 was primarily due to increasespayment of dividends of $1,175,000, cash used in operating activities of $596,000, and repurchases of common stock of $186,000.
Net cash and cash equivalentsused in operating activities for the three months ended March 31, 2024 increased by $306,000 from $290,000 for the three months ended March 31, 2023, to $596,000 for the three months ended March 31, 2024, primarily as a result of $1,347,000 and royalty receivables of $691,000, decreasesa higher net loss in accrued payroll of $1,508,000 and accrued contingency fees and related 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 provided by operatinginvesting activities during the three months ended March 31, 2024 increased by $4,921,000 to $3,262,000 as compared to net cash used by investing activities of $1,659,000 for the ninethree months ended September 30, 2017 decreased by $33,203,000March 31, 2023, primarily as a result of net investment shifting from $37,140,000 for the nine months ended September 30, 2016marketable securities to $3,937,000 for the nine months ended September 30, 2017. The decreaseinvestments in netsecurities classified as cash provided by operating activities for the nine months ended September 30, 2017 compared with the same period in 2016 was primarily due to decreases 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.
We maintain our cash primarily in money market accounts.funds, government securities, certificates 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 the lease obligations set forth in Note H[3] to our condensed consolidated financial statements included in this quarterly report.
CRITICAL ACCOUNTING POLICIES
Our unaudited 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, liabilities revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying valuesdisclosure of ourcontingent assets and liabilities whichat the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are not readily apparent from other sources.material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates and judgments on our own historical experience and on various other assumptions that we believe are reasonable underafter taking account of our circumstances and expectations for the circumstances. Onfuture based on available information. We evaluate these estimates on an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. basis.
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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 thesean accounting estimate to be our critical if: (i) the accounting policiesestimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and estimates. There(ii) changes in the estimate that are reasonably likely to occur from the period to period or use of different estimates that we reasonably could have been no material changes to our critical accounting policies and estimates as compared toused in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. See also Note B to our unaudited condensed consolidated financial statements included in this report.
For a detailed discussion of our significant accounting policies and Leases (Topic 842)
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 September 30, 2017March 31,2024 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 3. 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 September 30, 2017.
Stock Repurchases
On June 14, 2017,13, 2023, 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 inat 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 September 30, 2017,March 31, 2024, we have repurchased an aggregate of 7,201,5979,724,540 shares of our common stock at an aggregate cost of $12,589,253$18,894,986 (exclusive of commissions) or an average per share price of $1.75.$1.97. During the three months ended September 30, 2017,March 31, 2024, we repurchased 39,872an aggregate of 83,744 shares of our common stock at an aggregate cost of $149,253 (exclusive of commissions)$182,070 or an average per share price of $3.74.$2.17. At September 30, 2017,March 31, 2024, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $3,875,050.$4,190,635.
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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 January, February and increase of theMarch 2024, 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 Plans or | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs1 |
| January 1 to January 31, 2024 | 11,712 | 2.15 | 11,712 | 4,347,476 |
| February 1 to February 29, 2024 | 50,414 | 2.21 | 50,414 | 4,236,291 |
| March 1 to March 31, 2024 | 21,618 | 2.11 | 21,618 | 4,190,635 |
| Total | 83,744 | 2.17 | 83,744 |
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 5. Other Information.OTHER INFORMATION
None.
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ITEM 6. Exhibits
(a) Exhibits
| 31.1 |
| 31.2 |
| 32.1 |
| 32.2 |
| 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: May 10, 2024 | By: | ||
| /s/ Corey M. Horowitz | |||
Corey M. Horowitz | |||
Chairman and Chief Executive Officer (Principal Executive Officer) | |||
| Date: May 10, 2024 | By: | ||
| /s/ Robert Mahan | |||
Robert Mahan | |||
(Principal Financial Officer) | |||
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