UNITED STATES
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
(Mark One) |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 |
or
☐ | 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 Registrantregistrant as Specifiedspecified in Its Charter)
Delaware | 11-3027591 | |
(State or incorporation or | ( Identification No.) |
445 Park Avenue, Suite 912 New York, New York | 10022 | |
(Address of | (Zip Code) |
212-829-5770
(Registrant's Telephone Number)
(Former name or former address and former fiscal year, if changed since last report)
_________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | 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: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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§223.405)S-T (§232.405 of this chapterchapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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"filer”, "smaller“accelerated filer” and “smaller reporting company" and "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 company ☐ | |||
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 May 10, 201911, 2020 was 23,889,598.
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
Page No.
PART I. Financial Information | ||
Item 1. | Condensed Consolidated Financial Statements (unaudited) | |
Condensed Consolidated Balance Sheets as of March 31, | 3 | |
Condensed Consolidated Statements of Operations and Comprehensive | 4 | |
Condensed Consolidated Statements of | 5 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, | 6 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
PART II. Other Information | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | 36 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Other Information | 37 |
Item 5. | 38 | |
Signatures | 39 |
-2- |
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2019 | December 31, 2018 | |||||||
ASSETS: | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 21,650,000 | $ | 23,763,000 | ||||
Marketable securities, at fair value | 30,837,000 | 31,228,000 | ||||||
Royalty receivables, net | 774,000 | 444,000 | ||||||
Other current assets | 83,000 | 112,000 | ||||||
Total Current Assets | 53,344,000 | 55,547,000 | ||||||
OTHER ASSETS: | ||||||||
Deferred tax assets | 233,000 | 168,000 | ||||||
Patents, net of accumulated amortization | 1,959,000 | 1,989,000 | ||||||
Equity investment | 2,445,000 | 2,541,000 | ||||||
Operating leases right-of-use asset | 95,000 | — | ||||||
Security deposits | 21,000 | 21,000 | ||||||
Total Other Assets | 4,753,000 | 4,719,000 | ||||||
TOTAL ASSETS | $ | 58,097,000 | $ | 60,266,000 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 395,000 | $ | 67,000 | ||||
Income taxes payable | 197,000 | 197,000 | ||||||
Accrued contingency fees and related costs | 198,000 | 1,136,000 | ||||||
Accrued payroll | 68,000 | 486,000 | ||||||
Operating lease obligations – current | 88,000 | — | ||||||
Other accrued expenses | 140,000 | 175,000 | ||||||
TOTAL CURRENT LIABILITIES | $ | 1,086,000 | $ | 2,061,000 | ||||
Operating lease obligations | 8,000 | — | ||||||
TOTAL LIABILITIES | $ | 1,094,000 | $ | 2,061,000 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
none issued and outstanding at March 31, 2019 and | ||||||||
December 31, 2018 | — | — | ||||||
Common stock, $0.01 par value; authorized 50,000,000 shares; | ||||||||
23,782,761 and 23,735,927 shares issued and outstanding at | ||||||||
March 31, 2019 and December 31, 2018, respectively | 238,000 | 237,000 | ||||||
Additional paid-in capital | 65,294,000 | 65,151,000 | ||||||
Accumulated deficit | (8,558,000 | ) | (7,102,000 | ) | ||||
Accumulated other comprehensive income (loss) | 29,000 | (81,000 | ) | |||||
TOTAL STOCKHOLDERS' EQUITY | 57,003,000 | 58,205,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 58,097,000 | $ | 60,266,000 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
ASSETS: | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 26,594,000 | $ | 22,587,000 | ||||
Marketable securities, at fair value | 18,409,000 | 25,730,000 | ||||||
Royalty receivables, net | 144,000 | 343,000 | ||||||
Other current assets | 75,000 | 98,000 | ||||||
Total Current Assets | 45,222,000 | 48,758,000 | ||||||
OTHER ASSETS: | ||||||||
Patents, net of accumulated amortization | 1,755,000 | 1,819,000 | ||||||
Equity investment | 4,144,000 | 4,437,000 | ||||||
Operating leases right-of-use asset | 9,000 | 41,000 | ||||||
Security deposits | 21,000 | 21,000 | ||||||
Total Other Assets | 5,929,000 | 6,318,000 | ||||||
TOTAL ASSETS | $ | 51,151,000 | $ | 55,076,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 214,000 | $ | 421,000 | ||||
Accrued contingency fees and related costs | 24,000 | 492,000 | ||||||
Accrued payroll | 13,000 | 334,000 | ||||||
Operating lease obligations – current | 9,000 | 41,000 | ||||||
Other accrued expenses | 207,000 | 281,000 | ||||||
TOTAL CURRENT LIABILITIES | 467,000 | 1,569,000 | ||||||
TOTAL LIABILITIES | $ | 467,000 | $ | 1,569,000 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
none issued and outstanding at March 31, 2020 and December 31, 2019 | — | — | ||||||
Common stock, $0.01 par value; authorized 50,000,000 shares; | ||||||||
23,979,728 and 24,036,071 shares issued and outstanding at | ||||||||
March 31, 2020 and December 31, 2019, respectively | 239,000 | 240,000 | ||||||
Additional paid-in capital | 65,896,000 | 65,824,000 | ||||||
Accumulated deficit | (15,347,000 | ) | (12,636,000 | ) | ||||
Accumulated other comprehensive income (loss) | (104,000 | ) | 79,000 | |||||
TOTAL STOCKHOLDERS’ EQUITY | 50,684,000 | 53,507,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 51,151,000 | $ | 55,076,000 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-3- |
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended March 31 | ||||||||
2019 | 2018 | |||||||
REVENUE | $ | 606,000 | $ | 19,463,000 | ||||
OPERATING EXPENSES: | ||||||||
Costs of revenue | 146,000 | 7,259,000 | ||||||
Professional fees and related costs | 307,000 | 518,000 | ||||||
General and administrative | 488,000 | 507,000 | ||||||
Amortization of patents | 54,000 | 70,000 | ||||||
Stock-based compensation | 144,000 | 226,000 | ||||||
TOTAL OPERATING EXPENSES | 1,139,000 | 8,580,000 | ||||||
OPERATING INCOME(LOSS) | (533,000 | ) | 10,883,000 | |||||
OTHER INCOME: | ||||||||
Interest income, net | 301,000 | 143,000 | ||||||
Net realized and unrealized gain from investments | 23,000 | — | ||||||
Total other income | 324,000 | 143,000 | ||||||
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN | ||||||||
NET LOSSES OF EQUITY METHOD INVESTEE | (209,000 | ) | 11,026,000 | |||||
INCOME TAXES (BENEFIT): | ||||||||
Current | — | 2,425,000 | ||||||
Deferred taxes, net | (65,000 | ) | — | |||||
Total income taxes (benefit) | (65,000 | ) | 2,425,000 | |||||
INCOME (LOSS) BEFORE EQUITY IN NET LOSS OF EQUITY METHOD INVESTEE: | (144,000 | ) | 8,601,000 | |||||
Share of net losses of equity method investee | (96,000 | ) | — | |||||
NET INCOME (LOSS) | $ | (240,000 | ) | $ | 8,601,000 | |||
Net Income (Loss) Per Share | ||||||||
Basic | $ | (0.01 | ) | $ | 0.36 | |||
Diluted | $ | (0.01 | ) | $ | 0.34 | |||
Weighted average common shares outstanding: | ||||||||
Basic | 23,745,848 | 23,807,014 | ||||||
Diluted | 23,745,848 | 25,611,497 | ||||||
Cash dividends declared per share | $ | 0.05 | $ | 0.05 | ||||
NET INCOME (LOSS) | $ | (240,000 | ) | $ | 8,601,000 | |||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
Net unrealized holding gain (loss) on corporate bonds and notes arising during the period, net of tax | 110,000 | (25,000 | ) | |||||
COMPREHENSIVE INCOME (LOSS) | $ | (130,000 | ) | $ | 8,576,000 |
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
REVENUE | $ | 161,000 | $ | 606,000 | ||||
OPERATING EXPENSES: | ||||||||
Costs of revenue | 32,000 | 146,000 | ||||||
Professional fees and related costs | 399,000 | 307,000 | ||||||
General and administrative | 486,000 | 488,000 | ||||||
Amortization of patents | 72,000 | 54,000 | ||||||
Stock-based compensation | 72,000 | 144,000 | ||||||
TOTAL OPERATING EXPENSES | 1,061,000 | 1,139,000 | ||||||
OPERATING LOSS | (900,000 | ) | (533,000 | ) | ||||
OTHER INCOME (LOSS): | ||||||||
Interest and dividend income, net | 178,000 | 301,000 | ||||||
Net realized and unrealized gain (loss) on marketable securities | (322,000 | ) | 23,000 | |||||
Total other income (loss), net | (144,000 | ) | 324,000 | |||||
LOSS BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | (1,044,000 | ) | (209,000 | ) | ||||
INCOME TAXES PROVISION (BENEFIT): | ||||||||
Current | — | — | ||||||
Deferred taxes, net | — | (65,000 | ) | |||||
Total income taxes provision (benefit) | — | (65,000 | ) | |||||
LOSS BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | (1,044,000 | ) | $ | (144,000 | ) | ||
SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (293,000 | ) | $ | (96,000 | ) | ||
NET LOSS | $ | (1,337,000 | ) | $ | (240,000 | ) | ||
Net Loss Per Share | ||||||||
Basic | $ | (0.06 | ) | $ | (0.01 | ) | ||
Diluted | $ | (0.06 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 24,029,513 | 23,745,848 | ||||||
Diluted | 24,029,513 | 23,745,848 | ||||||
Cash dividends declared per share | $ | 0.05 | $ | 0.05 | ||||
NET LOSS | $ | (1,337,000 | ) | $ | (240,000 | ) | ||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
Net unrealized holding gain (loss) on corporate bonds and notes during the period, net of tax | (163,000 | ) | 115,000 | |||||
Amounts reclassified from accumulated other comprehensive income (loss) | (20,000 | ) | (5,000 | ) | ||||
Net other comprehensive income (loss) | (183,000 | ) | 110,000 | |||||
COMPREHENSIVE LOSS | $ | (1,520,000 | ) | $ | (130,000 | ) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4- |
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2020
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Stockholders’ Equity | |||||||||||||||||||
Balance – December 31, 2019 | 24,036,071 | $ | 240,000 | $ | 65,824,000 | $ | (12,636,000 | ) | $ | 79,000 | $ | 53,507,000 | ||||||||||||
Dividends and dividend equivalents declared | — | — | — | (1,221,000 | ) | — | (1,221,000 | ) | ||||||||||||||||
Stock-based compensation | — | — | 72,000 | — | — | 72,000 | ||||||||||||||||||
Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
Cashless exercise of stock options | 105,000 | 1,000 | — | — | — | 1,000 | ||||||||||||||||||
Shares delivered to fund stock option exercises | (100,293 | ) | (1,000 | ) | — | — | — | (1,000 | ) | |||||||||||||||
Treasury stock purchased and retired | (72,300 | ) | (1,000 | ) | — | (153,000 | ) | — | (154,000 | ) | ||||||||||||||
Net other comprehensive loss | — | — | — | — | (183,000 | ) | (183,000 | ) | ||||||||||||||||
Net loss | — | �� | — | — | (1,337,000 | ) | — | (1,337,000 | ) | |||||||||||||||
Balance – March 31, 2020 | 23,979,728 | $ | 239,000 | $ | 65,896,000 | $ | (15,347,000 | ) | $ | (104,000 | ) | $ | 50,684,000 | |||||||||||
THREE MONTHS ENDED MARCH 31, 2019
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance – December 31, 2018 | 23,735,927 | $ | 237,000 | $ | 65,151,000 | $ | (7,102,000 | ) | $ | (81,000 | ) | $ | 58,205,000 | |||||||||||
Dividends and dividend equivalents declared | — | — | — | (1,215,000 | ) | — | (1,215,000 | ) | ||||||||||||||||
Stock-based compensation | — | — | 144,000 | — | — | 144,000 | ||||||||||||||||||
Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
Cashless exercise of options | 35,884 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
Treasury stock purchased and retired | (300 | ) | — | — | (1,000 | ) | — | (1,000 | ) | |||||||||||||||
Net unrealized gain on corporate bonds and notes | — | — | — | — | 110,000 | 110,000 | ||||||||||||||||||
Net loss | — | — | — | (240,000 | ) | — | (240,000 | ) | ||||||||||||||||
Balance – March 31, 2019 | 23,782,761 | $ | 238,000 | $ | 65,294,000 | $ | (8,558,000 | ) | $ | 29,000 | $ | 57,003,000 | ||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance – December 31, 2017 | 23,843,915 | $ | 238,000 | $ | 64,435,000 | $ | (10,219,000 | ) | $ | (42,000 | ) | $ | 54,412,000 | |||||||||||
Dividends and dividend equivalents declared | — | — | — | (1,228,000 | ) | — | (1,228,000 | ) | ||||||||||||||||
Stock-based compensation | — | — | 226,000 | — | — | 226,000 | ||||||||||||||||||
Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
Cashless exercise of options | 26,890 | 1,000 | — | — | — | 1,000 | ||||||||||||||||||
Proceeds from exercise of options | 25,000 | 1,000 | 29,000 | — | — | 30,000 | ||||||||||||||||||
Treasury stock purchased and retired | (153,993 | ) | (2,000 | ) | — | (397,000 | ) | — | (399,000 | ) | ||||||||||||||
Net unrealized (loss) on corporate bonds and notes | — | — | — | — | (25,000 | ) | (25,000 | ) | ||||||||||||||||
Net income | — | — | — | 8,601,000 | — | 8,601,000 | ||||||||||||||||||
Balance – March 31, 2018 | 23,753,062 | $ | 238,000 | $ | 64,690,000 | $ | (3,243,000 | ) | $ | (67,000 | ) | $ | 61,618,000 |
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Stockholders’ Equity | |||||||||||||||||||
Balance – December 31, 2018 | 23,735,927 | $ | 237,000 | $ | 65,151,000 | $ | (7,102,000 | ) | $ | (81,000 | ) | $ | 58,205,000 | |||||||||||
Dividends and dividend equivalents declared | — | — | — | (1,215,000 | ) | — | (1,215,000 | ) | ||||||||||||||||
Stock-based compensation | — | — | 144,000 | — | — | 144,000 | ||||||||||||||||||
Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
Cashless exercise of stock options | 105,000 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
Shares delivered to fund stock option exercises | (69,116 | ) | — | — | — | — | — | |||||||||||||||||
Treasury stock purchased and retired | (300 | ) | — | — | (1,000 | ) | — | (1,000 | ) | |||||||||||||||
Net other comprehensive gain | — | — | — | — | 110,000 | 110,000 | ||||||||||||||||||
Net loss | — | — | — | (240,000 | ) | — | (240,000 | ) | ||||||||||||||||
Balance – March 31, 2019 | 23,782,761 | $ | 238,000 | $ | 65,294,000 | $ | (8,558,000 | ) | $ | 29,000 | $ | 57,003,000 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
-5- |
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (240,000 | ) | $ | 8,601,000 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Amortization of patents | 54,000 | 70,000 | ||||||
Stock-based compensation | 144,000 | 226,000 | ||||||
Loss from equity investment | 96,000 | — | ||||||
Unrealized gains on marketable securities | (14,000 | ) | — | |||||
Deferred tax benefit | (65,000 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Royalty receivables | (330,000 | ) | 151,000 | |||||
Prepaid taxes | — | 125,000 | ||||||
Other current assets | 29,000 | 22,000 | ||||||
Operating lease right-of-use assets | 33,000 | — | ||||||
Accounts payable | 328,000 | 185,000 | ||||||
Income taxes payable | — | 2,319,000 | ||||||
Operating lease obligations | (31,000 | ) | — | |||||
Accrued expenses | (1,419,000 | ) | 5,223,000 | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (1,415,000 | ) | 16,922,000 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Sales of marketable securities | 10,586,000 | — | ||||||
Purchases of marketable securities | (10,068,000 | ) | (9,761,000 | ) | ||||
Development of patents | (24,000 | ) | (27,000 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 494,000 | (9,788,000 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Cash dividends paid | (1,191,000 | ) | (1,188,000 | ) | ||||
Repurchases of common stock, inclusive of commissions | (1,000 | ) | (399,000 | ) | ||||
Proceeds from exercise of options and warrants | — | 30,000 | ||||||
NET CASH USED IN FINANCING ACTIVITIES | (1,192,000 | ) | (1,557,000 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,113,000 | ) | 5,557,000 | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 23,763,000 | 51,101,000 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 21,650,000 | $ | 56,678,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | — | $ | — | ||||
Income taxes | $ | — | $ | — | ||||
NON-CASH FINANCING ACTIVITY | ||||||||
Accrued dividend rights on restricted stock units | $ | 27,000 | $ | 41,000 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,337,000 | ) | $ | (240,000 | ) | ||
Adjustments to reconcile net loss to net cash | ||||||||
used in operating activities: | ||||||||
Amortization of patents | 72,000 | 54,000 | ||||||
Stock-based compensation | 72,000 | 144,000 | ||||||
Loss from equity investment | 293,000 | 96,000 | ||||||
Amortization of right of use asset, net | 32,000 | — | ||||||
Unrealized (gain) loss on marketable securities | 220,000 | (14,000 | ) | |||||
Deferred tax benefit | — | (65,000 | ) | |||||
Changes in operating asset and liabilities: | ||||||||
Royalty receivables | 199,000 | (330,000 | ) | |||||
Other current assets | 23,000 | 29,000 | ||||||
Operating lease right-of-use assets | — | 33,000 | ||||||
Accounts payable | (207,000 | ) | 328,000 | |||||
Operating lease obligations | (33,000 | ) | (31,000 | ) | ||||
Accrued expenses | (872,000 | ) | (1,419,000 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (1,538,000 | ) | (1,415,000 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Sales of marketable securities | 10,919,000 | 10,586,000 | ||||||
Purchases of marketable securities | (4,001,000 | ) | (10,068,000 | ) | ||||
Development of patents | (8,000 | ) | (24,000 | ) | ||||
NET CASH PROVIDED BY INVESTING ACTIVITIES | 6,910,000 | 494,000 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Cash dividends paid | (1,211,000 | ) | (1,191,000 | ) | ||||
Repurchases of common stock, inclusive of commissions | (154,000 | ) | (1,000 | ) | ||||
NET CASH USED IN FINANCING ACTIVITIES: | (1,365,000 | ) | (1,192,000 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 4,007,000 | (2,113,000 | ) | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 22,587,000 | 23,763,000 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 26,594,000 | $ | 21,650,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | — | $ | — | ||||
Income taxes | $ | — | $ | — | ||||
NON-CASH FINANCING ACTIVITY | ||||||||
Accrued dividend rights on restricted stock units | $ | 19,000 | $ | 27,000 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
-6- |
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 March 31, 2019,2020, and the results of its operations and comprehensive income (loss)loss for the three month periods ended March 31, 20192020 and March 31, 2018,2019, changes in stockholders'stockholders’ equity for the three month periods ended March 31, 20192020 and March 31, 2018,2019, and its cash flows for the three month periods ended March 31, 20192020 and March 31, 2018.2019. 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, 20182019 included in the Company'sCompany’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2019.20, 2020. The results of operations for the three months ended March 31, 20192020 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, Mirror Worlds Technologies, LLC.
[2] BUSINESS
The Company is engaged in the development,
licensing and protection of its intellectual property assets. The Company presently owns-7- |
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS(continued)
the Company will no longer receive licensing revenue for its Remote Power Patent that accrues for any period subsequent to the expiration date. Depending upon the outcome of the Company’s appeal to the U.S. Court of Appeals for the Federal Circuit of the District Court’s order of non-infringement of the Remote Power Patent in the Company’s trial with Hewlett Packard, the Company may receive significant royalty payments from other licensees for periods prior to March 7, 2020 (see below and Note I [1] and Note I [2] hereof). 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 intellectual property assets. In addition, the Company continually reviews opportunities to acquire or license additional intellectual property as well as other strategic alternatives. The Company'sCompany’s patent acquisition 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. In addition, the Company may enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
On November 13, 2017, a jury empaneled inAugust 30, 2018, the Company appealed to the U.S. Court of Appeals for the Federal Circuit the decision of the U.S. District Court for the Eastern District of Texas Tyler Division, found that certain claims of the Company's Remote Power Patent were invalid and not infringed by Hewlett-Packard (the "HP Jury Verdict"). On August 29, 2018, the District Court (i) granted the Company's motion for judgment as a matter of law that its Remote Power Patent is valid, thereby overturning the HP Jury Verdict of invalidity and (ii) denied the Company's motion for a new trial on infringement. The Company has appealed the District Court's denial ofdenying its motion for a new trial on infringement with respect to the U.S. Court of Appeals forNovember 13, 2017 jury finding that its Remote Power Patent was not infringed by Hewlett Packard (“HP”). Oral argument on the Federal Circuitappeal took place on November 4, 2019 and a decision is pending (see Note I[1] hereof). The HP Jury Verdict had a material adverse effect on the Company's results of operations and cash-flow for the year ended December 31, 2018 and the three months ended March 31, 2019 and will continue to do so for the life of the Company's Remote Power Patent (March 2020) unless the District Court judgment of non-infringement is reversed on appeal. The Company has been dependent upon its Remote Power Patent for a significant portion of its revenue. As a result of the jury verdict in November 2017 with respect to the Company’s trial with HP, Jury Verdict, several of the Company'sCompany’s largest licensees, including Cisco Systems, Inc. (“Cisco”), its largest licensee, notified the Company in late November 2017 and January 2018 that they willwould no longer make ongoing royalty payments to the Company pursuant to their license agreements.
Consistent
-8- |
NoteB –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, stock-based compensation, income taxes, valuation of patents and equity method investments, including evaluation of the Company'sCompany’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based.
[2] | Cash and Cash Equivalents |
The Company maintains cash deposits in high quality financial institutions insured by the Federal Deposit InsuranceCorporation ("FDIC" (“FDIC”). Accounts at each institution are insured by the FDIC up to $250,000. At March 31, 2019,2020, the Company maintained a cash balance of $15,032,000$6,245,000 in excess of the FDIC insured limit.
The Company considers all highly liquid short-term investments, including certificates of deposit and money market funds, that are purchased with an
original maturity of three months or less to be cash equivalents.[3] | Marketable Securities |
The Company'sCompany’s marketable securities are comprised of certificates of deposit with original maturity greater than three months from date of purchase, bondfixed income mutual funds, and corporate bonds and notes (see Note F). At March 31, 2019,2020, included in marketable securities, the Company had aggregate certificates of deposit of $11,126,000$10,460,000 at financial institutions which constituted $1,500,000 in excess ofwere within the FDIC limit. The Company'sCompany’s marketable securities are measured at fair value and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on certificates of deposit and bondfixed income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the unaudited condensed consolidated statements of incomeoperations and comprehensive income.loss. Unrealized holding gains and losses, net of the related tax effect, on corporate bonds and notes are excluded from earnings and are reported as a separate component of stockholders'stockholders’ equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of the marketable securities.
No. 2014-09[4], Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018.
Under ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
-9- |
NoteB –Summary of Significant Accounting Policies (continued)
The Company determines revenue recognition through the following steps:
· | identification of the license agreement; |
· | identification of the performance obligations in the license agreement; |
· | determination of the consideration for the license; |
· | allocation of the transaction price to the performance obligations in the contract; and |
· | recognition of revenue when the Company satisfies its performance obligations. |
Revenue disaggregated by source is as follows:
Three Months Ended March 31 | ||||||||
2019 | 2018 | |||||||
Fully-Paid Licenses | $ | 130,000 | (1) | $ | 12,700,000 | |||
Royalty Bearing Licenses | 476,000 | 443,000 | ||||||
Other Revenue | — | 6,320,000 | (2) | |||||
Total Revenue | $ | 606,000 | $ | 19,463,000 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Fully-Paid – Licenses | $ | ― | $ | 130,000 | (1) | |||
Royalty Bearing - Licenses | 161,000 | 476,000 | ||||||
Total Revenue | $ | 161,000 | $ | 606,000 |
__________________________
(1) RepresentsIncludes conversion of an existing royalty bearing license to a fully-paid license.
The Company relies on royalty reports received from third party licensees to record its revenue. From time to time, the Company may audit or otherwise dispute royalties reported from licensees. Any adjusted royalty revenue as a result of such audits or dispute is recorded by the Company in the period in which such adjustment is agreed to by the Company and the licensee or otherwise determined.
Revenue from the Company'sCompany’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of settlement of litigation related to the Company'sCompany’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a "Fully-Paid License"“Fully-Paid License”), or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent (a "Royalty“Royalty Bearing License"License”).
The Company'sCompany’s license agreements, both Fully-Paid Licenses and Royalty Bearing Licenses, typically include some combination of the following: (i) the grant of a non-exclusive license to manufacture and/or sell products covered by its patented technologies; (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted pursuant to these licenses typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company typically has no further performance obligations with respect to the grant of the non-exclusive licenses. Generally, the license agreements provide for the grant of the licenses, releases, and other obligations following execution of the agreement and the receipt of the up-front lump sum payment for a Fully-Paid License or a license initiation fee for a Royalty Bearing License.
-10- |
NoteB –Summary of Significant Accounting Policies (continued)
Ongoing Royalty Payments: Certain of the Company'sCompany’s revenue from Royalty Bearing Licenses results from the calculation of royalties based on a licensee'slicensee’s actual quarterly sales (one licensee pays monthly royalties) of licensed products, applied to a contractual royalty rate. Licensees that pay royalties on a quarterly basis generally report to the Company actual quarterly sales and related quarterly royalties due within 45 days after the end of the quarter in which such sales activity takes place. Licensees with Royalty Bearing Licenses are obligated to provide the Company with quarterly (or monthly) royalty reports that summarize their sales of licensed products and their related royalty obligations to the Company. The Company receives these royalty reports subsequent to the period in which its licensees underlying sales occurred. The amount of royalties due under Royalty Bearing Licenses, each quarter, cannot be reasonably estimated by management. Consequently, the Company recognizes revenue for the period in which the royalty report is received in arrears and other revenue recognition criteria are met.
Non-Refundable Up-Front Fees: 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 and determinable, and collectability 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.
[5] Equity Method Investments
Equity method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323,Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company'sCompany’s share of an investee'sinvestee’s income or loss. The Company'sCompany’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company'sCompany’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company'sCompany’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding.
11[6]
The Company owns patents that relate to various technologies. The Company capitalizes the costs associated with acquisition, registration and maintenance of its acquired patents and amortizes these assets over their remaining useful lives on a straight-line basis. Any further payments made to maintain or develop the patents would be capitalized and amortized over the balance of the useful life for the patents.
[7]Costs of Revenue
The Company includes in costs of revenue for the three months endedMarch 31, 2019 2020and 20182019 contingent legal fees payable to patent litigation counsel (see Note G[1] hereof), other contractual payments related to net proceeds from settlements (see Note G[2] hereof) and incentive bonus compensation payable to its Chairman and Chief Executive Officer (see Note H[1] hereof).
-11- |
NoteB –Summary of Significant Accounting Policies (continued)
[8]Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)Topic 740, Income Taxes (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. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
ASC 740-10,Accounting 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 ofMarch 31 2019, 2020 and 2018.
U.S. federal, state and local income tax returns prior to 20152016 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. In July 2018, the Internal Revenue Service notified the Company that it was examining its 2016 federal tax return.
In March 2020, the Company received notices of tax assessments for 2018 and forward, including, but not limited to, a reductionfrom the New York State Department of Taxation in the federal corporate rate from 35.0%amounts of $638,745 and $57,784. After discussions with the New York State Department of Taxation and Finance, on May 6, 2020, the Company filed an amended 2018 tax return to 21.0%, elimination ofprovide additional information. On May 13, 2020, the corporate alternative minimumCompany was advised that the amended return was accepted and there was no tax a new limitation ondue with respect to the deductibility of certain executive compensation, limitations on net operating losses generated after December 31, 2017 and various other items.
The personal holding company ("PHC"(“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC'sPHC’s undistributed personal holding company income ("(“PHC Income"Income”), which means, in general, taxable income subject to certain adjustments. 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 5 or fewer individuals at anytimeany time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the "Ownership Test"“Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the "Income Test"“Income Test”). InDuring the second half of 20182019 (as well as during the second half of prior years), the Company believes it did not meet the Ownership Test. Due to the significant number of shares held by the Company'sCompany’s largest shareholders, the Company
-12- |
NoteB –Summary of Significant Accounting Policies (continued)
continually assesses its share ownership to determine whether it meets the Ownership Test. If the Ownership Test were met and the income generated by the Company were determined to constitute "royalties"“royalties” within the meaning of the Income Test, the Company would constitute a PHC and the Company would be subject to a 20% tax on the amount of any PHC Income that it does not distribute to its shareholders.
[9]Stock-Based Compensation
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASBASC Topic 718, Compensation-Stock Compensation ("“ASC 718"718”). ASC 718 requires all stock-based compensation to employees, including grants of employee stock options and restricted stock units, to be recognized in the condensed consolidated statements of incomeoperations and comprehensive incomeloss based ontheirtheir grant date fair values.
Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Share based payments issued to non-employees are recorded at their fair values and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period and are expensed using an accelerated attribution model. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of options granted. The fair value of restricted stock units is determined based on the number of shares underlying the grant and either the quoted market price of the Company'sCompany’s common stock on the date of grant for time-based and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model for market-based awards (see Note D for further discussion of the Company'sCompany’s stock-based compensation).
ASU 2018-07, Compensation – Stock Compensation [10]("ASC 718"), Improvements to Nonemployee Share-Based Payment AccountingEarnings Per Share ("ASU 2018-07)". The amendments in ASU 2018-07 expanded the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
The Company reports earnings per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and options to purchase common stock, were exercised and shares were issued pursuant to outstanding restricted stock units. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share (see Note E).
13[11]
ASC Topic 820, Fair Value Measurement and Disclosures
, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value.-13- |
NoteB –Summary of Significant Accounting Policies (continued)
There are three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that are supported by little or no market activity; therefore, the inputs are developed by the Company using estimates and assumptions that the Company expects a market participant would use, including pricing models, discounted cash flow methodologies, or similar techniques.
The carrying value of the Company'sCompany’s financial instruments, including cash and cash equivalents, royalty receivable, other assets, accounts payable, and accrued expenses approximates fair value because of the short-term nature of these financial instruments.
The Company'sCompany’s marketable securities are classified within Level 1 because they are valued using quoted market prices in an active market (see Marketable Securities–Securities – Note F).
[12]Carrying Value, Recoverability and Impairment of Long-Lived Assets
An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.
If an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. At March 31, 20192020 and 2018,2019, there was no impairment to the Company'sCompany’s patents and equity investment.
The Company'sCompany’s equity method investment in ILiAD Biotechnologies, LLC ("ILiAD"(“ILiAD”), a privately held development stage biotechnology company (see Equity Investment – Note J) is evaluated on a non-recurring basis for impairment and is classified within Level 3 as it is valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity.
14[13]
Cash dividends are recorded when declared by the Company'sCompany’s Board of Directors. Common stock dividends are charged against retained earnings when declared or paid (see Note M hereof).
-14- |
NoteB –Summary of Significant Accounting Policies (continued)
[14] | Reclassification |
The Company has reclassified certain amounts in the prior period consolidated financial statements to conform to the current period'speriod’s presentation. The Company reclassified a certain investment within cash and cash equivalents which was previously classified as marketable securities. These reclassifications had no impact on the previously reported net income.
[15]New Accounting Standards
Recently Issued Accounting Standards
LeasesIncome Taxes
In February 2016,December 2019, the FASB issued ASU 2016-2, Leases ("ASC 842")2019-12,Income Taxes (Topic 740), which required Simplifying the CompanyAccounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the interim period and making improvements for income taxes related to recognize lease assets and lease obligations (related to leases previously classified as operating under previous U.S. GAAP) on its condensed consolidated balance sheet. ASC 842 wasemployee stock ownership plans. ASU 2019-12 is effective for the Company on January 1, 2019. Thefiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption of ASC 842 impacted the Company's condensed consolidated financial statementsis permitted, including adoption in that existing leases were recorded as right-of-use ("ROU") assets and related lease obligations on the condensed consolidated balance sheet.
Equity Securities
In January 2020, the FASB issued ASU 2020-01,Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).The ASU amends and clarifies certain interactions between the guidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability of the accounting for these interactions. The amendments in the ASU should be applied on a statement of comprehensive incomeprospective basis. The ASU is presented.
Recently Adopted Accounting Pronouncements
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (" (“ASC 820"820”), Disclosure Framework -— Changes to the Disclosure Requirements for Fair Value Measurement (" (“ASU 2018-13"2018-13”). ASU 2018-13 is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. On January 1, 2020, the Company adopted ASU 2018-13. The Company is currently evaluatingadoption of this standard did not have a material impact on the impact of ASU 2018-13 on itsCompany’s condensed consolidated financial statements.
-15- |
NOTE C – PATENTS
The Company'sCompany’s intangible assets atMarch 31 2019, 2020 include patents with estimated remaining economic useful lives ranging from 1.251.50 to 14.7513.5 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 ofMarch 31 2019, 2020 and December 31, 20182019 were as follows:
March 31, 2019 | December 31, 2018 | |||||||
Gross carrying amount – patents | $ | 7,705,000 | $ | 7,682,000 | ||||
Accumulated amortization – patents | (5,746,000 | ) | (5,693,000 | ) | ||||
Patents, net | $ | 1,959,000 | $ | 1,989,000 |
March 31, 2020 | December 31, 2019 | |||||||
Gross carrying amount – patents | $ | 7,805,000 | $ | 7,797,000 | ||||
Accumulated amortization – patents | (6,050,000 | ) | (5,978,000 | ) | ||||
Patents, net | $ | 1,755,000 | $ | 1,819,000 |
Amortization expense for the three months endedMarch 31, 2020 andMarch 31, 2019 was$72,000and March 31, 2018 was $54,000, and $70,000, respectively. Future amortization of intangible assets, net is as follows:
Twelve Months Ended March 31, | ||||
2020 | $ | 280,000 | ||
2021 | 280,000 | |||
2022 | 280,000 | |||
2023 | 280,000 | |||
2024 and thereafter | 839,000 | |||
Total | $ | 1,959,000 |
Twelve Months Ended March 31, | ||||||
2021 | $ | 290,000 | ||||
2022 | 290,000 | |||||
2023 | 290,000 | |||||
2024 | 150,000 | |||||
2025 and thereafter | 735,000 | |||||
Total | $ | 1,755,000 |
The Company'sCompany’s Remote Power Patent expires inexpired on March 7, 2020. The expiration dateAll of the patentpatents within the Company's Mirror Worlds Patent Portfolio is February 2020 (eight of the nine patents in theCompany’s Mirror Worlds Patent Portfolio have expired).expired. The expiration dates of the patents within the Cox Patent Portfolio range from September 2021 to November 2023. The expiration dates of patents within the Company'sCompany’s M2M/IoT Patent Portfolio range from September 2033 to May 2034 and the expiration date of the QoS Patents is June 2019.
NOTE D – STOCK-BASED COMPENSATION
Restricted Stock Units
On February 19, 2020, the Company issued 15,000 restricted stock units (“RSUs”) to each of its three non-management directors as an annual grant for 2020 for service on the Company’s Board of Directors. The RSUs vest in four equal quarterly installments of 3,750 shares of common stock on March 15, 2020, June 15, 2020, September 15, 2020 and December 15, 2020, subject to continued service on the Board of Directors.
During the three months ended March 31, 2019, the Company issued 15,000 restricted stock units ("RSUs")RSUs to each of its three non-management directors as an annual grant for 2019 for service on the Company'sCompany’s Board of Directors. The RSUs vestvested in four equal quarterly installments of 3,750 shares of common stock on March 15, 2019, June 15, 2019, September 15, 2019 and December 15, 2019, subject to continued service on the Board of Directors.2019.
-16- |
NOTE D – STOCK-BASED COMPENSATION (CONTINUED)
A summary of restricted stock unit activity for the three months ended March 31, 20192020 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, 2018 | 505,000 | $ | 2.17 | |||||
Grants of restricted stock units | 45,000 | 2.60 | ||||||
Vested restricted stock units | (11,250 | ) | 2.60 | |||||
Balance of unvested restricted stock units at March 31, 2019 | 538,750 | $ | 2.20 |
Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
Balance of restricted stock units outstanding at December 31, 2019 | 340,000 | $ | 2.15 | |||||
Grants of restricted stock units | 45,000 | 2.30 | ||||||
Vested restricted stock units | (11,250 | ) | 2.30 | |||||
Balance of unvested restricted stock units at March 31, 2020 | 373,750 | $ | 2.16 |
Restricted stock unit compensation expense was $144,000$72,000 and $226,000$144,000 for the three months ended March 31, 20192020 and March 31, 2018,2019, respectively.
The Company has an aggregate of $599,000$255,000 of unrecognized restricted stock unit compensation as of March 31, 20192020 to be expensed over a weighted average period of 1.410.87 years.
All of the Company'sCompany’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of March 31, 2019,2020, there was $102,000$100,000 accrued for dividend equivalent rights. As of December 31, 2018,2019, there was $76,000$90,000 accrued for dividend equivalent rights.
Stock Options
There were no stock option grants during the three months ended March 31, 20192020 and March 31, 2018.
Weighted | ||||||||
Weighted | Average | |||||||
Range of | Average | Remaining | ||||||
Exercise | Options | Exercise | Life in | Options | ||||
Price | Outstanding | Price | Years | Exercisable | ||||
$0.83 - $2.34 | 1,530,000 | $1.15 | 1.33 | 1,530,000 |
Options Outstanding | Weighted Average Exercise | Weighted Average Remaining Life in Years | Options Exercisable | |||||||||||
500,000 | $1.19 | 2.59 | 500,000 |
The Company had no recorded stock-based compensation related to stock option grants for the three months ended March 31, 20192020 and March 31, 2018.
The Company had no unrecognized stock-based compensation cost as of March 31, 2019.2020. The aggregate intrinsic value of stock options exercisable at March 31, 20182020 was $2,226,000.
During the three months ended March 31, 2020, stock options to purchase an aggregate of 105,000 shares of the Company’s common stock, at an exercise price of $2.34 per share, were exercised on a net exercise (cashless) basis by three non-management directors of the Company. With respect to the aforementioned stock options, net shares of an aggregate of 4,707 shares were delivered to the non-management directors.
During the three months ended March 31, 2019, stock options to purchase an aggregate of 105,000 shares of the Company'sCompany’s common stock, at an exercise price of $1.65 per share, were exercised on a net exercise (cashless) basis by three non-management directors of the Company. With respect to the aforementioned stock options, net shares of an aggregate of 35,884 were delivered to the three non-management directors.
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NOTE E – EARNINGSLOSS 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. Potential shares of 2,068,750873,750 and 2,788,7502,068,750 at March 31, 20192020 and March 31, 2018,2019, respectively, consisted of options and restricted stock units.
Computations of basic and diluted weighted average common shares outstanding were as follows:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Weighted-average common shares outstanding – basic | 23,745,848 | 23,807,014 | ||||||
Dilutive effect of options, warrants and restricted stock units | — | 1,804,483 | ||||||
Weighted-average common shares outstanding – diluted | 23,745,848 | 25,611,497 | ||||||
Options and restricted stock units excluded from the computation of diluted income per share because the effect of inclusion would have been anti-dilutive | 2,068,750 | — |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Weighted-average common shares outstanding – basic | 24,029,513 | 23,745,848 | ||||||
Dilutive effect of options, warrants and restricted stock units | — | — | ||||||
Weighted-average common shares outstanding – diluted | 24,029,513 | 23,745,848 | ||||||
Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | 873,750 | 2,068,750 |
NOTE F – MARKETABLE SECURITIES
Marketable securities as ofMarch 31 2019, 2020 and December 31, 20182019 were composed of:
March 31, 2020 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Certificates of deposit | $ | 10,485,000 | $ | 25,000 | $ | — | $ | 10,510,000 | ||||||||
Fixed income mutual funds | 3,560,000 | — | (246,000 | ) | 3,314,000 | |||||||||||
Corporate bonds and notes | 4,689,000 | — | (104,000 | ) | 4,585,000 | |||||||||||
Total marketable securities | $ | 18,734,000 | $ | 25,000 | $ | (350,000 | ) | $ | 18,409,000 |
December 31, 2019 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Certificates of deposit | $ | 8,953,000 | $ | 6,000 | $ | — | $ | 8,959,000 | ||||||||
Fixed income mutual funds | 7,878,000 | 1,000 | — | 7,879,000 | ||||||||||||
Corporate bonds and notes | 8,813,000 | 112,000 | (33,000 | ) | 8,892,000 | |||||||||||
Total marketable securities | $ | 25,644,000 | $ | 119,000 | $ | (33,000 | ) | $ | 25,730,000 |
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March 31, 2019 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Certificates of deposit | $ | 11,126,000 | $ | — | $ | — | $ | 11,126,000 | ||||||||
Short term bond funds | 11,379,000 | 14,000 | — | 11,393,000 | ||||||||||||
Corporate bonds and notes | 8,289,000 | 86,000 | (57,000 | ) | 8,318,000 | |||||||||||
Total marketable securities | $ | 30,794,000 | $ | 100,000 | $ | (57,000 | ) | $ | 30,837,000 |
December 31, 2018 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Certificates of deposit | $ | 13,151,000 | $ | — | $ | — | $ | 13,151,000 | ||||||||
Short term bond funds | 9,648,000 | — | (8,000 | ) | 9,640,000 | |||||||||||
Corporate bonds and notes | 8,518,000 | — | (81,000 | ) | 8,437,000 | |||||||||||
Total marketable securities | $ | 31,317,000 | — | $ | (89,000 | ) | $ | 31,228,000 |
NOTE G – COMMITMENTS AND CONTINGENCIES
[1] Legal Fees
Russ, August & Kabat provides legal services to the Company with respect to its patent litigation filed in May 2017 against Facebook, Inc. in the U.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 I[4] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between 15% and 24% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Russ, August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014 and December 2014 against Google Inc. and YouTube, LLC in the United StatesU.S. District Court for the Southern District of New York relating to certain patents within the Company'sCompany’s Cox Patent Portfolio (see Note I[3] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for legal fees on a full contingency basis ranging from 15% to 30% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Dovel & Luner, LLP provides legal services to the Company with respect to its patent litigation filed in September 2011 against sixteen (16) data networking equipment manufacturers in the U.S. District Court for the Eastern District of Texas, Tyler (see Note I[1] hereof). The terms of the Company'sCompany’s agreement with Dovel & Luner LLP essentially provide for legal fees on a full contingency basis ranging from 12.5% to 35% (with certain exceptions) of the net recovery (after deduction for expenses) depending on the stage of the preceding in which a result (settlement or judgment) is achieved. For the three months ended March 31, 20192020 and March 31, 2018,2019, the Company incurred aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $19,000 and $108,000, respectively. As of March 31, 2020 and $6,277,000,for the year ended December 31, 2019, the Company included in accrued expenses aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $19,000 and $485,000, respectively. The Company is responsible for a certain portion of the expenses incurred with respect to the litigation.
Dovel & Luner, LLP also provided legal services to the Company with respect to the litigation settled in July 2010 against Cisco and several other major data networking equipment manufacturers (see Note I[2] hereof). The terms of the Company'sCompany’s agreement with Dovel & Luner, LLP with respect to this litigation provided for legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of 24% (based on the settlement being achieved at the trial stage). As a result of theWith respect to royalty payments payable quarterly byreceived from Cisco in accordance with the Company'sCompany’s settlement and license agreement with Cisco, the Company has an obligation to pay Dovel & Luner, LLP (including local counsel) 24% of such royalties received. During the three months ended March 31, 20192020 and March 31, 2018,2019, the Company did not incur any contingent legal fees to Dovel & Luner, LLP with respect to the litigation.
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NOTE G – COMMITMENTS AND CONTINGENCIES (CONTINUED)
[2] Patent Acquisitions
In connection with the Company completed theCompany’s acquisition of four patents (as well as a pending patent application) from Dr. Ingemar Cox (these patents together with subsequent related patent issuances comprise theits Cox Patent Portfolio), a technology leader in digital watermarking content identification, digital rights management and related technologies, for a purchase price of $1,000,000 in cash and 403,226 shares of the Company's common stock. In addition,Portfolio, the Company is obligated to pay Dr. Cox 12.5% of the net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the patents. Since the acquisition of the patent portfolio from Dr. Cox, the Company has been issued twenty-five (25) additional related patents by the USPTO resulting in an aggregate of twenty-nine (29) patents within the Cox Patent Portfolio.
As consideration for the patent acquisition, the Company paid Looking Glass $3,000,000 in cash, and issued 5-year warrants to purchase an aggregate of 1,750,000 shares of the Company's common stock (875,000 shares of common stock at an exercise price of $1.40 per share and 875,000 shares of common stock at an exercise price of $2.10 per share) (the "Looking Glass Warrants"). On June 3, 2014, the Company repurchased the Looking Glass Warrants from Looking Glass at partofthea cost of $505,000. In addition, Recognition Interface, LLC ("Recognition"), an entity that financed the commercialization of the patent portfolio prior to its sale to Mirror Worlds, LLC and also retained an interest in the licensing proceeds of the patent portfolio held by Mirror Worlds, LLC, and an affiliated entity also received warrants to purchase an aggregate of 1,250,000 shares 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 proceeds to the Company of $2,337,000.
On December 29, 2017,In connection with the Company acquired from M2M and IoT Technologies, LLC ("M2M") theCompany’s acquisition of its M2M/IoT Patent Portfolio, consisting of twelve (12) issued U.S. patents relating to, among other things, the enabling technology for authenticating and using embedded SIM cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers as well as automobiles and drones. The Company paid $1,000,000 to acquire the M2M/IoT Patent Portfolio from M2M and has an obligationis obligated to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as defined) related to the patent portfolio. In addition, M2M will be entitled to receive from the Company $250,000 of additional consideration upon the occurrence of certain future events related to the patent portfolio. Since the acquisition of the patent portfolio from M2M, the Company has been issued nine additional related patents by the USPTO resulting in an aggregate of twenty-one (21) issued U.S. patents.
[3] Lease Agreements
The Company leases its principal office space in New York City at a monthly base rentrate of approximately $3,900 which lease expires on May 31, 2020. The Company also leases office space in New Canaan, Connecticut expiring(which was to expire on September 30, 2019 2019)at a base rent (inclusive of utilities) of $7,750$7,850 per month (increasing $100 per month each year), which is subject to annual adjustments to reflect increases in real estate taxesmonth. The Connecticut lease was extended (in September 2019) through March 31, 2020 and operating expenses.
Under ASC 842 (see Note B[15] hereof), operating lease expense is generally recognized evenly over the term of the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease arrangements entered into or reassessed after the adoption of ASC 842, the Company combines the lease and non-lease components in determining the right-of-use ("ROU"(“ROU”) assets and related lease obligation.
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Three Months Ended March 31, 2019 | ||||
Operating lease expense | $ | 34,000 | ||
Cash paid for amounts included in the measurement of operating lease obligations | 34,000 | |||
ROU assets obtained in exchange for operating lease obligations | 128,000 |
NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
Activity related to the Company’s operating leases was as follows:
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
Operating lease expense | $ | 33,000 | $ | 34,000 | ||||
Cash paid for amounts included in the measurement of operating lease obligations | $ | 34,000 | $ | 34,000 |
The Company'sCompany’s operating lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate was determined based on information available for purposes of determining the present value of lease payments. The Company has used an incremental borrowing rate of 5.5% at January 1, 2019 for all leases that commenced prior to that date.recognized operating lease right-of use assets as of March 31, 2020 and December 31, 2019. ROU lease assets and related lease obligations for the Company'sCompany’s operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
As of | ||||
March 31, 2019 | ||||
Operating lease right-of-use assets | $ | 95,000 | ||
Operating lease obligations – current | $ | 88,000 | ||
Operating lease obligations – non-current | 8,000 | |||
Total lease obligations | $ | 96,000 | ||
Weighted average remaining lease term (in months) | 10 | |||
Weighted average discount rate | 5.5 | % | ||
As of | As of | |||||||
March 31, 2020 | December 31, 2019 | |||||||
Operating lease right-of-use assets | $ | 9,000 | $ | 41,000 | ||||
Operating lease obligations – current | $ | 9,000 | $ | 41,000 | ||||
Total lease obligations | $ | 9,000 | $ | 41,000 | ||||
Weighted average remaining lease term (in months) | 2 months | 4 months | ||||||
Weighted average discount rate | 5.5% | 5.5% |
Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2019,2020, were as follows:
Operating Leases | ||||
2019 – remaining period | $ | 79,000 | ||
2020 | 20,000 | |||
Total future minimum lease payments | 99,000 | |||
Less imputed interest | (3,000 | ) | ||
Total operating lease liability | $ | 96,000 |
Operating Leases | ||||
2020-remaining period | $ | 9,000 | ||
Total future minimum lease payments | $ | 9,000 | ||
Less imputed interest | — | |||
Total operating lease liability | $ | 9,000 |
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
[1] On July 14, 2016, the Company entered into a new employment agreement ("Agreement"(“Agreement”) with its Chairman and Chief Executive Officer pursuant to which he continues to serve the Company in such positions for a five year term, at an annual base salary of $475,000 which shall be increased by 3% per annum during the term of the Agreement. The Agreement established an annual target bonus of $175,000 for the Chairman and Chief Executive Officer based upon performance. In addition, the Company granted to the Chairman and Chief Executive Officer, under its 2013 Stock Incentive Plan, 750,000 restricted stock units (the "RSUs"(“RSUs”) which terms. The Agreement provided for vestingthe 750,000 RSUs to vest in the three tranches, as follows: (i) 250,000 RSUs shall vest on July 14, 2018, subject to the Chairman and Chief Executive Officer'sOfficer’s continued employment by the Company through the vesting date (the "Employment Condition"“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'sCompany’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 employment; and (iii) 250,000 RSUs vest at any time
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)
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'sCompany’s common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $4.25 per share (subject to adjustment for stock splits) at any time during the term of employment. The aforementioned stock price vesting conditions of $3.25 per share and $4.25 per share have been satisfied. Notwithstanding the above, in the event of a Change of Control (as defined), a Termination Other Than for Cause (as defined), or a termination of employment by the Chairman and Chief Executive Officer for Good Reason (as defined), all of the 750,000 RSUs shall accelerate and become immediately fully vested.
Under the terms of the Agreement, so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal to 5% of the Company'sCompany’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less than 6.25% of the gross recovery) of the Company'sCompany’s royalties and other payments relating to Licensing Activities with respect to patents other than the Remote Power Patent (including the Mirror Worlds Patent Portfolio, Cox Patent Portfolio and M2M/IoT Patent Portfolio) (collectively, the "Incentive Compensation"“Incentive Compensation”). During the three months ended March 31, 20192020 and March 31, 2018,2019, the Chairman and Chief Executive Officer earned Incentive Compensation of 30,000$8,000 and $973,000,$30,000, respectively. As ofAt March 31, 20192020 and December 31, 2018, $49,0002019, $8,000 and $109,000$92,000 of such compensation were included in accrued expenses, respectively.
On July 14, 2018, 375,000 RSUs owned by the Company’s Chairman and Chief Executive Officer vested in accordance with the above referenced terms of the Agreement. With respect to such vesting of RSUs, the Company’s Chairman and Chief Executive Officer delivered 172,313 shares of common stock to satisfy withholding taxes and received 202,687 net shares of common stock. On July 14, 2019, 125,000 additional restricted stock units owned by the Company’s Chairman and Chief Executive Officer vested in accordance with the Agreement. With respect to the vesting of such restricted stock units, the Company’s Chairman and Chief Executive Officer delivered 56,813 shares of common stock to satisfy withholding taxes and received 68,187 net shares of common stock.
The Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer for the life of each of the Company'sCompany’s patents with respect to licenses entered into with third parties during the term of his employment or at any time thereafter, whether he is employed by the Company or not; provided,, that,, the Chairman and Chief Executive Officer'sOfficer’s employment has not been terminated by the Company "For Cause"“For Cause” (as defined) or terminated by him without "Good Reason"“Good Reason” (as defined). In the event of a merger or sale of substantially all of the assets of the Company, the Company has the option to extinguish the right of the Chairman and Chief Executive Officer to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to such value. In the event that the Chairman and Chief Executive Officer'sOfficer’s employment is terminated by the Company "Other“Other Than For Cause"Cause” (as defined) or by him for "Good Reason"“Good Reason” (as defined), the Chairman and Chief Executive Officer shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated portion of the $175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and (iii) accelerated vesting of all unvested options, warrants, RSUs and other awards.
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)
In connection with the Agreement, the Chairman and Chief Executive Officer has also agreed not to compete with the Company as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated "Otherby us “Other Than For Cause"Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two years from the termination date, if terminated "For Cause"“For Cause” by the Company or "Without“Without Good Reason"Reason” by the Chairman and Chief Executive Officer.
[2]
The[3]
TheNote I – Legal Proceedings
[1]In September 2011, the Company initiated patent litigation against sixteen (16) data networking equipment manufacturers (and affiliated entities) in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of its Remote Power Patent. Named as defendants in the lawsuit, excluding affiliated parties, were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc. As of January 2018, the Company reached settlements with fifteen (15) of the sixteen (16) defendants with Hewlett-Packard Company ("HP"(“HP”) being the sole remaining defendant.
On November 13, 2017, a jury empaneled in the U.S. District Court for the Eastern District of Texas, Tyler Division, found that certain claims of the Company'sCompany’s Remote Power Patent were invalid and not infringed by HP. On February 2, 2018, the Company moved to throw out the jury verdict and have the Court determine that certain claims of the Remote Power Patent are not obvious (invalid) as a matter of law by filing motions for judgment as a matter of law on validity and a new trial on validity and infringement. On August 29, 2018, the District Court issued an order granting the Company'sCompany’s motion for judgment as a matter of law that the Remote Power Patent is valid, thereby overturning the jury verdict of invalidity and denied the Company'sCompany’s motion for a new trial on infringement. On August 30, 2018, the Company appealed the District Court'sCourt’s denial of its motion for a new trial on infringement to the U.S. Court of Appeals for the Federal Circuit. On September 13, 2018, HP filed a cross-appeal of the District Court'sCourt’s order that the Remote Power Patent is valid as a matter of law. No hearingOral argument on the appeal has been set.was held on November 4, 2019 and a decision is pending. If the Company is unable to reverse the District Court order on appeal, or thereit is not likely that the Company will receive significant licensing revenue from Cisco and certain other licensees for the period beginning in the fourth quarter of 2017 through the date of expiration of the Remote Power Patent (March 7, 2020) unless the Company obtains an arbitration ruling that the District Court order relievesdoes not affect the obligation of Cisco and certain of the Company'sother licensees including Cisco, the Company's largest licensee, to continue to pay royalties to the Company and the District Court order is not subsequently reversed on appeal, the Company's business, results of operations and cash-flow will continue to be materially adversely effected.
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24
[2]
[3]
On April 4, 2014 and December 3, 2014, the Company initiated litigation against Google Inc.[4]
On May 9, 2017, Mirror Worlds Technologies, LLC, the-24- |
Note I – Legal Proceedings (continued)
summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. No hearing onOn January 23, 2020, the appeal has been set.
[5]
On November 13, 2018, the Company filed a lawsuit against Dell, Inc. in the District Court, 241st Judicial District, Smith County, Texas, for breach of a settlement and license agreement, dated August 15, 2016, with the Company as a result ofNote J – Equity Investment
On December 18, 2018, the Company agreed to make an investment of up to $5,000,000 in ILiAD Biotechnologies, LLC ("ILiAD"(“ILiAD”), a privately held development stage biotechnology company dedicated to the prevention of human disease caused by Bordetella pertussis with a current focus on its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). The investment by the Company iswas part of a financing of up to approximately $16,200,000 of Class C units of ILiAD, consisting of two tranches.
In accordance with the Securities Purchase Agreement, dated December 18, 2018, the Company isbecame obligated to invest an additional $2,500,000 (tranche 2) to purchase 943,396 Class C units at $2.65 per unit (and will also receivereceived additional five-year warrants to purchase 311,320 Class C units at an exercise price of $3.50 per unit) contingent upon ILiAD receiving,as a result of ILiAD’s notification to the Company on or before December 31, 2019, an "allowed-to-proceed" notification from the FDA for a Phase 2b clinical study. On May 2, 2019 ILiAD notified the Company that it had received an "allowed“allowed to proceed"proceed” notice from the FDA permitting ILiAD to advance to the Phase 2b clinical study of its BP2E1 vaccine. ILiAD elected to permit its Class C investors (including the Company) to bifurcate their tranche 2 commitmentscommitment such that 40% would be currently due (additional $1,000,000 investment($1,000,000 paid by the Company which was made on May 6, 2019) and 60% (additional $1,500,000 investment
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Note J – Equity Investment (continued)
by the Company) would be due when ILiAD receivesreceived satisfactory safety data from the clinical study. Following completionOn August 9, 2019, ILiAD notified the Company that the FDA has allowed Phase 2b to proceed to full enrollment based on satisfactory safety data from the first phase of the Class C unit financing (assuming completion ofclinical study which triggered the second tranche),Company’s additional $1,500,000 investment. In April 2020, ILiAD advised its equity holders, including the Company, will ownthat it had received results from the Phase 2b study of BPZE1 which indicated excellent safety and colonization results. ILiAD further advised that it does not yet have final results for immunological data as certain aspects of laboratory assays (tests to measure antibodies) require further analysis. At March 31, 2020, the Company owned approximately 10.5%9.5% of the outstanding units of ILiAD (on a non-fully diluted basis).
The Company incurred approximately $41,000 of advisory and legal expenses in conjunction with its equity investment in ILiAD which have been capitalized as a component of the equity investment carrying value at March 31, 2019.
The difference between the Company'sCompany’s share of equity in ILiAD'sILiAD’s net assets and the equity investment carrying value reported on the Company'sCompany’s condensed consolidated balance sheet at March 31, 20192020 is due to an excess amount paid over the book value of the investment totaling approximately $2,445,000$5,000,000 which is accounted for as equity method goodwill.
Note K– STOCK REPURCHASE
On June 14, 2017,11, 2019, 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 of common stock over the subsequent 24 month period (for a total authorization of approximately $17,000,000$22,000,000 since inception of the program in August 2011). The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in the Company'sCompany’s discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time.
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28
Revenue from the Company’s Remote Power Patent constituted 100% of the Company’s revenue for the three months ended March 31, 2020 and March 31, 2019. Revenue from five licensees constituted approximately 99% of the Company’s revenue for the three months ended March 31, 2020. Revenue from four licensees constituted approximately 80%, of the Company'sCompany’s revenue for the three months ended March 31, 2019. Revenue from one licensee constituted approximately 65% of the Company's revenue for the three months ended March 31, 2018. Revenue from the sale of the Company's unsecured claim against Avaya, Inc. constituted approximately 32% of the Company's revenue for the three months ended March 31, 2018. At March 31, 2019, royalty receivables from five licensees constituted in the aggregate approximately 93% of the Company's royalty receivables. At December 31, 2018,2020, royalty receivables from four licensees constituted in the aggregate approximately 80%97% of the Company'sCompany’s royalty receivables.
Note M – DIVIDEND POLICY
On December 7, 2016, the Board of Directors of the Company approved the initiation of a dividend policy providingwhich provided for the payment (in March and September of each year) of a semi-annual cash dividend of $0.05 per common share ($0.10commencing in 2017. In 2018 and 2019 the Company paid semi-annual cash dividends of $0.05 per common share annually) commencing in 2017. The Company anticipates paying the semi-annual cash dividends in March and September of each year.consistent with its dividend policy. It iswas anticipated that the semi-annual cash dividend willwould continue to be paid through March 7, 2020 (the expiration of the Company'sCompany’s Remote Power Patent) provided that the Company continuescontinued to receive royalties from licensees of its Remote Power Patent. On February 9, 2018,19, 2020, the Company’s Board of Directors of the Company declared a semi-annual cash dividend of $0.05 per common share which was paid on March 23, 2018 to all common stockholders of record as of March 9, 2018. On February 11, 2019, the Board of Directors declared a cash dividend of $0.05 per common share with a payment date of March 25, 201931, 2020 to all common stockholdersshareholders of record as of March 11, 2019. However, if the Company is unable to overturn the District Court order of non-infringement in its litigation with Hewlett-Packard on appeal to the Federal Circuit (see Note I[1] hereof), or there is not an arbitration ruling that the HP Jury Verdict finding of non‑infringement does not apply to certain licensees of the Remote Power Patent including Cisco, the16, 2020. The Board of Directors may decide to modify or discontinue semi-annual cash dividends of $0.05 per common share.is reviewing the Company’s dividend policy.
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ITEM 2: MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE STATEMENTS THAT INCLUDE INFORMATION BASED UPON BELIEF OF OUR MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO MANAGEMENT. STATEMENTS CONTAINING TERMS SUCH AS "BELIEVES"“BELIEVES”, "EXPECTS"“EXPECTS”, "ANTICIPATES"“ANTICIPATES”, "INTENDS"“INTENDS” OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED ON PAGES 16-2615-26 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20182019 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 201920, 2020 AND 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 sixty-six (66)eighty-three (83) patents includingincluding: (i) our remote power patent ("(“Remote Power Patent"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; (ii) our Mirror Worlds patent portfolio (the "Mirror“Mirror Worlds Patent Portfolio"Portfolio”) relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii) our Cox patent portfolio (the "Cox“Cox Patent Portfolio"Portfolio”) relating to enabling technology for identifying media content on the Internet and taking further action to be performed basedafter on such identification; (iv) our M2M/IoT patent portfolio (the "M2M/“M2M/IoT Patent Portfolio"Portfolio”) relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; and (v) our QoS patents (the "QoS Patents"“QoS Patents”) covering systems and methods for the transmission of audio, video and data in order to achieve high quality of service (QoS) over computer and telephony networks. In addition, we continually review opportunities to acquire or license additional intellectual property.
We have been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930). We have entered into twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, include license agreements with Cisco, Dell Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd, Huawei Technologies Co., Ltd., ShoreTel, Inc., Juniper Networks, Inc., Polycom, Inc. and Avaya, Inc. Our Remote Power Patent expired on March 7, 2020, and we will no longer receive licensing revenue for our Remote Power Patent that accrues for any period subsequent to the expiration date. Depending upon the outcome of our appeal to the U.S. Court of Appeals for the Federal Circuit of the District Court order of non-infringement of our Remote Power Patent in our trial with Hewlett Packard, we may receive significant royalty payments from other licensees for periods prior to March 7, 2020 (see below and Note I[1] and Note I[2] hereof). We have also entered into license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror Worlds Patent Portfolio. Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize. Our strategy includes working with inventors and patent owners to assist in the development and monetization of their patented technologies. We may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
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Our 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 we have achieved with respect to our Remote Power Patent and Mirror Worlds Patent Portfolio. Our Remote Power Patent has generated licensing revenue in excess of approximately $144,000,000$147,000,000 from May 2007 through March 31, 2019.2020. Since our acquisition of Mirror Worlds Patent Portfolio in May 2013, we have received licensing and other revenue from the portfolio of $47,150,000 through March 31, 2019.
On August 29,30, 2018, the Company appealed the decision of the U.S. District Court (i) granted our motion for judgment as a matterthe Eastern District of law that our Remote Power Patent is valid, thereby overturning the HP Jury Verdict of invalidity and (ii) denied our motion for a new trial on infringement. We have appealed the District Court's denial of ourTexas denying its motion for a new trial on infringement with respect to the U.S. Court of Appeals for the Federal Circuit (see Note I[1] to our unaudited condensed consolidated financial statements included in this quarterly report). The HP Jury Verdict had a material adverse effect on our business, results of operations and cash-flow for the year ended December 31, 2018 and the three months ended March 31, 2019 and will continue to do so for the life of ourNovember 13, 2017 jury finding that its Remote Power Patent (March 2020) unlesswas not infringed by Hewlett Packard. Oral argument on the District Court judgment of non-infringementappeal took place on November 4, 2019 and a decision is reversed on appeal. We have been dependent upon our Remote Power Patent for a significant portion of our revenue. As a result of the HP Jury Verdict, several of our largest licensees, including Cisco, our largest licensee, notified us in late November 2017 and January 2018 that they will no longer make ongoing royalty payments to us pursuant to their license agreements. If we successfully overturn the District Court order of non-infringement in our appeal to the Federal Circuit, certain licensees of the Remote Power Patent, including Cisco, will be obligated to pay us ongoing royalties and all royalties that accrued but were not paid following (and prior to) the HP Jury Verdict in November 2017.pending. If we are unable to reverse the District Court order of non-infringement on appeal, or thereit is likely that we will not receive significant royalty revenue from Cisco and certain other licensees for the period beginning in the fourth quarter of 2017 through March 7, 2020 (the expiration of our Remote Power Patent) unless we obtain an arbitration ruling that certain of our licensees, including Cisco, are relieved of their obligations to pay royalties and the District Court order of non-infringement isdid not subsequently reversed on appeal, our business, results of operations and cash-flow will continueaffect such licensees obligation to be materially adversely effectedpay us or we reach a satisfactory resolution with such licensees (see Note I[1] and Note I[2] to our unaudited condensed consolidated financial statements included in this quarterly report)hereof).
Consistent with our prior view, the District Court decision in August 2018 overturning the HP Jury Verdictjury verdict on invalidity confirmed the following: (i) we believeour belief that Dell, Inc. ("Dell"(“Dell”) is obligated to pay to us all prior unpaid royalties, including those that accrued after the date of the HP Jury Verdict (November 13, 2017), as well as future royalties through the expiration of the Remote Power Patent in March 2020 and (ii) Polycom, Inc. has a continuing obligation to2020. Dell did make ongoing licensing payments to us including $2,000,000 of installment license initiation fees ($1,000,000 of which was paid and recorded as revenue for the year ended December 31, 2018) (see Note I[1] to our unaudited condensed consolidated financial statements included in this quarterly report). Dell has not made payment of such accrued royalties due us and on November 13, 2018 we commenced legal action against Dell. On March 25, 2020, the Court granted our motion for summary judgment against Dell on our breach of contract claim (see Note I[5] to our unaudited condensed consolidated financial statements included in this quarterly report).
We have been dependent upon our Remote Power Patent for a significant amount of our revenue. Our Remote Power Patent expired on March 7, 2020 and licensees will no longer be required to pay us any royalties that accrue for the period after the expiration date. Revenue for the year ended December 31, 20182019 from license agreements for our Remote Power Patent was $15,785,000 (71%$3,037,000 (100% of our revenue) and such revenue was $16,451,000 (100%$15,785,000 (71% of our revenue) for the year ended December 31, 2017 and $22,588,000 for the year ended December 31, 2016.2018. In addition, we have been dependent on royalty bearing licenses for our Remote Power Patent for our recurring revenue (mostly payable quarterly). As a result of certain of our licensees including Cisco, our largest licenseeslicensee, not paying us royalties pursuant to licenses for our Remote Power Patent following the HP Jury Verdict, as described above, we only achieved revenue from royalty bearing licenses of $3,037,000 and $3,086,000 for the year ended December 31, 2019 and December 31, 2018 as compared to royalty bearing revenue of $12,053,000 and $10,788,000 for the year ended December 31, 2017 and December 31, 2016, respectively. In addition, we only received revenue from Royalty Bearing Licenses of $476,000$161,000 and $443,000$476,000 for the three months ended March 31, 20192020 and March 31, 2018,2019 respectively. Since our Remote Power Patent expired on March 7, 2020 and significant revenue from our Remote Power Patent licensees (including Cisco) for the period beginning in the fourth quarter of 2017 through March 7, 2020 remains uncertain pending the outcome of the appeal to the Federal Circuit of the District Court order of non-infringement in our trial with Hewlett Packard, additional significantour ability to achieve licensing revenue in the future may be dependent upon the outcome of litigation involving our Cox Patent Portfolio, Mirror Worlds Patent Portfolio and our ability to monetize our M2M/IoT Patent Portfolio or new patents to be acquired in the future. OurAccordingly, our future revenue stream is uncertain.
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At March 31, 2019,2020, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,487,000$45,003,000 and working capital of $52,258,000.$44,755,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the foreseeable future. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
As to the impact of the global COVID-19 pandemic on us, COVID-19 is currently causing some delays in the courts including the scheduling of trial dates, which could adversely affect the timing of our consummation of future license agreements (see Item 1A. Risk Factors of this quarterly report).
In December 2018, we agreed to make an investment of up to $5.0 million$5,000,000 ($2.5 million2,500,000 of which was invested at the December 2018 closing, and an additional $1,000,000 was invested in May 2019 and the balance of $1,500,000 was invested in August 2019) in ILiAD Biotechnologies, LLC, a development stage biotechnology company with an exclusive license to over thirty-five (35) patents (see Note J to our unaudited condensed consolidated financial statements in this quarterly report).
On December 8,7, 2016, our Board of Directors approved the initiation of a dividend policy. The policy providesprovided for the payment of regular semi-annual cash dividends of $0.05 per common share ($0.10 per common share annually) which are anticipated to bewere paid in March and September of each year. It iswas anticipated that the semi-annual cash dividend willwould continue to be paid through March 7, 2020 (expiration of our Remote Power Patent) provided that we continuecontinued to receive royalties from licensees of our Remote Power Patent. During 2017 and 2018 semi-annual cash dividends of $0.05 per share were paid in March and September in accordance with our dividend policy. On February 11, 2019,19, 2020, our Board of Directors declared a semi-annual cash dividend of $0.05 per common share with a payment date of March 25, 201931, 2020 to all shareholders of record on March 11, 2019. However, if we are unable to overturn the HP Jury Verdict finding of non-infringement in the District Court or there is not an arbitration ruling that the HP Jury Verdict finding of non-infringement does not apply to certain of our licensees of our Remote Power Patent, our16, 2020. Our Board of Directors may choose to modify or discontinue regular semi-annual cash dividends of $0.05 per common share.
Our revenue from our patent licensing business is generated from license agreements entered into as a result of litigation settlements or judgments (after a jury verdict). Generally, in the event of settlement of litigation related to our assertion of patent infringement involving our intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a "Fully-Paid License"“Fully-Paid License”), or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly royalties to us for the life of the licensed patent (a "Royalty“Royalty Bearing License"License”).
Royalty Bearing Licenses
Our Royalty Bearing Licenses for our Remote Power Patent obligate licensees to pay us ongoing royalties primarily on a quarterly basis for the life of our Remote Power Patent (March(which expired on March 7, 2020), subject to certain conditions including the validity of certain claims of our Remote Power Patent or a finding that a third party'sparty’s PoE products are found not to infringe our Remote Power Patent and such finding applies to our particular licensee'slicensee’s licensed products. At March 31, 2019,2020, we had sixteen (16) Royalty Bearing Licenses and at March 31, 20182019 we had Royalty Bearing Licenses with seventeen (17) licensees. In March 2019, one Royalty Bearing License was converted to a Fully-Paid License.
Pending Litigation
We currently have pending patent infringement litigations involving our Remote Power Patent and certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see "Legal Proceedings"“Legal Proceedings” at pages 37-3934–36 hereof).
New York for infringement of several patents within our Cox Patent Portfolio (see "Legal Proceedings" at pages 37-39 of this quarterly report).
During the three month period ended March 31, 2020, and March 31, 2019 we had no revenue from new litigation settlements. During the three month period ended March 31, 2018, we had revenue of $12,700,000 from a Fully-Paid License with Juniper Systems, Inc. from a litigation settlement and $6,320,000 from the sale of our Avaya unsecured claim (see "Legal Proceedings" at pages 37-39 hereof).license agreements.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 20192020 Compared to Three Months Ended March 31, 2018
Revenue
. We had revenue of $161,000 for the three months ended March 31, 2020 as compared to revenue of $606,000 for the three months ended March 31,Operating Expenses
. Operating expenses for the three months ended March 31,General and administrative expenses were $488,000 and $507,000$486,000 for the three months ended March 31, 2019 and the three months ended March 31, 2018, respectively. Amortization of patents was $54,000 for three months ended March 31, 20192020 as compared to $70,000$488,000 for the three months ended March 31, 2018.2019. Amortization of patents was $72,000 for three months ended March 31, 2020 as compared to $54,000 for the three months ended March 31, 2019. Stock-based compensation expense related to the issuance of restricted stock units was $72,000 for the three months ended March 31, 2020 as compared to $144,000 for the three months ended March 31, 2019 as compared to $226,0002019. Professional fees and related costs were $399,000 for the three months ended March 31, 2018 for the issuance of restricted stock units. Professional fees and related costs were2020 as compared to $307,000 for the three months ended March 31, 2019 primarily as compareda result of increased costs related to $518,000our pending patent litigations.
Operating Loss. We had an operating loss of $900,000 for the three months ended March 31, 20182020 compared with operating loss of $533,000 for the three months ended March 31, 2019. The increased operating loss of $367,000 for the three months ended March 31, 2020 was primarily as a resultdue to decreased revenue of decreased legal fees$445,000 for the three months ended March 31, 2020.
Interest and costs related to our pending patent litigations.
Income Taxes (Benefit). We had no deferred tax for federal, state and local income taxes as a result of a full allowance for the deferred tax asset and no current tax benefit for federal, state and local taxes for the three months ended March 31, 2018. The decreased operating income of $11,416,000 for2020. For the three months ended March 31, 2019, was due to operating income for the three months ended March 31, 2018 associated with increased revenue of $19,020,000 primarily from our Fully-Paid License with Juniper and the sale of our Avaya unsecured claim.
Share of federal, state and local taxes were recordedNet Losses of Equity Method Investee. We incurred a net loss of $293,000 during the three month period ended March 31, 2020 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $96,000 for the three months ended March 31, 2019 and 2018, respectively. The decreaseas a result of our investment having been made in such taxes of $2,490,000 for the three months ended March 31, 2019 was primarily due to decreased taxable income of $11,235,000 for the three months ended March 31, 2019. The deferred tax asset was increased by $65,000 based on the Tax Act.
Net Losses of Equity Method Investee
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At March 31, 2019,2020, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,487,000$45,003,000 and working capital of $52,258,000.$44,755,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the foreseeable future.
At March 31, 2019,2020, we had royalty receivables of $774,000$144,000 due from our Royalty Bearing Licenses, which are typically paid within sixty (60) days.
Working capital decreased by $1,228,000$2,434,000 at March 31, 20192020 to $44,755,000 as compared to working capital of $53,486,000$47,189,000 at December 31, 2018.2019. The decrease in working capital of $2,434,000 for the three months ended March 31, 20192020 was primarily due to a decreasedecreases in marketable securities of $7,321,000 and current liabilities of $1,102,000 offset by an increase in cash and cash equivalents of $2,113,000, which included a cash dividend of $1,191,000, offset by an increase in royalty receivables of $330,000.
Net cash provided by (used in)used in operating activities for the three months ended March 31, 2019 decreased2020 increased by $18,337,000$123,000 from $16,922,000 for three months ended March 31, 2018 to $(1,415,000) for the three months ended March 31, 2019. The decrease in net cash provided by operating activities$1,415,000 for the three months ended March 31, 2019 compared withto $1,538,000 for the three months ended March 31, 2018 was primarily due to a decrease in net income of $8,841,000 and accrued expenses of $6,642,000.
Net cash provided by (used in) investing activities during the three months ended March 31, 20192020 was $494,000$6,910,000 as compared to $(9,788,000)$494,000 for the three months ended March 31, 2018.
Net cash used in financing activities for the three months ended March 31, 2020 and 2019 was $1,365,000 and 2018 was $(1,192,000) and $(1,557,000),$1,192,000, respectively. The change of $(365,000)$173,000 primarily resulted from a decrease in theincreased stock repurchases of $395,000, exclusive of commissions.
We maintain our cash in money market accounts and other 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, purchase obligations or other long-term liabilities other than operating lease obligations recorded in connection with ASC 842.liabilities.
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CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of operations, and cash flows are based on our auditedcondensed consolidated financial statements which have beenare prepared in accordance with accounting principles generally accepted in the United States.GAAP. The preparation of our financial statements included in this Quarterly Report on Form 10-Q requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of our unaudited condensed consolidated financial statements include revenue recognition, patents, stock-based compensation, income taxes, valuation of patents and equity method investments, including the evaluation of the Company'sCompany’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based. See also Note B to our unaudited condensed consolidated financial statements included in this quarterly report.
Accounting Standards Adopted In The Period
Fair Value Measurements
In February 2016,August 2018, the FASB issued ASU 2016-2, Leases ("2018-13, Fair Value Measurement (“ASC 842"820”), which required us Disclosure Framework — Changes to recognize lease assets and lease obligations (relatedthe Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to leases previously classified as operating under previous U.S. GAAP) on its condensed consolidated balance sheet. ASC 842 wasimprove the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. On January 1, 2020, the Company on January 1, 2019.adopted ASU 1028-13. The adoption of ASC 842 impacted our condensedthis standard did not have a material impact on its consolidated financial statements.
New Accounting Standards
Income Taxes
In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the interim period and making improvements for income taxes related to employee stock ownership plans. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements in that existing leases were recorded as right-of-use ("ROU") assets and related lease obligationshave not been issued. We are currently evaluating the impact the standard will have on the condensed consolidated balance sheet.
Equity Securities
In January 2020, the packageFASB issued ASU 2020-01,Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).The ASU amends and clarifies certain interactions between the guidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability of transition practical expedientsthe accounting for existing leasesthese interactions. The amendments in the ASU should be applied on a prospective basis. The ASU is effective for fiscal years beginning after December 15, 2020, and therefore weinterim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for which financial statements have not reassessedyet been issued. We are currently evaluating the following: lease classification for existing leases, whether any existing contracts contained leases, and if any initial direct costs were incurred. We did not applyimpact the hindsight practical expedient, and accordingly, we did not use hindsight in its assessment of lease terms. As permitted under ASC 842, we elected to not recognize ROU assets and related lease obligations for leases with terms of twelve months or less. In connection with the adoption of ASC 842, the Company recorded $127,000 of operating lease right-of-use assets and $128,000 of operating lease obligations as of January 1, 2019.
We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated financial position, statements of operations and cash flows.
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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 March 31, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Remote Power Patent Litigation
In September 2011, we initiated patent litigation against sixteen (16) data networkingnetwork-ing equipment manufacturers (and affiliated entities) in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power Patent. Named as defendants in the lawsuit (excluding affiliated parties) were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc. As of January 2018, we reached settlements with fifteen (15) of the sixteen (16) defendants, with Hewlett-Packard Company ("HP"(“HP”) being the sole remaining defendant.
On November 13, 2017, a jury empaneled in the U.S. District Court for the Eastern District of Texas, Tyler Division, found that certain claims of our Remote Power Patent were invalid and not infringed by HP. On February 2, 2018, we moved to throw out the jury verdict and have the Court determine that certain claims of our Remote Power Patent are not obvious (invalid) as a matter of law by filing motions for judgment as a matter of law on validity and a new trial on validity and infringement. On August 29, 2018, the District Court issued an order granting our motion for judgment as a matter of law that our Remote Power Patent is valid, thereby overturning the jury verdict of invalidity and denied our motion for a new trial on infringement. On August 30, 2018, we appealed the District Court'sCourt’s denial of our motion for a new trial on infringement to the U.S. Court of Appeals for the Federal Circuit. On September 13, 2018, HP filed a cross-appeal of the District Court'sCourt’s order that the Remote Power Patent is valid as a matter of law. No hearingOral argument on the appeal has been set. If we are unable to reverse the District Court order of non-infringement on appeal, or there is an arbitration ruling that the District Court order relieves the obligation of certain of our licensees including Cisco, our largest licensee, to continue to pay us royalties and the District Court order is not subsequently reversed on appeal, our business, results of operations and cash-flow will continue to be materially adversely effected.
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Dell Litigation
On November 13, 2018, we filed a lawsuit against Dell, Inc. in the District Court, 241st Judicial District, Smith County, Texas, for breach of a settlement and license agreement, dated August 15, 2016, with us as a result of Dell'sDell’s failure to make royalty payments, and provide corresponding royalty reports, to us based on sales of Dell'sDell’s PoE products. We believe Dell is obligated to pay us all prior unpaid royalties that accrued prior to and after the date of the HP Jury Verdict (November 2017) as well as future royalties through the expiration of the Remote Power Patent in March 7, 2020. On December 7, 2018, Dell filed its Answer and Counterclaim. Dell denied the claim asserted by us and asserted a counterclaim in excess of $1,000,000. On January 28, 2019, Dell brought a motion to stay the case as a result of our pending appeal of the District Court order overturning the HP Jury Verdict on non-infringement to the U.S. Court of Appeals for the Federal Circuit and HP'sHP’s appeal of the District Court'sCourt’s order that the Remote Power Patent is valid as a matter of law. Dell'sDell’s motion to stay was denied by the Court on May 7, 2019.
Mirror Worlds Patent Portfolio Litigation
Pending Facebook Litigation
On May 9, 2017, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, initiated litigation against Facebook, Inc. ("Facebook"(“Facebook”) in the U.S. District Court for the Southern District of New York, for infringement of U.S. Patent No. 6,006,227, U.S. Patent No. 7,865,538 and U.S. Patent No. 8,255,439 (among the patents within our Mirror Worlds Patent Portfolio). The lawsuit alleged that the asserted patents are infringed by Facebook'sFacebook’s core technologies that enable Facebook'sFacebook’s Newsfeed and Timeline features. The lawsuit further alleged that Facebook'sFacebook’s unauthorized use of the stream-based solutions of our asserted patents has helped Facebook become the most popular social networking site in the world. We sought, among other things, monetary damages based upon reasonable royalties. On May 7, 2018, Facebook filed a motion for summary judgment on non-infringement. On August 11, 2018, the Court issued an order granting Facebook'sFacebook’s motion for summary judgment of non-infringement and dismissed the case. On August 17, 2018, we filed a Notice of Appeal to appeal the summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. No hearingOral argument on the appeal has been set.
Cox Patent Portfolio – Google and YouTube Legal Proceedings
On April 4, 2014, we initiated litigation against Google Inc. ("Google"(“Google”) and YouTube, LLC ("YouTube"(“YouTube”) in the U.S. District Court for the Southern District of New York for infringement of several of our patents within our Cox Patent Portfolio which relate to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube
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have infringed and continue to infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube'sYouTube’s Content ID system. In May 2014, the defendants filed an answer to our complaint and asserted defenses of non-infringement and invalidity.
On December 3, 2014, we initiated a second litigation against Google and YouTube in the United States District Court for the Southern District of New York for infringement of our then newly issued patent (part of the Cox Patent Portfolio) relating to the identification and tagging of media content (U.S. Patent No. 8,904,464). The lawsuit alleges that Google and YouTube have infringed and continue to infringe the asserted patent by making, using, selling and offering to sell unlicensed systems and products and services related thereto, which include YouTube'sYouTube’s Content ID system. In January 2015, the defendants filed an answer to our complaint and asserted defenses of non-infringement and invalidity.
The above referenced litigations that we commenced in the U.S. District Court for the Southern District of New York in April 2014 and December 2014 against Google and YouTube were subject to a court ordered stays which were in effect from July 2, 2015 until January 2, 2019 as a result of proceedings then pending at the Patent Trial and Appeal Board (PTAB) and the appeals to the U.S. District Court of Appeals for the Federal Circuit. Pursuant to a Joint Stipulation and Order Regarding Lifting of Stays, entered on January 2, 2019, the parties agreed, among other things, that the stays with respect to the litigations were lifted. In addition, we agreed not to assert certain patent claims which were asserted in the litigation commenced in April 2014 and we were permitted to substitute new claims. Google also agreed to terminate the pending IPR proceedings that were subject to remand by the U.S. Court of Appeals for the Federal Circuit. In January 2019, our two litigations against Google and YouTube were consolidated. The Court has set a claim constructionA Markman hearing for August 26,(claim construction) was held on November 21, 2019 and discoverya ruling has not been rendered.
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 to the risks described below and elsewhere in this quarterly report, our Annual Report on Form 10-K for the year ended December 31, 2019 (pages 16-27) filed with the Securities and Exchange Commission on March 20, 2020 includes a discussion of our risk factors and should be carefully considered by investors.
The Global COVID-19 Pandemic Could Have an Adverse Impact on Our Business
In December 2019, COVID-19, a novel coronavirus, was reported in China, and in March 2020 the World Health Organization called it a pandemic. The contagious disease outbreak has continued to spread around the world and is impacting economic activities and the financial markets. As to be completed by September 30, 2019.
ITEM 2
.Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended March 31, 2019.
Stock Repurchases
On August 22, 2011, we established a share repurchase program ("(“Share Repurchase Program"Program”). On June 14, 2017,11, 2019, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000of shares of our common stock over the subsequent 24 month period (for a total authorization of approximately $17,000,000$22,000,000 since inception of the program).The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. Since inception of the Share Repurchase Program in August 2011 through March 31, 2019,2020, we have repurchased an aggregate of 8,154,6988,562,070 shares of our common stock at an aggregate cost of $15,142,916$16,058,472 (exclusive of commissions) or an average per share price of $1.86.$1.88. During the three months ended March 31, 2019,2020, we repurchased 30072,300 shares of our common stock at an aggregate cost of $676$151,626 (exclusive of commissions) or an average per share price of $2.25.$2.10. At March 31, 2019,2020, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $1,321,091.$4,293,632.
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During the months of January, February and March 2019,2020, we purchased common stock pursuant to our Share Repurchase Program as indicated below:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 to January 31, 2019 | 300 | 2.25 | — | $1,321,091 |
February 1 to February 28, 2019 | — | — | — | $1,321,091 |
March 1 to March 31, 2019 | — | — | — | $1,321,091 |
Total | 300 | 2.25 | — |
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 |
January 1 to January 31, 2020 | 5,137 | $2.21 | 5,137 | $4,433,907 |
February 1 to February 29, 2020 | 2,700 | $2.25 | 2,700 | $4,427,832 |
March 1 to March 31, 2020 | 64,463 | $2.02 | 64,463 | $4,293,632 |
Total | 72,300 | $2.10 | 72.300 |
ITEM 3.Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.Other InformationOTHER INFORMATION
None.
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ITEM 5.ExhibitsEXHIBITS
(a) Exhibits
101 | Interactive data files:** |
101.INS | XBRL Instance Document |
101.SCH | XBRL Scheme Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Label Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
_____________________________
*
Filed herewith**
Furnished herewith-38- |
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 | By: | /s/ Corey M. Horowitz | ||
Corey M. Horowitz | ||||
Chairman and Chief Executive Officer | ||||
Date: May | By: | /s/ David C. Kahn | ||
David C. Kahn | ||||
Chairman and Chief | ||||
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