__________________________ UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 |
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 registrant as specified in its charter)
| Delaware | 11-3027591 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
445 Park Avenue, Suite 912 New York, New York | 10022 | |
| (Address of principal executive offices) | (Zip Code) |
212-829-5770
(Registrant’s telephone number, including area code)
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 (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 (§232.405 of this chapter) 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. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| 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 ☒
TheThe number of shares of the registrant’s common stock, $.01 par value per share, outstanding as of AugustMay 10, 20202021 was 24,021,826. 24,117,129.
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
Page No.
| Page No. | |||
| PART I. Financial Information | |||
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | ||
Condensed Consolidated Balance Sheets as of | |||
Condensed Consolidated Statements of Operations and Comprehensive | |||
Condensed Consolidated Statements of Stockholders’ Equity for the three | |||
Condensed Consolidated Statements of Cash Flows for the | |||
| Notes to Unaudited Condensed Consolidated Financial Statements | |||
| 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 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
| Item 3. | Defaults Upon Senior Securities | ||
| Item 4. | Other Information | ||
| Item 5. | Exhibits | ||
| Signatures | |||
-2-
PART I. FINANCIAL INFORMATIONSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future performance and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include various risks and uncertainties described below and elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020 (on pages 13-22) filed with the SEC on March 31, 2021. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Such risks and uncertainties include, but are not limited to, the following:
-3-
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 24,122,000 | $ | 25,505,000 | ||||
| Marketable securities, at fair value | 17,149,000 | 19,366,000 | ||||||
| Royalty receivables | 18,692,000 | — | ||||||
| Other current assets | 88,000 | 120,000 | ||||||
| �� | ||||||||
| TOTAL CURRENT ASSETS | 60,051,000 | 44,991,000 | ||||||
| OTHER ASSETS: | ||||||||
| Deferred tax assets, net | — | 954,000 | ||||||
| Patents, net of accumulated amortization | 1,512,000 | 1,578,000 | ||||||
| Equity investment | 3,440,000 | 3,650,000 | ||||||
| Convertible note investment | 1,000,000 | — | ||||||
| Security deposits | 13,000 | 21,000 | ||||||
| Total Other Assets | 5,965,000 | 6,203,000 | ||||||
| TOTAL ASSETS | $ | 66,016,000 | $ | 51,194,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Income taxes payable | $ | 890,000 | $ | — | ||||
| Accounts payable | 363,000 | 597,000 | ||||||
| Accrued contingency fees and related costs | 5,422,000 | 932,000 | ||||||
| Accrued payroll | 941,000 | 277,000 | ||||||
| Other accrued expenses | 164,000 | 226,000 | ||||||
| Total Current Liabilities | 7,780,000 | 2,032,000 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | 769,000 | — | ||||||
| TOTAL LIABILITIES | $ | 8,549,000 | $ | 2,032,000 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
| none issued and outstanding at March 31, 2021 and December 31, 2020 | — | — | ||||||
| Common stock, $0.01 par value; authorized 50,000,000 shares; | ||||||||
| 24,117,129 and 24,105,879 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 241,000 | 241,000 | ||||||
| Additional paid-in capital | 66,183,000 | 66,124,000 | ||||||
| Accumulated deficit | (8,958,000 | ) | (17,193,000 | ) | ||||
| Accumulated other comprehensive income (loss) | 1,000 | (10,000 | ) | |||||
| TOTAL STOCKHOLDERS’ EQUITY | 57,467,000 | 49,162,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 66,016,000 | $ | 51,194,000 | ||||
| June 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 20,972,000 | $ | 22,587,000 | ||||
| Marketable securities, at fair value | 23,763,000 | 25,730,000 | ||||||
| Royalty receivables, net | 128,000 | 343,000 | ||||||
| Other current assets | 51,000 | 98,000 | ||||||
| TOTAL CURRENT ASSETS | 44,914,000 | 48,758,000 | ||||||
| OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | 1,714,000 | 1,819,000 | ||||||
| Equity investment | 3,938,000 | 4,437,000 | ||||||
| Operating leases right-of-use asset | — | 41,000 | ||||||
| Security deposits | 21,000 | 21,000 | ||||||
| Total Other Assets | 5,673,000 | 6,318,000 | ||||||
| TOTAL ASSETS | $ | 50,587,000 | $ | 55,076,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 38,000 | $ | 421,000 | ||||
| Accrued contingency fees and related costs | 45,000 | 492,000 | ||||||
| Accrued payroll | 16,000 | 334,000 | ||||||
| Operating lease obligations – current | — | 41,000 | ||||||
| Other accrued expenses | 226,000 | 281,000 | ||||||
| TOTAL CURRENT LIABILITIES | 325,000 | 1,569,000 | ||||||
| TOTAL LIABILITIES | $ | 325,000 | $ | 1,569,000 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $0.01 par value, authorized 10,000,000 shares; none issued and outstanding at June 30,2020 and December 31,2019 | — | — | ||||||
| Common stock, $0.01 par value; authorized 50,000,000 shares; 23,947,389 and 24,036,071 shares issued and outstanding at June 30,2020 and December 31,2019 respectively | 239,000 | 240,000 | ||||||
| Additional paid-in capital | 65,981,000 | 65,824,000 | ||||||
| Accumulated deficit | (16,029,000 | ) | (12,636,000 | ) | ||||
| Accumulated other comprehensive income | 71,000 | 79,000 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 50,262,000 | 53,507,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 50,587,000 | $ | 55,076,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUE | $ | 55,000 | $ | 599,000 | $ | 216,000 | $ | 1,205,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | 20,000 | 175,000 | 52,000 | 321,000 | ||||||||||||
| Professional fees and related costs | 124,000 | 238,000 | 523,000 | 545,000 | ||||||||||||
| General and administrative | 459,000 | 488,000 | 945,000 | 976,000 | ||||||||||||
| Amortization of patents | 72,000 | 87,000 | 144,000 | 141,000 | ||||||||||||
| Stock-based compensation | 85,000 | 127,000 | 157,000 | 271,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 760,000 | 1,115,000 | 1,821,000 | 2,254,000 | ||||||||||||
| OPERATING LOSS | (705,000 | ) | (516,000 | ) | (1,605,000 | ) | (1,049,000 | ) | ||||||||
| OTHER INCOME (LOSS): | ||||||||||||||||
| Interest and dividend income, net | 120,000 | 301,000 | 298,000 | 602,000 | ||||||||||||
| Net realized and unrealized gain (loss) on marketable securities | 206,000 | 22,000 | (116,000 | ) | 45,000 | |||||||||||
| Total other income, net | 326,000 | 323,000 | 182,000 | 647,000 | ||||||||||||
| LOSS BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | (379,000 | ) | (193,000 | ) | (1,423,000 | ) | (402,000 | ) | ||||||||
| INCOME TAXES PROVISION (BENEFIT): | ||||||||||||||||
| Current | (142,000 | ) | — | (382,000 | ) | — | ||||||||||
| Deferred taxes, net | 142,000 | (38,000 | ) | 382,000 | (103,000 | ) | ||||||||||
| Total income taxes (benefit) | — | (38,000 | ) | — | (103,000 | ) | ||||||||||
| LOSS BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | (379,000 | ) | $ | (155,000 | ) | $ | (1,423,000 | ) | $ | (299,000 | ) | ||||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (205,000 | ) | $ | (53,000 | ) | $ | (498,000 | ) | $ | (149,000 | ) | ||||
| NET LOSS | $ | (584,000 | ) | $ | (208,000 | ) | $ | (1,921,000 | ) | $ | (448,000 | ) | ||||
| Net loss per share | ||||||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.02 | ) | ||||
| Diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.02 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 23,945,916 | 23,917,563 | 23,987,715 | 23,830,367 | ||||||||||||
| Diluted | 23,945,916 | 23,917,563 | 23,987,715 | 23,830,367 | ||||||||||||
| Cash dividends declared per share | — | — | $ | 0.05 | $ | 0.05 | ||||||||||
| NET LOSS | $ | (584,000 | ) | $ | (208,000 | ) | $ | (1,921,000 | ) | $ | (448,000 | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Net unrealized holding gain (loss) on corporate bonds and notes arising during the period, net of tax | 175,000 | 53,000 | (8,000 | ) | 163,000 | |||||||||||
| COMPREHENSIVE LOSS | $ | (409,000 | ) | $ | (155,000 | ) | $ | (1,929,000 | ) | $ | (285,000 | ) | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 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 unrealized loss on corporate bonds and notes | — | — | — | — | (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 | |||||||||||
| Stock-based compensation | — | — | 85,000 | — | — | 85,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Treasury stock purchased and retired | (43,589 | ) | — | — | (98,000 | ) | — | (98,000 | ) | |||||||||||||||
| Net unrealized gain on corporate bonds and notes | — | — | — | — | 175,000 | 175,000 | ||||||||||||||||||
| Net loss | — | — | — | (584,000 | ) | — | (584,000 | ) | ||||||||||||||||
| Balance – June 30, 2020 | 23,947,389 | $ | 239,000 | $ | 65,981,000 | $ | (16,029,000 | ) | $ | 71,000 | $ | 50,262,000 | ||||||||||||
THREE AND SIX MONTHS ENDED JUNE 30, 2019
| 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 exercise | (69,116 | ) | — | — | — | — | — | |||||||||||||||||
| 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 | ||||||||||||
| Stock-based compensation | — | — | 127,000 | — | — | 127,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Proceeds from exercise of stock options | 65,150 | — | 107,000 | — | — | 107,000 | ||||||||||||||||||
| Cashless exercise of stock options | 859,849 | 9,000 | (9,000 | ) | — | — | — | |||||||||||||||||
| Shares delivered to fund stock option exercises | (490,351 | ) | (5,000 | ) | 5,000 | — | — | — | ||||||||||||||||
| Value of shares delivered to pay withholding taxes | — | — | — | (366,000 | ) | — | (366,000 | ) | ||||||||||||||||
| Treasury stock purchased and retired | (139,848 | ) | (1,000 | ) | — | (332,000 | ) | — | (333,000 | ) | ||||||||||||||
| Net unrealized gain on corporate bonds and notes | — | — | — | — | 53,000 | 53,000 | ||||||||||||||||||
| Net loss | — | — | — | (208,000 | ) | — | (208,000 | ) | ||||||||||||||||
| Balance – June 30, 2019 | 24,088,811 | $ | 241,000 | $ | 65,524,000 | $ | (9,464,000 | ) | $ | 82,000 | $ | 56,383,000 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUE | $ | 18,692,000 | $ | 161,000 | ||||
| OPERATING EXPENSES: | ||||||||
| Costs of revenue | 5,420,000 | 32,000 | ||||||
| Professional fees and related costs | 355,000 | 399,000 | ||||||
| General and administrative | 513,000 | 486,000 | ||||||
| Amortization of patents | 74,000 | 72,000 | ||||||
| Stock-based compensation | 59,000 | 72,000 | ||||||
| TOTAL OPERATING EXPENSES | 6,421,000 | 1,061,000 | ||||||
| OPERATING INCOME (LOSS) | 12,271,000 | (900,000 | ) | |||||
| OTHER INCOME (LOSS): | ||||||||
| Interest and dividend income, net | 50,000 | 178,000 | ||||||
| Net realized and unrealized gain (loss) on marketable securities | (46,000 | ) | (322,000 | ) | ||||
| Total other income (loss), net | 4,000 | (144,000 | ) | |||||
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | 12,275,000 | (1,044,000 | ) | |||||
| INCOME TAXES PROVISION: | ||||||||
| Current | 890,000 | — | ||||||
| Deferred taxes, net | 1,724,000 | — | ||||||
| Total income taxes provision | 2,614,000 | — | ||||||
| INCOME (LOSS) BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | 9,661,000 | $ | (1,044,000 | ) | |||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (210,000 | ) | $ | (293,000 | ) | ||
| NET INCOME (LOSS) | $ | 9,451,000 | $ | (1,337,000 | ) | |||
| Net Income (Loss) Per Share | ||||||||
| Basic | $ | 0.39 | $ | (0.06 | ) | |||
| Diluted | $ | 0.38 | $ | (0.06 | ) | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 24,107,879 | 24,029,513 | ||||||
| Diluted | 24,616,379 | 24,029,513 | ||||||
| Cash dividends declared per share | $ | 0.05 | $ | 0.05 | ||||
| NET INCOME (LOSS) | $ | 9,451,000 | $ | (1,337,000 | ) | |||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
| Net unrealized holding gain (loss) on corporate bonds and notes during the period, net of tax | 11,000 | (163,000 | ) | |||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (20,000 | ) | |||||
| Net other comprehensive income (loss) | 11,000 | (183,000 | ) | |||||
| COMPREHENSIVE INCOME (LOSS) | $ | 9,462,000 | $ | (1,520,000 | ) | |||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-5-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2021
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,921,000 | ) | $ | (448,000 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of patents | 144,000 | 141,000 | ||||||
| Stock-based compensation | 157,000 | 271,000 | ||||||
| Loss from equity investment | 498,000 | 149,000 | ||||||
| Deferred tax benefit | — | (103,000 | ) | |||||
| Amortization of right of use asset, net | 41,000 | 67,000 | ||||||
| Unrealized (gain) on marketable securities | (1,000 | ) | (45,000 | ) | ||||
| Changes in operating asset and liabilities: | ||||||||
| Royalty receivables | 215,000 | (197,000 | ) | |||||
| Other current assets | 48,000 | 54,000 | ||||||
| Accounts payable | (384,000 | ) | 133,000 | |||||
| Operating lease obligations | (41,000 | ) | (67,000 | ) | ||||
| Accrued expenses | (829,000 | ) | (1,297,000 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (2,073,000 | ) | (1,342,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | 13,169,000 | 21,611,000 | ||||||
| Purchases of marketable securities | (11,209,000 | ) | (22,291,000 | ) | ||||
| Development of patents | (39,000 | ) | (35,000 | ) | ||||
| Equity investment | — | (1,000,000 | ) | |||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 1,921,000 | (1,715,000 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (1,211,000 | ) | (1,191,000 | ) | ||||
| Value of shares delivered to fund withholding taxes | — | (366,000 | ) | |||||
| Repurchases of common stock, inclusive of commissions | (252,000 | ) | (333,000 | ) | ||||
| Proceeds from exercise of options | — | 107,000 | ||||||
| NET CASH USED IN FINANCING ACTIVITIES: | (1,463,000 | ) | (1,783,000 | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (1,615,000 | ) | (4,840,000 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period | 22,587,000 | 23,763,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 20,972,000 | $ | 18,923,000 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Income taxes | $ | — | $ | — | ||||
| NON-CASH FINANCING ACTIVITY | ||||||||
| Accrued dividend rights on restricted stock units | $ | 19,000 | $ | 27,000 | ||||
| Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||
| Balance – December 31, 2020 | 24,105,879 | $ | 241,000 | $ | 66,124,000 | $ | (17,193,000 | ) | $ | (10,000 | ) | $ | 49,162,000 | |||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,216,000 | ) | — | (1,216,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 59,000 | — | — | 59,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Net other comprehensive gain | — | — | — | — | 11,000 | 11,000 | ||||||||||||||||||
| Net income | — | — | — | 9,451,000 | — | 9,451,000 | ||||||||||||||||||
| Balance – March 31, 2021 | 24,117,129 | $ | 241,000 | $ | 66,183,000 | $ | (8,958,000 | ) | $ | 1,000 | $ | 57,467,000 | ||||||||||||
THREE MONTHS ENDED MARCH 31, 2020
| Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | 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 | |||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-6-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | 9,451,000 | $ | (1,337,000 | ) | |||
| Adjustments to reconcile income (loss) to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of patents | 74,000 | 72,000 | ||||||
| Stock-based compensation | 59,000 | 72,000 | ||||||
| Loss from equity method investment | 210,000 | 293,000 | ||||||
| Amortization of right of use asset, net | — | 32,000 | ||||||
| Unrealized loss on marketable securities | 23,000 | 220,000 | ||||||
| Deferred tax expense | 1,724,000 | — | ||||||
| Changes in operating asset and liabilities: | ||||||||
| Royalty receivables | (18,692,000 | ) | 199,000 | |||||
| Other current assets | 32,000 | 23,000 | ||||||
| Income taxes payable | 890,000 | — | ||||||
| Security deposit | 8,000 | — | ||||||
| Accounts payable | (232,000 | ) | (207,000 | ) | ||||
| Operating lease obligations | — | (33,000 | ) | |||||
| Accrued expenses | 5,078,000 | (872,000 | ) | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (1,375,000 | ) | (1,538,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | 4,499,000 | 10,919,000 | ||||||
| Purchases of marketable securities | (2,293,000 | ) | (4,001,000 | ) | ||||
| Development of patents | (8,000 | ) | (8,000 | ) | ||||
| Convertible note investment | (1,000,000 | ) | — | |||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 1,198,000 | 6,910,000 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (1,206,000 | ) | (1,211,000 | ) | ||||
| Repurchases of common stock, inclusive of commissions | — | (154,000 | ) | |||||
| NET CASH USED IN FINANCING ACTIVITIES: | (1,206,000 | ) | (1,365,000 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,383,000 | ) | 4,007,000 | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 25,505,000 | 22,587,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 24,122,000 | $ | 26,594,000 | ||||
| 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 | $ | 10,000 | $ | 19,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-7-
NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS: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”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company’s financial position as of June 30, 2020,March 31, 2021, and the results of its operations and comprehensive lossincome (loss) for the three and six month periods ended June 30,March 31, 2021 and March 31, 2020, and June 30, 2019, changes in stockholders’ equity for the three and six month periods ended June 30,March 31, 2021 and March 31, 2020, and June 30, 2019, and its cash flows for the sixthree month periods ended June 30, 2020March 31, 2021 and June 30, 2019.March 31, 2020. 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, 20192020 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2020.31, 2021. The results of operations for the three months ended June 30, 2020March 31, 2021 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 eighty-four (84) patents including (i) the remote power patent (the “Remote Power Patent”) covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) the Mirror Worlds patent portfolio (the “Mirror Worlds Patent Portfolio”) relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii) the Cox patent portfolio (the “Cox Patent Portfolio”) relating to enabling technology for identifying media content on the Internet and taking further actions to be performed based on such identification; and (iv) the M2M/IoT patent portfolio (the “M2M/IoT Patent 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)computers.
-8-
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
Until March 7, 2020, when the QoS patents (the “QoS Patents”) covering systems and methods forRemote Power Patent expired, the transmission of audio, video and data over computer and telephony networks in order to achieve high quality of service (QoS). The Company had been actively engaged in licensing its Remote Power Patent (U.S. Patent No. 6,218,930) which expired on. As of March 7, 2020. As of the expiration date,2020, the Company had entered into twenty-seven (27) license agreements with respect to its Remote Power Patent. TheAs a result of the expiration of the Remote Power Patent, the Company no longer receives licensing revenue for its Remote Power Patent that
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
accrues for any period subsequent to the expiration date (March 7, 2020). Notwithstanding the expirationAs a result of the Remote Power Patent, the Company may still receive significant revenue from its Remote Power Patent for periods prior to March 7,decision on September 24, 2020 if is successful on its appeal toof the U.S. Court of Appeals for the Federal Circuit ofto overturn the District Court’s orderjudgment of non-infringement that resulted from the Company’s trial with Hewlett-Packard involving the Remote Power Patent, the Company believed that Cisco Systems, Inc. (“Cisco”), the largest licensee of the Remote Power Patent, was obligated to pay the Company royalties that accrued but were not paid beginning in its trialthe fourth quarter of 2017 through the expiration of the Remote Power Patent. On March 30, 2021, the Company entered into an amendment (the “Amendment”) to the Settlement and License Agreement, dated May 25, 2011, between the Company and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco paid $18,692,000 to the Company in April 2021 to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement to the Company for the period beginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired) with Hewlett Packardrespect to licensing the Remote Power Patent (see below and Note I [1] and Note I [2]I[2] hereof). The Company also believes that NETGEAR, Inc. (“Netgear”), another licensee of the Remote Power Patent, is obligated to pay the Company royalties that accrued but were not paid during the same period. The Company has also entered into two license agreements with respectcommenced litigation against Netgear (see Note I[5] hereof). In addition, the Company may receive additional revenue related to its Mirror WorldsRemote Power Patent Portfolio.from Hewlett-Packard depending upon the outcome of the new trial scheduled to commence on August 2, 2021 as a result of the Federal Circuit’s decision in September 2020 (see Note I[1] hereof).
The Company’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’s patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds Patent Portfolio. In addition, the Company may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
On August 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 denying its motion for a new trial on infringement with respect to the November 13, 2017 jury finding that its Remote Power Patent was not infringed by Hewlett Packard (“HP”). Oral argument on the appeal took place on November 4, 2019 and a decision is pending (see Note I[1] hereof). 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, several of the Company’s largest licensees, including Cisco Systems, Inc. (“Cisco”), its largest licensee, notified the Company in late November 2017 and January 2018 that they would no longer make ongoing royalty payments to the Company pursuant to their license agreements. If the Company successfully overturns the District Court order of non-infringement in its appeal to the U.S. Court of Appeals for the Federal Circuit, certain licensees of the Remote Power Patent, including Cisco, will be obligated to pay the Company significant royalties that accrued but were not paid beginning in the fourth quarter of 2017 through March 7, 2020 (the expiration of the Remote Power Patent). If the Company is unable to reverse the District Court order of non-infringement on appeal, the Company will not likely receive significant licensing revenue from Cisco and certain other licensees for such period unless the Company obtains an arbitration ruling that the District Court order does not affect the obligation of Cisco and other licensees to pay the Company royalties under applicable license agreements or the Company reaches a satisfactory resolution with such licensees (see Note I[1] and Note I[2] hereof).
Consistent with the Company’s revenue recognition policy (see Note B[4] hereof), the Company did not record revenue for 2018, 2019 and for the three and six months ended June 30, 2020 from certain licensees, including Cisco, who notified the Company they would not pay the Company ongoing royalties as a result of the HP jury verdict. The Company disagrees with the position taken by such licensees and may pursue arbitration if it does not achieve a satisfactory resolution (see Notes I[1] and I[2] hereof).
Note NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary[1] Use of Significant Accounting PoliciesEstimates 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’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’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based.
-9- NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) [2] Cash and Cash Equivalents
|
The Company maintains cash deposits in high quality financial institutions insured by the Federal Deposit Insurance Corporation(“FDIC”). Accounts at each institution are insured by the FDIC up to $250,000. At June 30, 2020,March 31, 2021, the Company maintained a cash balance of $19,122,000$4,241,000 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’s marketable securities are comprised of certificates of deposit with original maturity greater than three months from date of purchase, fixed income mutual funds, and corporate bonds and notes (see Note F).notes. At June 30, 2020,March 31, 2021, included in marketable securities, the Company had aggregate certificates of deposit of $9,516,000$2,250,000 at financial institutions which were within the FDIC limit. The Company’s marketable securities are measured at fair value and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on certificates of deposit and fixed income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the unaudited condensed consolidated statements of operations and comprehensive 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’ 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.
[4]Revenue Recognition
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.
Note B – Summary of Significant Accounting Policies (continued)
The Company determines revenue recognition through the following steps:
Revenue disaggregated by source isAll of the Company’s revenue for the three months ended March 31, 2021 was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Fully-Paid - Licenses | $ | ― | $ | ― | $ | ― | $ | 130,000 | (1) | |||||||
| Royalty Bearing - Licenses | 55,000 | 599,000 | 216,000 | 1,075,000 | ||||||||||||
| Total Revenue | $ | 55,000 | $ | 599,000 | $ | 216,000 | $ | 1,205,000 | ||||||||
__________________________
(1) Includes conversiona result of an existingresolution of a contractual dispute with a licensee to pay royalties to the Company pursuant to a royalty bearing license to a fully-paid license.
for the Remote Power Patent for the period beginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired) (see Note I[2] hereof).
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.
-10-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of settlement of litigation related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a “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 Bearing License”).
The Company’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.
Note B – Summary of Significant Accounting Policies (continued)
Ongoing Royalty Payments: Certain of the Company’s revenue from Royalty Bearing Licenses results from the calculation of royalties based on a licensee’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.
The Company recognizes revenue from their Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement, and in accordance with the royalty recognition constraint that applies to licenses of IP for which some or all of the consideration is in the form of sales or usage based royalty. Consequently, the Company recognizes revenue at the later of when (1) the subsequent sale occurs or (2) the performance obligation to which some or all of the sales based royalty has been satisfied.
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.
-11-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
[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’s share of an investee’s income or loss. The Company’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount of the equity investment is recognized in profit or loss.
[6]Patents
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 and six months ended June 30, 2020March 31, 2021 and 20192020 contingent legal fees payable to patent litigation counsel (see Note G[1] hereof), any other contractual payments to third parties 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).
Note B – Summary of Significant Accounting Policies (continued)
[8] 7]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 of March 31, 2021.June 30
-12-
, 2020 and 2019.NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
U.S. federal, state and local income tax returns prior to 20162017 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 was advised by the Internal Revenue Service that the examination was concluded with no change to the Company’s 2016 federal tax return.
In March 2020, the Company received notices of tax assessments for 2018 from the New York State Department of Taxation in the 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 provide additional information. On May 13, 2020, the Company was advised that the amended return was accepted and there was no tax with respect to the assessments due.
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“PHC Income”UPHCI”), 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)(1) that more than 50% in value of its outstanding shares must be owned directly or indirectly by 5five or fewer individuals at any time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the “Ownership Test”) and (ii)(2) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). During Julythe second half of 2020, based upon available shareholder information and certain assumptions as to the attribution of stock ownership, information, the Company may have satisfied the Ownership Test. As a
Note B – Summary of Significant Accounting Policies (continued)
result,In addition, the Company has engaged tax counselmay have satisfied the Income Test for 2020. However, the Company did not have UPHCI for 2020 because the Company did not have taxable income as adjusted for purposes of computing UPHCI for 2020. Based on net income of $9,451,000 for the three months ended March 31, 2021, the Company is likely to further evaluate whetherhave UPHCI for 2021 if it has satisfiedsatisfies both the Ownership Test and whether potential future income generated by the Company constitutes “royalties” within the meaning of the Income Test as well as other related PHC issues.for 2021. If the Company satisfies the Ownership Test and achieves net incomethe Income Test for the year ended December 31, 20202021, and has UPHCI for 2021 (or forin any subsequent year in which the Ownership Test is also satisfied) that is determined to satisfy the Income Test, the Company would constitute a PHC and for the year ended December 31, 2020 (and each subsequent year in which the Ownership Test is alsotests are satisfied), the Company would be subject to a 20% tax on the amount of any PHC IncomeUPHCI that it does not distribute to its shareholders. WhileIn the event that the Company is determined to be a Personal Holding Company in 2021 (satisfying both the Ownership Test and Income Test) and the Company has sustained a net loss of $1,921,000UPHCI for the six month period ended June 30, 2020, it is possible that2021, the Company could achieve significant income for the year ended December 31, 2020 in the event of favorable outcomes of pending litigation and receipt of significant revenue including, but not limitedmay issue a special cash dividend to its appealshareholders in an amount equal to the U.S. Court of Appeals forUPHCI rather than incur the Federal Circuit of the District Court’s order of non-infringement in its trial with HP (see Note I[1] and Note I[2] hereof). If any such net income were achieved for the year ended December 31, 2020 and determined to be PHC Income, it would be subject to a 20% tax on the amount of any PHC Income the Company does not distribute to its shareholders.tax.
[9] Stock-Based Compensation
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all stock-based compensation to employees, including grants of employee stock options and restricted stock units, to be recognized in the condensed consolidated statements of operations and comprehensive loss based on their8] 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’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’s stock-based compensation).
[10] Earnings Per Share
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).
Note B – Summary of Significant Accounting Policies (continued)
[11] Fair Value Measurements
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.
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’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’s marketable securities are classified within Level 1 because they are valued using quoted market prices in an active market (see Marketable 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 June 30, 2020 and 2019, there was no impairment to the Company’s patents and equity investment.
The Company’s equity method investment in ILiAD Biotechnologies, LLC (“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.
[13] Dividend Policy
Cash dividends are recorded when declared by the Company’s Board of Directors. Common stock dividends are charged against retained earnings when declared or paid (see Note M hereof).
Note B – Summary of Significant Accounting Policies (continued)
[14]New Accounting Standards
Recently Issued 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. EarlyThe adoption is permitted, including adoption in any interim period for which financial statementsof this standard did not have not been issued. The Company is currently evaluatinga material effect on the impact the standard will have on itsCompany’s consolidated financial statements.
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
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NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
accounting for these 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 interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for which financial statements have not yet been issued. The Company is currently evaluating the impact the standard will have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“ASC 820”), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 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 adoption of this standard did not have a material impacteffect on the Company’s condensed consolidated financial statements.
Codification Improvements
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in Section B of this Update improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section. Section C of this Update contains Codification improvements that vary in nature. The amendments in this Update should be applied retrospectively. This Update is effective for annual periods beginning after December 15, 2020. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
NOTE C – PATENTS
The Company’s intangible assets at June 30March 31, 20202021 include patents with estimated remaining economic useful lives ranging from 1.250.50 to 13.2512.50 years. For all periods presented, all of the Company’s patents were subject to amortization. The gross carrying amounts and accumulated amortization related to acquired intangible assets as of June 30March 31, 20202021 and December 31, 20192020 were as follows:
| June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
| Gross carrying amount – patents | $ | 7,835,000 | $ | 7,797,000 | $ | 7,856,000 | $ | 7,848,000 | ||||||||
| Accumulated amortization – patents | (6,121,000 | ) | (5,978,000 | ) | (6,344,000 | ) | (6,270,000 | ) | ||||||||
| Patents, net | $ | 1,714,000 | $ | 1,819,000 | $ | 1,512,000 | $ | 1,578,000 | ||||||||
Amortization expense for the three months ended June 30March 31, 20202021 and June 30, 20192020 was $72,00074,000 and $87,000, respectively. Amortization expense for the six months ended June 30, 2020 and June 30, 2019, was $144,000 and $141,000$72,000, respectively. Future amortization of intangible assets, net is as follows:
| Twelve Months Ended June 30, | ||||||
| 2021 | $ | 293,000 | ||||
| 2022 | 293,000 | |||||
| 2023 | 293,000 | |||||
| 2024 | 118,000 | |||||
| 2025 and thereafter | 717,000 | |||||
| Total | $ | 1,714,000 | ||||
| Twelve Months Ended March 31, | ||||||
| 2022 | $ | 294,000 | ||||
| 2023 | 294,000 | |||||
| 2024 | 230,000 | |||||
| 2025 | 83,000 | |||||
| 2026 and thereafter | 611,000 | |||||
| Total | $ | 1,512,000 | ||||
The Company’s Remote Power Patent expired on March 7, 2020. All of the patents within the Company’s Mirror Worlds Patent Portfolio have 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’s M2M/IoT Patent Portfolio range from September 2033 to May 2034.
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NOTE D – STOCK-BASED COMPENSATION
Restricted Stock Units
DuringThe 2013 Stock Incentive Plan (“2013 Plan”) provides for the six months ended June 30, 2020,grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock units. Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as provided, the 2013 Plan provides for an aggregate of 2,600,000 shares of the Company’s common stock to be available for distribution. The Company’s Compensation Committee generally has the authority to administer the 2013 Plan, determine participants who will be granted awards, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2013 Plan may be granted to employees, directors and consultants of the Company issued 15,000 restricted stock units (“RSUs”) to eachand its subsidiaries. As 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 3,750March 31, 2021, there are 1,832,308 shares of common stock on March 15, 2020, June 15, 2020, September 15, 2020 and December 15, 2020, subject to continued service onavailable for issuance under the Board of Directors.
During the six months ended June 30, 2019, the Company issued 15,000 RSUs to each of its three non-management directors as an annual grant for 2019 for service on the Company’s Board of Directors. The RSUs vested 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.
NOTE D – STOCK-BASED COMPENSATION (CONTINUED)2013 Plan.
A summary of restricted stock unit activity for the sixthree months ended June 30, 2020March 31, 2021 is as follows (each restricted stock unit issued by the Company represents the right to receive one share of the Company’s common stock):
| Number of Shares | Weighted-Average Grant Date Fair Value | Number of Shares | Weighted-Average Grant Date Fair Value | |||||||||||||
| Balance of restricted stock units outstanding at December 31, 2019 | 340,000 | $ | 2.15 | |||||||||||||
| Balance of restricted stock units outstanding at December 31, 2020 | 162,500 | $ | 2.25 | |||||||||||||
| Grants of restricted stock units | 45,000 | 2.30 | 45,000 | 3.51 | ||||||||||||
| Vested restricted stock units | (22,500 | ) | 2.30 | (11,250 | ) | (3.51 | ) | |||||||||
| Balance of unvested restricted stock units at June 30, 2020 | 362,500 | $ | 2.16 | |||||||||||||
| Balance of unvested restricted stock units at March 31, 2021 | 196,250 | $ | 2.47 | |||||||||||||
Restricted stock unit compensation expense was $85,000$59,000 and $127,000$72,000 for the three months ended June 30,March 31, 2021 and 2020, and June 30, 2019, respectively. Restricted stock unit compensation expense was $157,000 and $271,000 for the six months ended June 30, 2020 and June 30, 2019, respectively.
The Company has an aggregate of $170,000$232,000 of unrecognized restricted stock unit compensation as of June 30, 2020March 31, 2021 to be expensed over a weighted average period of 0.671.02 years.
All of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of June 30, 2020,March 31, 2021, there was $100,000$63,000 accrued for dividend equivalent rights. As of December 31, 2019,2020, there was $90,000$53,000 accrued for dividend equivalent rights.
Stock Options
There were no stock option grants during the sixthree months ended June 30, 2020March 31, 2021 and June 30, 2019.2020. The following table presents information relating to all stock options outstanding and exercisable at June 30March 31, 2020:2021:
Options | Weighted Average Exercise | Weighted | Options |
| 500,000 | $1.19 | 2.34 | 500,000 |
Options | Weighted Average Exercise | Weighted | Options |
| 500,000 | $1.19 | 1.59 | 500,000 |
The Company had no recorded stock-based compensation related to stock option grants for the sixthree months ended June 30, 2020March 31, 2021 and June 30, 2019.2020.
The Company had no unrecognized stock-based compensation cost as of June 30, 2020.March 31, 2021. The aggregate intrinsic value of stock options exercisable at June 30, 2020March 31, 2021 was $490,000.$965,000.
During the six months ended June 30, 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 June 30, 2019, stock options to purchase an aggregate of 925,000 shares were exercised by executive officers of the Company and a consultant (750,000 shares at an exercise price of $0.83 per share by the Company’s Chairman and Chief Executive Officer, 50,000 shares at an exercise price of $1.65 per share by each of the Company’s Chief Financial Officer and Executive Vice President and 75,000 shares at an exercise price of $1.65 per share by a consultant). With respect to such options, options to purchase an aggregate of 859,849 shares
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NOTE D – STOCK-BASED COMPENSATION (CONTINUED)
were exercised on a net exercise (cashless) basis by the Company’s Chairman and Chief Executive Officer (750,000 shares), the Company’s Executive Vice President (34,849 shares) and a consultant (75,000 shares) resulting in net shares (after delivery of shares for withholding taxes) of an aggregate of 328,111 issued to the Company’s Chairman and Chief Executive Officer, 27,713 net shares issued to the Company’s Executive Vice President and 28,824 net shares issued to the consultant.
NOTE E – LOSSEARNINGS (LOSS) PER SHARE
Basic lossearnings (loss) per share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted earnings (loss) per share data includes the dilutive effects of options, warrants and restricted stock units. PotentialPotentially dilutive shares of 862,500696,250 and 1,132,500873,750 at June 30,March 31, 2021 and 2020, and June 30, 2019, respectively, consisted of options and restricted stock units.
Computations of basic and diluted weighted average common shares outstanding were as follows:
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Weighted-average common shares outstanding – basic | 23,987,715 | 23,830,367 | 23,945,916 | 23,917,563 | ||||||||||||
| Dilutive effect of options, warrants and restricted stock units | — | — | — | — | ||||||||||||
| Weighted-average common shares outstanding – diluted | 23,987,715 | 23,830,367 | 23,945,916 | 23,917,563 | ||||||||||||
| Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | 862,500 | 1,132,500 | 862,500 | 1,132,500 | ||||||||||||
Three Months Ended | ||||||||
2021 | 2020 | |||||||
| Weighted-average common shares outstanding – basic | 24,107,879 | 24,029,513 | ||||||
| Dilutive effect of options and restricted stock units | 508,500 | — | ||||||
| Weighted-average common shares outstanding – diluted | 24,616,379 | 24,029,513 | ||||||
| Options and restricted stock units excluded from the computation of diluted earnings (loss) per share because the effect of inclusion would have been anti-dilutive | — | 873,750 | ||||||
NOTE F – MARKETABLE SECURITIES
Marketable securities as of June 30March 31, 20202021 and December 31, 20192020 were composed of:
| June 30, 2020 | March 31, 2021 | |||||||||||||||||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
| Certificates of deposit | $ | 9,516,000 | $ | 56,000 | $ | — | $ | 9,572,000 | $ | 2,279,000 | $ | — | $ | (7,000 | ) | $ | 2,272,000 | |||||||||||||||
| Fixed income mutual funds | 8,692,000 | — | (64,000 | ) | 8,628,000 | 11,377,000 | — | (16,000 | ) | 11,361,000 | ||||||||||||||||||||||
| Corporate bonds and notes | 5,492,000 | 88,000 | (17,000 | ) | 5,563,000 | 3,515,000 | 1,000 | — | 3,516,000 | |||||||||||||||||||||||
| Total marketable securities | $ | 23,700,000 | $ | 144,000 | $ | (81,000 | ) | $ | 23,763,000 | $ | 17,171,000 | $ | 1,000 | $ | (23,000 | ) | $ | 17,149,000 | ||||||||||||||
| 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 | |||||||
| ||||||||||||||||
| December 31, 2020 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | 3,534,000 | $ | 7,000 | $ | — | $ | 3,541,000 | ||||||||
| Fixed income mutual funds | 11,255,000 | 80,000 | — | 11,335,000 | ||||||||||||
| Corporate bonds and notes | 4,500,000 | 18,000 | (28,000 | ) | 4,490,000 | |||||||||||
| Total marketable securities | $ | 19,289,000 | $ | 105,000 | $ | (28,000 | ) | $ | 19,366,000 | |||||||
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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’s Mirror Worlds Patent Portfolio (see Note I[4] hereof). The terms of the Company’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 U.S. District Court for the Southern District of New York relating to certain patents within the Company’s Cox Patent Portfolio (see Note I[3] hereof). The terms of the Company’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’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 June 30,March 31, 2021 and 2020, and June 30, 2019, the Company incurred aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $18,000$-0- and $136,000, respectively. For the six months ended June 30, 2020 and June 30, 2019, the Company incurred contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $37,000 and $244,000,$19,000, respectively. As of June 30, 2020March 31, 2021 and for the year ended December 31, 2019,2020, the Company included in accrued expenses aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $36,000 and $485,000, respectively.$38,000. The Company is responsible for a certain portion of the expenses incurred with respect to the litigation. As of March 31, 2021, the Company had accrued expenses of $887,000 owed to Dovel & Luner, LLP 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’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). With respect to royalty payments received from Cisco in accordance with the Company’s settlementSettlement and license agreementLicense Agreement with Cisco, the Company has an obligation to pay Dovel & Luner, LLP (including local counsel) 24% of such royalties received. DuringFor the three and six months ended June 30,March 31, 2021 and 2020, and June 30, 2019, the Company did not incur anyincurred aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $4,485,000 and $-0-, respectively. The Company is responsible for a portion of the expenses incurred with respect to the litigation. As of March 31, 2021, the Company had accrued expenses of $4,490,000 (consisting of contingency fees and costs) owed to Dovel & Luner, LLP with respect to the litigation.
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NOTE G – COMMITMENTS AND CONTINGENCIES (CONTINUED)(continued)
[2] Patent Acquisitions
In connection with the Company’s acquisition of its Cox Patent 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 patent portfolio.
As part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition Interface, LLC (“Recognition”) pursuant to which Recognitiitioonn received from the Company an interest in the net proceeds realized from the monetization of the Mirror Worlds Patent Portfolio, as follows: (i) 10% of the first $125 million of net proceeds; (ii) 15% of the next $125 million of net proceeds; and (iii) 20% of any portion of the net proceeds in excess of $250 million. Since entering into the agreement with Recognition in May 2013, the Company has paid Recognition an aggregate of $3,127,000 with respect to such net proceeds interest related to the Mirror Worlds Patent Portfolio. No such payments were made by the Company to Recognition during the three months ended June 30, 2020March 31, 2021 and June 30, 2019.2020.
In connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as defined) related to the patent portfolio. In addition, 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.
[3] Lease Agreements
The Company leases its principal office in New York City at a monthly base rate of approximately $3,900 which lease expired on May 31, 2020 and is currently occupied on a month-to-month basis. The Company also leases office space in New Canaan, Connecticut (which was to expire on September 30, 2019) at a base rent (inclusive of utilities) of $7,850$7,300 per month. The Connecticut lease was extended (in September 2019) throughmonth which expired on March 31, 2020 and thereafteris currently occupied on a month-to-month basis.
Under ASC 842 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”) assets and related lease obligation.
Activity related to the Company’s operating leases was as follows:
| Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||
| Operating lease expense | $ | 8,000 | $ | 41,000 | ||||
| Cash paid for amounts included in the measurement of operating lease obligations | $ | 8,000 | $ | 41,000 | ||||
NOTE G – COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company’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% for all recognized operating lease right-of use assets as of December 31, 2019. ROU lease assets and related lease obligations for the Company’s operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
| As of | As of | |||||||
| June 30, 2020 | December 31, 2019 | |||||||
| Operating lease right-of-use assets | $ | — | $ | 41,000 | ||||
| Operating lease obligations – current | $ | — | $ | 41,000 | ||||
| Total lease obligations | $ | — | $ | 41,000 | ||||
| Weighted average remaining lease term (in months) | — | 4 months | ||||||
| Weighted average discount rate | — | 5.5% | ||||||
As of June 30, 2020,March 31, 2021, there were no future lease payments included in the measurement of operating lease liabilities on the unaudited condensed consolidated balance sheet as all of the Company’s leases are now on a month-to-month basis. In accordance with ASC 842 and the Company’s policy, the Company does not recognize an operating lease right-of-use asset and associated lease obligation for leases with an initial term of less than 12 months.
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
[1]On July 14, 2016, the Company entered into a new employment 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 (“RSUs”). The Agreement provided for the 750,000625,000 of such RSUs to vest in the three tranches,vested as follows: (i) 250,000of March 31, 2021 and 125,000 RSUs shallwill vest on July 14, 2018,2021, subject to the Chairman and Chief Executive Officer’s continued employment by the Company through the vesting date (the “Employment Condition”); (ii) 250,000 RSUs shall vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment, subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2) the Company’s common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $3.25 per share (subject to adjustment for stock splits) at any time during the term of employment; and (iii) 250,000 RSUs vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2) the Company’s common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $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.
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)(continued)
Under the terms of the Agreement, so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal to 5% of the Company’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’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”). During the three months ended June 30,March 31, 2021 and 2020, and June 30, 2019, the Chairman and Chief Executive Officer earned Incentive Compensation of $2,000$935,000 and $30,000, respectively. During the six months ended June 30, 2020 and June 30, 2019, the Chairman and Chief Executive Officer earned incentive compensation $10,000 and $60,000,$8,000, respectively. At June 30, 2020March 31, 2021 and December 31, 2019, $10,0002020, $935,000 and $92,000$2,000 of such compensation were included in accrued payroll 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’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’s employment has not been terminated by the Company “For Cause” (as defined) or terminated by him without “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’s employment is terminated by the Company “Other Than For Cause” (as defined) or by him for “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.
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 by us “Other Than For 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” by the Company or “Without Good Reason” by the Chairman and Chief Executive Officer.
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)
[2] The Company’s Chief Financial Officer serves on an at-will basis at an annual base salary of $175,000 (increased in June 2016 from $157,500) and is eligible to receive incentive or bonus compensation on an annual basis in the discretion of the Company’s Compensation Committee. In the event the Chief Financial Officer’s employment is terminated without “Good Cause” (as defined), he shall receive (i) (a) 6 months base salary or (b) 12 months base salary in the event of a termination without “Good Cause” within 6 months following a “Change of Control” of the Company (as defined) and (ii) accelerated vesting of all remaining unvested shares underlying his options or any other awards he may receive in the future.
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
[3] The Company’s Executive Vice President serves on an at-will basis at an annual base salary of $200,000 and is eligible to receive incentive or bonus compensation on an annual basis in the discretion of the Company’s Compensation Committee.
NoteNOTE I – Legal ProceedingsLEGAL 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”) 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’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’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’s motion for a new trial on infringement. On August 30, 2018, the Company appealed the District Court’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’s order that the Remote Power Patent is valid as a matter of law. Oral argument onOn September 24, 2020, the appeal was held on November 4, 2019 and a decision is pending. IfU.S. Court of Appeals for the Company is unable to reverseFederal Circuit overturned the judgment of non-infringement of the U.S. District Court of the Eastern District of Texas. The Federal Circuit also vacated the District Court order on appeal, it is not likely that the Company will receive significant licensing revenue from Cisco and certain other licensees for the period beginning in the fourth quarterjudgment of 2017 through the date of expirationvalidity of the Remote Power Patent (March 7, 2020) unlessPatent. The Federal Circuit has remanded the Company obtains an arbitration ruling thatcase to the District Court order does not affectfor a new trial on infringement against HP and further proceedings on validity. On May 7, 2021, the obligationU.S. District Court for the Eastern District of CiscoTexas, Tyler Division, granted the Company’s motion for new trial and certain other licenseesdenied the Company’s request for judgment as a matter of law on validity (which will be a part of the trial). In addition, the District Court scheduled the trial to pay the Company royalties under applicable license agreements or the Company reaches a satisfactory resolution with such licensees.commence on August 2, 2021.
[2]In accordance with the Settlement and License Agreement, dated May 25, 2011, between the Company and Cisco (the “Agreement”), Cisco became obligated to pay the Company royalties (which began in the first quarter of 2011) based on its sales of PoE products up to maximum royalty payments per year of $9 million beginning in 2016 for the remaining term of the patent. The royalty payments from Cisco arewere subject to certain conditions including the continued validity of certain claims of the Remote Power Patent or a finding that a third party’s PoE products are found not to infringe the Remote
Note I – Legal Proceedings (continued)
Power Patent and such finding applies to the applicable licensee’s licensed products. As a result of the HP jury verdict in November 2017 several of the Company’s(referenced above), Cisco, our largest licensees, including Cisco, its largest licensee, and Netgear notified the Company in late November 2017 and January 2018 that they will no longer make ongoing royalty payments to the Company pursuant to their license agreements. IfAs a result of the Company successfully overturnsdecision on September 24, 2020 of the U.S. Court of Appeals for the Federal Circuit to overturn the District CourtCourt’s judgment of non-infringement in the appeal to the Federal Circuit, certain licensees ofour trial with Hewlett-Packard involving the Remote Power Patent, includingthe Company believed that Cisco will bewas obligated to pay the Company all royalties that accrued but were not paid beginning in the fourth quarter of 2017 through
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NOTE I – LEGAL PROCEEDINGS(continued)
the expiration of the Remote Power Patent. On March 2020. If30, 2021, the Company is unableentered into an amendment (the “Amendment”) to reverse the District Court order of non-infringement on appeal,Settlement and License Agreement, dated May 25, 2011, between the Company and Cisco and such other licensees are not likely(the “Agreement”). Pursuant to the Amendment, Cisco paid $18,692,000 to the Company to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement to the Company royalties for suchthe period unlessbeginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired) with respect to licensing the Remote Power Patent. The Company obtains an arbitration ruling that the District Court order of non-infringement does not affect the obligation of such licensees to pay the Company royalties or the Company reaches a satisfactory resolution with such licenseeshas commenced litigation against Netgear (see Note I[5] hereof).
[3] On April 4, 2014 and December 3, 2014, the Company initiated litigation against Google Inc. (“Google”) and YouTube, LLC (“YouTube”) in the U.S. District Court for the Southern District of New York for infringement of several of its patents within its Cox Patent Portfolio acquired from Dr. Cox (see Note G[2] hereof) which relate to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to infringe certain of the Company’s patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s Content ID system. In May 2014, the defendants filed an answer to the complaint and asserted defenses of non-infringement and invalidity. The above referenced litigations that the Company 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 court ordered stays which were in effect from July 2, 2015 until January 2, 2019 as a result of proceedings at the Patent Trial and Appeal Board (PTAB) and the appeals of PTAB Final Written Decisions to the U.S 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 January 2019, the two litigations against Google and YouTube were consolidated. A Markman hearing (claim construction) was held on November 21, 2019 and a ruling has not yet been rendered.
[4]On May 9, 2017, Mirror Worlds Technologies, LLC, the Company’s wholly-owned subsidiary, initiated litigation against Facebook, Inc. (“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 the Company’s Mirror Worlds Patent Portfolio). The lawsuit alleged that the asserted patents are infringed by Facebook’s core technologies that enable Facebook’s Newsfeed and Timeline features. The lawsuit further alleged that Facebook’s unauthorized use of the stream-based solutions of the Company’s asserted patents has helped Facebook become the most popular social networking site in the world. The Company 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’s motion for summary judgment of non-infringement and dismissed the case. On August 17, 2018, the Company filed a Notice of Appeal to appeal the summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment finding of the District Court and remanded the litigation to the Southern District of New York for further proceedings.
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NoteNOTE I – Legal Proceedings LEGAL PROCEEDINGS(continued)
[5]On November 13, 2018,December 15, 2020, the Company filed a lawsuit against Dell, Inc.Netgear in the DistrictSupreme Court 241st Judicial District, Smithof the State of New York, County Texas,of New York, for breach of a settlementSettlement and license agreement,License Agreement, dated August 15, 2016,May 22, 2009, with the Company as a result of Dell’sfor failure to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of Dell’sNetgear’s PoE products. The Company believes Dell is obligated to pay the Company 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 2020. On December 7, 2018, Dell filed its Answer and Counterclaim. Dell denied the claim asserted by the Company and asserted a counterclaim in excess of $1,000,000.
[6] On January 28, 2019, Dell brought a motion to stay the case as a result of the Company’s 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’s appeal of the District Court’s order that the Remote Power Patent is valid as a matter of law. Dell’s motion to stay the litigation was denied by the Court on May 7, 2019. On December 19, 2019,2021, the Company filed a motionlawsuit against Plantronics, Inc., the successor entity to Polycom, Inc., in the Supreme Court of the State of California, County of Santa Clara, for summary judgment. On March 25, 2020, the Court granted the Company’s motion for summary judgment on its breach of contract claima Settlement and denied Dell’s motion for summary judgment on its breach of contract claim. As a result of the summary judgment decision in favor ofLicense Agreement, dated September 29, 2016, with the Company it isfor the Company’s position that Dell is now obligatedfailure of Plantronics and Polycom to paymake royalty payments, and provide corresponding royalty reports, to the Company all prior unpaid royalties that accrued prior to and afterbased on sales of PoE products.
NOTE J – INVESTMENT
During the HP jury verdict (November 13, 2017)period December 2018 through March 7, 2020 (see Note N[2] – Subsequent Events).
Note J – Equity Investment
On December 18, 2018,2021, the Company agreed to makemade an aggregate investment of up to $5,000,000$6,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”)ILiAD), a privately held developmentclinical 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 aggregate investment of $6,000,000 by the Company was partincludes a $5,000,000 equity investment and a $1,000,000 investment in a convertible note (see below). At March 31, 2021, the Company owned approximately 9.5% of a financing of up to approximately $16,200,000 of Class Cthe outstanding units of ILiAD. The Company made an initial investmentILiAD on a non-fully diluted basis and 7.6% of $2,500,000 at the initial closing in December 2018 which was followed by additional investments of $1,000,000 and $1,500,000 in May and August 2019, respectively, which were triggered by ILiAD’s receipt of an “allowed to proceed” notice from the FDA permitting ILiAD to advanceoutstanding units on a fully diluted basis (after giving effect to the phase 2b clinical studyexercise of its BPZE1 vaccine.all outstanding options and warrants). In connection with its investment, the Company’s Chairman and Chief Executive Officer obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members. 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.
In AprilOn September 29, 2020, ILiAD advisedpresented positive topline Phase 2b trial results of its equity holders, includinglead pertussis (whooping cough) vaccine candidate BPZE1 at the virtual World Vaccine Congress. BPZE1 met both primary endpoints of overall safety and induction of mucosal immunity. Specifically, a single vaccination with BPZE1 prevented 90% of colonization by revaccination/challenge three months later (only 10% colonization observed). BPZE1 was differentiated in its ability to demonstrate induction of broad mucosal immunity against whole cell extract (WCE) and pertussis-specific protein antibodies. In addition, BPZE1 induced both IgG and IgA systemic immunity using WCE and pertussis specific protein assays, with durability of response measured to end of study (nine months).
On March 12, 2021, the Company that it had received results frominvested an additional $1,000,000 in ILiAD as part of a private offering of up to $23,500,000 of convertible notes (the “Notes”). The Notes have a maturity of three years with interest accruing at 6% per annum. The Notes are required to be converted into a Qualified Financing (minimum financing of $15 million) at the Phase 2b studylesser of BPZE1 which indicated excellent safety and colonization results.(i) 80% of the price paid per unit in such offering or (ii) a price based on an enterprise value of $176,000,000. In addition, the Notes shall convert in the event of a merger at the lower of an enterprise value of $176,000,000 or the stated valuation of ILiAD further advised that it does not yetin the merger transaction. In the event of a change-in-control, noteholders will also have final results for immunological data as certain aspects of laboratory assays (teststhe option to measure antibodies) require further analysis. At June 30, 2020,have the Notes repaid except in a Qualified Offering or a stock-for-stock merger. The convertible note held by the Company owned approximately 9.5%in the principal amount of $1,000,000 has been recorded on the outstanding units of ILiAD on a non-fully diluted basis and 8.3% of the outstanding units on a fully diluted basis (after giving effect to the exercise of all outstanding options and warrants)Company’s balance sheet at March 31, 2021 as “Convertible note investment”.
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NoteNOTE J – Equity InvestmentINVESTMENT (continued)
The Company’s investment in ILiAD is accounted for as an equity method investment in accordance with ASC 323, Investments — Equity Method and Joint Ventures as the Company has the ability to exercise significant influence, but not control, over ILiAD. The Company’s investment in ILiAD is measured at cost minus impairment, if any, plus or minus the Company’s share of ILiAD’s income or loss. The Company’s proportionate share of the income or loss from its investment in ILiAD is recognized on a one-quarter lag. At MarchDecember 31, 2020, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis. For the three and six months ended June 30, 2020,March 31, 2021, the Company recorded a net loss from its equity investment in ILiAD totaling $205,000 and $498,000, respectively.$210,000.
The difference between the Company’s share of equity in ILiAD’s net assets and the equity investment carrying value reported on the Company’s unaudited condensed consolidated balance sheet at June 30, 2020March 31, 2021 is due to an excess amount paid over the book value of the equity investment totaling approximately $5,000,000 which is accounted for as equity method goodwill.
NoteNOTE K – Stock RepurchasesCONCENTRATIONS
On June 11, 2019, the Board of Directors authorized an extension and increase of the Company’s share repurchase program (the “Share Repurchase Program”) to repurchase up to $5,000,000 of common stock over the subsequent 24 month period (for a total authorization of approximately $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’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. Since inception of the Share Repurchase Program through June 30, 2020, the Company has repurchased an aggregate of 8,605,659 shares of its common stock at an aggregate cost of $16,156,005 (exclusive of commissions) or an average per share price of $1.88. All such repurchased shares have been cancelled. During the three months ended June 30, 2020, the Company repurchased 43,589 shares of its common stock at an aggregate cost of $97,533 (exclusive of commissions) or an average per share price of $2.24. During the six months ended June 30, 2020, the Company repurchased 115,889 shares of its common stock at an aggregate cost of $249,158 (exclusive of commissions) or an average per share price of $2.15. At June 30, 2020, the dollar value of remaining shares that may be repurchased under the Share Repurchase Program was $4,196,100.
Note L– Concentrations
Revenue from the Company’s Remote Power Patent constituted 100% of the Company’s revenue for the three and six months ended June 30, 2020 and June 30, 2019. Revenue from one licensee constituted 100% of the Company’s revenue for the three months ended June 30, 2020.March 31, 2021. Revenue from fourfive licensees constituted approximately 90% of the Company’s revenue for the six months ended June 30, 2020. Revenue from four licensees constituted approximately 86%99% of the Company’s revenue for the three months ended June 30, 2019 and revenue from four licensees constituted approximately 79% of the Company’s revenue for the six months ended June 30, 2019.March 31, 2020. At June 30, 2020, the Company receivables from two licenseesMarch 31, 2021, one licensee constituted 100% of the royalties receivables. AtCompany’s royalty receivables and at December 31, 2019, royalty receivables from four licensees constituted in2020 the aggregate approximately 90% of the Company’sCompany had no royalty receivables.
Note MNOTE L – Dividend PolicyDIVIDEND POLICY
On June 9, 2020, the Board of Directors of the Company approved the continuation of the Company’s dividend policy which consists of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. The Company’s dividend policy was previously contingent upon receipt of revenue from its Remote Power Patent through March 7, 2020 (the expiration of the patent). On February 15, 2020,23, 2021, the Company’s Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of March 31, 20202021 to all common shareholders of record as of March 16, 2020.2021. The Company’s dividend policy undergoes a periodic review by the Board of Directors and is subject to change at any time depending upon the Company’s earnings, financial requirements and other factors existing at the time.
Note N – Subsequent Events
[1] On July 14, 2020, our Chairman and Chief Executive Officer vested 125,000 shares of common stock pursuant to restricted stock units in accordance with his employment agreement (see Note H[1] hereof).
[2] On July 28, 2020, the Company agreed to settle its litigation against Dell, Inc. pending in the District Court, 241st Judicial District Smith County, Texas (see Note I[5] hereof). Under the terms of the settlement, Dell paid $4,150,000 to the Company on August 7, 2020 in full settlement of the litigation.
ITEM 2: MANAGEMENT’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”, “EXPECTS”, “ANTICIPATES”, “INTENDS” OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED ON PAGES 15-26 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019 FILED WITH THE SEC ON MARCH 20, 2020, PAGE 36 OF OUR QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2020 FILED WITH THE SEC ON MAY 19, 2020 AND 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 eighty-four (84) patents including: (i) our remote power patent (“Remote Power Patent”) covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) our Mirror Worlds patent portfolio (the “Mirror Worlds Patent 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 Patent Portfolio”) relating to enabling technology for identifying media content on the Internet and taking further action to be performed after on such identification; (iv) our M2M/IoT patent portfolio (the “M2M/IoT Patent 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”) 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.computers. In addition, we continually review opportunities to acquire or license additional intellectual property as well as other strategic alternatives.
We
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Until March 7, 2020, when the Remote Power Patent expired, we had been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930) which generated licensing revenue in excess of $147,000,000$170,000,000 from May 2007 through March 7, 2020 (the expiration date of our Remote Power Patent.31, 2021. As of the expiration date,March 7, 2020, we had twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, includeincluded 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. As a result of the expiration of theour Remote Power Patent, we no longer receive licensing revenue for our Remote Power Patent that accrues for any period subsequent to the expiration date. Depending upondate (March 7, 2020). As a result of the outcomedecision of our appeal to the U.S. Court of Appeals for the Federal Circuit ofon September 24, 2020 to overturn the District Court orderCourt’s judgment of non-infringement that resulted from our trial with Hewlett-Packard involving our Remote Power Patent, we believed that Cisco, the largest licensee of our Remote Power Patent, was obligated to pay us significant royalties that accrued but were not paid beginning in the fourth quarter of 2017 through the expiration of our Remote Power Patent. On March 30, 2021, we entered into an amendment (the “Amendment”) to the Settlement and License Agreement, dated May 25, 2011, between us and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco agreed to pay $18,692,000 to us to resolve a dispute relating to Cisco’s contractual obligation to pay us royalties under the Agreement for the period beginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired) with respect to licensing the Remote Power Patent (see Note I[2] to our consolidated financial statements included in this Quarterly Report). Cisco paid the $18,692,000 to us in April 2021. We also believe that Netgear, another licensee of our Remote Power Patent, is obligated to pay us royalties that accrued but were not paid for the same period. We have commenced litigation against Netgear (see I[5] to our consolidated financial statements included herein). In addition, we may receive additional revenue related to our Remote Power Patent from Hewlett-Packard depending upon the outcome of the new trial as a result of the September 24, 2020 decision of the U.S. Court of Appeals for the Federal Circuit (see Note I[1] to our unaudited condensed consolidated financial statements included herein).
Consistent with our revenue recognition policy (see Note B[4] of the consolidated financial statements included herein), we did not record revenue beginning in the fourth quarter of 2017 through March 7, 2020 (the expiration of the Remote Power Patent) from Cisco and Netgear who notified us they would not pay us ongoing royalties as a result of the jury verdict of non-infringement 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.
HP.
Our current strategy includes continuing our licensing efforts with respect to our Cox Patent Portfolio and Mirror Worlds Patent Portfolio as well as further developing our M2M Patent Portfolio (currently 29 issued patents)intellectual property assets. In addition, we continue to position it for future licensing efforts.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.
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. 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 June 30, 2020.
On August 30, 2018, the Company appealed the decision of the U.S. District Court for the Eastern District of Texas denying its motion for a new trial on infringement with respect to the November 13, 2017 jury finding that its Remote Power Patent was not infringed by Hewlett Packard. Oral argument on the appeal took place on November 4, 2019 and a decision is pending. If we are unable to reverse the District Court order of non-infringement on appeal, it 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 the District Court order did not affect such licensees obligation to pay us or we reach a satisfactory resolution with such licensees (see Note I[1] and Note I[2] hereof).
Consistent with our prior view, the District Court decision in August 2018 overturning the HP jury verdict on invalidity confirmed our belief that Dell, Inc. (“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. Dell did make payment of such accrued royalties due to 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. On July 28, 2020, we reached a settlement with Dell pursuant to which Dell paid us $4,150,000 on August 7, 2020.
We have been dependent upon our Remote Power Patent for a significant amountportion of our revenue. Our Remote Power Patent has generated licensing revenue includingin excess of $170,000,000 from May 2007 through March 31, 2021. In addition, revenue for the years ended December 31, 2020, 2019 and 2018 from license agreements for our recurring revenue (mostly paid on a quarterly basis).Remote Power Patent constituted $4,403,000 (100% of our revenue), $3,037,000 (100% of our revenue) and $15,785,000 (71% of our revenue), respectively. As a result of the expiration of theour Remote Power Patent on March 7, 2020, we only receivedno
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longer receive licensing revenue of $55,000 from one licensee for the three months ended June 30, 2020 and $216,000 of revenue for the six months ended June 30, 2020. Our revenue of $55,000 for the three months ended June 30, 2020 was related to receipt of an amended royalty report for the first quarter of 2020 from a licensee of our Remote Power Patent. Notwithstanding the expiration of our Remote Power Patent we may still receive significant licensingfor any period subsequent to the expiration date. Except for the uncertain revenue from our Remote Power Patent for periods prior to March 7, 2020 if we are successfulits expiration date from HP, Netgear and Plantronics (successor to Polycom) (see Notes I[1], I[5] and I[6] to our unaudited condensed consolidated financial statements included herein), our future revenue will be entirely dependent on our appeal to the U.S. Court of Appeals for the Federal Circuit of the District Court’s order of non-infringement in our trial with Hewlett Packard. Certain of our licensees for our Remote Power Patent including Cisco, our largest licensee, stopped paying us royalties pursuant to licenses for our Remote Power Patent following the HP jury verdict (November 2017). Since 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, our 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 Mirror Worlds, Cox M2M/IoT Patent Portfolio orpatent portfolios as well as any new patents we may acquire.
Our annual and quarterly operating and financial results may fluctuate significantly from period to be acquiredperiod as a result of a variety of factors that are outside our control, including the timing and our ability to achieve successful outcomes of patent litigation, our ability and timing of consummating future license agreements for our intellectual property, and whether we will achieve a return on our investment in ILiAD Biotechnologies, LLC (“ILiAD”) and the future. Accordingly, our future revenue is uncertain.timing of any such distributions.
At June 30, 2020,March 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents and, marketable securities of $44,735,000$41,271,000 and working capital of $44,589,000.$52,271,000. 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.
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 Note [I] to our consolidated financial statements included herein). Patent litigation is inherently risky and the outcome is uncertain.
In 2021 and future years we could be classified as a Personal Holding Company. If this is the case, we would be subject to a 20% tax on the amount of any PHC Income for such year that we do not distribute to our shareholders. If we are determined to be a Personal Holding Company in 2021 and in 2021 we have undistributed personal holding company income (which generally means taxable income subject to certain adjustments), we will issue a special dividend to our shareholders rather than incur the 20% tax(see Note B[8] to our consolidated financial statements included in this Quarterly Report).
During the period December 2018 through March 2021, we made an aggregate investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to fifty-one (51) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment in ILiAD involves significant risk.
As to the impact of the global COVID-19 pandemic on us, COVID-19 is currently causinghas and continues to cause 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 in this Quarterly Report on Form 10-Q).
We currently have pending patent infringement litigations involving Remote Power Patent and certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 36-37 hereof).
The Company may be deemed a personal holding company for 2020 (and possibly in subsequent years). If this is the case, the Company would be subject to a 20% tax on the amount of any PHC Income that it does not distribute to its shareholders (see Note B[8] and Item 1A. Risk Factors of this Quarterly Report).
In December 2018, we agreed to make an investment of up to $5,000,000 ($2,500,000 of which was invested at the December 2018 closing, 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).agreements.
On June 9, 2020, our Board of Directors approved the continuation of our dividend policy consisting of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. The Company’sOn February 23, 2021, our Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of March 31, 2021 to all common shareholders of record as of March 16, 2021. Our dividend policy undergoes a periodic review by theour Board of Directors and is subject to change at any time depending upon the Company’sour financial requirements, earnings and other factors existing at the time.time (see Note L to our unaudited condensed consolidated financial statements included herein).
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2020March 31, 2021 Compared to Three Months Ended June 30, 2019March 31, 2020
Revenue. We had revenue of $55,000$18,692,000 for the three months ended June 30, 2020March 31, 2021 as compared to revenue of $599,000$161,000 for the three months ended June 30, 2019March 31, 2020. The increase in revenue of $18,531,000 for the three months ended March 31, 2021 was due to the expirationrevenue of $18,692,000 from our resolution of a contractual dispute with Cisco concerning licensing of our Remote Power Patent in March 2020 resulting in no licensing revenue from such patent that accrues for any period subsequent(see Note I[2] to the expiration date. Revenue of $55,000 for the three months ended June 30, 2020 related to receipt of an amended royalty report for the first quarter of 2020 from a licensee of our Remote Power Patent.unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the three months ended June 30, 2020March 31, 2021 were $760,000$6,421,000 as compared to $1,115,000$1,061,000 for the three months ended June 30, 2019.March 31, 2020. We had costs of revenue of $20,000$5,420,000 and $175,000$32,000 for the three months ended June 30,March 31, 2021 and 2020 and 2019, respectively. Included in the costs of revenue for the three months ended June 30, 2020March 31, 2021 were contingent legal fees of $4,485,000 and expenses of $18,000 and $2,000$935,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note HH[1] to our unaudited condensed consolidated financial statements included in this Quarterly Report)herein). Included in the costs of revenue for the three months ended June 30, 2019March 31, 2020 were contingent legal fees of $24,000 and expenses of $145,000 and $30,000$8,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
General and administrative expenses were $459,000$513,000 for the three months ended June 30, 2020March 31, 2021 as compared to $488,000$486,000 for the three months ended June 30, 2019.March 31, 2020. Amortization of patents was $72,000$74,000 for three months ended June 30, 2020March 31, 2021 as compared to $87,000$72,000 for the three months ended June 30, 2019.March 31, 2020. Stock-based compensation expense related to the issuance of restricted stock units was $85,000$59,000 for the three months ended June 30, 2020March 31, 2021 as compared to $127,000$72,000 for the three months ended June 30, 2019.March 31, 2020. Professional fees and related costs were $124,000$355,000 for the three months ended June 30, 2020March 31, 2021 as compared to $238,000$399,000 for the three months ended June 30, 2019 primarily as a result of decreased costs related to our pending patent litigations.March 31, 2020.
Operating LossIncome (Loss). We had an operating lossincome of $705,000$12,271,000 for the three months ended June 30, 2020March 31, 2021 compared with an operating loss of $516,000$900,000 for the three months ended June 30, 2019.March 31, 2020. The increased operating lossincome of $189,000$13,171,000 for the three months ended June 30, 2020March 31, 2021 was primarily due to revenue of $55,000 for$18,692,000 from the three months ended June 30, 2020 as a result of expirationresolution of our Remote Power Patent as compared to revenue of $599,000 for the three months ended June 30, 2019.contractual dispute with Cisco.
Interest and Dividend Income. Interest and dividend income for the three months ended June 30, 2020 was $120,000 as compared to $301,000March 31, 2021 decreased $128,000 from $178,000 for the three months ended June 30, 2019March 31, 2020 to $50,000 for the three months ended March 31, 2021 primarily as a result of lower interest rates on short-term fixeda change in the mix of our short term fix income investments and the sale of marketable securities.cash equivalents.
Income Taxes (Benefit). WeFor the three months ended March 31, 2021, we had a current tax expense for federal, state and local income taxes of $890,000 and a deferred tax expense of $1,724,000. For the three months ended March 31, 2020, 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 June 30, 2020. For the three months ended June 30, 2019, we had a deferred tax benefit for federal state and local income taxes of $(38,000).taxes.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $205,000$210,000 during the three month period ended June 30, 2020March 31, 2021 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $53,000$293,000 for the three months ended June 30, 2019March 31, 2020 (see Note J to our unaudited condensed consolidated financial statements included in the Quarterly Report)herein).
Net LossIncome (Loss). As a result of the foregoing, we realized net income of $9,451,000 or $0.39 per share basic and $0.38 diluted for the three months ended March 31, 2021 compared with a net loss of $584,000$1,337,000 or $(0.02)$(0.06) per share basic and diluted for the three months ended June 30, 2020 compared with aMarch 31, 2020. The increased net lossincome of $208,000 or $(0.01) per share basic and diluted$10,788,000 for the three months ended June 30, 2019. The increased net lossMarch 31, 2021 was primarily due to $18,692,000 of $376,000 forrevenue from the resolution of our contractual dispute with Cisco during the three months ended June 30, 2020 was primarily due to decreased revenue of $544,000 for the three months ended June 30, 2020 as a result of expiration of our Remote Power Patent, decreased interest and dividend income of $181,000 and an increased loss on our share of net losses of our equity investment of $152,000.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue. We had revenue of $216,000 for the six months ended June 30, 2020 as compared to revenue of $1,205,000 for the six months ended June 30, 2019. The decrease in revenue of $989,000 for the six months ended June 30, 2020 was primarily due to the expiration of our Remote Power Patent in March 2020 resulting in no licensing revenue from such patent that accrues for any period subsequent to the expiration date.
Operating Expenses. Operating expenses for the six months ended June 30, 2020 were $1,821,000 as compared to $2,254,000 for the six months ended June 30, 2019. We had costs of revenue of $52,000 and $321,000 for the six months ended June 30, 2020 and 2019, respectively. Included in the costs of revenue for the six months ended June 30, 2020 were contingent legal fees and expenses of $42,000 and $10,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement31, 2021 (see Note HI[2] to our unaudited condensed consolidated financial statements included in this Quarterly Report)herein). Included in the costs of revenue for the six months ended June 30, 2019 were contingent legal fees and expenses of $261,000 and $60,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
General and administrative expenses were $945,000 for the six months ended June 30, 2020 as compared to $976,000 for the six months ended June 30, 2019. Amortization of patents was $144,000 for six months ended June 30, 2020 as compared to $141,000 for the six months ended June 30, 2020. Stock-based compensation expense related to the issuance of restricted stock units was $157,000 for the six months ended June 30, 2020 as compared to $271,000 for the six months ended June 30, 2019. Professional fees and related costs were $523,000 for the six months ended June 30, 2020 as compared to $545,000 for the six months ended June 30, 2019.-26-
Operating Loss. We had an operating loss of $1,605,000 for the six months ended June 30, 2020 compared with operating loss of $1,049,000 for the six months ended June 30, 2019. The increased operating loss of $556,000 for the six months ended June 30, 2020 was primarily due to a decline in revenue of $989,000 for the six months ended June 30, 2020 as a result of expiration of our Remote Power Patent.
Interest and Dividend Income. Interest and dividend income for the six months ended June 30, 2020 was $298,000 as compared to interest and dividend income of $602,000 for the six months ended June 30, 2019 primarily as a result of lower interest rates on short-term fixed income investments and the sale of marketable securities.
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 six months ended June 30, 2020. For the six months ended June 30, 2019, we had a deferred tax benefit for federal state and local income taxes of $(103,000).
Share of Net Losses of Equity Method Investee. We incurred a net loss of $498,000 during the six month period ended June 30, 2020 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $149,000 for the six months ended June 30, 2019 (see Note J to our condensed consolidated financial statements included in this Quarterly Report).
Net Loss. As a result of the foregoing, we realized a net loss of $1,921,000 or $(0.08) per share basic and diluted for the six months ended June 30, 2020 compared with a net loss of $448,000 or $(0.02) per share basic and diluted for the six months ended June 30, 2019. The increased net loss of $1,473,000 for the six months ended June 30, 2020 was primarily due to decreased revenue of $989,000 for the six months ended June 30, 2020 as a result of expiration of our Remote Power Patent in March 2020, decreased interest and dividend income of $304,000 and an increase loss on our share of net loss on our equity investment of $349,000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At June 30, 2020,March 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $44,735,000$41,271,000 and working capital of $44,589,000.$52,271,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the foreseeable future.
Working capital decreasedincreased by $2,600,000$9,312,000 at June 30, 2020March 31, 2021 to $44,589,000$52,271,000 as compared to working capital of $47,189,000$42,959,000 at December 31, 2019.2020. The decreaseincrease in working capital of $2,600,000$9,312,000 for the sixthree months ended June 30, 2020March 31, 2021 was primarily due to decreases in cash and cash equivalentsnet income of $1,615,000 and marketable securities of $1,967,000 offset by a decrease of current liabilities of $1,245,000 including decreases in accounts payable of $384,000, accrued contingency fees and related costs of $447,000 and accrued payroll of $318,000.$9,451,000.
Net cash used in operating activities for the sixthree months ended June 30, 2020March 31, 2021 increased by $731,000$163,000 from $(1,342,000)$1,538,000 for the sixthree months ended June 30, 2019March 31, 2020 to $(2,073,000)$1,375,000 for the sixthree months ended June 30, 2020.March 31, 2021 primarily due to revenue of $18,692,000 from resolution of our contractual dispute with Cisco during the three months ended March 31, 2021.
Net cash provided by investing activities during the sixthree months ended June 30, 2020March 31, 2021 was $1,921,000$1,198,000 as compared to $(1,715,000)$6,910,000 for the three months ended March 31, 2020 primarily as a result of the differential of purchases and sales of marketable securities and our equity$1,000,000 convertible note investment of $1,000,000 for the six months ended June 30, 2019.
in ILiAD Biotechnologies (see Note J to our unaudited condensed consolidated financial statements included herein).
Net cash used in financing activities for the sixthree months ended June 30,March 31, 2021 and 2020 was $1,206,000 and 2019 was $(1,463,000) and $(1,783,000),$1,365,000, respectively. The change of $320,000$159,000 primarily resulted from $366,000no repurchases of value of shares delivered to fund withholding taxesour common stock for the sixthree months ended June 30, 2019 asMarch 31, 2021 compared to -0-$154,000 of repurchases of our common stock for the six monthsthree month period ended June 30,March 31, 2020.
We maintain our cash in money market accountsfunds, certificates of deposit 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.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements are prepared in accordance with 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,contingent legal fees and related expenses, income taxes, valuation of patents and equity method investments, including the evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, 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
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We believe our most critical accounting policies to be the following:
Revenue Recognition
Under ASC 606, revenue is recognized when we complete the licensing of our intellectual property to our licensees, in an amount that reflects the consideration we expect to be entitled to in exchange for licensing our intellectual property. Revenue from our patent licensing business is generated from negotiated license agreements. The Period
Fair Value Measurements
In August 2018,timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the FASB issued ASU 2018-13, Fair Value Measurement (“ASC 820”), Disclosure Framework - Changesterms 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 Disclosure Requirements for Fair Value Measurement (“ASU 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 1028-13. The adoption of this 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 lawslicensee. Generally, in the interim period and making improvements for income taxesevent of settlement of litigation related to employee stock ownership plans. ASU 2019-12 is effectiveour assertion of patent infringement involving our intellectual property, defendants will either pay (i) a non-refundable lump sum payment for fiscal years,a non-exclusive fully-paid license (a “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 Bearing License”).
We recognize revenue from our Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim periodaccordance with the royalty recognition constraint that applies to licenses of IP for which financial statements have not been issued. We are currently evaluating the impact the standard will have on its consolidated financial statements.
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 comparabilitysome or all of the accounting for these interactions. The amendmentsconsideration is in the ASU should be applied onform of sales or usage based royalty. Consequently, we recognize revenue at the later of when (1) the subsequent sale occurs or (2) the performance obligation to which some or all of the sales based royalty has been satisfied.
Fully-Paid Licenses provide for a prospective basis. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim periodnon-refundable up-front payment, for which financial statementswe have not yetno future obligations or performance requirements, revenue is generally recognized when we have obtained the signed license agreement, all performance obligations have been issued. 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.
Costs of Revenue and Related Costs
We are currently evaluatinginclude in costs of revenue for the impact the standard will have onthree months ended March 31, 2021 and 2020 contingent legal fees payable to patent litigation counsel, any other contractual payments to third parties related to net proceeds from settlements (see Note G[2] hereof) and incentive bonus compensation payable to its consolidated financial statements.Chairman and Chief Executive Officer.
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.flows (see Note B to our unaudited condensed financial statements included herein).
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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 June 30, 2020March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1:1. LEGAL PROCEEDINGS
Remote Power Patent Litigation
In September 2011, we initiated patent litigation against sixteen (16) data network-ing equipment manufacturers (and affiliated entities)For a description of our legal proceedings see Note I to our unaudited condensed consolidated financial statements included in the U.S. District Courtthis Quarterly Report and Item 1. Legal Proceedings of our Annual Report on Form 10-K for the Eastern District of Texas, Tyler Division, for infringementyear ended December 31, 2020.
During the three months ended March 31, 2021, the following material events occurred with respect to certain 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”) being the sole remaining defendant.legal proceedings:
Plantronics Litigation
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’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’s order that the Remote Power Patent is valid as a matter of law. Oral argument on the appeal took place on November 4, 2019 and a decision is pending.
Dell Litigation
On November 13, 2018,January 7, 2021, we filed a lawsuit against Dell,Plantronics, Inc., the successor entity to Polycom, Inc., in the DistrictSupreme Court 241st Judicial District, Smithof the State of California, County Texas,of Santa Clara, for breach of a settlementSettlement and license agreement,License Agreement, dated August 15,September 29, 2016, with us as a resultfor the failure of Dell’s failurePlantronics and Polycom to make royalty payments, and provide corresponding royalty reports, to us based on sales of Dell’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’s appeal of the District Court’s order that the Remote Power Patent is valid as a matter of law. Dell’s motion to stay was denied by the Court on May 7, 2019. On December 19, 2019, we filed a motion for summary judgment on our breach of contract claim. On March 25, 2020, the Court granted summary judgment in our favor and denied Dell’s motion for summary judgment. On July 28, 2020, we reached a settlement with Dell. On August 7, 2020, under the terms of the settlement, Dell paid us $4,150,000 in full settlement of the litigation.
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”) in7, 2021, the U.S. District Court for the SouthernEastern District of New York,Texas, Tyler Division, granted our motion for infringementnew trial and denied our request for judgment as a matter 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’s core technologies that enable Facebook’s Newsfeed and Timeline features. The lawsuit further alleged that Facebook’s unauthorized uselaw on validity (which will be part 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’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. Oral argument on the appeal was held on January 13, 2020. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment finding on non-infringement oftrial). In addition, the District Court and remandedscheduled the litigationtrial to the Southern District of New York for further proceedings.commence on August 6, 2021.
Cox Patent Portfolio – Google and YouTube Legal Proceedings
On April 4, 2014, we initiated litigation against Google Inc. (“Google”) and YouTube, LLC (“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 have infringed and continue to infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s Content ID system. In 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’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 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. 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. A Markman hearing (claim construction) was held on November 21, 2019 and a ruling has not been rendered.
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ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. In addition toInvestors should carefully consider the risks described below and elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31, 2021 including, but not limited to, the risk described below, and our Annual Report on Form 10-K for the year ended December 31, 20192020 (pages 16-27)13-22), filed with the Securities and Exchange CommissionSEC on March 20, 2020 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (page 36) filed with the Securities and Exchange Commission on May 19, 2020 include2021.
If we are determined to be a discussion of our risk factors and should be carefully considered by investors.
We could be classified as a Personal Holding Company resulting in a 20% tax on our PHC Income that we do not distribute to our shareholders
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC'sin 2021 and have undistributed personal holding company income, (“PHC Income” whichwe may issue a special cash dividend to our shareholders and will have less cash available for our operations and strategic transactions.
If we are determined to be a personal holding company in 2021 and have undistributed personal holding company income (see Note B[8] to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q), we may issue a special cash dividend to our shareholders in the full amount of undistributed personal holding company 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 rather than 50% in value of its outstanding shares must be owned directly or indirectly by 5 or fewer individuals at any time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the “Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). During July 2020, based upon available shareholder ownership information, we may have satisfied the Ownership Test. As a result, we have engaged tax counsel to further evaluate whether we have satisfied the Ownership Test and whether potential future income generated by us constitutes “royalties” within the meaning of the Income Test as well as other related PHC issues. If we satisfy the Ownership Test and achieve net income for the year ended December 31, 2020 (or for any subsequent year in which the Ownership Test is also satisfied) that is determined to satisfy the Income Test, we would constitute a PHC and for the year ended December 31, 2020 (and each subsequent year in which the Ownership Test is also satisfied) we would be subject to aincur an additional 20% tax on the amount of any PHC Incomesuch income. Such a special cash dividend would mean that we do not distribute towill have less cash available for our shareholders. While we have sustained a net loss of $1,921,000 for the six month period ended June 30, 2020, it is possible that we could achieve significant net income for the year ended December 31, 2020 in the event of favorable outcomes of pending litigationoperations and receipt of significant revenue including, but not limited to, our appeal to the U.S. Court of Appeals for the Federal Circuit of the District Court’s order of non-infringement in its trial with Hewlett Packard (see Note I [1] and Note I [2] hereof). If any such net income were achieved for the year ended December 31, 2020 and determined to be PHC Income, it would be subject to a 20% tax on the amount of any PHC Income that we do not distribute to our shareholders.strategic transactions.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended June 30, 2020.March 31, 2021.
Stock Repurchases
On August 22, 2011, we established a share repurchase program (“Share Repurchase Program”). On June 11, 2019, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of shares of our common stock over the subsequent 24 month period (for a total authorization of approximately $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 June 30, 2020,March 31, 2021, we have repurchased an aggregate of 8,605,659 shares of our common stock at an aggregate cost of $16,156,005 (exclusive of commissions) or an average per share price of $1.88. During the three months ended June 30, 2020,March 31, 2021, we repurchased 43,589did not repurchase any of our shares of our common stock at an aggregate cost of $97,533 (exclusive of commissions) or an average per share price of $2.24.stock. At June 30, 2020,March 31, 2021, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $4,196,100.
During the months of April, May and June 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 |
| April 1 to April 30, 2020 | 30,402 | $2.24 | 30,402 | $4,225,638 |
| May 1 to May 31, 2020 | 13,187 | $2.24 | 13,187 | $4,196,100 |
| June 1 to June 30, 2020 | — | — | — | $4,196,100 |
| Total | 43,589 | $2.24 | 43,589 |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Other Information
None.
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ITEM 5. Exhibits
(a) Exhibits
| 31.1 | Controls and Procedure Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 31.2 | Controls and Procedure Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 101 | Interactive data files:** |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Scheme Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
_____________________________
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETWORK-1 TECHNOLOGIES, INC. | ||
| ||
| Date: | By: | /s/ Corey M. Horowitz |
| Corey M. Horowitz Chairman and Chief Executive Officer | ||
| ||
| Date: | By: | /s/ David C. Kahn |
| David C. Kahn Chief Financial Officer | ||
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