UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended |
| ☐ | 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.) | |
New | ||
| (Address of principal executive offices) | (Zip Code) |
212203-829-5770920-1055
(Registrant’s Telephone Number)
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 (§223.405) 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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer☐ | Smaller reporting company ☒ | |
| Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock, $$.01 par value per share, outstanding as of November 4, 2021May 12, 2022 was 23,883,024.
-1-
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
| Page No. | ||||
| PART I. | Financial Information | |||
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | |||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 8 | |||
| Item 2. |
| |||
| 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 5. | Other Information | |||
| Item 6. | Exhibits | |||
| Signatures |
-2-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future performance and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Factors that could cause or contribute to such differences include various risks and uncertainties described below and elsewhere in this Quarterly Report on Form 10-Q as well as in our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 (filed with the SEC on May 17, 2021) and our Annual Report on Form 10-K for the year ended December 31, 20202021 (filed with the SEC on March 31, 2021)30, 2022). Furthermore, such forward-looking statements speak only as of the date of this report. Such risks and uncertainties include, but are not limited to, the following:
| • | our uncertain revenue; |
| • | uncertainty of the outcome of our pending litigations; |
| • | our ability to achieve future revenue from our |
| • | our ability to protect our patents; |
| • | our ability to execute our strategy to acquire or make investments in high quality patents with significant licensing opportunities; |
| • | our ability to enter into strategic relationships with third parties to license or otherwise monetize their intellectual property; |
| • | our ability to achieve a return on our investment in ILiAD Biotechnologies, LLC; |
| • | our ability to continue to acquire additional intellectual property; |
| • | uncertainty as to whether cash dividends will continue to be paid; |
| • | variations in our quarterly and annual operating results; |
| • | the risk that we may be determined to be a personal holding company in |
| • | the impact of Covid-19 causing delays in our legal proceedings; and |
| • | legislative, regulatory and competitive developments. |
-3-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 43,173,000 | $ | 25,505,000 | ||||
| Marketable securities, at fair value | 17,667,000 | 19,366,000 | ||||||
| Other current assets | 26,000 | 120,000 | ||||||
| TOTAL CURRENT ASSETS | $ | 60,866,000 | 44,991,000 | |||||
| OTHER ASSETS: | ||||||||
| Deferred tax assets, net | — | 954,000 | ||||||
| Patents, net of accumulated amortization | 1,444,000 | 1,578,000 | ||||||
| Equity investment | 3,018,000 | 3,650,000 | ||||||
| Convertible note investment | 1,000,000 | — | ||||||
| Security deposits | 13,000 | 21,000 | ||||||
| Total Other Assets | 5,475,000 | 6,203,000 | ||||||
| TOTAL ASSETS | $ | 66,341,000 | $ | 51,194,000 | ||||
| ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Income taxes payable | $ | 3,036,000 | $ | — | ||||
| Accounts payable | 399,000 | 597,000 | ||||||
| Accrued contingency fees and related costs | 46,000 | 932,000 | ||||||
| Accrued payroll | — | 277,000 | ||||||
| Other accrued expenses | 134,000 | 226,000 | ||||||
| Total Current Liabilities | 3,615,000 | 2,032,000 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | 680,000 | — | ||||||
| TOTAL LIABILITIES | $ | 4,295,000 | $ | 2,032,000 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at September 30,2021 and December 31,2020 | — | — | ||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at September 30,2021 and December 31,2020,respectively | 241,000 | 241,000 | ||||||
Additional paid-in capital | 66,307,000 | 66,124,000 | ||||||
Accumulated deficit | (4,496,000 | ) | (17,193,000 | ) | ||||
| Accumulated other comprehensive loss | (6,000 | ) | (10,000 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 62,046,000 | 49,162,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 66,341,000 | $ | 51,194,000 | ||||
March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 42,459,000 | $ | 44,497,000 | ||||
| Marketable securities, at fair value | 14,076,000 | 15,126,000 | ||||||
| Other current assets | 111,000 | 150,000 | ||||||
| TOTAL CURRENT ASSETS | 56,646,000 | 59,773,000 | ||||||
| OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | 1,833,000 | 1,384,000 | ||||||
| Equity investment | 2,218,000 | 2,651,000 | ||||||
| Convertible note investment | 1,000,000 | 1,000,000 | ||||||
| Security deposits | 13,000 | 13,000 | ||||||
| Total other assets | 5,064,000 | 5,048,000 | ||||||
| TOTAL ASSETS | $ | 61,710,000 | $ | 64,821,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Income taxes payable | $ | 2,952,000 | $ | 2,952,000 | ||||
| Accounts payable | 490,000 | 459,000 | ||||||
| Accrued contingency fees and related costs | 147,000 | 137,000 | ||||||
| Accrued payroll | 161,000 | 380,000 | ||||||
| Other accrued expenses | 261,000 | 180,000 | ||||||
| Total current liabilities | 4,011,000 | 4,108,000 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | 102,000 | 554,000 | ||||||
| TOTAL LIABILITIES | $ | 4,113,000 | $ | 4,662,000 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at March 31, 2022 and December 31, 2021 | — | — | ||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 239,000 | 238,000 | ||||||
| Additional paid-in capital | 66,415,000 | 66,361,000 | ||||||
| Accumulated deficit | (9,042,000 | ) | (6,428,000 | ) | ||||
| Accumulated other comprehensive loss | (15,000 | ) | (12,000 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 57,597,000 | 60,159,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 61,710,000 | $ | 64,821,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (LOSS)
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUE | $ | 17,000,000 | $ | 4,150,000 | $ | 35,692,000 | $ | 4,366,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | 6,610,000 | 1,593,000 | 12,030,000 | 1,645,000 | ||||||||||||
| Professional fees and related costs | 721,000 | 267,000 | 1,384,000 | 790,000 | ||||||||||||
| General and administrative | 493,000 | 473,000 | 1,467,000 | 1,418,000 | ||||||||||||
| Amortization of patents | 74,000 | 72,000 | 221,000 | 216,000 | ||||||||||||
| Stock-based compensation | 65,000 | 85,000 | 183,000 | 242,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 7,963,000 | 2,490,000 | 15,285,000 | 4,311,000 | ||||||||||||
| OPERATING INCOME | 9,037,000 | 1,660,000 | 20,407,000 | 55,000 | ||||||||||||
| OTHER INCOME: | ||||||||||||||||
| Interest and dividend income, net | 67,000 | 105,000 | 185,000 | 403,000 | ||||||||||||
| Net realized and unrealized gain (loss) on marketable securities | (40,000 | ) | 68,000 | (32,000 | ) | (48,000 | ) | |||||||||
| Total other income, net | 27,000 | 173,000 | 153,000 | 355,000 | ||||||||||||
| INCOME BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | 9,064,000 | 1,833,000 | 20,560,000 | 410,000 | ||||||||||||
| INCOME TAXES PROVISION: | ||||||||||||||||
| Current | 2,326,000 | 355,000 | 3,036,000 | (79,000 | ) | |||||||||||
| Deferred taxes, net | (37,000 | ) | (355,000 | ) | 1,635,000 | 79,000 | ||||||||||
| Total income taxes provision | 2,289,000 | — | 4,671,000 | — | ||||||||||||
| INCOME BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | 6,775,000 | $ | 1,833,000 | $ | 15,889,000 | $ | 410,000 | ||||||||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (186,000 | ) | $ | (146,000 | ) | $ | (632,000 | ) | $ | (644,000 | ) | ||||
| NET INCOME (LOSS) | $ | 6,589,000 | $ | 1,687,000 | $ | 15,257,000 | $ | (234,000 | ) | |||||||
| Net Income (loss) per share | ||||||||||||||||
| Basic | $ | 0.28 | $ | 0.07 | $ | 0.63 | $ | (0.01 | ) | |||||||
| Diluted | $ | 0.27 | $ | 0.07 | $ | 0.62 | $ | (0.01 | ) | |||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 23,934,361 | 24,012,333 | 24,136,506 | 23,992,203 | ||||||||||||
| Diluted | 24,320,231 | 24,521,708 | 24,607,242 | 23,992,203 | ||||||||||||
| Cash dividends declared per share | $ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.10 | ||||||||
| NET INCOME (LOSS) | $ | 6,589,000 | $ | 1,687,000 | $ | 15,257,000 | $ | (234,000 | ) | |||||||
OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized holding gain (loss) on corporate bonds and notes | (4,000 | ) | (67,000 | ) | 4,000 | (75,000 | ) | |||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | 6,585,000 | $ | 1,620,000 | $ | 15,261,000 | $ | (309,000 | ) | |||||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUE | $ | — | $ | 18,692,000 | ||||
| OPERATING EXPENSES: | ||||||||
| Costs of revenue | — | 5,420,000 | ||||||
| Professional fees and related costs | 250,000 | 355,000 | ||||||
| General and administrative | 517,000 | 513,000 | ||||||
| Amortization of patents | 75,000 | 74,000 | ||||||
| Stock-based compensation | 55,000 | 59,000 | ||||||
| TOTAL OPERATING EXPENSES | 897,000 | 6,421,000 | ||||||
| OPERATING (LOSS) INCOME | (897,000 | ) | 12,271,000 | |||||
| OTHER (LOSS) INCOME: | ||||||||
| Interest and dividend income, net | 80,000 | 50,000 | ||||||
| Net realized and unrealized loss on marketable securities | (514,000 | ) | (46,000 | ) | ||||
| Total other (loss) income, net | (434,000 | ) | 4,000 | |||||
| (LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | (1,331,000 | ) | 12,275,000 | |||||
| INCOME TAX PROVISION: | ||||||||
| Current | — | 890,000 | ||||||
| Deferred taxes, net | (452,000 | ) | 1,724,000 | |||||
| Total income tax (benefit) expense | (452,000 | ) | 2,614,000 | |||||
| (LOSS) INCOME BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (879,000 | ) | $ | 9,661,000 | |||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (433,000 | ) | $ | (210,000 | ) | ||
| NET (LOSS) INCOME | $ | (1,312,000 | ) | $ | 9,451,000 | |||
| Net (loss) income per share: | ||||||||
| Basic | $ | (0.05 | ) | $ | 0.39 | |||
| Diluted | $ | (0.05 | ) | $ | 0.38 | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 23,909,115 | 24,107,879 | ||||||
| Diluted | 23,909,115 | 24,616,379 | ||||||
| Cash dividends declared per share | $ | 0.05 | $ | 0.05 | ||||
| NET (LOSS) INCOME | $ | (1,312,000 | ) | $ | 9,451,000 | |||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||
Net unrealized holding (loss) gain on corporate bonds and notes during the period, net of tax | (3,000 | ) | 11,000 | |||||
| COMPREHENSIVE (LOSS) INCOME | $ | (1,315,000 | ) | $ | 9,462,000 | |||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-5-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2022
| Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||
| Balance – December 31, 2021 | 23,792,212 | $ | 238,000 | $ | 66,361,000 | $ | (6,428,000 | ) | $ | (12,000 | ) | $ | 60,159,000 | |||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,190,000 | ) | — | (1,190,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 55,000 | — | — | 55,000 | ||||||||||||||||||
| Vesting of restricted stock units | 136,250 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (45,438 | ) | — | — | (112,000 | ) | — | (112,000 | ) | |||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | — | — | — | (3,000 | ) | (3,000 | ) | ||||||||||||||||
| Net loss | — | — | — | (1,312,000 | ) | — | (1,312,000 | ) | ||||||||||||||||
| Balance – March 31, 2022 | 23,883,024 | $ | 239,000 | $ | 66,415,000 | $ | (9,042,000 | ) | $ | (15,000 | ) | $ | 57,597,000 | |||||||||||
THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2021
| Common Stock | Additional | Accumulated Other | Total | Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | Stockholders’ | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Equity | 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 | 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 | ) | — | — | — | (1,216,000 | ) | — | (1,216,000 | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 59,000 | — | — | 59,000 | — | — | 59,000 | — | — | 59,000 | ||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | 11,250 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net other comprehensive gain | — | — | — | — | 11,000 | 11,000 | ||||||||||||||||||||||||||||||||||||||||||
Net unrealized gain on corporate bonds and notes | — | — | — | — | 11,000 | 11,000 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 9,451,000 | — | 9,451,000 | — | — | — | 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 | 24,117,129 | $ | 241,000 | $ | 66,183,000 | $ | (8,958,000 | ) | $ | 1,000 | $ | 57,467,000 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 59,000 | — | — | 59,000 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Treasury shares purchased and retired | (40,000 | ) | — | — | (131,000 | ) | — | (131,000 | ) | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | — | — | — | — | (3,000 | ) | (3,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (783,000 | ) | — | (783,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance – June 30, 2021 | 24,088,379 | $ | 241,000 | $ | 66,242,000 | $ | (9,872,000 | ) | $ | (2,000 | ) | $ | 56,609,000 | |||||||||||||||||||||||||||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,213,000 | ) | — | (1,213,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 65,000 | — | — | 65,000 | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | — | — | — | — | (4,000 | ) | (4,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 6,589,000 | — | 6,589,000 | ||||||||||||||||||||||||||||||||||||||||||
| Balance – September 30, 2021 | 24,099,629 | $ | 241,000 | $ | 66,307,000 | $ | (4,496,000 | ) | $ | (6,000 | ) | $ | 62,046,000 | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-6-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 | |||||||||||
| 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 other comprehensive income | — | — | — | — | 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 | ||||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,213,000 | ) | — | (1,213,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 85,000 | — | — | 85,000 | ||||||||||||||||||
| Vesting of restricted stock units | 136,250 | 1,000 | (1,000 | ) | — | — | — | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (50,563 | ) | — | — | (109,000 | ) | — | (109,000 | ) | |||||||||||||||
| Net other comprehensive loss | — | — | — | — | (67,000 | ) | (67,000 | ) | ||||||||||||||||
| Net income | — | — | — | 1,687,000 | — | 1,687,000 | ||||||||||||||||||
| Balance – September 30, 2020 | 24,033,076 | $ | 240,000 | $ | 66,065,000 | $ | (15,664,000 | ) | $ | 4,000 | $ | 50,645,000 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net income (loss) | $ | 15,257,000 | $ | (234,000 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash | ||||||||||||||||
| used in operating activities: | ||||||||||||||||
| Net (loss) income | $ | (1,312,000 | ) | $ | 9,451,000 | |||||||||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||||||
| Amortization of patents | 221,000 | 216,000 | 75,000 | 74,000 | ||||||||||||
| Stock-based compensation | 183,000 | 242,000 | 55,000 | 59,000 | ||||||||||||
| Loss from equity investment | 632,000 | 644,000 | 433,000 | 210,000 | ||||||||||||
| Deferred tax expense | 1,634,000 | — | ||||||||||||||
| Amortization of right of use asset, net | — | 41,000 | ||||||||||||||
| Unrealized (gain) loss on marketable securities | 9,000 | (10,000 | ) | |||||||||||||
| Unrealized loss on marketable securities | 510,000 | 23,000 | ||||||||||||||
| Deferred tax expense (benefit) | (452,000 | ) | 1,724,000 | |||||||||||||
| Changes in operating asset and liabilities: | ||||||||||||||||
| Royalty receivables | — | 343,000 | — | (18,692,000 | ) | |||||||||||
| Other current assets | 94,000 | 68,000 | 39,000 | 32,000 | ||||||||||||
| Accounts payable | (197,000 | ) | (350,000 | ) | ||||||||||||
| Income taxes payable | 3,036,000 | — | — | 890,000 | ||||||||||||
| Security deposit | 8,000 | — | — | 8,000 | ||||||||||||
| Operating lease obligations | — | (41,000 | ) | |||||||||||||
| Accounts payable | 31,000 | (232,000 | ) | |||||||||||||
| Accrued expenses | (1,276,000 | ) | (812,000 | ) | (128,000 | ) | 5,078,000 | |||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 19,601,000 | 107,000 | ||||||||||||||
| NET CASH USED IN OPERATING ACTIVITIES | (749,000 | ) | (1,375,000 | ) | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Sales of marketable securities | 12,291,000 | 17,539,000 | 1,100,000 | 4,499,000 | ||||||||||||
| Purchases of marketable securities | (10,597,000 | ) | (13,145,000 | ) | (563,000 | ) | (2,293,000 | ) | ||||||||
| Development of patents | (86,000 | ) | (50,000 | ) | (524,000 | ) | (8,000 | ) | ||||||||
| Convertible note investment | (1,000,000 | ) | — | — | (1,000,000 | ) | ||||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 608,000 | 4,344,000 | 13,000 | 1,198,000 | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Cash dividends paid | (2,410,000 | ) | (2,456,000 | ) | (1,190,000 | ) | (1,206,000 | ) | ||||||||
| Value of shares delivered to fund withholding taxes | — | (109,000 | ) | (112,000 | ) | — | ||||||||||
| Repurchases of common stock, inclusive of commissions | (131,000 | ) | (252,000 | ) | ||||||||||||
| NET CASH USED IN FINANCING ACTIVITIES: | (2,541,000 | ) | (2,817,000 | ) | (1,302,000 | ) | (1,206,000 | ) | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 17,668,000 | 1,634,000 | ||||||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,038,000 | ) | (1,383,000 | ) | ||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 25,505,000 | 22,587,000 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 44,497,000 | 25,505,000 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 43,173,000 | $ | 24,221,000 | ||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 42,459,000 | $ | 24,122,000 | ||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Interest | $ | — | $ | — | $ | — | $ | — | ||||||||
| Income taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
| NON-CASH FINANCING ACTIVITY | ||||||||||||||||
| Accrued dividend rights on restricted stock units | $ | 19,000 | $ | 31,000 | $ | — | $ | 10,000 | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS
[1] BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the “Company”), 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 September 30, 2021,March 31, 2022, and the results of its operations and comprehensive income (loss) for the three and nine month periods ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, changes in stockholders’ equity for the three and nine month periods ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, and its cash flows for the ninethree month periodperiods ended September 30, 2021March 31, 2022 and September 30, 2020.March 31, 2021. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 20202021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2021.30, 2022. The results of operations for the three and nine months ended September 30, 2021March 31, 2022 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiary,subsidiaries, Mirror Worlds Technologies, LLC. and HFT Solutions, LLC.
On March 17, 2022, the Company formed HFT Solutions, LLC for the purpose of acquiring its HFT patent portfolio (see Note G[2] hereof). All intercompany balances and transactions have been eliminated on consolidation.
[2] BUSINESS
The Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns eighty-eightninety-six (8896) 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”)Portfolio) relating to enabling technology for identifying media content on the Internet and taking further actions to be performed based onafter such identification; and (iv)(ii) 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.computers; (iii) the HFT patent portfolio (the “HFT Patent Portfolio”) covering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with speed and latency and provide critical latency gains in trading systems where the difference between success and failure may be measured in nanoseconds; (iv) 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; and (v) the remote power patent (the “Remote Power Patent”) covering 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.
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NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
Until March 7, 2020, when the Remote Power Patent expired, theThe Company had been actively engaged in licensingdependent upon its Remote Power Patent (U.S. Patent No. 6,218,930). Asfor a resultsignificant portion of the expiration of the Remote Power Patent, theits revenue. The Company no longer receives licensing revenue for its Remote Power Patent for any period subsequent to the expiration date (MarchMarch 7, 2020). However, subsequent to the2020 (the expiration date of the patent). Except for the Company’s pending legal proceeding against NETGEAR, Inc. involving its Remote Power Patent, the Company has received and may continueCompany’s future revenue is entirely dependent on its ability to receive licensing revenue from certain licensees for periods prior to March 7, 2020. 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 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 respect to licensing the Remote Power Patent (see Note I[2] hereof). In addition, on July 26, 2021, the Company entered into a settlement agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid the Company $17,000,000 in full settlement of amonetize its other patent litigation (see Note 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 commenced litigation against Netgear (see Note I[5] hereof).assets.
The Company’s current strategy includes continuing to pursue licensing opportunities for its intellectual property assets.patent portfolios. 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.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] | Use of Estimates and Assumptions |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include revenue recognition,legal fees and related costs, 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.
| [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 September 30, 2021,March 31, 2022, the Company maintained a cash balance of $5,835,0008,325,000 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.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [3] | Marketable Securities |
The Company’s marketable securities are comprised of certificates of deposit with original maturity greater than three months from date of purchase, fixed income mutual funds, and corporate bonds and notes. 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.income (loss). Unrealized holding gains and losses, net of the related tax effect, on corporate bonds and notes are excluded from earnings and are reported as a separate component of stockholders’ 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.
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NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [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.
The Company determines revenue recognition through the following steps:
| • | identification of the license agreement; |
| • | identification of the performance obligations in the license agreement; |
| • | determination of the consideration for the license; |
| • | allocation of the transaction price to the performance obligations in the contract; and |
| • | recognition of revenue when the Company satisfies its performance obligations. |
All of the Company’s revenue for the nine months ended September 30, 2021 was as a result of (i) resolution of a contractual dispute with a licensee to pay royalties to the Company pursuant to a royalty bearing 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) and (ii) settlement of a patent litigation with another licensee also involving the Remote Power Patent (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.
Revenue from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of a litigation settlement related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license, (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”).patent.
| Stock-Based Compensation |
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The Company recognizes revenue from their Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement,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 royalty recognition constraint that appliesunaudited condensed consolidated statements of operations and comprehensive income (loss) based on their grant date fair values.
Compensation expense related to licenses of IP for which some or allawards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the considerationaward, which is ingenerally the formvesting term. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of sales or usageoptions granted. The fair value of restricted stock units is determined based royalty. Consequently,on the Company recognizes revenue atnumber of shares underlying the later of when (1)grant and either the subsequent sale occurs or (2) the performance obligation to which some or allquoted market price of the sales based royalty has been satisfied.
Non-Refundable Up-Front Fees: Fully-Paid Licenses provideCompany’s common stock on the date of grant for a non-refundable up-front payment,time-based and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model 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.market-based awards.
| [ | 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.
-10-
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [ | Costs of Revenue |
The Company includes in costs of revenue 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)
| [ | 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 September 30, 2021.March 31, 2022.
U.S. federal, state and local income tax returns prior to 20172018 are not subject to examination by any applicable tax authorities, except that tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent they generated loss carry-forwards that are available for those future years.
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“UPHCI”), which means, in general, taxable income subject to certain adjustments.adjustments and reduced by certain distributions to shareholders. For a corporation to be classified as a PHC, it must satisfy two tests: (1)(i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by five or fewer individuals at anytime 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 (2)(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”). Based on net income of $15,257,000 for the nine months ended September 30, 2021, the Company is likely to have UPHCI for 2021 if it satisfies both the Ownership Test and Income Test for 2021. During the second half of 2021, through September 30, 2021,based on available information concerning the Company’s shareholder ownership, the Company doesdid not believe it satisfiedsatisfy the Ownership Test.Test and thus the Company was not a PHC for 2021. However, the Company may be determined to be a PHC in 2022 or in future years. If the Company satisfies the Ownership Test during the second half of 2021 and the Income Test for 2021, and has UPHCI for 2021 (orwere to become a PHC in 2022 or any subsequentfuture year, in which the tests are satisfied), the Companyit would be subject to athe 20% tax on the amount of UPHCI that it does not distribute to its shareholders.UPHCI. In thesuch 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 UPHCI for 2021, the Company may issue a special cash dividend to its shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
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NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [ | 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 theThere are no new 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. The adoption of this standard did not havestandards that had a material effectimpact on the Company’sCompany's unaudited condensed 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 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. The adoption of this standard did not have a material effect on the Company’s 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 March 31, 2022 include patents with estimated remaining economic useful lives ranging from 1.751 to 1217.25 years.years (see Note G[2] hereof). 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 September, 2021March 31, 2022 and December 31, 20202021 were as followsfollows:
| Schedule of patent | ||||||||||||||||
| September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Gross carrying amount – patents | $ | 7,934,000 | $ | 7,848,000 | $ | 8,473,000 | $ | 7,949,000 | ||||||||
| Accumulated amortization – patents | (6,490,000 | ) | (6,270,000 | ) | (6,640,000 | ) | (6,565,000 | ) | ||||||||
| Patents, net | $ | 1,444,000 | $ | 1,578,000 | $ | 1,833,000 | $ | 1,384,000 | ||||||||
NOTE C – PATENTS (continued)
Amortization expense for the three months ended SeptemberMarch 31, 2022 and 2021 was $75,000 30, 2021 and 2020 was $74,000and $72,00074,000, respectively. Amortization expense for the nine months ended September 30, 2021 and 2020 was $221,000and $216,000, respectively. Future amortization of intangible assets, net is as follows:
| Twelve Months Ended September 30, | ||||||||
| 2022 | $ | 297,000 | ||||||
| 2023 | 297,000 | |||||||
| 2024 | 87,000 | |||||||
| 2025 | 87,000 | |||||||
| 2026 and thereafter | 676,000 | |||||||
| Total | $ | 1,444,000 | ||||||
| Schedule of future amortization of current intangible | ||||||||
| Twelve Months Ended March 31, | ||||||||
| 2023 | $ | 330,000 | ||||||
| 2024 | 215,000 | |||||||
| 2025 | 120,000 | |||||||
| 2026 | 120,000 | |||||||
| 2027 and thereafter | 1,048,000 | |||||||
| Total | $ | 1,833,000 | ||||||
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.
All of the patents within the Cox Patent Portfolio expired in September 2021 except for two patents which expire in July 2023 and November 2023.2023. The expiration dates of patents within the Company’s M2M/IoT Patent Portfolio range from September 2033 to May 2034.2034. The expiration dates within the Company’s HFT Patent Portfolio range from October 31, 2039 to November 1, 2039. All of the patents within the Company’s Mirror Worlds Patent Portfolio expired. The Company’s Remote Power Patent expired on March 7, 2020.
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Restricted Stock Units
The 2013 Stock Incentive Plan (“2013 Plan”) provides for the 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 and its subsidiaries. As of September 30, 2021,March 31, 2022, there were shares of common stock available for issuance under the 2013 Plan.
NOTE D – STOCK-BASED COMPENSATION (continued)
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2020 | 162,500 | $ | 2.25 | |||||
| Grants of restricted stock units | 45,000 | 3.51 | ||||||
| Vested restricted stock units1 | (158,750 | ) | (2.35 | ) | ||||
| Balance of unvested restricted stock units at September 30, 2021 | 48,750 | $ | 3.09 | |||||
| Schedule of restricted stock unit activity | ||||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2021 | 12,500 | $ | 3.36 | |||||
| Grants of restricted stock units | 670,000 | 1.94 | ||||||
| Vested restricted stock units | (11,250 | ) | (2.55 | ) | ||||
| Balance of restricted stock units outstanding at March 31, 2022 | 671,250 | $ | 1.94 | |||||
______________________________
On January 18, 2022, the Company approved the grant of an aggregate of 25,000 restricted stock units to Jon Greene (15,000 restricted stock units), the Company’s Executive Vice President, and Jonathan Maslow (10,000 restricted stock units), a consultant to the Company. The restricted stock units vest 50% on the one year anniversary of the date of grant (January 18, 2023) and 50% on the two year anniversary of the date of grant (January 18, 2024).
1 Includes 125,000On February 23, 2022, the Company’s Board of Directors approved the grant of 15,000 restricted stock units to each of the Company’s three non-management directors. The restricted stock units vest over a one year period in equal quarterly installments of 3,750 shares of common stock on each of March 15, 2022, June 15, 2022, September 15, 2022 and December 15, 2022.
On March 11, 2022, 125,000 shares of the Company’s common stock subject to restricted stock units owned by the Company’s Chairman and Chief Executive Officer were settled (such restricted stock units vested in July 2021). With respect to the restricted stock unit settlement, the Chairman and Chief Executive Officer delivered shares to satisfy withholding taxes and received net shares of common stock.
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NOTE D – STOCK-BASED COMPENSATION (continued)
On March 22, 2022, in connection with the Company entering into a new four year employment agreement with its Chairman and Chief Executive Officer, the Company granted to its Chairman and Chief Executive Officer 600,000 restricted stock units which vested on July 14, 2021 and arevest in four tranches subject to settlement after January 1, 2022 but not later than March 15, 2022certain conditions (see Note H[1]). The Company valued the grant of these 600,000 restricted stock units using a simulation due to certain market-based conditions included in the vesting terms (see Note B[5] hereof). The key inputs into the Monte Carlo simulation used to value the restricted stock units was a risk-free rate of %, expected term of four years, expected volatility of % and a stock price of $.
Restricted stock unit compensation expense was $ and $ for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively. Restricted stock unit compensation expense was $ and $ for the nine months ended September 30, 2021 and September 30, 2020.
The Company has an aggregate of $ of unrecognized restricted stock unit compensation as of September 30, 2021March 31, 2022 to be expensed over a weighted average period of years.
All of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of September 30,March 31, 2022 and December 31, 2021, there was $72,000 accrued for dividend equivalent rights. As of December 31, 2020, there was $53,000rights which were included in other accrued for dividend equivalent rights.
expenses.
Basic earningsincome (loss) per share is calculated by dividing the net lossincome (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. Potentially dilutive shares of and at September 30,March 31, 2022 and 2021, and 2020, respectively, consisted of options and restricted stock units.
Computations of basic and diluted weighted average common shares outstanding were as follows:
| Schedule of Earnings per share | ||||||||
Three Months Ended | ||||||||
2022 | 2021 | |||||||
| Weighted-average common shares outstanding – basic | 23,909,115 | 24,107,879 | ||||||
| Dilutive effect of options and restricted stock units | — | 508,505 | ||||||
| Weighted-average common shares outstanding – diluted | 23,909,115 | 24,616,379 | ||||||
| Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | 1,171,250 | — | ||||||
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Nine Months Ended | Three Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
| Weighted-average common shares outstanding – basic | 24,136,506 | 23,992,203 | 23,934,361 | 24,012,333 | ||||||||||||
| Dilutive effect of options and restricted stock units | 470,736 | — | 385,870 | 509,375 | ||||||||||||
| Weighted-average common shares outstanding – diluted | 24,607,242 | 23,992,203 | 24,320,231 | 24,521,708 | ||||||||||||
| Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | — | 726,250 | — | — | ||||||||||||
NOTE F – MARKETABLE SECURITIES
Marketable securities as of September30, 2021March 31, 2022 and December 31, 20202021 were composed of:
| Schedule of Marketable Securities | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| September 30, 2020 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| Fixed income mutual funds | $ | 12,313,000 | $ | 3,000 | $ | — | $ | 12,316,000 | $ | 14,389,000 | $ | — | $ | (490,000 | ) | $ | 13,899,000 | |||||||||||||||
| Corporate bonds and notes | 5,357,000 | — | (6,000 | ) | 5,351,000 | 192,000 | — | (15,000 | ) | 177,000 | ||||||||||||||||||||||
| Total marketable securities | $ | 17,670,000 | $ | 3,000 | $ | (6,000 | ) | $ | 17,667,000 | $ | 14,581,000 | $ | — | $ | (505,000 | ) | $ | 14,076,000 | ||||||||||||||
| 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 | |||||||
| December 31, 2021 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Fixed income mutual funds | $ | 14,462,000 | $ | — | $ | (137,000 | ) | $ | 14,325,000 | |||||||
| Corporate bonds and notes | 813,000 | — | (12,000 | ) | 801,000 | |||||||||||
| Total marketable securities | $ | 15,275,000 | $ | — | $ | (149,000 | ) | $ | 15,126,000 | |||||||
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]3] 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.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]2] 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.achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Dovel & Luner, LLP provided legal services to[2] Patent Acquisitions
On March 25, 2022, the Company completed the acquisition of a new patent portfolio (HFT Patent Portfolio) consisting of six U.S. patents and two pending U.S. patents covering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with respect to its patent litigation filedspeed and latency and provide critical latency gains 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 provided 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. The Company is responsible for a certain portion of the expenses incurred with respect to the litigation. As of September 30, 2021, the Company had accrued expenses and contingent liabilities of $46,000 owed to Dovel & Luner, LLP with respect to the litigation.
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NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
Dovel & Luner, LLP also provided legal services totrading systems where the difference between success and failure may be measured in nanoseconds. The Company with respect topaid 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 seller $legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of 24% (based on the settlement being achieved 500,000 at the trial stage). With respect to royalty payments received from Cisco in accordance with the Company’s Settlementclosing and License Agreement with Cisco, as amended, the Company has an obligation to pay Dovel & Luner, LLP (including local counsel) 24% the seller an additional $500,000 in cash and $375,000 of such royalties received. For the three and nine months ended September 30, 2021, the Company incurred aggregate contingent legal feesCompany's common stock (up to Dovel & Luner, LLPa maximum of 375,000 shares) upon achieving certain milestones with respect to the litigationpatent portfolio. The Company also has an additional obligation to pay the seller 15% of $5,760,000the first $50 million of net proceeds (after deduction of expenses) generated by the patent portfolio and $10,245,000, respectively. For the three and nine months ended September 30, 2020,17.5% of net proceeds greater than $50 million. On May 10, 2022, the Company incurred aggregate contingent legal fees to Dovel & Luner, LLP with respectreceived an additional patent issuance from the U.S. Patent and Trademark Office related to the litigation of $1,385,000 and $1,421,000, respectively. The Company was responsible for a portion of the expenses incurred with respect to the litigation. As of September 30, 2021, the Company had no accrued expenses owed to Dovel & Luner, LLP with respect to the litigation.
[2]HFT Patent AcquisitionsPortfolio.
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 acquisitionpart of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition also entered into an agreement with Recognition Interface, LLC (“Recognition”) pursuant to which Recognition received from Recognition received from the Company an interest in the net proceeds realized from the monetizationan interest in the net proceeds realized from the monetization of the the Mirror Worlds PPatent Portfolio, as follows: (i) 10atent Portfolio, as follows: (i) 10%% of the firstthe first $125 millionmillion of nnet proceeds; (ii) e15t proceeds; (ii) 15%% of the nextthe next $125 millionmillion of net proceeds;net proceeds; and (iii) (20iii) 20%% of any portionany portion of the net proceeds in excessthe net proceeds in excess of $250 million.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 September 30, 2021March 31, 2022 and 2020.2021.
In connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M 14%14% of the first $100 million of net proceeds (after deduction of expenses) and 5%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.
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
[1] The Company'sOn March 22, 2022, the Company entered into a new employment agreement (“Agreement”) with its Chairman and Chief Executive Officer, currently serves on an at-will basispursuant to which he continues to serve as the Company’s Chairman and Chief Executive Officer for a four year term (“Term”), at an annual base salary of $535,000.$535,000 which shall be increased by 3% per annum during the term of the Agreement. The Company'sAgreement established an annual target bonus of $175,000 for the Chairman and Chief Executive Officer had servedbased upon performance.
In addition, pursuant to a five-year employment agreement withthe Agreement, the Company granted the Chairman and Chief Executive Officer, under its 2013 Plan, 600,000 restricted stock units (the “RSUs”, each RSU awarded by the Company to its officers, directors and consultants represents a contingent right to receive one share of the Company’s common stock) which expiredterms provided for vesting in July 2021four tranches, as follows: (1) RSUs which shall vest RSUs on March 22, 2023 and RSUs on March 22, 2024, subject to the Chairman and Chief Executive Officer’s continued employment by the Company through each such vesting date (the "Prior Agreement"“Employment Condition”) (“Tranche 1”); (2) RSUs shall vest if at any time during the term of the Agreement that the Company’s common stock (the “Common Stock”) achieves a closing price for twenty (20) consecutive trading days (“Closing Price”) of a minimum of $ per share (subject to adjustment for stock splits)
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 2”); (3) RSUs shall vest if at any time during the term of the Agreement that the Common Stock achieves a Closing Price of a minimum of $ per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 3”); and (4) RSUs shall vest if at any time during the term of the Agreement, that the Common Stock achieves a Closing Price of a minimum of $ per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 4”). In the event of a Change of Control (as defined), Termination Other Than for Cause (as defined) or a termination by the Chairman and Chief Executive Officer for Good Reason (as defined), in each case prior to the last day of the term of the Agreement, the vesting of all unvested RSUs shall accelerate (and not be subject to any conditions) and all RSUs shall become immediately fully vested. All RSUs granted by the Company to its officers, directors or consultants have dividend equivalent rights.
Under certainthe terms of the Prior Agreement, which survived its expiration, so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant to the agreementAgreement or otherwise, the Chairman and Chief Executive Officer receivesshall also receive incentive compensation in an amount equal to 5% of the Company'sCompany’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less than 6.25% of the gross recovery) of the Company'sCompany’s royalties and other payments relating to Licensing Activities with respect to patents other than the Remote Power Patent (including all of the Mirror Worlds Patent Portfolio, Cox Patent PortfolioCompany’s patent portfolios and M2M/IoT Patent Portfolio)its investment in ILiAD Biotechnologies) (collectively, the "Incentive Compensation"“Incentive Compensation”). During the three months ended September 30,March 31, 2022 and 2021, and 2020, the Chairman and Chief Executive Officer earned Incentive Compensation of $850,0000 and $208,000935,000, respectively. During the nine months ended September 30, 2021 and 2020,
The Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer earnedfor 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 us or not; provided, that, the employment of the Chairman and Chief Executive Officer 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 Company’s assets, 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 $1,785,000175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and $218,000(iii) accelerated vesting of all unvested options, RSUs or other awards., respectively.
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NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
In connection with the Agreement, the Chairman and Chief Executive Officer has also agreed not to compete with the Company as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated “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.
[2] The Company’s Chief Financial Officer serves on an at-will basis at an annual base salary of $175,000 and is eligible to receive incentive or bonus compensation on an annual basis in the discretion of the Company’s Compensation Committee.
[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.
NOTE I – LEGAL PROCEEDINGS AND DISPUTES
[1] On July 26, 2021, the Company agreed to settle its patent litigation against Hewlett-Packard Company and Hewlett-Packard Enterprise Company (collectively, “HP”) pending in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of the Company’s Remote Power Patent. Under the terms of the settlement agreement, Hewlett-Packard Enterprise Company paid the Company $17,000,000 in full settlement of the litigation and HP received a fully paid license and release to the Remote Power Patent for its full term, which applies to sales of Power over Ethernet (“PoE”) products by HP and its wholly-owned subsidiary Aruba Networks, LLC.
[2] 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 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 respect to licensing the Remote Power Patent.
[3]2] 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 systemsystem.. The litigations against Google
NOTE I – LEGAL PROCEEDINGS(continued)
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.SU.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. Discovery has been substantially completed and a trial date has not yet been set.
[4]3] 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 featuresfeatures.. 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. 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
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NOTE I – LEGAL PROCEEDINGS AND DISPUTES (continued)
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. Discovery has been substantially completed
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a trial date has not yet been set.motion for summary judgment by Facebook. In its ruling the Court (i) denied Facebook’s motion that the asserted patents were invalid by concluding that all asserted claims were patent eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Facebook and dismissed the case. The Company strongly disagrees with the decision of the District Court on non-infringement and on April 4, 2022, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Facebook filed a notice of cross-appeal with respect to the Court’s ruling on validity.
[5]4] On December 15, 2020, the Company filed a lawsuit against NetgearNETGEAR, Inc. (“Netgear”) in the Supreme Court of the State of New York, County of New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with the Company (the “Agreement”) for failure to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of Netgear’s PoE products.
[6] On January 7,October 22, 2021, Netgear filed a Demand for Arbitration at the American Arbitration Association (AAA) seeking to arbitrate certain issues raised in the litigation. The Company has objected to jurisdiction at the AAA and the dispute is pending. On April 1, 2022, the Court denied Netgear’s motion to compel arbitration. On April 22, 2022, Netgear filed a counterclaim in the Court action alleging that the Company filed a lawsuit against Plantronics, Inc.,breached the successor entity to Polycom, Inc., in the Supreme Court of the State of California, County of Santa Clara, for breach of a Settlement and License Agreement dated September 29, 2016, with the Company for the failure of Plantronics and Polycom to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of PoE products.by not offering Netgear lower royalties.
NOTE J –INVESTMENT
During the period December 2018 through– March 2021, the Company made an aggregate investment of $6,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held clinical stage biotechnology company dedicated to the prevention and treatment of human disease caused by Bordetella pertussis with a currentpertussis. ILiAD is developing key technologies that focus on validating its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). The aggregate investment of $6,000,000 by the Company includes a $5,000,000 equity investment and a $1,000,000 investment in a convertible note (see below). At September 30, 2021,March 31, 2022, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis and 7.37.2% of the outstanding units on a fully diluted basis (after giving effect to the exercise of all outstanding options, warrants and warrants)convertible notes). In connection with its investment, the Company’s Chairman and Chief Executive Officer obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members.
NOTE J – INVESTMENT(continued)
On March 12, 2021, the Company invested an additional $1,000,000 in ILiAD as part of aits private offering of up to $23,500,000 of convertible notes (the “Notes”). The Notes have a maturity of three years with interest accruing at 6% per annum. The Notes are required to be converted into a Qualified Financing (minimum financing of $15 million) at the lesser of (i) 80% of the price paid per unit in such offering or (ii) a price based on an enterprise value of $176,000,000. In addition, the Notes shall convert in the event of a merger at the lower of an enterprise value of $176,000,000$176,000,000 or the stated valuation of ILiAD in the merger transaction.transaction. In the event of a change-in-control, noteholders will also have the option to have the Notes repaid except in a Qualified OfferingFinancing or a stock-for-stock merger.
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NOTE J – INVESTMENT (continued)
For the three months ended September 30,March 31, 2022 and 2021, the Company recorded a net loss from its equity investment in ILiAD totalingof $186,000433,000. For the nine months ended September 30, 2021, the Company recorded a net loss from its equity investment in ILiAD totaling and $632,000210,000., respectively.
The difference between the Company’s share of equity in ILiAD’s net assets and the equity investment carrying value reported on the Company’s unaudited condensed consolidated balance sheet at September 30, 2021March 31, 2022 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.
On June 8, 2021, 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. 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 September 30, 2021,March 31, 2022, the Company has repurchased an aggregate of shares of its common stock at an aggregate cost of $16,286,80517,225,276 (exclusive of commissions) or an average per share price of $. Except for the Company’s repurchase in May 2021 of shares of its common stock from one of its directors at a price of $ per share or an aggregate consideration of $130,800 in a privately negotiated transaction (see Note M below), theThe Company did nott repurchase any shares of its common stock during the ninethree months ended September 30, 2021.March 31, 2022. At September 30, 2021,March 31, 2022, the dollar value of remaining shares that may be repurchased under the Share Repurchase Program was $.
NOTE L – CONCENTRATIONS
Revenue from the Company’s Remote Power Patent constituted 100% of the Company’sThe Company had no revenue for the three and nine months ended September 30, 2021.March 31, 2022. Revenue from one licensee constituted 100% of the Company’s revenue forof the three months ended September 30, 2021 and revenue from two licensees constituted 100% of the Company’s revenue for the nine months ended September 30,March 31, 2021. Revenue from one licensee constituted 100% of the Company’s revenue for the three months ended September 30, 2020 and 95% of the Company’s revenue for the nine months ended September 30, 2020. At September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had 0 royalty receivables.
NOTE M – RELATED PARTY TRANSACTION
On May 27, 2021, the Company repurchased from a director of the Company shares of its common stock at a purchase price of $ per share or aggregate consideration of $130,800.
NOTE N – DIVIDEND POLICY
The Company’s dividend policy consists of semi-annual cash dividends of $ per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. On February 23,The Company paid dividends consistent with its policy in 2021 and the Company’s Boardfirst quarter of Directors declared a semi-annual cash dividend of $ per share with a payment date of March 31, 2021 to all common shareholders of record as of March 16, 2021. On September 10, 2021, the Company’s Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of September 30, 2021 to common stockholders of record as of September 21, 2021.2022. 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 ON – SUBSEQUENT EVENTS
On October 26, 2021,May 1, 2022, the Company settledsigned a new three-year lease for its litigation against Plantronics, Inc.principal office space in consideration forNew Canaan, Connecticut, pursuant to which the Company pays a paymentbase rent and additional expenses of $3an aggregate of $37,0006,000 (see Note I[6] hereof).per month.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own eighty-eight (88)ninety-six (96) 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 WorldsCox 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”)Portfolio relating to enabling technology for identifying media content on the Internet and taking further action to be performed after such identification; (iv)(ii) our M2M/IoT patent portfolio (the “M2M/IoT Patent Portfolio”)Portfolio relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers.computers; (iii) our HFT Patent Portfolio covering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with speed and latency and provide critical latency gains in trading systems where the difference between success and failure may be measured in nanoseconds; (iv) our Mirror Worlds Patent Portfolio relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; and (v) our Remote Power Patent covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras. In addition, we continually review opportunities to acquire or license additional intellectual property as well as other strategic alternatives.
UntilAt March 7, 2020, when31, 2022, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $56,535,000 and working capital of $52,635,000. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
During the Remote Power Patent expired,period December 2018 through March 2021, we hadmade an aggregate investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to sixty (60) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment in ILiAD involves significant risk.
We have been actively engaged in the licensing ofdependent upon our Remote Power Patent (U.S.for a significant portion of our revenue. Our Remote Power Patent No. 6,218,930) which generated licensing revenue in excess of $187,000,000 from May 2007 through September 30, 2021. As of March 7, 2020, we had twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, included license agreements with Cisco, Dell Inc., Extreme Networks, Inc., Netgear, 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 our Remote Power Patent, we31, 2022. We no longer receive licensing revenue for our Remote Power Patent that accrues for any period subsequent to theMarch 7, 2020 (the expiration date (March 7, 2020).
However, subsequent toof the expiration date ofpatent). Except for our pending legal proceeding against NETGEAR, Inc. involving our Remote Power Patent, we received and may continueour future revenue is entirely dependent on our ability to receive licensing revenue from certain licensees ofmonetize our Remote Patent for periods prior to March 7, 2020. 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 paid $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 unaudited condensed consolidated financial statements included in this Quarterly Report). In addition, on July 26, 2021, we entered into a settlement agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid us $17,000,000 in full settlement of aother patent litigation (see Note I[2] hereof). 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 commenced litigation against Netgear (see I[5] to our unaudited condensed consolidated financial statements included herein).assets.
Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets.assets and the monetization of our patent portfolios. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize. 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
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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.
On March 25, 2022, we completed the acquisition of a new patent portfolio (the HFT Patent Portfolio) consisting of six U.S. patents and two pending U.S. patents (see Note G[2] to our consolidated financial statements included in this Quarterly Report). On May 10, 2022, we received an additional patent issuance from the U.S. Patent and Trademark Office related to the HFT Patent Portfolio.
We have been dependent upon our Remote Power Patent for a significant portionAll of our revenue. We had revenue of $35,692,000 for the ninethree months ended September 30,March 31, 2021 resulted from two licenseesthe resolution of our Remote Power Patent. Revenue for the years ended December 31, 2020, 2019 and 2018 from license agreements for our 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 our Remote Power Patent on March 7, 2020,contractual dispute with Cisco in which we no longer receive licensing revenue for our Remote Power Patent for any period subsequent to the expiration date. Except for the uncertain licensing revenue from Netgear related to licensing our Remote Power Patent for a period prior to its expiration datereceived $18,692,000 (see Note I[5]1] to our unaudited condensed consolidated financial statements included herein). While we have pending litigation involving certain patents within our Cox Patent Portfolio against Google and YouTube and have appealed the judgment of the District Court dismissing our litigation against Facebook on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio, we may not achieve successful outcomes of the litigation or the appeal. Accordingly, our future revenue is uncertain.
The significant components of expenses impacting our net income include contingent legal fees and expenses related to our patent litigation (see Note B[7] to our unaudited condensed consolidated financial statements included herein) and incentive compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H[1] to our unaudited condensed consolidated financial statements included herein), our futureboth such components of expenses are based on a percentage of the licensing revenue will be entirely dependent on our ability to monetize our Mirror Worlds, Cox and M2M/IoT patent portfoliosreceived by us as well as any new patents we may acquire.a result of litigation or otherwise.
Our annualquarterly and quarterlyannual operating and financial results may fluctuate significantly from period to period as a result of a variety of factors that are outside our control, including the timing and our ability to achieve successful outcomes of patent litigation, our ability and timing of consummating future license agreements for our intellectual property, and whether we will achieve a return on our investment in ILiAD Biotechnologies, LLC (“ILiAD”) and the timing of any such distributions.returns.
At September 30, 2021,Our future operating results may also be materially impacted by our principal sources of liquidity consisted of cash and cash equivalents and, marketable securities of $60,840,000 and working capital of $57,251,000. 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 opportunitiesability to acquire additional intellectual property as well as evaluate other strategichigh quality patents which management believes have the potential to generate significant licensing opportunities.
We currently have pending In the future, we may not be able to identify or consummate such patent infringement litigations involving certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see Notes I[3] and I[4]acquisitions or achieve significant licensing revenue with respect to our unaudited condensed consolidated financial statements included herein). Patent litigation is inherently risky and the outcome is uncertain.such patent acquisitions.
In 20212022 and future years we could be classified as a Personal Holding Company. If this is the case, we would be subject to a 20% tax on the amount of any PHC Income (as defined) for such year that we do not distribute to our shareholders. If we are determined to be a Personal Holding Company in 2021 and in 2021we have undistributed personal holding company income (which generally means taxable income subject to certain adjustments), we may issue a special dividend to our shareholders rather than incur the 20% tax(see(see Note B[7]8] to our unaudited condensed consolidated financial statements included in this Quarterly Report).
During the period December 2018 to date, we made an aggregate investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to fifty-four (54) 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 has 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.
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On June 9, 2020,2021, 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. On February 23,In 2021 our Boardand the first quarter of Directors declared a2022, we paid semi-annual cash dividends in accordance with our 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. On September 10, 2021, our Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of September 30, 2021 to all common shareholders of record as of September 21, 2021.policy. Our dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time depending upon our financial requirements, earnings and other factors existing at the time (see Note NM to our unaudited condensed consolidated financial statements included herein).
RESULTS OF OPERATIONS
Three Months Ended September 30, 2021March 31, 2022 Compared to Three Months Ended September 30, 2020March 31, 2021
Revenue. We had no revenue of $17,000,000 for the three months ended September 30, 2021March 31, 2022 as compared to revenue of $4,150,000$18,692,000 for the three months ended September 30, 2020. The increase inMarch 31, 2021. Our revenue of $12,850,000$18,692,000 for the three months ended September 30,March 31, 2021 was due to revenue of $17,000,000 from our litigation settlementresolution of a contractual dispute with Hewlett-Packard.Cisco concerning licensing of our Remote Power Patent (see Note I[1] to our unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the three months ended September 30, 2021March 31, 2022 were $7,963,000$897,000 as compared to $2,490,000$6,421,000 for the three months ended September 30, 2020. We had costs of revenue of $6,610,000 and $1,593,000March 31, 2021. The decrease in operating expenses for the three months ended September 30,March 31, 2022 was primarily due to a decrease in costs of revenue of $5,420,000 as a result of revenue of $18,692,000 for the three months ended March 31, 2021 and 2020, respectively.from resolution of our contractual dispute with Cisco. Included in the costs of revenue for the three months ended September 30,March 31, 2021 were contingent legal fees of $5,760,000$4,485,000 and $850,000$935,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H[1] to our unaudited condensed consolidated financial statements included herein). Included in the costs of revenue for the three months ended September 30, 2020 were contingent legal fees and expenses of $1,385,000 and $208,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
General and administrative expenses were $493,000 for the three months ended September 30, 2021 as compared to $473,000 for the three months ended September 30, 2020. Amortization of patents was $74,000 for three months ended September 30, 2021 as compared to $72,000 for the three months ended September 30, 2020. Stock-based compensation expense related to the issuance of restricted stock units was $65,000 for the three months ended September 30, 2021 as compared to $85,000 for the three months ended September 30, 2020. Professional fees and related costs were $721,000$250,000 for the three months ended September 30, 2021March 31, 2022 as compared to $267,000$355,000 for the three months ended September 30, 2020 primarilyMarch 31, 2021 as a result of increaseddecreased expenses related to patent litigation costs of $573,000.litigation.
Operating Income (Loss). We had an operating incomeloss of $9,037,000$897,000 for the three months ended September 30, 2021March 31, 2022 compared with operating income of $1,660,000$12,271,000 for the three months ended September 30, 2020.March 31, 2021. The increaseddecreased operating income of $7,377,000$13,168,000 for the three months ended September 30, 2021March 31, 2022 was primarily due to the increase in revenue of $12,850,000 related to our litigation settlement with Hewlett-Packard.
Interest and Dividend Income. Interest and dividend income for$18,692,000 from the three months ended September 30, 2021 decreased $38,000 from $105,000 for the three months ended September 30, 2020 to $67,000 for the three months ended September 30, 2021 primarily as a result of a change in the mixresolution of our short term fixed income investments and cash equivalents.contractual dispute with Cisco.
Income Taxes. For the three months ended September 30,March 31, 2022, we had a current tax expense for federal, state and local income taxes of $0 and a deferred tax benefit of $452,000. For the three months ended March 31, 2021, we had a current tax expense for federal, state and local income taxes of $2,326,000$890,000 and a deferred tax benefitexpense of $37,000. For the three months ended September 30, 2020, we had a current tax expense for federal, state and local income taxes of $355,000 and a deferred tax benefit of $355,000.$1,724,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $186,000$433,000 during the three month period ended September 30, 2021March 31, 2022 related to our equity share in ILiAD Biotechnologies, a clinical stage biotechnology company, as compared to a net loss of $146,000$210,000 for the three months ended September 30, 2020 (see Note [J] to our unaudited condensed consolidated financial statements included herein).
Net Income. As a result of the foregoing, we realized net income of $6,589,000 or $0.28 per share basic and $0.27 per share diluted for the three months ended September 30,March 31, 2021 compared with net income of $1,687,000 or $0.07 per share basic and diluted for the three months ended September 30, 2020. The increased net income of $4,902,000 for the three months ended September 30, 2021 was primarily due to an increase in revenue of $12,850,000 from our litigation settlement with Hewlett-Packard.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Revenue. We had revenue of $35,692,000 for the nine months ended September 30, 2021 as compared to revenue of $4,366,000 for the nine months ended September 30, 2020. The increase in revenue of $31,326,000 for the nine months ended September 30, 2021 was due to revenue of $18,692,000 from our resolution of a contractual dispute with Cisco concerning licensing of our Remote Power Patent and revenue of $17,000,000 from our litigation settlement with Hewlett-Packard (see Note I[2] to our unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the nine months ended September 30, 2021 were $15,285,000 as compared to $4,311,000 for the nine months ended September 30, 2020. We had costs of revenue of $12,030,000 and $1,645,000 for the nine months ended September 30, 2021 and 2020, respectively. Included in the costs of revenue for the nine months ended September 30, 2021 were contingent legal fees of $10,245,000 and $1,785,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H[1] to our unaudited condensed consolidated financial statements included herein). Included in the costs of revenue for the nine months ended September 30, 2020 were contingent legal fees of $1,427,000 and $218,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
General and administrative expenses were $1,467,000 for the nine months ended September 30, 2021 as compared to $1,418,000 for the nine months ended September 30, 2020. Amortization of patents was $221,000 for nine months ended September 30, 2021 as compared to $216,000 for the nine months ended September 30, 2020. Stock-based compensation expense related to the issuance of restricted stock units was $183,000 for the nine months ended September 30, 2021 as compared to $242,000 for the three months ended September 30, 2020. Professional fees and related costs were $1,384,000 for the nine months ended September 30, 2021 as compared to $790,000 for the nine months ended September 30, 2020 primarily as a result of increased patent litigation costs of $779,000.
Operating Income. We had operating income of $20,407,000 for the nine months ended September 30, 2021 compared with operating income of $55,000 for the nine months ended September 30, 2020. The increased operating income of $20,352,000 for the nine months ended September 30, 2021 was primarily due to the increase in revenue of $31,326,000 from the resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard.
Interest and Dividend Income. Interest and dividend income for the nine months ended September 30, 2021 decreased $218,000 from $403,000 for the nine months ended September 30, 2020 to $185,000 for the nine months ended September 30, 2021 primarily as a result of a change in the mix of our short term fix income investments and cash equivalents.
Income Taxes. For the nine months ended September 30, 2021, we had a current tax expense for federal, state and local income taxes of $3,036,000 and a deferred tax expense of $1,635,000. For the nine months ended September 30, 2020, we had a deferred tax benefit for federal, state and local income taxes of $79,000 and a current tax benefit of $79,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $632,000 during the nine month period ended September 30, 2021 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $644,000 for the nine months ended September 30, 2020 (see Note J to our unaudited condensed consolidated financial statements included herein).
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Net Income (Loss). As a result of the foregoing, we realized a net incomeloss of $15,257,000$1,312,000 or $0.63$(0.05) per share basic and $0.62$(0.05) diluted for the ninethree months ended September 30, 2021March 31, 2022 compared with a net lossincome of $234,000$9,451,000 or $(0.01)$0.39 per share basic and $0.38 diluted for the ninethree months ended September 30, 2020.March 31, 2021. The increased net incomeloss of $15,491,000$1,312,000 for the ninethree months ended September 30, 2021March 31, 2022 was primarily due to increasedno revenue for such period as compared to $18,692,000 of $31,326,000revenue for the three months ended March 31, 2021 from the resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard (see Note I[2]1] to our unaudited condensed consolidated financial statements included herein).
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At September 30, 2021,March 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $60,840,000$56,535,000 and working capital of $57,251,000.$52,635,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the next twelve months and the foreseeable future.
Working capital increaseddecreased by $14,292,000$3,030,000 at September 30, 2021March 31, 2022 to $57,251,000$52,635,000 as compared to working capital of $42,959,000$55,665,000 at December 31, 2020.2021. The increasedecrease in working capital of $14,292,000$3,030,000 for the ninethree months ended September 30, 2021March 31, 2022 was primarily due to our net incomeloss of $15,257,000$1,312,000 during the period.
Net cash provided byused in operating activities for the ninethree months ended September 30, 2021 increasedMarch 31, 2022 decreased by $19,494,000$626,000 from $107,000$1,375,000 for the ninethree months ended September 30, 2020March 31, 2021 to $19,601,000$749,000 for the ninethree months ended September 30, 2021March 31, 2022 primarily due to revenue of $35,692,000$18,692,000 from resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard during the ninethree months ended September 30,March 31, 2021.
Net cash (used in) provided by investing activities during the ninethree months ended September 30, 2021March 31, 2022 was $608,000$13,000 as compared to $4,344,000$1,198,000 for the ninethree months ended September 30, 2020March 31, 2021 primarily as a result of the differential of purchases and sales of marketable securities and partially offset by our $1,000,000 convertible note investment in ILiAD Biotechnologies (see Note J to our unaudited condensed consolidated financial statements included herein).
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2022 and 2021 was $1,302,000 and 2020 was $2,541,000 and $2,817,000,$1,206,000, respectively. The change of $276,000$96,000 primarily resulted from reduced repurchasesan increase of common stock$112,000 in the value of $121,000 and shares delivered to pay payrollfund withholding taxes of $109,000 for the ninethree months ended September 30, 2020.March 31, 2022.
We maintain our cash in money market funds certificates of deposit and short-term fixed income securities. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
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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, 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.
We believe our most critical accounting policies to be the following:
Revenue RecognitionEquity Method Investments
UnderEquity method investments are equity securities in entities that we do not control but over which we have the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 606, revenue323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. Our proportionate share of the income or loss from equity method investments is recognized when we complete the licensing ofon a one-quarter lag. When our intellectual property to our licensees,carrying value in an amount that reflects the considerationequity method investment is reduced to zero, no further losses are recorded in our financial statements unless 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 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 theguaranteed obligations of the parties. These agreements may include, butinvestee company or have committed additional funding. When the investee company subsequently reports income, we will not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees,record our share of such income until it equals the amount of our share of losses not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and ongoing royalties on licensed products sold by the licensee. Generally, in the event of settlement of litigation related to our assertion of patent infringement involving our intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a “Fully-Paid License”), 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 lifecarrying amount of the licensed patent (a “Royalty Bearing License”).
We recognize revenue from our Royalty Bearing Licensesequity investment is recognized 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 someprofit or all of the consideration is in the form 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 non-refundable up-front payment, for which we have no future obligations or performance requirements, revenue is generally recognized when we have 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.loss.
Costs of Revenue and Related CostsIncome Taxes
We includeaccount for income taxes in costsaccordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes (ASC 740), which requires us to use the assets and liability method of revenueaccounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the threetax consequences of temporary (timing) differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and nine months ended September 30, 2021the tax bases of existing assets 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)liabilities and incentive bonus compensation payable to its Chairmanoperating loss and Chief Executive Officer.
We do not believe recently issued but not yet effectivetax credit carry forwards. Under this accounting standards, if currently adopted, would have a materialstandard, the effect on our consolidated financial position, statementsdeferred income taxes of operations and cash flows (see Note B to our unaudited condensed financial statements included herein).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.
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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 September 30, 2021March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our legal proceedings see Note I to our unaudited condensed consolidated financial statements included in this Quarterly Report and Item 1. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2020.2021 (filed with the SEC on March 30, 2022).
During the three months ended September 30, 2021,March 31, 2022, the following material events occurred with respect to certain of our legal proceedings:
Remote PowerMirror Worlds Patent Portfolio
On July 26, 2021, we agreedWith respect to settle our patent litigation against Hewlett-Packard Company and Hewlett-Packard Enterprise Company (collectively, “HP”) pendingFacebook in the U.S. District Court for the EasternSouthern District of Texas, Tyler Division, for infringement of our Remote Power Patent. Under the terms of the settlement agreement, Hewlett-Packard Enterprise Company paid us $17,000,000 in full settlement of the litigation and HP received a fully paid license and release to the Remote Power Patent for its full term (which expiredNew York, on March 7, 2020), which applies2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Facebook. In its ruling the Court (i) denied Facebook’s motion that the asserted patents were invalid by concluding that all asserted claims were patent eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Facebook and dismissed the case. We strongly disagree with the decision on non-infringement and on April 4, 2022, we filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Facebook filed a cross-appeal with respect to the Court’s ruling on validity.
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Netgear Litigation
With respect to our litigation against NETGEAR, Inc. (“Netgear”) in the Supreme Court of the State of New York, County of New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with us (the “Agreement”) for failure to make royalty payments to us based on Netgear’s sales of Power over Ethernet (“PoE”)PoE products, on April 1, 2022, the Court denied Netgear’s motion to compel arbitration. On April 22, 2022, Netgear filed a counterclaim against us alleging that we breached the Agreement by HP and its wholly owned subsidiary Aruba Networks, LLC.not offering Netgear lower royalty rates.
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. Investors should carefully consider the risks described in this Quarterly Report on Form 10-Q for the three months ended September 30, 2021,March 31, 2022, and our Annual Report on Form 10-K for the year ended December 31, 20202021 (pages 13-22)11-20), filed with the SEC on March 31, 2021 as well as the risk disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 (page 30).30, 2022.
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 September 30, 2021.March 31, 2022.
Stock Repurchases
On August 22, 2011, we established a share repurchase program (“Share Repurchase Program”). On June 8, 2021, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of shares of our common stock over the subsequent 24 month period. The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. Since inception of the Share Repurchase Program in August 2011 through September 30, 2021,March 31, 2022, we have repurchased an aggregate of 8,645,6598,984,134 shares of our common stock at an aggregate cost of $16,286,805$17,225,276 (exclusive of commissions) or an average per share price of $1.88.$1.92. During the three months ended September 30, 2021,March 31, 2022, we did not repurchase any of our shares of common stock. At September 30, 2021,March 31, 2022, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $4,869,200.$3,930,729.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. 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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