NETWORK-1 TECHNOLOGIES, INC.
(Exact name of Registrantregistrant as Specifiedspecified in Its Charter)
Delaware | 11-3027591 | |
(State or incorporation or | ( Identification No.) |
445 Park Avenue, Suite 912 New York, New York | 10022 | |
| (Address of | (Zip Code) |
212-829-5770
(Registrant'sRegistrant’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:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§223.405)S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"filer”, "smaller“accelerated filer” and “smaller reporting company" and "emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | ||
Non-accelerated filer ☐ | Smaller reporting company ☒ | ||
| Emerging growth company ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant'sregistrant’s common stock, $.01 par value per share, outstanding as of November 13, 20179, 2020 was 24,131,012.
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
| Page No. | ||
| PART I. Financial Information | ||
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | |
| Condensed Consolidated Balance Sheets as of September 30, | 3 | |
| Condensed Consolidated Statements of | 4 | |
| Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 | 5 | |
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, | ||
| Notes to Unaudited Condensed Consolidated Financial Statements | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | Controls and Procedures | |
| PART II. Other Information | ||
| Item 1. | Legal Proceedings | |
| Item 1A. | Risk Factors | 35 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35 |
| Item 3. | Defaults Upon Senior Securities | 36 |
| Item | Other Information | 36 |
| Item | Exhibits | 36 |
| Signatures | 37 | |
-2-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2017 | December 31, 2016 | |||||||
| ASSETS: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 52,265,000 | $ | 50,918,000 | ||||
| Marketable securities, available for sale | 1,064,000 | 1,065,000 | ||||||
| Royalty receivables, net | 3,570,000 | 2,879,000 | ||||||
| Prepaid taxes | 300,000 | 1,195,000 | ||||||
| Other current assets | 18,000 | 83,000 | ||||||
| Total Current Assets | 57,217,000 | 56,140,000 | ||||||
| OTHER ASSETS: | ||||||||
| Deferred tax assets | 168,000 | 207,000 | ||||||
| Patents, net of accumulated amortization | 1,131,000 | 1,231,000 | ||||||
| Security deposits | 19,000 | 19,000 | ||||||
| Total Other Assets | 1,318,000 | 1,457,000 | ||||||
| TOTAL ASSETS | $ | 58,535,000 | $ | 57,597,000 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 70,000 | $ | 171,000 | ||||
| Income taxes payable | 930,000 | — | ||||||
| Accrued contingency fees and related costs | 1,789,000 | 2,681,000 | ||||||
| Accrued payroll | 240,000 | 1,748,000 | ||||||
| Other accrued expenses | 87,000 | 125,000 | ||||||
| TOTAL LIABILITIES | 3,116,000 | 4,725,000 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
| none issued and outstanding at September 30, 2017 and December 31, 2016 | — | — | ||||||
| Common stock, $0.01 par value; authorized 50,000,000 shares; | ||||||||
| 24,131,012 and 23,744,829 shares issued and outstanding at | ||||||||
| September 30, 2017 and December 31, 2016, respectively | 241,000 | 238,000 | ||||||
| Additional paid-in capital | 64,141,000 | 62,367,000 | ||||||
| Accumulated deficit | (8,931,000 | ) | (9,702,000 | ) | ||||
| Accumulated other comprehensive loss | (32,000 | ) | (31,000 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 55,419,000 | 52,872,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 58,535,000 | $ | 57,597,000 | ||||
September 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 24,221,000 | $ | 22,587,000 | ||||
| Marketable securities, at fair value | 21,271,000 | 25,730,000 | ||||||
| Royalty receivables, net | — | 343,000 | ||||||
| Other current assets | 30,000 | 98,000 | ||||||
TOTAL CURRENT ASSETS | 45,522,000 | 48,758,000 | ||||||
OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | 1,653,000 | 1,819,000 | ||||||
| Equity investment | 3,793,000 | 4,437,000 | ||||||
| Operating leases right-of-use asset | — | 41,000 | ||||||
| Security deposits | 21,000 | 21,000 | ||||||
| Total Other Assets | 5,467,000 | 6,318,000 | ||||||
| TOTAL ASSETS | $ | 50,989,000 | $ | 55,076,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 70,000 | $ | 421,000 | ||||
| Accrued contingency fees and related costs | 75,000 | 492,000 | ||||||
| Accrued payroll | 5,000 | 334,000 | ||||||
| Operating lease obligations – current | — | 41,000 | ||||||
| Other accrued expenses | 194,000 | 281,000 | ||||||
| TOTAL CURRENT LIABILITIES | 344,000 | 1,569,000 | ||||||
| TOTAL LIABILITIES | $ | 344,000 | $ | 1,569,000 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||||
none issued and outstanding at September 30,2020 and December 31,2019 | — | — | ||||||
Common stock, $0.01 par value; authorized 50,000,000 shares; 24,033,076 and 24,036,071 shares issued and outstanding at September 30,2020 and December 31,2019,respectively | 240,000 | 240,000 | ||||||
| Additional paid-in capital | 66,065,000 | 65,824,000 | ||||||
| Accumulated deficit | (15,664,000 | ) | (12,636,000 | ) | ||||
Accumulated other comprehensive income | 4,000 | 79,000 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 50,645,000 | 53,507,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 50,989,000 | $ | 55,076,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-3-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUE | $ | 3,237,000 | $ | 34,326,000 | $ | 14,320,000 | $ | 59,963,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | 964,000 | 16,943,000 | 4,339,000 | 24,183,000 | ||||||||||||
| Professional fees and related costs | 534,000 | 633,000 | 1,154,000 | 1,458,000 | ||||||||||||
| General and administrative | 434,000 | 428,000 | 1,358,000 | 1,256,000 | ||||||||||||
| Amortization of patents | 50,000 | 49,000 | 150,000 | 760,000 | ||||||||||||
| Stock-based compensation | 237,000 | 189,000 | 711,000 | 233,000 | ||||||||||||
| Contingent patent cost | — | — | — | 500,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 2,219,000 | 18,242,000 | 7,712,000 | 28,390,000 | ||||||||||||
| OPERATING INCOME | 1,018,000 | 16,084,000 | 6,608,000 | 31,573,000 | ||||||||||||
OTHER INCOME: | �� | |||||||||||||||
| Interest income, net | 55,000 | 24,000 | 89,000 | 50,000 | ||||||||||||
| INCOME BEFORE INCOME TAXES | 1,073,000 | 16,108,000 | 6,697,000 | 31,623,000 | ||||||||||||
| INCOME TAXES: | ||||||||||||||||
| Current | 425,000 | 3,817,000 | 2,198,000 | 4,198,000 | ||||||||||||
| Deferred taxes, net | — | 1,459,000 | 39,000 | 4,543,000 | ||||||||||||
| Total income taxes | 425,000 | 5,276,000 | 2,237,000 | 8,741,000 | ||||||||||||
| NET INCOME | $ | 648,000 | $ | 10,832,000 | $ | 4,460,000 | $ | 22,882,000 | ||||||||
| Net Income Per Share | ||||||||||||||||
| Basic | $ | 0.03 | $ | 0.46 | $ | 0.18 | $ | 0.98 | ||||||||
| Diluted | $ | 0.02 | $ | 0.43 | $ | 0.17 | $ | 0.93 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 24,150,388 | 23,320,514 | 24,185,129 | 23,291,408 | ||||||||||||
| Diluted | 26,412,139 | 25,198,142 | 26,480,084 | 24,700,784 | ||||||||||||
| Cash dividends declared per share | $ | 0.05 | $ | — | $ | 0.10 | $ | — | ||||||||
| NET INCOME | $ | 648,000 | $ | 10,832,000 | $ | 4,460,000 | $ | 22,882,000 | ||||||||
| OTHER COMPREHENSIVE INCOME: | ||||||||||||||||
| Unrealized holding gain (loss) on securities available-for-sale arising during the period | (2,000 | ) | (4,000 | ) | (1,000 | ) | 39,000 | |||||||||
| COMPREHENSIVE INCOME | $ | 646,000 | $ | 10,828,000 | $ | 4,459,000 | $ | 22,921,000 | ||||||||
| Three Months Ended September 30, | �� | Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUE | $ | 4,150,000 | $ | 520,000 | $ | 4,366,000 | $ | 1,725,000 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | 1,593,000 | 138,000 | 1,645,000 | 459,000 | ||||||||||||
| Professional fees and related costs | 267,000 | 267,000 | 790,000 | 812,000 | ||||||||||||
| General and administrative | 473,000 | 466,000 | 1,418,000 | 1,442,000 | ||||||||||||
| Amortization of patents | 72,000 | 71,000 | 216,000 | 212,000 | ||||||||||||
| Stock-based compensation | 85,000 | 154,000 | 242,000 | 425,000 | ||||||||||||
| TOTAL OPERATING EXPENSES | 2,490,000 | 1,096,000 | 4,311,000 | 3,350,000 | ||||||||||||
| OPERATING INCOME (LOSS) | 1,660,000 | (576,000 | ) | 55,000 | (1,625,000 | ) | ||||||||||
| OTHER INCOME (LOSS): | ||||||||||||||||
| Interest and dividend income, net | 105,000 | 270,000 | 403,000 | 872,000 | ||||||||||||
| Net realized and unrealized gain (loss) on marketable securities | 68,000 | (39,000 | ) | (48,000 | ) | 6,000 | ||||||||||
| Total other income, net | 173,000 | 231,000 | 355,000 | 878,000 | ||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN NET LOSSES OF EQUITY METHOD INVESTEE | 1,833,000 | (345,000 | ) | 410,000 | (747,000 | ) | ||||||||||
| INCOME TAXES PROVISION (BENEFIT): | ||||||||||||||||
| Current | 355,000 | (197,000 | ) | (79,000 | ) | (197,000 | ) | |||||||||
| Deferred taxes, net | (355,000 | ) | 67,000 | 79,000 | (36,000 | ) | ||||||||||
| Total income taxes (benefit) | — | (130,000 | ) | — | (233,000 | ) | ||||||||||
| INCOME (LOSS) BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | $ | 1,833,000 | $ | (215,000 | ) | $ | 410,000 | $ | (514,000 | ) | ||||||
| SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | $ | (146,000 | ) | $ | (196,000 | ) | $ | (644,000 | ) | $ | (345,000 | ) | ||||
| NET INCOME (LOSS) | $ | 1,687,000 | $ | (411,000 | ) | $ | (234,000 | ) | $ | (859,000 | ) | |||||
| Net Income (loss) per share | ||||||||||||||||
| Basic | $ | 0.07 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.04 | ) | |||||
| Diluted | $ | 0.07 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.04 | ) | |||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 24,012,333 | 24,138,191 | 23,992,203 | 23,935,304 | ||||||||||||
| Diluted | 24,521,708 | 24,138,191 | 23,992,203 | 23,935,304 | ||||||||||||
| Cash dividends declared per share | $ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.10 | ||||||||
| NET INCOME (LOSS) | $ | 1,687,000 | $ | (411,000 | ) | $ | (234,000 | ) | $ | (859,000 | ) | |||||
OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized holding gain (loss) on corporate bonds and notes arising during the period, net of tax | (67,000 | ) | 20,000 | (75,000 | ) | 183,000 | ||||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | 1,620,000 | $ | (391,000 | ) | $ | (309,000 | ) | $ | (676,000 | ) | |||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020
| Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Stockholders’ Equity | |||||||||||||||||||
| Balance – December 31, 2019 | 24,036,071 | $ | 240,000 | $ | 65,824,000 | $ | (12,636,000 | ) | $ | 79,000 | $ | 53,507,000 | ||||||||||||
| Dividends and dividend equivalents declared | — | — | — | (1,221,000 | ) | — | (1,221,000 | ) | ||||||||||||||||
| Stock-based compensation | — | — | 72,000 | — | — | 72,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Cashless exercise of stock options | 105,000 | 1,000 | — | — | — | 1,000 | ||||||||||||||||||
| Shares delivered to fund stock option exercises | (100,293 | ) | (1,000 | ) | — | — | — | (1,000 | ) | |||||||||||||||
| Treasury stock purchased and retired | (72,300 | ) | (1,000 | ) | — | (153,000 | ) | — | (154,000 | ) | ||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | — | — | — | (183,000 | ) | (183,000 | ) | ||||||||||||||||
| Net loss | — | — | — | (1,337,000 | ) | — | (1,337,000 | ) | ||||||||||||||||
| Balance – March 31, 2020 | 23,979,728 | $ | 239,000 | $ | 65,896,000 | $ | (15,347,000 | ) | $ | (104,000 | ) | $ | 50,684,000 | |||||||||||
| Stock-based compensation | — | — | 85,000 | — | — | 85,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | — | — | — | — | — | ||||||||||||||||||
| Treasury stock purchased and retired | (43,589 | ) | — | — | (98,000 | ) | — | (98,000 | ) | |||||||||||||||
| Net unrealized gain on corporate bonds and notes | — | �� | — | — | — | 175,000 | 175,000 | |||||||||||||||||
| Net loss | — | — | — | (584,000 | ) | — | (584,000 | ) | ||||||||||||||||
| Balance – June 30, 2020 | 23,947,389 | $ | 239,000 | $ | 65,981,000 | $ | (16,029,000 | ) | $ | 71,000 | $ | 50,262,000 | ||||||||||||
| 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 unrealized loss on corporate bonds and notes | — | — | — | — | (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.
-5-
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income | $ | 4,460,000 | $ | 22,882,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of patents | 150,000 | 760,000 | ||||||
| Stock-based compensation | 711,000 | 233,000 | ||||||
| Deferred tax provision | 39,000 | 4,543,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Royalty receivables | (691,000 | ) | 123,000 | |||||
| Prepaid Taxes | 895,000 | — | ||||||
| Other current assets | 65,000 | 176,000 | ||||||
| Accounts payable | (101,000 | ) | 323,000 | |||||
| Accrued expenses | (2,521,000 | ) | 4,020,000 | |||||
| Income taxes payable | 930,000 | 4,080,000 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,937,000 | 37,140,000 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of patents | (50,000 | ) | (4,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends | (2,421,000 | ) | — | |||||
| Value of shares delivered to fund withholding taxes on exercise of options | (56,000 | ) | (44,000 | ) | ||||
| Repurchases of common stock, net of commissions | (1,131,000 | ) | (1,000 | ) | ||||
| Proceeds from exercise of options and warrants | 1,068,000 | 60,000 | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (2,540,000 | ) | 15,000 | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,347,000 | 37,151,000 | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 50,918,000 | 20,608,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 52,265,000 | $ | 57,759,000 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| CASH PAID DURING THE PERIOD FOR: | ||||||||
| Interest | $ | — | $ | — | ||||
| Taxes | 440,000 | $ | — | |||||
| NON-CASH FINANCING ACTIVITY | ||||||||
| Accrued dividend rights on restricted stock units | 84,000 | — | ||||||
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
| Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Stockholders’ Equity | |||||||||||||||||||
| Balance – December 31, 2018 | 23,735,927 | $ | 237,000 | $ | 65,151,000 | $ | (7,102,000 | ) | $ | (81,000 | ) | $ | 58,205,000 | |||||||||||
| Dividends and dividend equivalents declared | ― | ― | ― | (1,215,000 | ) | ― | (1,215,000 | ) | ||||||||||||||||
| Stock-based compensation | ― | ― | 144,000 | ― | ― | 144,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | ― | ― | ― | ― | ― | ||||||||||||||||||
| Cashless exercise of stock options | 105,000 | 1,000 | (1,000 | ) | ― | ― | ― | |||||||||||||||||
| Shares delivered to fund stock option exercise | (69,116 | ) | ― | ― | ― | ― | ― | |||||||||||||||||
| Treasury stock purchased and retired | (300 | ) | ― | ― | (1,000 | ) | ― | (1,000 | ) | |||||||||||||||
| Net unrealized gain on corporate bonds and notes | ― | ― | ― | ― | 110,000 | 110,000 | ||||||||||||||||||
| Net Loss | ― | ― | ― | (240,000 | ) | ― | (240,000 | ) | ||||||||||||||||
| Balance – March 31, 2019 | 23,782,761 | $ | 238,000 | $ | 65,294,000 | $ | (8,558,000 | ) | $ | 29,000 | $ | 57,003,000 | ||||||||||||
| Stock-based compensation | ― | ― | 127,000 | ― | ― | 127,000 | ||||||||||||||||||
| Vesting of restricted stock units | 11,250 | ― | ― | ― | ― | ― | ||||||||||||||||||
| Proceeds from exercise of stock options | 65,150 | ― | 107,000 | ― | ― | 107,000 | ||||||||||||||||||
| Cashless exercise of stock options | 859,849 | 9,000 | (9,000 | ) | ― | ― | ― | |||||||||||||||||
| Shares delivered to fund stock option exercises | (490,351 | ) | (5,000 | ) | 5,000 | ― | ― | ― | ||||||||||||||||
| Value of shares delivered to pay withholding taxes | ― | ― | ― | (366,000 | ) | ― | (366,000 | ) | ||||||||||||||||
| Treasury stock purchased and retired | (139,848 | ) | (1,000 | ) | ― | (332,000 | ) | ― | (333,000 | ) | ||||||||||||||
| Net unrealized gain on corporate bonds and notes | ― | ― | ― | ― | 53,000 | 53,000 | ||||||||||||||||||
| Net loss | ― | ― | ― | (208,000 | ) | ― | (208,000 | ) | ||||||||||||||||
| Balance – June 30, 2019 | 24,088,811 | $ | 241,000 | $ | 65,524,000 | $ | (9,464,000 | ) | $ | 82,000 | $ | 56,383,000 | ||||||||||||
| Dividends and dividend equivalents declared | ― | ― | ― | (1,227,000 | ) | ― | (1,227,000 | ) | ||||||||||||||||
| Stock-based compensation | ― | ― | 154,000 | ― | ― | 154,000 | ||||||||||||||||||
| Vesting of restricted stock units | 136,250 | 1,000 | (1,000 | ) | ― | ― | ― | |||||||||||||||||
| Value of shares delivered to pay withholding taxes | (56,813 | ) | (1,000 | ) | 1,000 | (133,000 | ) | ― | (133,000 | ) | ||||||||||||||
| Treasury stock purchased and retired | (30,407 | ) | ― | ― | (75,000 | ) | ― | (75,000 | ) | |||||||||||||||
| Net unrealized gain on corporate bonds and notes | ― | ― | ― | ― | 20,000 | 20,000 | ||||||||||||||||||
| Net loss | ― | ― | ― | (411,000 | ) | ― | (411,000 | ) | ||||||||||||||||
| Balance – September 30, 2019 | 24,137,841 | $ | 241,000 | $ | 65,678,000 | $ | (11,310,000 | ) | $ | 102,000 | $ | 54,711,000 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
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NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (234,000 | ) | $ | (859,000 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of patents | 216,000 | 212,000 | ||||||
| Stock-based compensation | 242,000 | 425,000 | ||||||
| Loss from equity investment | 644,000 | 345,000 | ||||||
| Deferred tax benefit | — | (36,000 | ) | |||||
| Amortization of right of use asset, net | 41,000 | 76,000 | ||||||
| Unrealized gain on marketable securities | (10,000 | ) | (17,000 | ) | ||||
| Changes in operating asset and liabilities: | ||||||||
| Royalty receivables | 343,000 | (49,000 | ) | |||||
| Other current assets | 68,000 | 81,000 | ||||||
| Accounts payable | (350,000 | ) | 178,000 | |||||
| Income taxes payable | — | (197,000 | ) | |||||
| Operating lease obligations | (41,000 | ) | (74,000 | ) | ||||
| Accrued expenses | (812,000 | ) | (1,473,000 | ) | ||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 107,000 | (1,388,000 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | 17,539,000 | 30,836,000 | ||||||
| Purchases of marketable securities | (13,145,000 | ) | (30,691,000 | ) | ||||
| Development of patents | (50,000 | ) | (55,000 | ) | ||||
| Equity investment | — | (2,500,000 | ) | |||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 4,344,000 | (2,410,000 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (2,456,000 | ) | (2,428,000 | ) | ||||
| Value of shares delivered to fund withholding taxes | (109,000 | ) | (499,000 | ) | ||||
| Repurchases of common stock, inclusive of commissions | (252,000 | ) | (408,000 | ) | ||||
| Proceeds from exercise of options | — | 107,000 | ||||||
| NET CASH USED IN FINANCING ACTIVITIES: | (2,817,000 | ) | (3,228,000 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,634,000 | (7,026,000 | ) | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 22,587,000 | 23,763,000 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 24,221,000 | $ | 16,737,000 | ||||
| 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 | $ | 31,000 | $ | 50,000 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
-7-
NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS:
[1] BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the "Company"“Company”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company'sCompany’s financial position as of September 30, 2017,2020, and the results of its operations and comprehensive income (loss) for the three and nine month periods ended September 30, 20172020 and September 30, 20162019, changes in stockholders’ equity for the three and nine month periods ended September 30, 2020 and September 30, 2019, and its cash flows for the nine month periods ended September 30, 20172020 and September 30, 2016.2019. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 20162019 included in the Company'sCompany’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2017.2020. The results of operations for the three and nine months ended September 30, 20172020 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, Mirror Worlds Technologies, LLC.
[2] BUSINESS:
The Company is engaged in the development,
licensing and protection of its intellectual property assets. The Company presently owns-8-
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
Patent. The Company no longer receives licensing revenue for its Remote Power Patent that accrues for any period subsequent to the expiration date (March 7, 2020). Notwithstanding the expiration of the Remote Power Patent, the Company believes that Cisco and certain other licensees are obligated to pay the Company significant royalties related to its Remote Power Patent for periods prior to March 7, 2020 as a result of the decision of the U.S. Court of Appeals for the Federal Circuit to overturn the District Court’s order of non-infringement of the Remote Power Patent in its trial with Hewlett-Packard. In addition, the Company has also entered intoan opportunity to receive revenue from Hewlett-Packard related to its Remote Power Patent depending upon the outcome of a new trial with Hewlett-Packard as a result of the decision of the Federal Circuit (see below and Note I[1] and Note I[2] hereof). In addition, the Company has two license agreements with respect to its Mirror Worlds Patent Portfolio.
The Company'sCompany’s current strategy includes continuing to pursue licensing opportunities for its intellectual property assets. In addition, the Company continually reviews opportunities to acquire or license additional intellectual property as well as other strategic alternatives. The Company'sCompany’s patent acquisition strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds Patent Portfolio. The Company's Remote Power Patent has generated licensing revenue in excess of $119,000,000 from May 2007 through September 30, 2017. As a result of the Company's acquisition of the Mirror Worlds Patent Portfolio in May 2013, the Company achieved licensing and other revenue of $47,150,000 through September 30, 2017.
On September 24, 2020, the U.S. Court of Appeals for the Federal Circuit overturned the judgment of non-infringement of the U.S. District Court of the Eastern District of Texas in the Company’s litigation with Hewlett-Packard involving its Remote Power Patent. The Federal Circuit also vacated the District Court judgment of validity of the Remote Power Patent. The Federal Circuit has remanded the case to the District Court for a new trial on infringement against Hewlett-Packard and further proceedings on validity. As a result of the Federal Circuit’s decision to overturn the District Court judgment of non-infringement, the Company believes that Cisco and certain other licensees of the Company’s Remote Power Patent are obligated to pay the Company significant royalties that accrued but were not paid beginning the fourth quarter of 2017 through March 7, 2020 (the expiration of the Remote Power Patent) (see Note I[1] and Note I[2] hereof). There is, however, no certainty that the Company will receive such royalties from Cisco and certain other licensees.
Consistent with the Company’s revenue recognition policy (see Note B[4] hereof), the Company did not record revenue for 2018, 2019 and for the three and nine months ended September 30, 2020 from certain licensees, including Cisco, who notified the Company they would not pay the Company ongoing royalties as a result of the Hewlett-Packard jury verdict. The Company disagrees with the position taken by such licensees and may pursue legal proceedings if it does not achieve a satisfactory resolution (see Notes I[1] and I[2] hereof).
-9-
Note B – Summary of Estimates and Assumptions
| [1] | Use of Estimates and Assumptions |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company'sCompany’s unaudited condensed consolidated financial statements include revenue recognition, stock-based compensation, income taxes, valuation of patents and stock-based compensation.equity method investments, including evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based.
| [2] | Cash and Cash Equivalents |
The Company 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, 2020, the Company maintained a cash balance of $6,772,000 in excess of the FDIC insured limit.
The Company considers all highly liquid short-term investments, including certificates of deposit and money market funds, that are purchased with an original maturity of three months or less to be cash equivalents.
| [3] | Marketable Securities |
The Company’s marketable securities are comprised of certificates of deposit with original maturity greater than three months from date of purchase, fixed income mutual funds, and corporate bonds and notes (see Note F). At September 30, 2020, included in marketable securities, the Company had aggregate certificates of deposit of $8,195,000 at financial institutions which were within the FDIC limit. The Company’s marketable securities are measured at fair value and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on certificates of deposit and fixed income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the unaudited condensed consolidated statements of operations and comprehensive loss. Unrealized holding gains and losses, net of the related tax effect, on corporate bonds and notes are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of the marketable securities.
| [4] | Revenue Recognition |
Under ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
-10-
Note B – Summary of Significant Accounting Policies (continued)
The Company determines revenue recognition through the following steps:
| · | identification of the license agreement; |
| · | identification of the performance obligations in the license agreement; |
| · | determination of the consideration for the license; |
| · | allocation of the transaction price to the performance obligations in the contract; and |
| · | recognition of revenue when the Company satisfies its performance obligations. |
Revenue disaggregated by source is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Fully-Paid - Licenses | $ | ― | $ | ― | $ | ― | $ | 130,000 | (1) | |||||||
| Royalty Bearing - Licenses | 4,150,000 | (2) | 520,000 | 4,366,000 | (2) | 1,595,000 | ||||||||||
| Total Revenue | $ | 4,150,000 | $ | 520,000 | $ | 4,366,000 | $ | 1,725,000 | ||||||||
__________________________
(1) Includes conversion of an existing royalty bearing license to a fully-paid license.
(2) Includes revenue of $4,150,000 from a litigation settlement with Dell, Inc. (see Note I[5] 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 settlement of litigation related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a “Fully-Paid License”), or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent (a “Royalty Bearing License”).
The Company’s license agreements, both Fully-Paid Licenses and Royalty Bearing Licenses, typically include some combination of the following: (i) the grant of a non-exclusive license to manufacture and/or sell products covered by its patented technologies; (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted pursuant to these licenses typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company typically has no further performance obligations with respect to the grant of the non-exclusive licenses. Generally, the license agreements provide for the grant of the licenses, releases, and other obligations following execution of the agreement and the receipt of the up-front lump sum payment for a Fully-Paid License or a license initiation fee for a Royalty Bearing License.
-11-
Note B – Summary of Significant Accounting Policies (continued)
Ongoing Royalty Payments: Certain of the Company’s revenue from Royalty Bearing Licenses results from the calculation of royalties based on a licensee’s actual quarterly sales (one licensee pays monthly royalties) of licensed products, applied to a contractual royalty rate. Licensees that pay royalties on a quarterly basis generally report to the Company actual quarterly sales and related quarterly royalties due within 45 days after the end of the quarter in which such sales activity takes place. Licensees with Royalty Bearing Licenses are obligated to provide the Company with quarterly (or monthly) royalty reports that summarize their sales of licensed products and their related royalty obligations to the Company. The Company receives these royalty reports subsequent to the period in which its licensees underlying sales occurred. The amount of royalties due under Royalty Bearing Licenses, each quarter, cannot be reasonably estimated by management. Consequently, the Company recognizes revenue for the period in which the royalty report is received in arrears and other revenue recognition criteria are met.
Non-Refundable Up-Front Fees: Fully-Paid Licenses provide for a non-refundable up-front payment, for which the Company has no future obligations or performance requirements, revenue is generally recognized when the Company has obtained the signed license agreement, all performance obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably assured. Revenue from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
| [5] | Equity Method Investments |
Equity method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount of the equity investment is recognized in profit or loss.
| [6] | Patents |
The Company owns patents that relate to various technologies. The Company capitalizes the costs associated with acquisition, registration and maintenance of its acquired patents and amortizes these assets over their remaining useful lives on a straight-line basis. Any further payments made to maintain or develop the patents would be capitalized and amortized over the balance of the useful life for the patents.
| [7] | Costs of Revenue |
The Company includes in costs of revenue for the three and nine months ended September 30, 2017 2020 and 20162019 contingent legal fees payable to patent litigation counsel (see Note H[G[1] hereof), and incentive bonus compensation payable to its Chairman and Chief Executive Officer (see Note I[H[1] hereof) and payments.
-12-
Note B – Summary of certain percentages of net proceeds to Recognition Interface, LLC and others with respect to monetization of the Company's Mirror Worlds Patent Portfolio (see Note HSignificant Accounting Policies (continued)
| [8] | Income Taxes |
[2] hereof).
ASC 740-10, "AccountingAccounting for Uncertainty in Income Taxes", defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company had no uncertain tax positions as of September 30 2017 and December 31, 2016.
U.S. federal, state and local income tax returns prior to 20142016 are not subject to examination by any applicable tax authorities, except that tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent they generated loss carry-forwards that are available for those future years.
The personal holding company ("PHC"(“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC'sPHC’s undistributed personal holding company income ("(“PHC Income"Income”), which means, in general, taxable income subject to certain adjustments. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by 5 or fewer individuals at anytimeany time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the "Ownership Test"“Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the "Income Test"“Income Test”). In the second half of 2017 (as well as during the second half of prior years),Beginning in July 2020, based upon available shareholder ownership information, the Company did not meetmay have satisfied the Ownership Test. Due to the significant number of shares held by the Company's largest shareholders,As a result, the Company continually assesses its share ownershiphas engaged tax counsel to determinefurther evaluate whether it meets the Ownership Test. Ifhas satisfied the Ownership Test were met and thewhether potential future income generated by the Company were determined to constitute "royalties"constitutes “royalties” within the meaning of the Income Test as well as other related PHC issues. If the Company satisfies the Ownership Test and achieves net income for the year ended December 31, 2020 (or for any subsequent year in which the Ownership Test is also satisfied) that
-13-
Note B – Summary of Significant Accounting Policies (continued)
is determined to satisfy the Income Test, the Company would constitute a PHC and for the year ended December 31, 2020 (and each subsequent year in which the Ownership Test is also satisfied), the Company would be subject to a 20% tax on the amount of any PHC Income that it does not distribute to its shareholders.
| [9] | Stock-Based Compensation |
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation -Stock Compensation ("“ASC 718"718”). ASC 718 requires all stock-based compensation to employees, including grants of employee stock options and restricted stock units, to be recognized in the unaudited condensed consolidated statements of incomeoperations and comprehensive incomeloss based on their grant date fair values.
Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Share-based compensationShare based payments issued to non-employees are recorded at their fair values and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period and are expensed using an accelerated attribution model. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of options granted. The fair value of restricted stock units is determined based on the number of shares grantedunderlying the grant and either the quoted market price of the Company'sCompany’s common stock on the date of grant for time-based and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model for market-based awards (see Note D hereof for further discussion of the Company's stock–basedCompany’s stock-based compensation).
| [10] | Earnings Per Share |
The Company reports earnings per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and options to purchase common stock, were exercised and shares were issued pursuant to outstanding restricted stock units. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share (see Note E hereof)E).
-14-
Note B – Summary of Significant Accounting Policies (continued)
| [11] | Fair Value Measurements |
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value of financial instruments and relatedas the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value measurements define fair value, establish a three-level valuation hierarchy thatwhich requires an entity to maximize the use ofclassification based on observable inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs are definedthat may be used to measure fair value:
Level 1: Observable inputs such as follows:
Level 2 inputs to the valuation methodology2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets andor liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that are observable forsupported by little or no market activity; therefore, the assetinputs are developed by the Company using estimates and assumptions that the Company expects a market participant would use, including pricing models, discounted cash flow methodologies, or liability, either directly or indirectly, for substantially the full term of the financial instrument.
The carrying value of the Company’s financial instruments, including cash marketable securities,and cash equivalents, royalty receivables,receivable, other assets, accounts payable, and accrued expenses approximates fair value because of the short periodshort-term nature of time betweenthese financial instruments.
The Company’s marketable securities are classified within Level 1 because they are valued using quoted market prices in an active market (see Marketable Securities – Note F).
| [12] | Carrying Value, Recoverability and Impairment of Long-Lived Assets |
An impairment loss shall be recognized only if the originationcarrying amount of such instrumentsa long-lived asset (asset group) is not recoverable and theirexceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected realizationto result from the use and their current market rateseventual disposition of interest. Marketable securities availablethe asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for sale arerecoverability. An impairment loss shall be measured atas the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair valuevalue.
If an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. At September 30, 2020 and 2019, there was no impairment to the Company’s patents and equity investment.
The Company’s equity method investment in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held development stage biotechnology company (see Equity Investment – Note J) is evaluated on a recurringnon-recurring basis based onfor impairment and is classified within Level 13 as it is valued using significant unobservable inputs (see Note G hereof).
| [13] | Dividend Policy |
Cash dividends are recorded when declared by the Company'sCompany’s Board of Directors. Common stock dividends are charged against retained earnings when declared or paid (see Note NM hereof).
-15-
Note B – Summary of Significant Accounting PronouncementsPolicies (continued)
| [14] | New Accounting Standards |
Recently Issued Accounting Standards
Income Taxes
In August 2016,December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting Standards Update ("ASU") No. 2016-15, Classificationfor Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of Certain Cash Receiptsfranchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the interim period and Cash Payments, which amends ASC 230, Statement of Cash Flows. Thismaking improvements for income taxes related to employee stock ownership plans. ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The guidance2019-12 is effective for fiscal years, and interim and annual periods within those years, beginning after December 15, 2017, and early2020. Early adoption is permitted.permitted, including adoption in any interim period for which financial statements have not been issued. The Company does not believe thatis currently evaluating the adoption of this ASUimpact the standard will have a material impact on its consolidated financial statements.
Equity Securities
In February 2016,January 2020, the FASB issued ASU No. 2016-02, LeasesASU 2020-01, Investments – Equity Securities (Topic 842). In September 2017, the FASB issued ASU 2017-13, Revenue Recognition321), Investments – Equity Method and Joint Ventures (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840)323), and LeasesDerivatives and Hedging (Topic 842), which provides additional implementation guidance on the previously issued 815). The ASU 2016-02 Leases (Topic 842). ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018,amends and requires a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Early application is permitted. The Company does not believe that the adoption of this accounting standard will have a material impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
Fair Value Measurements
In August 2018, the FASB issued ASU 2016-09
-16-
NOTE C -– PATENTS
The Company'sCompany’s intangible assets at September 30 2017, 2020 include patents with estimated remaining economic useful lives ranging from 3.01.00 to 4.013.00 years. For all periods presented, all of the Company'sCompany’s patents were subject to amortization. The gross carrying amounts and accumulated amortization related to acquired intangible assets as of September 30 2017, 2020 and December 31, 20162019 were as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| Gross carrying amount – patents | $ | 6,477,000 | $ | 6,427,000 | ||||
| Accumulated amortization – patents | (5,346,000 | ) | (5,196,000 | ) | ||||
| Patents, net | $ | 1,131,000 | $ | 1,231,000 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| Gross carrying amount – patents | $ | 7,847,000 | $ | 7,797,000 | ||||
| Accumulated amortization – patents | (6,194,000 | ) | (5,978,000 | ) | ||||
| Patents, net | $ | 1,653,000 | $ | 1,819,000 | ||||
Amortization expense for the three months ended September 30 2017, 2020 and September 30 2016, 2019 was $50,000 $72,000 and $49,000,$71,000, respectively. Amortization expense for the nine months ended September 30, 20172020 and September 30, 20162019, was $150,000 $216,000 and $760,000,$212,000, respectively. Future amortization of current intangible assets, net is as follows:
| Twelve Months Ended September 30, | ||||
| 2018 | $ | 200,000 | ||
| 2019 | $ | 193,000 | ||
| 2020 | $ | 193,000 | ||
| 2021 | $ | 193,000 | ||
| 2022 and thereafter | $ | 352,000 | ||
| Total | $ | 1,131,000 | ||
| Twelve Months Ended September 30, | ||||||
| 2021 | $ | 293,000 | ||||
| 2022 | 293,000 | |||||
| 2023 | 282,000 | |||||
| 2024 | 83,000 | |||||
| 2025 and thereafter | 702,000 | |||||
| Total | $ | 1,653,000 | ||||
The Company'sCompany’s Remote Power Patent expires inexpired on March 7, 2020. The expiration datesAll of the patents within the Company'sCompany’s Mirror Worlds Patent Portfolio range from April 2018 to February 2020 (six of the patents in the Mirror Worlds Patent Portfolio expired during the nine months ended September 30, 2016 and two of the patents in the Mirror Worlds Patent Portfolio expired during the nine months ended September 30, 2017).have expired. The expiration dates of the patents within the Cox Patent Portfolio range from September 2021 to November 2023 and2023. The expiration dates of patents within the expiration date of the QoS Patents is June 2019.
NOTE D – STOCK-BASED COMPENSATION
Restricted Stock Units
During the nine months ended September 30, 2017,2020, the Company issued 13,50015,000 restricted stock units (“RSUs”) to each of its three non-management directors as an annual grant for 20172020 for service on the Company'sCompany’s Board of Directors. Each restricted stock unit represents a contingent right to receive one share of the Company's common stock. The restricted stock unitsRSUs vest in four equal quarterly installments of 3,3753,750 shares of common stock on March 15, 2017,2020, June 15, 2017,2020, September 15, 20172020 and December 15, 2017,2020, subject to continued service on the Board of Directors.
During the nine months ended September 30, 2019, the Company issued 15,000 RSUs to each of its three non-management directors as an annual grant for 2019 for service on the Company’s Board of Directors. The RSUs vested in four equal quarterly installments of 3,750 shares of common stock on March 15, 2019, June 15, 2019, September 15, 2019 and December 15, 2019.
On July 14, 2020, 125,000 RSUs owned by the Company’s Chairman and Chief Executive Officer vested in accordance with his employment agreement (see Note H[1] hereof), and he delivered 50,563 shares of the Company’s common stock to satisfy withholding taxes resulting in 74,437 net shares issued.
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NOTE D – STOCK-BASED COMPENSATION (continued)
A summary of restricted stock unit activity for the nine months ended September 30, 20172020 is as follows (each restricted stock unit issued by the Company represents the right to receive one share of the Company'sCompany’s common stock):
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2016 | 890,000 | $ | 2.29 | |||||
| Grants of restricted stock units | 40,500 | $ | 3.80 | |||||
| Vested restricted stock units | (100,375 | ) | $ | (2.87 | ) | |||
| Balance of unvested restricted stock units at September 30, 2017 | 830,125 | $ | 2.30 | |||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2019 | 340,000 | $ | 2.15 | |||||
| Grants of restricted stock units | 45,000 | 2.30 | ||||||
| Vested restricted stock units | (158,750 | ) | 2.10 | |||||
| Balance of unvested restricted stock units at September 30, 2020 | 226,250 | $ | 2.22 | |||||
Restricted stock unit compensation expense was $237,000$85,000 and $711,000$154,000 for the three and nine months ended September 30, 2017,2020 and September 30, 2019, respectively. Restricted stock unit compensation expense was $189,000$242,000 and $221,000$425,000 for the three and nine months ended September 30, 2016,2020 and September 30, 2019, respectively.
The Company has an aggregate of $1,097,000$85,000 of unrecognized restricted stock unit compensation expense as of September 30, 20172020 to be expensed over a weighted average period of 1.60.57 years.
All of the Company's 830,125Company’s outstanding (unvested) restricted stock units at September 30, 2017 have dividend equivalent rights.
Stock Options
There were no stock option grants during the three or nine months ended September 30, 20172020 and September 30, 2016.
| Weighted | ||||||||
| Weighted | Average | |||||||
| Range of | Average | Remaining | ||||||
| Exercise | Options | Exercise | Life in | Options | ||||
| Price | Outstanding | Price | Years | Exercisable | ||||
| $0.83 - $2.34 | 2,110,000 | $1.28 | 2.25 | 2,110,000 |
Options | Weighted Average Exercise | Weighted | Options |
| 500,000 | $1.19 | 2.09 | 500,000 |
The Company had no recorded stock-based compensation related to stock option grants for the three months ended September 30, 2017 and September 30, 2016, respectively. The Company recorded stock-based compensation related to stock option grants of $-0- and $12,000 for the nine months ended September 30, 20172020 and September 30, 2016, respectively.
The Company had no unrecognized stock-based compensation cost as of September 30, 2017.2020. The aggregate intrinsic value of stock options exercisable at September 30, 20172020 was $5,431,000.
During the three months ended September 30, 2020 and September 30, 2019, there were no stock option exercises.
During the nine months ended September 30, 2017, the Company's Chief Financial Officer and three of his children exercised2020, stock options to purchase an aggregate of 75,000105,000 shares of the Company'sCompany’s common stock, at an exercise price of $1.40$2.34 per share. In addition, duringshare, were exercised on a net exercise (cashless) basis by three non-management directors of the Company. With respect to the aforementioned stock options, net shares of an aggregate of 4,707 shares were delivered to the non-management directors.
During the nine months ended September 30, 2017, a former director exercised a2019, stock optionoptions to purchase 125,000an aggregate of 925,000 shares were exercised by executive officers of the Company and a consultant (750,000 shares at an exercise price of $0.83 per share by the Company’s Chairman and Chief Executive Officer, 50,000 shares at an exercise price of $1.65 per share by each of the Company’s Chief
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NOTE D – STOCK-BASED COMPENSATION (CONTINUED)
Financial Officer and Executive Vice President and 75,000 shares at an exercise price of $1.65 per share by a consultant). With respect to such options, options to purchase an aggregate of 859,849 shares were exercised on a net exercise (cashless) basis by the Company’s Chairman and Chief Executive Officer (750,000 shares), the Company’s Executive Vice President (34,849 shares) and a consultant (75,000 shares) resulting in 328,111 net shares (after delivery of shares for withholding taxes) issued to the Company’s Chairman and Chief Executive Officer, 27,713 net shares issued to the Company’s Executive Vice President and 28,824 net shares issued to the consultant.
During the nine months ended September 30, 2019, stock options to purchase an aggregate of 105,000 shares of the Company'sCompany’s common stock, at an exercise price of $1.40$1.65 per share.
NOTE E – EARNINGS (LOSS) PER SHARE
Basic Earningsearnings (loss) per share is calculated by dividing the net incomeloss 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. Potential shares of 2,940,125726,250 and 4,061,250996,250 at September 30, 20172020 and September 30, 2016,2019, respectively, consisted of options warrants and restricted stock units.
Computations of basic and diluted weighted average common shares outstanding were as follows:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Weighted-average common shares outstanding – basic | 23,992,203 | 23,935,304 | 24,012,333 | 24,138,191 | ||||||||||||
| Dilutive effect of options, warrants and restricted stock units | — | — | 509,375 | — | ||||||||||||
| Weighted-average common shares outstanding – diluted | 23,992,203 | 23,935,304 | 24,521,708 | 24,138,191 | ||||||||||||
| Options and restricted stock units excluded from the computation of diluted earnings (loss) per share because the effect of inclusion would have been anti-dilutive | 726,250 | 996,250 | -0- | 996,250 | ||||||||||||
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Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Weighted-average common shares outstanding – basic | 24,185,129 | 23,291,408 | 24,150,388 | 23,320,514 | ||||||||||||
| Dilutive effect of options, warrants and restricted stock units | 2,294,955 | 1,409,376 | 2,261,751 | 1,877,628 | ||||||||||||
| Weighted-average common shares outstanding – diluted | 26,480,084 | 24,700,784 | 26,412,139 | 25,198,142 | ||||||||||||
| Options and warrants excluded from the computation of diluted income per share because the effect of inclusion would have been anti-dilutive | — | 141,304 | — | 423,913 | ||||||||||||
NOTE F – CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents.
| September 30, 2017 | December 31, 2016 | |||||||
| Cash | $ | 9,395,000 | $ | 9,452,000 | ||||
| Money market fund | 42,870,000 | 41,466,000 | ||||||
| Total | $ | 52,265,000 | $ | 50,918,000 | ||||
| September 30, 2020 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | 8,282,000 | $ | 22,000 | $ | — | $ | 8,304,000 | ||||||||
| Fixed income mutual funds | 9,616,000 | — | (24,000 | ) | 9,592,000 | |||||||||||
| Corporate bonds and notes | 3,371,000 | 26,000 | (22,000 | ) | 3,375,000 | |||||||||||
| Total marketable securities | $ | 21,269,000 | $ | 48,000 | $ | (46,000 | ) | $ | 21,271,000 | |||||||
| December 31, 2019 | ||||||||||||||||
Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | 8,953,000 | $ | 6,000 | $ | — | $ | 8,959,000 | ||||||||
| Fixed income mutual funds | 7,878,000 | 1,000 | — | 7,879,000 | ||||||||||||
| Corporate bonds and notes | 8,813,000 | 112,000 | (33,000 | ) | 8,892,000 | |||||||||||
| Total marketable securities | $ | 25,644,000 | $ | 119,000 | $ | (33,000 | ) | $ | 25,730,000 | |||||||
NOTE G - MARKETABLE SECURITIES
[1] Legal Fees:
Russ, August & Kabat provides legal services to the Company with respect to its pending patent litigation filed in May 2017 against Facebook, Inc. in the United StatesU.S. District Court for the Southern District of New York relating to several patents within the Company'sCompany’s Mirror Worlds Patent Portfolio (see Note J[I[4] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between 15% and 24% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Russ, August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014 and December 2014 against Google Inc. and YouTube, LLC in the United StatesU.S. District Court for the Southern District of New York relating to certain patents within the Company'sCompany’s Cox Patent Portfolio (see Note J[I[3] hereof). The terms of the Company'sCompany’s agreement with Russ, August & Kabat provide for legal fees on a full contingency basis ranging from 15% to 30% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Dovel & Luner, LLP provides legal services to the Company with respect to its patent litigation filed in September 2011 against sixteen (16) data networking equipment manufacturers in the United StatesU.S. District Court for the Eastern District of Texas, Tyler (see Note J[I[1] hereof). The terms of the Company'sCompany’s agreement with Dovel & Luner LLP essentially provide for legal fees on a full contingency basis ranging from 12.5% to 35% (with certain exceptions) of the net recovery (after deduction for expenses) depending on the stage of the preceding in which a result (settlement or judgment) is achieved. For the three months ended September 30, 20172020 and September 30, 2016,2019, the Company incurred aggregate contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $523,000 $1,385,000 and $2,348,000,$103,000, respectively. For the nine month periodmonths ended September 30, 2017 and September 30 2016, the Company incurred aggregate contingent legal
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NOTE HG – COMMITMENTS AND CONTINGENCIES (continued)
2020 and September 30, 2019, the Company incurred contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $1,789,000$1,421,000 and $2,706,000,$346,000, respectively.
Dovel & Luner, LLP also provided legal services to the Company with respect to the litigation settled in July 2010 against Cisco and several other major data networking equipment manufacturers (see Note J[I[2] hereof). The terms of the Company'sCompany’s agreement with Dovel & Luner, LLP with respect to this litigation provided for legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of 24% (based on the settlement being achieved at the trial stage). As a result of theWith respect to royalty payments payable quarterly byreceived from Cisco in accordance with the Company'sCompany’s settlement and license agreement with Cisco, the Company has an obligation to pay Dovel & Luner, LLP (including local counsel) 24% of such royalties received. During the three and nine months ended September 30, 20172020 and September 30, 2016,2019, the Company incurred aggregatedid not incur any contingent legal fees to Dovel & Luner, LLP with respect to the litigation of $268,000 and $264,000, respectively. During the nine months ended September 30, 2017 and September 30, 2016, the Company incurred aggregate legal fees to Dovel & Luner LLP with respect to the litigation of $1,801,000 and $1,824,000, respectively.
[2] Patent Acquisitions:
In connection with the Company completed theCompany’s acquisition of four patents (as well as a pending patent application) from Dr. Ingemar Cox (these patents together with subsequent related patent issuances comprise theits Cox Patent Portfolio), a technology leader in digital watermarking content identification, digital rights management and related technologies, for a purchase price of $1,000,000 in cash and 403,226 shares of the Company's common stock. In addition,Portfolio, the Company is obligated to pay Dr. Cox 12.5% of the net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the patents. Since the acquisition of the patent portfolio from Dr. Cox, the Company has been issued sixteen (16) additional related patents by the USPTO resulting in an aggregate of twenty (20) patents within the Cox Patent Portfolio. Professional fees and filing fees of $169,000 were capitalized as patent cost.
As consideration for the patent acquisition, the Company paid Looking Glass $3,000,000 in cash, and issued 5-year warrants to purchase an aggregate of 1,750,000 shares of the Company's common stock (875,000 shares of common stock at an exercise price of $1.40 per share and 875,000 shares of common stock at an exercise price of $2.10 per share) (the "Looking Glass Warrants"). On June 3, 2014, the Company repurchased the Looking Glass Warrants from Looking Glass at part of the a cost of $505,000.
In connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as defined) related to the patent portfolio.In addition, Recognition (and an affiliated entity) also received warrantsM2M will be entitled to purchase an aggregatereceive from the Company $250,000 of 1,250,000 sharesadditional consideration upon the occurrence of the Company's common stock (500,000 shares at an exercise price of $2.05 per share, 375,000 shares at an exercise price of $2.10 per share and 375,000 shares at an exercise price of $1.40 per share). All such warrants were exercised by Recognition (and its affiliate) as of January 2017, resulting in aggregate proceedscertain future events related to the Company of $2,337,500. As part of the acquisition of the Mirror Worlds Patent Portfolio, professional fees and filing fees of $409,000 were capitalized as patent cost.
[3] Lease Agreements:
The Company leases its principal office space in New York City at a monthly base rentrate of approximately $3,800$3,900 which lease expiresexpired on May 31, 2018.
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NOTE G – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under ASC 842 operating lease expense is generally recognized evenly over the first year (increasing $100 per month each year), which is subject to annual adjustments to reflect increases in real estate taxes and operating expenses.
As of September 30, 2020, there were no future lease payments included in the measurement of operating lease liabilities on the unaudited condensed consolidated balance sheet as all of the Company’s leases are now on a one yearmonth-to-month basis. In accordance with ASC 842 and the Company’s policy, the Company does not recognize an operating lease at a base rentright-of-use asset and associated lease obligation for leases with an initial term of $620 per month, to rent office space in Tyler, Texas (expiring April 30, 2018).
NOTE IH - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
[1] On July 14, 2016, the Company entered into a new employment agreement ("Agreement"(“Agreement”) with its Chairman and Chief Executive Officer pursuant to which he continues to serve the Company in such positions for a five year term, at an annual base salary of $475,000 which shall be increased by 3% per annum during the term of the Agreement. The Agreement established an annual target bonus of $175,000 for the Chairman and Chief Executive Officer based upon performance. In addition, the Company granted to the Chairman and Chief Executive Officer, under its 2013 Stock Incentive Plan, 750,000 restricted stock units (the "RSUs"(“RSUs”) which. The Agreement provided for the 750,000 RSUs to vest in the three tranches, as follows: (i) 250,000 RSUs shall vest on July 14, 2018, subject to the Chairman and Chief Executive Officer'sOfficer’s continued employment by the Company through the vesting date (the "Employment Condition"“Employment Condition”); (ii) 250,000 RSUs shall vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment, subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2) the Company'sCompany’s common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $3.25 per share (subject to adjustment for stock splits) at any time during the term of
Under the terms of the Agreement, so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal to 5% of the Company'sCompany’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less than 6.25% of the gross recovery) of the Company'sCompany’s royalties and other payments relating to Licensing Activities with respect to patents other than the Remote Power Patent (including the Mirror Worlds Patent Portfolio, and the Cox Patent Portfolio and M2M/IoT Patent
-22-
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)
Portfolio) (collectively, the "Incentive Compensation"“Incentive Compensation”). During the three months ended September 30, 20172020 and September 30, 2016,2019, the Chairman and Chief Executive Officer earned Incentive Compensation of $162,000$208,000 and $2,029,000,$26,000, respectively. During the nine months ended September 30, 20172020 and September 30, 2016,2019, the Chairman and Chief Executive Officer earned incentive compensation of $716,000$218,000 and $3,996,000,$86,000, respectively. As ofAt September 30, 20172020 and December 31, 2016, $239,0002019, $-0- and $748,000$92,000 of such compensation were included in accrued expenses, respectively.
On July 14, 2018, 375,000 RSUs owned by the Company’s Chairman and Chief Executive Officer vested in accordance with the above referenced terms of the Agreement. With respect to such vesting of RSUs, the Company’s Chairman and Chief Executive Officer delivered 172,313 shares of common stock to satisfy withholding taxes and received 202,687 net shares of common stock. On July 14, 2019, 125,000 additional RSUs owned by the Company’s Chairman and Chief Executive Officer vested in accordance with the Agreement. With respect to the vesting of such restricted stock units, the Company’s Chairman and Chief Executive Officer delivered 56,813 shares of common stock to satisfy withholding taxes and received 68,187 net shares of common stock. On July 14, 2020, 125,000 additional RSUs owned by the Chairman and Chief Executive Officer vested in accordance with the Agreement and he delivered 50,563 shares of common stock to satisfy withholding taxes resulting in 74,437 net shares issued.
The Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer for the life of each of the Company'sCompany’s patents with respect to licenses entered into with third parties during the term of his employment or at anytimeany time thereafter, whether he is employed by the Company or not; provided,, that,, the Chairman and Chief Executive Officer'sOfficer’s employment has not been terminated by the Company "For Cause"“For Cause” (as defined) or terminated by him without "Good Reason"“Good Reason” (as defined). In the event of a merger or sale of substantially all of the assets of the Company, the Company has the option to extinguish the right of the Chairman and Chief Executive Officer to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to such value. In the event that the Chairman and Chief Executive Officer'sOfficer’s employment is terminated by the Company "Other“Other Than For Cause"Cause” (as defined) or by him for "Good Reason"“Good Reason” (as defined), the Chairman and Chief Executive Officer shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated portion of the $175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and (iii) accelerated vesting of all unvested options, warrants, RSUs and other awards.
In connection with the Agreement, the Chairman and Chief Executive Officer has also agreed not to compete with the Company as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated "Otherby us “Other Than For Cause"Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two years
[2]
The-23-
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)
6 months following a "Change“Change of Control"Control” of the Company (as defined) and (ii) accelerated vesting of all remaining unvested shares underlying his options or any other awards he may receive in the future.
[3]
TheNote I – Legal Proceedings
[1] In September 2011, the Company initiated patent litigation against sixteen (16) data networking equipment manufacturers (and affiliated entities) in the United StatesU.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of its Remote Power Patent. Named as defendants in the lawsuit, excluding relatedaffiliated parties, were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and TransitionsTransition Networks, Inc. The Company seeks monetary damages based upon reasonable royalties. As of September 30, 2017,January 2018, the Company had achieved settlement agreementsreached settlements with thirteen (13)fifteen (15) of the sixteen (16) defendants the remaining three defendants werewith Hewlett-Packard Company Juniper Networks, Inc. and Avaya Inc. (“HP”) being the sole remaining defendant.
On May 2,November 13, 2017, Judge Robert W. Schroeder ofa jury empaneled in the United StatesU.S. District Court for the Eastern District of Texas, Tyler Division, infound that certain claims of the Company's patent infringement action with respect to itsCompany’s Remote Power Patent as described above issued an order adoptingwere invalid and not infringed by HP. On February 2, 2018, the prior reportCompany moved to throw out the jury verdict and recommendation ofhave the United States Magistrate Judge which foundCourt determine that all of thecertain claims of the Remote Power Patent wereare not invalid. Asobvious (invalid) as a resultmatter of law by filing motions for judgment as a matter of law on validity and a new trial on validity and infringement. On August 29, 2018, the District Court issued an order granting the Company’s motion for judgment as a matter of law that the Remote Power Patent is valid, thereby overturning the jury verdict of invalidity and denied the Company’s motion for a new trial on infringement. On August 30, 2018, the Company appealed the District Court’s denial of its motion for a new trial on infringement to the U.S. Court of Appeals for the Federal Circuit. On September 13, 2018, HP filed a cross-appeal of the Court's decision,District Court’s order that the balanceRemote Power Patent is valid as a matter of $2,300,000law. On September 24, 2020, the U.S. Court of Appeals for the Federal Circuit overturned the judgment of non-infringement of the Company's settlement with ALE USA Inc. reached in July 2016 is payable to the Company in three equal quarterly payments of $766,666 which began on July 1, 2017. The settlement balance of $2,300,000 has been recorded in full by the Company as revenue for the nine months ended September 30, 2017.
[2] in March 2020. In accordance with the Settlement and License Agreement, dated May 25, 2011, between the Company and Cisco is obliged(the “Agreement”), Cisco became obligated to pay the Company royalties (which began in the first quarter of 2011) based on its sales of PoE products up to maximum royalty payments per year of $9 million$9,000,000 beginning in 2016 ($8 million through 2015) for the remaining term of the patent (March 2020).patent. The royalty payments from Cisco are subject to certain conditions including the continued validity of certain claims of the Company'sRemote Power Patent or a finding that a third party’s PoE products are found not to infringe the Remote Power Patent and such finding applies to the actual royalty amounts received may be less than the cap stated above. Under the termsapplicable licensee’s licensed products. As a result of the Agreement, ifHP jury verdict in November 2017 several of the Company’s largest licensees, including Cisco, its largest licensee, notified the Company grants other licenses with lowerin late November 2017 and January 2018 that they will no longer make ongoing royalty ratespayments to third parties (as definedthe Company pursuant to their license agreements. As a
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Note I – Legal Proceedings (continued)
result of the decision of the Federal Circuit to overturn the District Court judgment of non-infringement, the Company believes that certain licensees of its Remote Power Patent, including Cisco, are obligated to pay the Company significant royalties that accrued but were not paid beginning in the Agreement), Cisco shall be entitled to the benefitfourth quarter of 2017 through March 7, 2020 (the expiration of the lower royalty rates provided it agrees to the material terms of such other license. Under the terms of the Agreement,Remote Power Patent). There is, however, no certainty that the Company has certain obligations towill receive such significant royalties from Cisco and if it materially breaches such terms, Cisco will be entitled to stop paying royalties to the Company. This would have a material adverse effect on the Company's business, financial condition and results of operations.
[3]
On April 4, 2014 and December 3, 2014, the Company initiated litigation against Google Inc.[4]
On May9, 2017,[5] On November 13, 2018, the Company filed a lawsuit against Dell, Inc. in the District Court, 241st Judicial District, Smith County, Texas, for breach of a settlement and license agreement, dated August 15, 2016, with the Company as a result of Dell’s failure to make royalty payments, and provide corresponding royalty reports to the Company based on sales of Dell’s PoE products. The Company alleged that Dell is obligated to pay the Company all prior unpaid royalties that accrued prior to and after the date of the HP Jury Verdict (November 2017) as well as future
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Note I – Legal Proceedings (continued)
royalties through the expiration of the Remote Power Patent in March 2020. On December 7, 2018, Dell filed its Answer and Counterclaim. Dell denied the claims asserted by the Company and asserted a counterclaim in excess of $1,000,000. On December 19, 2019, the Company filed a motion for summary judgment. On March 25, 2020, the Court granted the Company’s motion for summary judgment on its breach of contract claim and denied Dell’s motion for summary judgment on its breach of contract claim. On August 7, 2020, Dell paid the Company $4,150,000 in full settlement of the litigation which the Company recorded as revenue during the three months ended September 30, 2020.
Note J – Equity Investment
During the period December 2018 – August 2019, the Company made an aggregate investment of $5,000,000 in ILiAD Biotechnologies, LLC (“ILiAD, a privately held clinical stage biotechnology company dedicated to the prevention of human disease caused by Bordetella pertussis with a current focus on its proprietary intranasal vaccine BPZE1, for the prevention of pertussis (whooping cough). At September 30, 2020, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis and 8.3% of the outstanding units on a fully diluted basis (after giving effect to the exercise of all outstanding options and warrants). In connection with its investment, the Company’s Chairman and Chief Executive Officer obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members. The Company incurred approximately $41,000 of advisory and legal expenses in conjunction with its equity investment in ILiAD which have been capitalized as a component of the equity investment carrying value.
On September 29, 2020, ILiAD presented positive topline Phase 2b trial results of its lead pertussis (whooping cough) vaccine candidate BPZE1 at the virtual World Vaccine Congress. BPZE1 met both primary endpoints of overall safety and induction of mucosal immunity. Specifically, a single vaccination with BPZE1 prevented 90% of colonization by revaccination/challenge three months later (only 10% colonization observed). BPZE1 was differentiated in its ability to demonstrate induction of broad mucosal immunity against whole cell extract (WCE) and pertussis-specific protein antibodies. In addition, BPZE1 induced both IgG and IgA systemic immunity using WCE and pertussis specific protein assays, with durability of response measured to end of study (nine months).
The Company’s investment in ILiAD is accounted for as an equity method investment in accordance with ASC 323, Investments — Equity Method and Joint Ventures as the Company has the ability to exercise significant influence, but not control, over ILiAD. The Company’s investment in ILiAD is measured at cost minus impairment, if any, plus or minus the Company’s share of ILiAD’s income or loss. The Company’s proportionate share of the income or loss from its investment in ILiAD is recognized on a one-quarter lag. At June 30, 2020, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis. For the three and nine months ended September 30, 2020, the Company recorded a net loss from its equity investment in ILiAD totaling $146,000 and $644,000, 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, 2020 is due to an excess amount paid over the book value of the investment totaling approximately $5,000,000 which is accounted for as equity method goodwill.
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- 20 -
On June 14, 2017,11, 2019, the Board of Directors authorized an extension and increase of the Company'sCompany’s share repurchase program (the "Share“Share Repurchase Program"Program”) to repurchase up to $5,000,000 of common stock over the subsequent 24 month period (for a total authorization of approximately $17,000,000$22,000,000 since inception of the program in August 2011). The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in the Company'sCompany’s discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time.
Note L– CONCENTRATIONS
Revenue from three licenseesthe Company’s Remote Power Patent constituted approximately 75%100% of the Company'sCompany’s revenue for both the three and nine months ended September 30, 2017. For the three months ended September 30, 2017, one licensee with a fully-paid license constituted approximately 30% of the Company's revenue and two other licensees with ongoing royalty bearing licenses constituted approximately 45% of the Company's revenue. Revenue from three licensees constituted approximately 96% and 90% for the three and nine months ended September 30, 2016 (exclusive2020 and September 30, 2019. Revenue from one licensee constituted 100% of the Company’s revenue for the three months ended September 30, 2020. Revenue from one licensee constituted approximately 95% of the Company’s revenue for the nine months ended September 30, 2020. Revenue from five licensees constituted approximately 93% of the Company’s revenue for the three months ended September 30, 2019 and revenue from our professional liability settlement – see Note M), respectively.five licensees constituted approximately 86% of the Company’s revenue for the nine months ended September 30, 2019. At September 30, 2017, royalty receivables from three licensees constituted approximately 36%, 27% and 21% of2020, the Company's netCompany had no royalty receivables. At December 31, 2016,2019, royalty receivables from three licensesfour licensees constituted in the aggregate approximately 29%, 45% and 11%97% of the Company's netCompany’s royalty receivables.
Note M – REVENUE FROM PROFESSIONAL LIABILITY SETTLEMENT
On April 22, 2016, Mirror Worlds Technologies, LLC ("MWT"), the Company's wholly-owned subsidiary, entered into an agreement pursuant to which it received $17.5 million in connection with the settlement of a professional liability claim relating to services rendered in 2008-2010. The Company, through MWT, acquired the claim in May 2013 as part of its acquisition of the patent portfolio of Mirror Worlds, LLC.
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ITEM 2: MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE STATEMENTS THAT INCLUDE INFORMATION BASED UPON BELIEF OF OUR MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO MANAGEMENT. STATEMENTS CONTAINING TERMS SUCH AS "BELIEVES"“BELIEVES”, "EXPECTS"“EXPECTS”, "ANTICIPATES"“ANTICIPATES”, "INTENDS"“INTENDS” OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED ON PAGES 16-2616-25 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20162019 FILED WITH THE SECURITIES AND EXCHANGE COMMISSIONSEC ON MARCH 20, 2017 AND IN THIS2020, PAGE 36 OF OUR QUARTERLY REPORT ON FORM 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own thirty-six (36)eighty-four (84) patents includingincluding: (i) our remote power patent (“Remote Power PatentPatent”) covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) our Mirror Worlds patent portfolio (the “Mirror Worlds Patent PortfolioPortfolio”) 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 PortfolioPortfolio”) relating to enabling technology for identifying media content on the Internet and taking further action to be performed based onafter such identification; and (iv) our M2M/IoT patent portfolio (the “M2M/IoT Patent Portfolio”) relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; and (v) our QoS Patentspatents (the “QoS Patents”) covering systems and methods for the transmission of audio, video and data in order to achieve high quality of service (QoS) over computer and telephony networks. In addition, we continually review opportunities to acquire or license additional intellectual property.
We havehad been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930). We currently have which generated licensing revenue in excess of $151,000,000 from May 2007 through September 30, 2020. As of March 7, 2020 (the expiration of our Remote Power Patent), we had twenty-seven (27) licensees forlicense agreements with respect to our Remote Power Patent which, among others, includeincluded license agreements with Cisco, Systems,Dell Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd., Dell, Inc.,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, we no longer receive licensing revenue for our Remote Power Patent that accrues for any period subsequent to the expiration date (March 7, 2020). As a result of the decision on September 24, 2020 of the U.S. Court of Appeals for the Federal Circuit to overturn the District Court’s judgment of non-infringement in our trial with Hewlett-Packard involving our Remote Power Patent, we believe that Cisco and severalcertain other major data networking equipment manufacturers.licensees of our Remote Power Patent are
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obligated to pay us significant royalties that accrued but were not paid beginning in the fourth quarter of 2017 through the expiration of our Remote Power Patent. The amount of such royalties payable to us for such period depends upon the amount of sales of licensed products by Cisco and other licensees pursuant to their license agreements with us. There is, however, no certainty that we will receive such significant royalties from Cisco and other licensees. In addition, we have an opportunity to achieve revenue related to our Remote Power Patent from Hewlett-Packard depending upon the outcome of the new trial as a result of the Federal Circuit decision in September 2020 (see Note I[1] and Note I[2] hereof). We have also entered into license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror Worlds Patent Portfolio.
Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets. In addition, we continueCox Patent Portfolio and Mirror Worlds Patent Portfolio as well as further developing our M2M Patent Portfolio (currently 29 issued patents) to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize such intellectual property.position it for future licensing efforts. 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 focusesis to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as we have achieved with respect to our Remote Power Patent and Mirror Worlds Patent Portfolio. Our Remote Power Patent generated licensing revenue in excess of $119,000,000 from May 2007 through September 30, 2017. As a result ofSince our acquisition of the Mirror Worlds Patent Portfolio in May 2013, we achievedhave received licensing and other revenue from the portfolio of an aggregate of $47,150,000 through September 30, 2017.
We have been dependent upon our Remote Patent for a significant amount of our revenue. For the three and nine month periods ended September 30, 2020, 100% and 95% of our revenue was derived from a settlement payment from Dell, Inc. in the amount of $4,150,000 relating to our Remote Power Patent. (see Note I[5] to our unaudited condensed consolidated financial statements included herein).
At September 30, 2017,2020, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,265,000$45,492,000 and working capital of $54,101,000. We believe based$45,178,000. Based on our current cash position, and projected licensing revenue from existing licenseeswe believe that we will have sufficient cash to fund our operations for the foreseeable future. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic alternatives.
As to the impact of Directors approved the initiationglobal COVID-19 pandemic on us, COVID-19 is currently causing some delays in the courts including the scheduling of a dividend policy. The policy provides fortrial dates, which could adversely affect the payment of regular semi-annual cash dividends of $0.05 per common share ($0.10 per common share annually) which are anticipated to be paid in March and September of each year. It is anticipated that the semi-annual cash dividend will continue to be paid through March 2020 (expirationtiming of our Remote Power Patent) provided that we continue to receive royalties from licenseesconsummation of our Remote Power Patent. On February 2, 2017, our Board of Directors declared an initial semi-annual cash dividend of $0.05 per common share with a payment date of March 24, 2017 to all shareholders of record on March 3, 2017. On July 25, 2017, our Board of Directors declared a semi-annual cash dividend of $0.05 per common share with a payment date of September 20, 2017 to all shareholders of record on September 1, 2017.
We currently have pending patent infringement litigations involving our Remote Power Patent and certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see "Legal Proceedings" at pages 32 – 34 hereof).
The remaining defendant in the litigation is Hewlett-Packard Company. On November 13, 2017,Company may be deemed a jury determined that certain claims of our Remote Patent are invalid and not infringed by Hewlett-Packard
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Beginning in December 2018, we made an aggregate investment of up to $5,000,000 in ILiAD Biotechnologies, LLC, a clinical stage biotechnology company with an exclusive license to fifty (50) patents (see Note J to our unaudited condensed consolidated financial statements included herein).
On June 9, 2020, our Board of Directors approved the continuation of our dividend policy consisting of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. The Company’s 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 M to our unaudited condensed financial statements included herein).
RESULTS OF OPERATIONS
Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 2016
Revenue. We had revenue of $3,237,000 $4,150,000 for the three months ended September 30, 20172020 as compared to revenue of $34,326,000$520,000 for the three months ended September 30, 2016.2019. The decreaseincrease in revenue of $31,089,000$3,630,000 for the three months ended September 30, 20172020 was primarily due to revenue of $32,900,000 for the three months ended September 30, 2016$4,150,000 from Fully-Paid Licenses and license initiation fees related to patentour litigation settlementssettlement with Apple Inc. ($25,000,000), Dell, Inc. ($6,000,000), and Alcatel and ALE USA Inc. ($1,900,000) (see "Legal Proceedings" at page 33 of this quarterly report). Excluding revenue from Fully-Paid Licenses and license initiation fees relatedNote I[5] to litigation settlements, revenue for the three months ended September 30, 2017 increased $837,000 or 59% as compared to the three months ended September 30, 2016 due primarily to increased revenue from Royalty Bearing Licenses for our Remote Power Patent.
Operating Expenses.
General and administrative expenses increased by $6,000 from $428,000 for the three months ended September 30, 2016 to $434,000were $473,000 for the three months ended September 30, 2017. Amortization of patents was $50,0002020 as compared to $466,000 for the three months ended September 30, 20172019. Amortization of patents was $72,000 for three months ended September 30, 2020 as compared to $49,000$71,000 for the three months ended September 30, 2016.2019. Stock-based compensation expense related to the issuance of restricted stock units was $237,000$85,000 for the three months ended September 30, 20172020 as compared to $189,000 for the issuance of restricted stock units and the vesting of stock options$154,000 for the three months ended September 30, 2016.2019. Professional fees and related costs were $534,000$267,000 for the three months ended September 30, 2017 as compared to $633,0002020 and September 30, 2019.
Operating Income. We had operating income of $1,660,000 for the three months ended September 30, 2016.
Interest and Dividend Income
. Interest and dividend income for the three months ended September 30,Income Taxes (Benefit). 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). For the three months ended September 30, 2019, we had a deferred tax expense for federal state and local income taxes of $67,000 and a current tax benefit of $(197,000).
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Share of Net Losses of Equity Method Investee. We had operating incomeincurred a net loss of $1,018,000$146,000 during the three month period ended September 30, 2020 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $196,000 for the three months ended September 30, 2017 compared with operating income of $16,084,000 for the three months ended September 30, 2016. The decreased operating income of $15,066,000 for the three months ended September 30, 2017 was primarily due2019 (see Note J to operating income associated with revenue of $32,900,000 from Fully-Paid Licenses and license initiation fees related to patent litigation settlements for the three months ended September 30, 2016.
Net Income.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 2016
Revenue. We had revenue of $14,320,000$4,366,000 for the nine months ended September 30, 20172020 as compared to revenue of $59,963,000$1,725,000 for the nine months ended September 30, 2016.2019. The decreaseincrease in revenue of $45,643,000$2,641,000 for the nine months ended September 30, 20172020 was due primarily to revenue of $33,800,000 for the nine months ended September 30, 2016$4,150,000 from Fully-Paid Licenses and license initiation fees related to litigation settlements and our $17,500,000 settlement of a professional liability claimwith Dell (see "Legal Proceedings" at page 33 hereof and Note MI[5] to our unaudited condensed consolidated financial statements included in this quarterly report)herein).
Operating Expenses.
General and administrative expenses increased by $102,000 from $1,256,000 for the nine months ended September 30, 2016 to $1,358,000were $1,418,000 for the nine months ended September 30, 2017, primarily due2020 as compared to increased franchise taxes of $74,000. Amortization of patents was $150,000$1,442,000 for the nine months ended September 30, 20172019. Amortization of patents was $216,000 for nine months ended September 30, 2020 as compared to $760,000$212,000 for the nine months ended September 30, 2016 due to the expiration of certain patents during the nine months ended September 30, 2016.2020. Stock-based compensation expense related to the issuance of restricted stock units was $711,000$242,000 for the nine months ended September 30, 20172020 as compared to $233,000 for the issuance of restricted stock units and the vesting of stock options$425,000 for the nine months ended September 30, 2016.2019. Professional fees and related costs were $1,154,000$790,000 for the nine months ended September 30, 20172020 as compared to $1,458,000$812,000 for the nine months ended September 30, 2016. Contingent patent cost was $-0- and $500,0002019.
Operating Income (Loss). We had operating income of $55,000 for the nine months ended September 30, 2017 and2020 compared with an operating loss of $1,625,000 for the nine months ended September 30, 2016, respectively.
Interest and Dividend Income
. Interest and dividend income for the nine months ended September 30,-31-
Income Taxes (Benefit). 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). For the nine months ended September 30, 2019, we had a deferred tax benefit for federal state and local income taxes of $(36,000) and a current tax benefit of $(197,000).
Share of Net Losses of Equity Method Investee. We had operating incomeincurred a net loss of $6,608,000$644,000 during the nine month period ended September 30, 2020 related to our equity share in ILiAD Biotechnologies as compared to a net loss of $345,000 for the nine months ended September 30, 2017 compared with operating income of $31,573,000 for the nine months ended September 30, 2016. The decreased operating income of $24,965,000 for the nine months ended September 30, 2017 was primarily due2019 (see Note J to revenue of $33,800,000 from Fully-Paid Licenses and license initiation fees related to patent litigation settlements and revenue of $17,500,000 from settlement of a professional liability claim.
Net Income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At September 30, 2017,2020, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $52,265,000$45,492,000 and working capital of $54,101,000. We believe based$45,178,000. Based on our current cash position, and projected licensing revenue from our existing license agreementswe believe that we will have sufficient cash to fund our operations for the foreseeable future.
Working capital increaseddecreased by $2,686,000 to $54,101,000$2,011,000 at September 30, 20172020 to $45,178,000 as compared to working capital of $51,415,000$47,189,000 at December 31, 2016.2019. The increasedecrease in working capital of $2,011,000 for the nine months ended September 30, 20172020 was primarily due to increasesa decrease in cash and cash equivalents and marketable securities of $1,347,000 and royalty receivables$2,825,000 offset by a decrease of $691,000,current liabilities of $1,225,000 including decreases in accrued payrollaccounts payable of $1,508,000 and$351,000, accrued contingency fees and related costs of $892,000, offset by an increase in income taxes payable$417,000 and accrued payroll of $930,000 and a decrease in prepaid taxes of $895,000.
Net cash provided by (used in) operating activities for the nine months ended September 30, 2017 decreased2020 increased by $33,203,000$1,495,000 from $37,140,000$(1,388,000) for the nine months ended September 30, 20162019 to $3,937,000$107,000 for the nine months ended September 30, 2017. The decrease in net cash provided by operating activities2020 primarily due to revenue of $4,150,000 from our settlement with Dell for the nine months ended September 30, 2017 compared with the same period in 2016 was primarily due to decreases in net income of $18,422,000, accrued expenses of $6,541,000, deferred taxes of $4,504,000 and income taxes payable of $3,150,000.
Net cash used inprovided by (used in) investing activities during the nine months ended September 30, 2020 was $4,344,000 as compared to $(2,410,000) for the nine months ended September 30, 20172019 primarily as a result of the differential of purchases and sales of marketable securities and our additional equity investment of $2,500,000 in ILiAD Biotechnologies for the nine months ended September 30, 2016 was $50,000 and $4,000, respectively, related to the purchase of patents.
Net cash provided by (used in)used in financing activities for the nine months ended September 30, 20172020 and September 30, 20162019 was $(2,540,000)$2,817,000 and $15,000,$3,228,000, respectively. The change of $411,000 primarily resulted from a decrease of $390,000 in the repurchasevalue of shares delivered to fund withholding taxes and a decrease of $157,000 in repurchases of our common stock of $1,131,000 and cash dividends of $2,421,000 offset by $1,068,000 of proceeds from the exercise of options and warrants for the nine months ended September 30, 2017.2020 which was offset by proceeds from exercises of options of $107,000 during the nine months ended September 30, 2019.
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We maintain our cash primarily in money market accounts.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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities except for the lease obligations set forth in Note H[3] to our condensed consolidated financial statements included in this quarterly report.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidatedour financial statements included in this Quarterly Report on Form 10-Q requires usmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue, costsand disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and related disclosures. Theseassumptions made in the preparation of our unaudited condensed consolidated financial statements include revenue recognition, patents, stock-based compensation, income taxes, valuation of patents and equity method investments, including the evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, form the basis for judgments we make aboutupon which the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with revenue recognition, patents, income taxes, and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.were based. See also Note B to our unaudited condensed consolidated financial statements included in this quarterly report.
Accounting Standards Adopted in The Period
Fair Value Measurements
In August 2018, the Period
New Accounting Standards
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the first quarter of 2017interim period and electedmaking improvements for income taxes related to apply thisemployee stock ownership plans. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption prospectively. Prior periodsis permitted, including adoption in any interim period for which financial statements have not been adjusted. issued. We are currently evaluating the impact the standard will have on its consolidated financial statements.
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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 effective tax rate forASU amends and clarifies certain interactions between the nine months ended September 30, 2017 differed from the federal statutory rate primarily due to the recognition of excess tax benefits as a componentguidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability of the provisionaccounting for income taxes attributable tothese interactions. The amendments in the ASU should be applied on a prospective basis. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for which financial statements have not yet been issued. We are currently evaluating the impact the standard will have on its consolidated financial statements.
We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated financial position, statements of ASU 2016-09.
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, 20172020 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
During the three months ended September 30, 2020, the following material events occurred with respect to certain of our Remote Power Patent. Named as defendants in the lawsuit (excluding affiliated parties) were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., legal proceedings:
Dell Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc. We seek monetary damages based upon reasonable royalties.
On July 2015, we reached settlements with defendants Samsung Electronics Co., Ltd. ("Samsung"), Huawei Technologies Co., Ltd. ("Huawei") and ShoreTel, Inc. ("ShoreTel"). Samsung and Huawei each entered into a non-exclusive fully paid license agreement for our Remote Power Patent for its full term. ShoreTel entered into a non-exclusive license agreement for our Remote Power Patent for its full term and paid a license initiation fee and agreed to pay quarterly royalties based upon its sales of PoE products.
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Remote Power Patent for its full term, Dell paid a license initiation fee of $6,000,000 and agreed to pay quarterly royalties based on its sales of PoE products.
On September 24, 2020, the terms of the settlement agreements, Alcatel and ALE received a non-exclusive fully paid license for our Remote Power Patent for its remaining life. The aggregate consideration to be received by us from Alcatel and ALE for the fully-paid license is $4,200,000 of which $1,900,000 has been paid and the balance of $2,300,000 is payable in three equal quarterly payments, two installments of which have been received.
On June 23, 2015, the PTAB issued an order instituting each of the four IPR petitionsOctober 9, 2020, we filed a petition for oral hearing. The consolidated oral hearing was held on March 9, 2016. On June 20, 2016, the PTAB issued its Final Written Decisions in the four pending IPRs finding eighty-six (86) claims "not unpatentable" (valid) and in total, one hundred nineteen (119) out of one hundred and twenty-nine (129) or 92% of the challenged claims of the patents survived. None of our asserted claims in the pending litigations against Google and YouTube were found invalid. On August 18, 2016, Google filed Notices of Appealrehearing to appeal the PTAB's Final Written Decisions on the IPRs to the United States Court of Appeals for the Federal Circuit and oral argumentto clarify the scope of the Federal Circuit’s remand to the District Court on the appeals (which have been consolidated) is scheduled for December 4, 2017.
ITEM 1A.1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. In addition to the risks described below and elsewhere in this quarterly report, and Quarterly Report, our Annual Report on Form 10-K for the year ended December 31, 20162019 (pages 16-26)16-27) filed with the Securities and Exchange CommissionSEC on March 20, 2017 includes2020, our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (page 36) filed with the SEC on May 19, 2020 and our Quarterly Report on Form 10-Q for the three months ended June 30, 2020 (page 36) filed with the SEC on August 12, 2020 include a discussion of our risk factors and should be carefully considered by investors.
ITEM 2.2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended September 30, 2017.
Stock Repurchases
On August 22, 2011, we established a share repurchase program ("(“Share Repurchase Program"Program”). On June 14, 2017,11, 2019, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000of shares of our common stock over the subsequent 1224 month period.period (for a total authorization of approximately $22,000,000 since inception of the program). The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. Since inception of the Share Repurchase Program in August 2011 through September 30, 2017,2020, we have repurchased an aggregate of 7,201,5978,605,659 shares of our common stock at an aggregate cost of $12,589,253$16,156,005 (exclusive of commissions) or an average per share price of $1.75.$1.88. During the three months ended September 30, 2017,2020, we repurchased 39,872did not repurchase any of our shares of our common stock at an aggregate cost of $149,253 (exclusive of commissions) or an average per share price of $3.74.stock. At September 30, 2017,2020, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $3,875,050.$4,196,100.
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| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1) |
| July 1 to July 31, 2017 | -0- | — | — | $ 4,024,303 |
| August 1 to August 31, 2017 | 25,022 | $3.77 | 25,022 | $ 3,929,875 |
| September 1 to September 30, 2017 | 14,850 | $3.69 | 14,850 | $ 3,875,050 |
| Total | 39,872 | $3.74 | 39,872 |
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 5. 4. Other Information.
None.
ITEM 6. 5. Exhibits
(a) Exhibits
| 101 | Interactive data files:** |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Scheme Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
_____________________________
*
Filed herewith** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETWORK-1 TECHNOLOGIES, INC. | |||
| Date: November | By: | /s/ Corey M. Horowitz | |
| Corey M. Horowitz | |||
Chairman and Chief Executive Officer | |||
| Date: November | By: | /s/ David C. Kahn | |
| David C. Kahn | |||
Chief Financial Officer | |||
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