Network-1(NTIP) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed notes on accounting policies, patent assets, and legal proceedings Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and liabilities from December 2018 to March 2019, leading to a slight decrease in total stockholders' equity | Metric | March 31, 2019 ($) | December 31, 2018 ($) | Change ($) | | :----- | :------------- | :---------------- | :----- | | Total Assets | $58,097,000 | $60,266,000 | -$2,169,000 | | Total Liabilities | $1,094,000 | $2,061,000 | -$967,000 | | Total Stockholders' Equity | $57,003,000 | $58,205,000 | -$1,202,000 | | Cash and cash equivalents | $21,650,000 | $23,763,000 | -$2,113,000 | | Marketable securities | $30,837,000 | $31,228,000 | -$391,000 | | Royalty receivables, net | $774,000 | $444,000 | +$330,000 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The company reported a significant decline in revenue and a net loss for Q1 2019, primarily due to the absence of large non-recurring licensing revenue from the prior year | Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | Change ($) | | :----- | :---------------------------- | :---------------------------- | :----- | | Revenue | $606,000 | $19,463,000 | -$18,857,000 | | Operating Expenses | $1,139,000 | $8,580,000 | -$7,441,000 | | Operating Income (Loss) | $(533,000) | $10,883,000 | -$11,416,000 | | Net Income (Loss) | $(240,000) | $8,601,000 | -$8,841,000 | | Basic EPS | $(0.01) | $0.36 | -$0.37 | | Diluted EPS | $(0.01) | $0.34 | -$0.35 | - The significant decrease in revenue and net income was primarily due to non-recurring revenue of $19,020,000 in Q1 2018, which included a $12,700,000 Fully-Paid License with Juniper Networks and $6,320,000 from the sale of an Avaya unsecured claim[158][166] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $58.21 million at December 31, 2018, to $57.00 million at March 31, 2019, mainly due to net loss and dividends | Metric | December 31, 2018 ($) | March 31, 2019 ($) | Change ($) | | :----- | :---------------- | :------------- | :----- | | Total Stockholders' Equity | $58,205,000 | $57,003,000 | -$1,202,000 | | Accumulated Deficit | $(7,102,000) | $(8,558,000) | -$1,456,000 | | Dividends and dividend equivalents declared | — | $(1,215,000) | -$1,215,000 | | Stock-based compensation | — | $144,000 | +$144,000 | | Net unrealized gain on corporate bonds and notes | — | $110,000 | +$110,000 | | Net loss | — | $(240,000) | -$240,000 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $(1.42) million for Q1 2019, a significant decrease from $16.92 million provided in Q1 2018, primarily due to net loss | Cash Flow Activity | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | Change ($) | | :----------------- | :---------------------------- | :---------------------------- | :----- | | Operating Activities | $(1,415,000) | $16,922,000 | -$18,337,000 | | Investing Activities | $494,000 | $(9,788,000) | +$10,282,000 | | Financing Activities | $(1,192,000) | $(1,557,000) | +$365,000 | | Net Increase (Decrease) in Cash | $(2,113,000) | $5,557,000 | -$7,670,000 | | Cash and Cash Equivalents, end of period | $21,650,000 | $56,678,000 | -$35,028,000 | - The decrease in net cash from operating activities was primarily due to a decrease in net income of $8.84 million and a $6.64 million decrease in accrued expenses[171] Notes to Unaudited Condensed Consolidated Financial Statements This section explains accounting policies, financial instrument valuations, patent assets, stock-based compensation, legal proceedings, and other commitments - The HP Jury Verdict on invalidity and non-infringement of the Remote Power Patent has materially adversely affected the company's results, leading several large licensees (including Cisco) to cease ongoing royalty payments[28][143] - The company adopted ASC 842 (Leases) on January 1, 2019, recognizing $127,000 of operating lease right-of-use assets and $128,000 of operating lease obligations[72][179] - The company made an initial investment of $2.5 million in ILiAD Biotechnologies, LLC, a development-stage biotechnology company, and is obligated to invest an additional $2.5 million contingent on FDA approval for a Phase 2b clinical study[127][128][129] NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS This note outlines the basis for financial statements, the company's IP business, and the adverse impact of the HP Jury Verdict on Remote Power Patent revenue - The company's primary business is the development, licensing, and protection of its intellectual property assets, including the Remote Power Patent, Mirror Worlds Patent Portfolio, Cox Patent Portfolio, M2M/IoT Patent Portfolio, and QoS Patents[25][139] - The HP Jury Verdict in November 2017, finding certain claims of the Remote Power Patent invalid and not infringed, has had a material adverse effect on the company's operations and cash flow, leading major licensees like Cisco to stop royalty payments[28][143] - The company is appealing the District Court's denial of its motion for a new trial on infringement, and if unsuccessful, its business, results of operations, and cash flow will continue to be materially adversely affected[28][143] NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details key accounting policies, including revenue recognition, marketable securities valuation, patent capitalization, and the adoption of ASC 842 for leases - Revenue is recognized when intellectual property licensing is complete, reflecting expected consideration. For royalty-bearing licenses, revenue is recognized when royalty reports are received due to the inability to reasonably estimate royalties in advance[37][43] - The company adopted ASC 842 (Leases) on January 1, 2019, recognizing operating lease right-of-use assets and related lease obligations on the balance sheet[70][72] - The company capitalizes costs associated with patent acquisition, registration, and maintenance, amortizing them over their remaining useful lives[47] NOTE C – PATENTS The company's patent portfolio includes Remote Power, Mirror Worlds, Cox, M2M/IoT, and QoS Patents, with reported net patent value and amortization expense | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :----- | :------------- | :---------------- | | Gross carrying amount – patents | $7,705,000 | $7,682,000 | | Accumulated amortization – patents | $(5,746,000) | $(5,693,000) | | Patents, net | $1,959,000 | $1,989,000 | | Amortization expense (3 months) | $54,000 | $70,000 | - The Remote Power Patent expires in March 2020, and most Mirror Worlds Patent Portfolio patents expired in February 2020. M2M/IoT Patent Portfolio patents have longer expiration dates, ranging from September 2033 to May 2034[78] NOTE D – STOCK-BASED COMPENSATION The company issues restricted stock units (RSUs) to non-management directors and its CEO, with vesting conditions including continued service and stock price targets. Stock-based compensation expense for RSUs decreased in Q1 2019 compared to Q1 2018 | Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | | :----- | :---------------------------- | :---------------------------- | | RSU Compensation Expense | $144,000 | $226,000 | - As of March 31, 2019, there was $599,000 of unrecognized RSU compensation to be expensed over a weighted average period of 1.41 years[82] - The CEO's 750,000 RSUs have vesting conditions tied to employment and stock price targets ($3.25 and $4.25 per share), which have been satisfied[105] NOTE E – EARNINGS PER SHARE Basic and diluted EPS calculations are provided, with potential dilutive effects from options, warrants, and restricted stock units. For Q1 2019, no dilutive effects were included due to their anti-dilutive nature | Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | | :----- | :---------------------------- | :---------------------------- | | Basic EPS | $(0.01) | $0.36 | | Diluted EPS | $(0.01) | $0.34 | | Weighted-average common shares outstanding – basic | 23,745,848 | 23,807,014 | | Weighted-average common shares outstanding – diluted | 23,745,848 | 25,611,497 | - Options and restricted stock units totaling 2,068,750 were excluded from diluted EPS calculation for Q1 2019 because their inclusion would have been anti-dilutive[89] NOTE F – MARKETABLE SECURITIES The company's marketable securities consist of certificates of deposit, short-term bond funds, and corporate bonds and notes, measured at fair value. Unrealized gains and losses are recognized differently based on the security type | Marketable Securities (Fair Value) | March 31, 2019 ($) | December 31, 2018 ($) | | :------------------------------- | :------------- | :---------------- | | Certificates of deposit | $11,126,000 | $13,151,000 | | Short term bond funds | $11,393,000 | $9,640,000 | | Corporate bonds and notes | $8,318,000 | $8,437,000 | | Total marketable securities | $30,837,000 | $31,228,000 | - Unrealized holding gains and losses on corporate bonds and notes are reported as a separate component of stockholders' equity until realized, while those on certificates of deposit and bond mutual funds are recorded in net realized and unrealized gain/loss from investments[90] NOTE G – COMMITMENTS AND CONTINGENCIES This note details legal fee arrangements for patent litigation, obligations related to patent acquisitions (including contingent payments to Dr. Cox and Recognition), and operating lease agreements, including the impact of adopting ASC 842 - The company has contingency fee arrangements with legal counsel for patent litigations, with fees ranging from 12.5% to 35% of net recovery depending on the stage of the proceeding[91][92][93] - Patent acquisition agreements include contingent payments to Dr. Ingemar Cox (12.5% of net proceeds from Cox Patent Portfolio) and Recognition Interface, LLC (10-20% of net proceeds from Mirror Worlds Patent Portfolio)[95][98] - The company recorded $128,000 of ROU assets and related lease obligations upon adopting ASC 842, with a weighted average remaining lease term of 10 months and a discount rate of 5.5% as of March 31, 2019[102][104] NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS This note outlines the employment agreements for the Chairman and CEO, CFO, and Executive Vice President, including base salaries, annual target bonuses, restricted stock unit grants with vesting conditions, and incentive compensation tied to patent licensing activities - The Chairman and CEO's employment agreement includes an annual base salary of $475,000 (increasing 3% annually), a target bonus of $175,000, and 750,000 RSUs with employment and stock price vesting conditions[105] - The Chairman and CEO receives incentive compensation of 5% of gross royalties from Remote Power Patent licensing and 10% net interest (min 6.25% gross) from other patent licensing activities, which continues for the life of the patents[106][107] | Incentive Compensation (Chairman & CEO) | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Earned | $30,000 | $973,000 | NOTE I – LEGAL PROCEEDINGS This note details ongoing patent litigation, including the Remote Power Patent case against HP (with an appeal pending), the Dell litigation for breach of license agreement, the Facebook litigation concerning the Mirror Worlds Patent Portfolio (also on appeal), and the Google/YouTube litigation for the Cox Patent Portfolio - The company is appealing the District Court's denial of a new trial on infringement in the Remote Power Patent case against HP, while HP cross-appealed the validity ruling. The outcome significantly impacts future royalty payments from licensees like Cisco[113][121][143] - Dell Inc. is being sued for breach of a settlement and license agreement due to its failure to make royalty payments following the HP Jury Verdict, with Dell asserting a counterclaim[126][193] - The Facebook litigation for infringement of Mirror Worlds Patent Portfolio patents was dismissed via summary judgment of non-infringement, which the company has appealed[125][194] - Litigations against Google and YouTube for infringement of Cox Patent Portfolio patents, previously stayed, were lifted in January 2019, with a claim construction hearing set for August 2019[123][198] NOTE J – EQUITY INVESTMENT The company invested $2.5 million in ILiAD Biotechnologies, LLC, a development-stage biotechnology company, with an obligation for an additional $2.5 million contingent on FDA approval for a Phase 2b clinical study, which was received in May 2019. The investment is accounted for using the equity method - The company made an initial $2.5 million investment in ILiAD Biotechnologies, LLC, acquiring 1,111,111 Class C units and warrants[128] - An additional $2.5 million investment is contingent on FDA approval for a Phase 2b clinical study, which was received on May 2, 2019, leading to a $1 million tranche 2 investment in May 2019[129] | Metric | 3 Months Ended March 31, 2019 ($) | | :----- | :---------------------------- | | Net loss from equity investment in ILiAD | $(96,000) | NOTE K– STOCK REPURCHASE The company has an ongoing share repurchase program, authorized to repurchase up to $5 million of common stock over 24 months (totaling $17 million since inception). A small number of shares were repurchased in Q1 2019 - The Board authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of common stock over 24 months, bringing the total authorization to approximately $17,000,000 since August 2011[133][200] | Metric | Since Inception (Aug 2011) through March 31, 2019 | 3 Months Ended March 31, 2019 | | :----- | :------------------------------------------------ | :---------------------------- | | Shares Repurchased | 8,154,698 | 300 | | Aggregate Cost ($) | $15,142,916 | $676 | | Average Price Per Share ($) | $1.86 | $2.25 | | Remaining Authorization ($) | — | $1,321,091 | NOTE L – CONCENTRATIONS The company's revenue and royalty receivables are highly concentrated, with a few licensees accounting for a significant portion of its financial performance - Revenue from four licensees constituted approximately 80% of the company's revenue for the three months ended March 31, 2019[135] - Royalty receivables from five licensees constituted approximately 93% of the company's total royalty receivables at March 31, 2019[135] NOTE M – DIVIDEND POLICY The company has a semi-annual cash dividend policy of $0.05 per common share, anticipated to continue through March 2020, contingent on receiving royalties from Remote Power Patent licensees. The policy may be modified or discontinued if the HP Jury Verdict on non-infringement is not overturned - The company has a semi-annual cash dividend policy of $0.05 per common share ($0.10 annually), paid in March and September[136][149] - The continuation of dividends through March 2020 is contingent on receiving royalties from Remote Power Patent licensees. The policy may be modified or discontinued if the HP Jury Verdict finding of non-infringement is not overturned or if arbitration does not rule in the company's favor[136][149] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's business, the impact of the HP Jury Verdict, Q1 2019 financial performance, liquidity, capital resources, and critical accounting policies - The company's principal business is intellectual property development, licensing, and protection, with the Remote Power Patent being a significant revenue generator historically[139][141] - The HP Jury Verdict and subsequent cessation of royalty payments by major licensees like Cisco have materially adversely affected revenue and cash flow, making future revenue uncertain and dependent on other patent portfolios or new acquisitions[143][145] - The company's liquidity at March 31, 2019, consisted of $52.49 million in cash, cash equivalents, and marketable securities, and $52.26 million in working capital, deemed sufficient for foreseeable operations[147][168] OVERVIEW The company's core business is intellectual property licensing, primarily from its Remote Power Patent, which has been severely impacted by the HP Jury Verdict - The company owns 66 patents across five portfolios: Remote Power, Mirror Worlds, Cox, M2M/IoT, and QoS[139] - The Remote Power Patent generated approximately $144,000,000 in licensing revenue from May 2007 through March 31, 2019. The Mirror Worlds Patent Portfolio generated $47,150,000 through March 31, 2019[141] - The HP Jury Verdict in November 2017, finding the Remote Power Patent invalid and not infringed, caused major licensees to stop royalty payments, leading to a material adverse effect on revenue and cash flow[143] RESULTS OF OPERATIONS (Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018) Revenue for Q1 2019 significantly decreased by $18.86 million (96.9%) compared to Q1 2018, primarily due to the absence of prior-year non-recurring revenue | Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | Change ($) | | :----- | :---------------------------- | :---------------------------- | :----- | | Revenue | $606,000 | $19,463,000 | -$18,857,000 | | Operating Expenses | $1,139,000 | $8,580,000 | -$7,441,000 | | Operating Income (Loss) | $(533,000) | $10,883,000 | -$11,416,000 | | Net Income (Loss) | $(240,000) | $8,601,000 | -$8,841,000 | - The decrease in revenue was primarily due to $19,020,000 of non-recurring revenue in Q1 2018 from a $12,700,000 Fully-Paid License with Juniper Networks and $6,320,000 from the sale of the Avaya unsecured claim[158][166] - Royalty Bearing Licenses revenue increased slightly by $33,000, from $443,000 in Q1 2018 to $476,000 in Q1 2019[158] LIQUIDITY AND CAPITAL RESOURCES The company's liquidity is strong, with $52.49 million in cash, cash equivalents, and marketable securities, and $52.26 million in working capital as of March 31, 2019 | Metric | March 31, 2019 ($) | December 31, 2018 ($) | Change ($) | | :----- | :------------- | :---------------- | :----- | | Cash and cash equivalents & marketable securities | $52,487,000 | $55,000,000 (approx) | -$2,513,000 | | Working Capital | $52,258,000 | $53,486,000 | -$1,228,000 | - Net cash provided by (used in) operating activities decreased by $18,337,000, from $16,922,000 in Q1 2018 to $(1,415,000) in Q1 2019, primarily due to decreased net income and accrued expenses[171] - The company believes it has sufficient cash to fund operations for the foreseeable future and continually reviews opportunities to acquire additional intellectual property and other strategic opportunities[168] OFF-BALANCE SHEET ARRANGEMENTS The company has no off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[174] CONTRACTUAL OBLIGATIONS The company has no long-term debt, capital lease obligations, or purchase obligations, only operating lease obligations recorded under ASC 842 - The company has no long-term debt, capital lease obligations, purchase obligations, or other long-term liabilities, apart from operating lease obligations recorded under ASC 842[175] CRITICAL ACCOUNTING POLICIES The preparation of financial statements involves significant estimates and assumptions, particularly concerning revenue recognition, patents, and income taxes - Significant estimates and assumptions are made in revenue recognition, patents, stock-based compensation, income taxes, and valuation of patents and equity method investments[176] Accounting Standards Adopted In The Period The company adopted ASU 2016-2 (ASC 842) for leases on January 1, 2019, recognizing right-of-use assets and lease obligations for existing operating leases using the modified retrospective method - The company adopted ASC 842 (Leases) on January 1, 2019, recognizing $127,000 of operating lease right-of-use assets and $128,000 of operating lease obligations[178][179] - The modified retrospective method was used for adoption, and the company elected practical expedients not to reassess lease classification, existing contracts for leases, or initial direct costs[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company, indicating no significant market risk disclosures are required - This item is not applicable[182] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, and there were no material changes in internal control over financial reporting during the quarter - The CEO and CFO evaluated and concluded that disclosure controls and procedures were effective as of March 31, 2019[182] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2019[183] PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS This section provides updates on the company's key patent infringement litigations, including the Remote Power Patent case against HP, Dell, Facebook, and Google/YouTube litigations - The company is appealing the District Court's denial of a new trial on infringement in the Remote Power Patent case against HP, which significantly impacts future royalty payments from licensees[187] - Dell Inc. is being sued for breach of a settlement and license agreement due to non-payment of royalties following the HP Jury Verdict; Dell's motion to stay the case was denied[193] - The Facebook litigation for Mirror Worlds Patent Portfolio infringement was dismissed via summary judgment of non-infringement, and the company has appealed this decision[194] - The Google and YouTube litigations for Cox Patent Portfolio infringement were consolidated and stays were lifted in January 2019, with a claim construction hearing scheduled for August 2019[198] Remote Power Patent Litigation The company initiated patent litigation against 16 manufacturers for infringement of its Remote Power Patent, settling with 15. The remaining defendant, HP, saw a jury verdict of invalidity and non-infringement, which the District Court partially overturned (validity) but upheld non-infringement. The company is appealing the non-infringement ruling, and HP is cross-appealing validity - The company settled with 15 of 16 defendants in the Remote Power Patent litigation, with HP remaining[186] - The District Court overturned the jury's invalidity verdict for the Remote Power Patent but denied a new trial on non-infringement, leading to appeals from both the company (non-infringement) and HP (validity)[187] - The outcome of the appeal is critical as it affects the obligation of major licensees, including Cisco, to continue paying royalties[187] Dell Litigation The company filed a lawsuit against Dell Inc. for breach of a settlement and license agreement, alleging Dell's failure to make royalty payments after the HP Jury Verdict. Dell denied the claim and filed a counterclaim, but its motion to stay the case was denied - The company sued Dell Inc. for breach of a license agreement due to Dell's failure to pay royalties following the HP Jury Verdict[193] - Dell filed a counterclaim exceeding $1,000,000 and sought to stay the case pending the HP appeal, but its motion was denied[193] Mirror Worlds Patent Portfolio Litigation The company's subsidiary initiated litigation against Facebook for infringement of Mirror Worlds Patent Portfolio patents related to Newsfeed and Timeline features. The case was dismissed via summary judgment of non-infringement, and the company has appealed this decision - Litigation against Facebook for infringement of Mirror Worlds Patent Portfolio patents (U.S. Patent Nos. 6,006,227, 7,865,538, and 8,255,439) was initiated in May 2017[194] - The case was dismissed in August 2018 after Facebook's motion for summary judgment of non-infringement was granted, and the company has appealed this decision[194] Cox Patent Portfolio – Google and YouTube Legal Proceedings The company initiated two litigations against Google and YouTube for infringement of its Cox Patent Portfolio patents related to media content identification (YouTube's Content ID system). These cases, previously stayed, were consolidated and the stays were lifted in January 2019, with a claim construction hearing set for August 2019 - Two litigations were initiated against Google and YouTube for infringement of Cox Patent Portfolio patents related to media content identification (YouTube's Content ID system)[196][197] - Court-ordered stays on these litigations were lifted on January 2, 2019, and the cases were consolidated, with a claim construction hearing scheduled for August 26, 2019[198] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports no recent issuances of unregistered securities during Q1 2019 and provides details on the company's ongoing share repurchase program, including the number of shares repurchased and the remaining authorization - There were no issuances of unregistered securities during the three months ended March 31, 2019[199] Recent Issuances of Unregistered Securities No unregistered securities were issued during the three months ended March 31, 2019 - No unregistered securities were issued during the three months ended March 31, 2019[199] Stock Repurchases The company's Share Repurchase Program, authorized for up to $5 million over 24 months (totaling $17 million since inception), saw 300 shares repurchased for $676 in Q1 2019, leaving $1,321,091 remaining under the authorization - The Share Repurchase Program was extended and increased to repurchase up to $5,000,000 of common stock over 24 months, with a total authorization of approximately $17,000,000 since August 2011[200] | Metric | 3 Months Ended March 31, 2019 | | :----- | :---------------------------- | | Shares Purchased | 300 | | Average Price Paid Per Share ($) | $2.25 | | Total Cost ($) | $676 | | Remaining Authorization ($) | $1,321,091 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities - There were no defaults upon senior securities[203] ITEM 4. OTHER INFORMATION This item states that there is no other information to report - No other information is reported under this item[204] ITEM 5. EXHIBITS This section lists the exhibits filed with the 10-Q report, including certifications from the CEO and CFO, and interactive data files in XBRL format - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and interactive data files (XBRL Instance, Scheme, Calculation, Definition, Label, Presentation Documents)[205]