Network-1(NTIP) - 2020 Q1 - Quarterly Report

PART I. Financial Information Item 1. Condensed Consolidated Financial Statements For the three months ended March 31, 2020, the company reported a significant decrease in revenue and a wider net loss compared to the same period in 2019, reflecting the impact of patent expiration and ongoing litigation Condensed Consolidated Balance Sheets As of March 31, 2020, total assets decreased to $51.15 million from $55.08 million at year-end 2019, primarily due to a reduction in marketable securities, while total liabilities also significantly dropped Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Current Assets | $45,222 | $48,758 | -$3,536 | | Cash and cash equivalents | $26,594 | $22,587 | +$4,007 | | Marketable securities, at fair value | $18,409 | $25,730 | -$7,321 | | Total Assets | $51,151 | $55,076 | -$3,925 | | Total Current Liabilities | $467 | $1,569 | -$1,102 | | Total Liabilities | $467 | $1,569 | -$1,102 | | Total Stockholders' Equity | $50,684 | $53,507 | -$2,823 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the first quarter of 2020, revenue sharply declined to $161,000, leading to a net loss of $1.34 million, significantly wider than the prior-year period due to lower revenue, investment losses, and equity method losses Statement of Operations Summary (in thousands, except per share data) | Metric | Q1 2020 | Q1 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $161 | $606 | -73.4% | | Total Operating Expenses | $1,061 | $1,139 | -6.9% | | Operating Loss | ($900) | ($533) | +68.9% | | Net realized and unrealized (loss) gain on marketable securities | ($322) | $23 | N/A | | Share of Net Losses of Equity Method Investee | ($293) | ($96) | +205.2% | | Net Loss | ($1,337) | ($240) | +457.1% | | Net Loss Per Share (Basic & Diluted) | ($0.06) | ($0.01) | +500% | - The company declared a cash dividend of $0.05 per share in both Q1 2020 and Q1 2019[14] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities slightly increased to $1.54 million for Q1 2020, while net cash provided by investing activities substantially rose to $6.91 million due to reduced marketable securities purchases, and cash used in financing activities increased due to higher stock repurchases Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($1,538) | ($1,415) | | Net Cash Provided by Investing Activities | $6,910 | $494 | | Net Cash Used in Financing Activities | ($1,365) | ($1,192) | | Net Increase (Decrease) in Cash | $4,007 | ($2,113) | | Cash and Cash Equivalents, End of Period | $26,594 | $21,650 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's intellectual property licensing business, the expiration of its primary revenue-generating patent, updates on significant legal proceedings, and information on its equity investment, stock repurchase program, and dividend policy - The company's business involves the development, licensing, and protection of its intellectual property assets, including 83 patents across several portfolios (Remote Power, Mirror Worlds, Cox, M2M/IoT, QoS)[26] - The Remote Power Patent expired on March 7, 2020, ceasing future licensing revenue, though significant past royalty payments are contingent on the outcome of the HP litigation appeal[26][27][29] - A pending appeal in the Hewlett-Packard case could obligate licensees like Cisco to pay significant royalties accrued from Q4 2017 through March 7, 2020[109][111] - On March 25, 2020, the company was granted summary judgment against Dell, Inc. for unpaid royalties, obligating Dell to pay all outstanding royalties through the patent's expiration[115] - In January 2020, the U.S. Court of Appeals reversed a summary judgment in favor of Facebook, remanding the patent infringement litigation for further proceedings[114] - The company invested $5 million in ILiAD Biotechnologies, LLC, recognizing a net loss of $293,000 from this equity method investment in Q1 2020[116][119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant financial impact of the Remote Power Patent's expiration on March 7, 2020, highlighting uncertain future revenue dependent on other patent portfolios and litigation outcomes, while maintaining a strong liquidity position to fund operations - The Remote Power Patent, a key revenue source, expired on March 7, 2020, having generated over $147 million in licensing revenue from May 2007 through March 31, 2020[128][130] - Future revenue is uncertain and may depend on the outcome of litigation involving the Cox and Mirror Worlds patent portfolios, and the ability to monetize the M2M/IoT portfolio or newly acquired patents[133] - The company's principal sources of liquidity at March 31, 2020, consisted of $45 million in cash, cash equivalents, and marketable securities, which management believes is sufficient to fund operations for the foreseeable future[135][153] Q1 2020 vs Q1 2019 Results Analysis | Item | Q1 2020 | Q1 2019 | Reason for Change | | :--- | :--- | :--- | :--- | | Revenue | $161,000 | $606,000 | Decline in licensing revenue, a one-time license conversion in 2019, and the patent expiration | | Operating Loss | ($900,000) | ($533,000) | Primarily due to the $445,000 decrease in revenue | | Net Loss | ($1,337,000) | ($240,000) | Driven by lower revenue, losses on marketable securities, and share of losses from equity investment | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable - The company states that there are no applicable quantitative and qualitative disclosures about market risk[167] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[167] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[168] PART II. Other Information Item 1. Legal Proceedings This section provides updates on key legal matters, including pending appeals in the Hewlett-Packard case, a favorable summary judgment against Dell, a reversed summary judgment in the Facebook case, and ongoing litigation against Google and YouTube - Remote Power Patent Litigation (HP): An appeal of the District Court's denial of a new trial on infringement is pending a decision from the U.S. Court of Appeals for the Federal Circuit[171] - Dell Litigation: On March 25, 2020, the court granted summary judgment in favor of Network-1 on its breach of contract claim against Dell for failure to make royalty payments[173] - Mirror Worlds Patent Litigation (Facebook): On January 23, 2020, the U.S. Court of Appeals reversed a summary judgment of non-infringement and remanded the case to the District Court for further proceedings[174] - Cox Patent Portfolio Litigation (Google/YouTube): The consolidated cases are ongoing, with a ruling on the Markman (claim construction) hearing held in November 2019 still pending[178] Item 1A. Risk Factors The company highlights the potential adverse impact of the global COVID-19 pandemic on its business, specifically noting delays in court proceedings that could affect the timing of future license agreements - The global COVID-19 pandemic is identified as a risk factor, specifically noting that it is causing delays in the courts, which could adversely affect the timing of consummating future license agreements[180] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the quarter, while repurchasing 72,300 shares of common stock for approximately $152,000 under its authorized program, with approximately $4.3 million remaining available for future repurchases - There were no issuances of unregistered securities during the three months ended March 31, 2020[181] Stock Repurchases in Q1 2020 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January 2020 | 5,137 | $2.21 | | February 2020 | 2,700 | $2.25 | | March 2020 | 64,463 | $2.02 | | Total Q1 2020 | 72,300 | $2.10 | - As of March 31, 2020, the remaining authorized amount for share repurchases under the program was $4,293,632[182] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[184] Item 4. Other Information The company reported no other information - None[185] Item 5. Exhibits This section lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and interactive data files (XBRL) Signatures The report is duly signed by the company's Chairman and Chief Executive Officer, Corey M. Horowitz, and another officer, David C. Kahn, on May 19, 2020