Network-1 Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company develops, licenses, and protects intellectual property; its results depend heavily on patent monetization, litigation outcomes, and investment activity.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $0 | $17.0 million | $0 | $35.7 million |
| Operating income (loss) | $(0.8) million | $9.0 million | $(2.6) million | $20.4 million |
| Net income (loss) | $2.2 million | $6.6 million | $(0.6) million | $15.3 million |
| Basic earnings (loss) per share | $0.09 | $0.28 | $(0.03) | $0.63 |
Q3 2022 net income included a $3.7 million gain from the remeasurement/dilution of the ILiAD equity-method investment and a $0.3 million gain on conversion of an ILiAD note. For the nine-month period, these gains were partly offset by a $1.4 million realized and unrealized loss on marketable securities and a $1.1 million share of ILiAD losses. Revenue-based gross and operating margins are not meaningful for 2022 because revenue was zero.
Cash, liquidity, and balance sheet
- At September 30, 2022, cash and cash equivalents were $21.2 million and marketable securities were $27.8 million, totaling $48.9 million. Working capital was $48.6 million.
- Total assets were $58.9 million; total liabilities were $1.9 million, including $1.0 million of deferred tax liabilities and $0.2 million of operating lease obligations. The company reported no long-term debt.
- Nine-month operating cash flow was $(5.2) million, investing cash flow $(15.2) million, and financing cash flow $(2.9) million. Cash declined $23.3 million to $21.2 million.
- Financing outflows included $2.4 million of dividends and $0.4 million of share repurchases. The company declared dividends of $0.10 per share for the nine months.
Changes versus the prior comparable period
- No revenue was recorded in 2022, compared with 2021 revenue of $17.0 million for Q3 and $35.7 million year to date. The 2021 revenue came from the Cisco dispute resolution and Hewlett-Packard litigation settlement.
- Nine-month net results shifted from $15.3 million income to a $0.6 million loss. Q3 remained profitable, but net income declined from $6.6 million to $2.2 million.
- Operating expenses fell substantially year over year because 2021 included litigation-related contingent legal fees and CEO incentive compensation tied to settlement proceeds. 2022 expenses included higher stock-based compensation.
- Cash and cash equivalents declined from $44.5 million at year-end 2021; marketable securities rose from $15.1 million to $27.8 million. Working capital decreased $7.1 million from December 31, 2021.
Outlook, commentary, and risks
- Management said available liquidity should fund operations for the next 12 months and the foreseeable future. No revenue or earnings guidance was provided.
- The company owns 96 patents and is pursuing licensing and monetization opportunities. It acquired the HFT portfolio in March 2022; additional contingent consideration and revenue-based payments may be owed under the acquisition terms.
- The Remote Power Patent expired in March 2020, so it generates no licensing revenue for later periods. Management stated that future revenue is uncertain and depends on successful licensing, patent litigation, and acquisitions.
- ILiAD is a high-risk clinical-stage biotechnology investment. The company had invested $7.0 million in total and held approximately 6.9% of ILiAD on a non-fully diluted basis at quarter-end. Its $3.7 million gain arose from an observable financing transaction and was not operating revenue.
- Pending matters include the company’s appeals in the Facebook case and litigation involving Google/YouTube and Netgear. After quarter-end, the company filed additional Remote Power Patent infringement suits against nine defendants, seeking reasonable-royalty damages; outcomes and recoveries are uncertain.
- The company warned it could be classified as a personal holding company in 2022 or a future year, potentially causing a 20% tax on undistributed personal holding company income or prompting a special dividend. Management said it did not meet the ownership test based on information available through October 2022.
- Other risks include market losses on securities, ILiAD valuation and operating performance, patent validity and enforceability, fluctuating results, and the possibility that dividends may change. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, timing, and potential economics of pending patent cases and newly filed Remote Power Patent suits.
- Whether the company can generate recurring licensing revenue from its remaining portfolios after having no revenue in the first nine months of 2022.
- ILiAD’s financial and clinical progress, and the assumptions supporting the investment’s carrying value and recognized gain.
- Cash burn, investment allocation, and ability to sustain dividends and repurchases without recurring operating revenue.
- Potential personal holding company status and any resulting tax or special-dividend implications.