Network-1 Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Network-1 develops, licenses, and protects intellectual property and reported ownership of 84 patents. Its revenue is episodic and depends on licensing outcomes and litigation.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $18.692 million | $161,000 |
| Operating expenses | $6.421 million | $1.061 million |
| Operating income (loss) | $12.271 million | $(900,000) |
| Net income (loss) | $9.451 million | $(1.337) million |
| Diluted EPS | $0.38 | $(0.06) |
| Operating cash flow | $(1.375) million | $(1.538) million |
- All Q1 2021 revenue came from resolving a royalty dispute with Cisco over the expired Remote Power Patent. Cisco paid $18.692 million in April 2021 under an amendment signed March 30; the amount was recorded as a royalty receivable at quarter-end.
- Costs of revenue were $5.420 million, including $4.485 million in contingent legal fees and $935,000 in CEO incentive compensation related to the Cisco recovery. The resulting operating margin was approximately 65.6%; net margin was approximately 50.6%.
- Income tax expense was $2.614 million, comprising $890,000 current and $1.724 million deferred. The company recorded a $210,000 share of losses from its ILiAD equity investment.
- Cash and cash equivalents were $24.122 million; marketable securities were $17.149 million. Working capital was $52.271 million. Total liabilities were $8.549 million. The company reported no long-term debt or off-balance-sheet arrangements.
- Operating cash use reflected, in large part, the $18.692 million royalty receivable outstanding at quarter-end. Investing activities provided $1.198 million, including marketable-security transactions and a $1 million ILiAD convertible-note investment. Financing activities used $1.206 million, mainly for dividends.
- The company declared and paid a $0.05-per-share dividend during the quarter; the filing describes a policy anticipating semiannual dividends, subject to Board review.
Changes, outlook, and risks
- Results improved sharply from Q1 2020, primarily because of the one-time Cisco settlement. Management cautions that quarterly and annual results can fluctuate significantly and that future revenue depends on monetizing other patent portfolios or acquiring new assets.
- The Remote Power Patent expired March 7, 2020, so it generates no royalties for periods after expiration. Management identifies uncertain potential recoveries from Netgear and Plantronics for past royalties, and a possible recovery from Hewlett-Packard (HP) depending on litigation outcomes.
- Pending matters include the HP Remote Power Patent case, the Netgear royalty dispute, litigation against Plantronics, Cox portfolio litigation against Google and YouTube, and the Mirror Worlds case against Facebook. Patent litigation is inherently uncertain; COVID-19-related court delays may affect timing.
- The HP trial date is inconsistent in the filing: one section states August 2, 2021, while another states August 6, 2021. The court had granted a new trial and denied judgment as a matter of law on validity, leaving validity for trial.
- Management said existing cash and investments should fund operations for the foreseeable future; no formal earnings or revenue guidance was provided. Future revenue remains uncertain, particularly following expiration of the principal historical revenue-generating patent.
- The company had invested $6 million in ILiAD, including the $1 million convertible note. The investment carries clinical-stage business risk; the filing reports a $210,000 equity-method loss for the quarter.
- Network-1 may meet the personal holding company tests in 2021. If it has undistributed personal holding company income, it could face a 20% tax or issue a special dividend, reducing cash available for operations and strategic transactions.
Important facts for investors to verify
- Receipt and accounting treatment of Cisco’s $18.692 million April payment, and whether any additional royalties are recovered from Netgear, Plantronics, or HP.
- Current status, schedule, and likely costs of the pending patent cases, including the conflicting HP trial dates and outcomes on infringement and validity.
- Whether the company generates material licensing revenue from its Cox and M2M/IoT portfolios or acquires additional intellectual property.
- ILiAD’s financing, note-conversion terms, clinical progress, and potential effect on Network-1’s investment carrying value.
- Whether personal holding company status or future earnings affect taxes, any special dividend, and the regular dividend policy.