Network-1 Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited statements are prepared under U.S. GAAP. Network-1 develops, licenses and protects intellectual property; results are driven by patent licensing, settlements and litigation outcomes.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $606,000 | $19.463 million |
| Operating expenses | $1.139 million | $8.580 million |
| Operating income (loss) | $(533,000) | $10.883 million |
| Net income (loss) | $(240,000) | $8.601 million |
| Basic and diluted EPS | $(0.01) | $0.36 basic; $0.34 diluted |
| Operating cash flow | $(1.415) million | $16.922 million |
Q1 2019 revenue comprised $476,000 from royalty-bearing licenses and $130,000 from converting an existing royalty-bearing license to a fully paid license. The filing reports no new litigation-settlement revenue in the quarter. Derived operating margin was approximately negative 88% in Q1 2019, versus approximately 56% in Q1 2018.
Cash and cash equivalents were $21.650 million and marketable securities were $30.837 million at March 31, 2019, totaling $52.487 million. Working capital was $52.258 million. Total liabilities were $1.094 million, including $96,000 of operating lease obligations; the company reported no long-term debt. Cash declined $2.113 million during the quarter. Investing activities provided $494,000 and financing activities used $1.192 million, primarily for the $1.191 million dividend payment.
Changes versus the prior comparable period
- Revenue decreased $18.857 million year over year, chiefly because Q1 2018 included a $12.7 million Juniper fully paid license and $6.32 million from selling the Avaya unsecured claim.
- Royalty-bearing license revenue increased $33,000, from $443,000 to $476,000. The company said several major Remote Power Patent licensees, including Cisco, had stopped paying ongoing royalties after the HP jury verdict.
- Operating expenses fell $7.441 million, largely because Q1 2018 included higher costs associated with the Juniper settlement and Avaya claim sale. Interest income rose to $301,000 from $143,000. Q1 2019 also included a $96,000 equity-method loss from ILiAD Biotechnologies.
- Operating cash flow swung from $16.922 million provided to $1.415 million used, reflecting lower earnings and changes in accrued expenses.
Outlook, risks and unusual items
- Management said available cash and investments should fund operations for the foreseeable future, but provided no specific revenue or earnings guidance and emphasized that future revenue is uncertain.
- The Remote Power Patent expires in March 2020 and has historically generated significant licensing revenue. The company’s appeal and HP’s cross-appeal remain pending; the company warns that an adverse outcome could materially harm its business, results and cash flow. Cisco and other licensees have withheld royalties; if the company prevails, it believes certain accrued and future royalties may become payable.
- The company is pursuing Dell for unpaid royalties and reports that Dell asserted a counterclaim exceeding $1 million. Separate patent litigation involving Google/YouTube resumed in January 2019; a claim-construction hearing was scheduled for August 26, 2019. The Facebook non-infringement judgment is on appeal.
- The board declared a $0.05-per-share semiannual dividend, paid March 25, 2019. Management said dividends could be modified or discontinued depending on litigation outcomes and continued Remote Power Patent royalties.
- Network-1 had invested $2.5 million in ILiAD and had a conditional additional $2.5 million commitment. After quarter-end, ILiAD received FDA permission to proceed with a Phase 2b study; Network-1 invested a further $1 million on May 6, 2019, with the remaining $1.5 million due upon satisfactory safety data.
- The company adopted lease accounting on January 1, 2019, recording $127,000 of right-of-use assets and $128,000 of lease obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and outcomes of the HP appeal and cross-appeal, and any resulting effect on royalty payments from Cisco and other licensees.
- Amounts and timing of royalties due from Dell, the status of its counterclaim, and the outcome of the Google/YouTube and Facebook cases.
- Recurring royalty revenue and licensee concentration: four licensees generated approximately 80% of Q1 2019 revenue; five licensees represented approximately 93% of royalty receivables at quarter-end.
- Whether ILiAD meets the safety-data condition for the remaining $1.5 million investment, and whether the dividend continues as the Remote Power Patent approaches expiration.