NETWORK-1 TECHNOLOGIES, INC. quarterly report, Q3 FY2023

Network-1 Technologies, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; unaudited. Network-1 develops, licenses, and protects intellectual property. Its revenue is episodic and largely dependent on patent licensing and litigation outcomes.

Financial performance and position

MetricQ3 2023Nine months 2023
Revenue$0$820,000
Operating expenses$859,000$3.004 million
Operating loss$859,000$2.184 million
Net income (loss)$(810,000)$(1.909) million
Net income (loss) per share, basic and diluted$(0.03)$(0.08)
  • Nine-month revenue came from settlements in Remote Power Patent litigation; there was no revenue in Q3. A further $150,000 settlement payment was conditional and not recognized at September 30.
  • Nine-month interest and dividend income was $1.161 million. The company also recorded a $420,000 net realized and unrealized gain on marketable securities and a $1.597 million share of ILiAD Biotechnologies’ net loss.
  • Cash and cash equivalents were $20.886 million and marketable securities were $23.682 million at September 30, for combined liquidity of $44.568 million. Working capital was $44.267 million; total liabilities were $1.533 million. The company reported no long-term debt.
  • For the nine months, operating cash use was $753,000, investing activities provided $11.350 million, and financing activities used $3.159 million. Cash increased by $7.438 million, largely alongside net sales of marketable securities.
  • Total assets were $51.957 million and stockholders’ equity was $50.424 million. The ILiAD equity-method investment was carried at $5.655 million.
  • Cash dividends declared were $0.05 per share for Q3 and $0.10 per share for the nine months. The company repurchased 311,318 shares for approximately $698,000 during the nine months.

Material changes versus comparable periods

  • Nine-month revenue increased from zero in 2022 to $820,000 in 2023, but was entirely litigation-settlement revenue. Operating loss narrowed from $2.569 million to $2.184 million, reflecting settlement revenue partly offset by higher expenses.
  • Nine-month net loss increased from $618,000 to $1.909 million. The 2022 comparison included a $3.727 million gain on the ILiAD investment and a $271,000 gain on conversion of an ILiAD note; neither recurred in 2023. Higher interest income and securities gains partly offset those absent gains and the larger ILiAD loss.
  • Q3 shifted from $2.226 million net income in 2022 to an $810,000 net loss in 2023. The prior-year quarter included the $3.727 million ILiAD investment gain and $271,000 note-conversion gain; Q3 2023 had no revenue.
  • Cash and cash equivalents rose from $13.448 million at December 31, 2022, while marketable securities declined from $34.991 million. Combined cash and securities fell from $48.439 million to $44.568 million.

Outlook, risks, contingencies, and unusual items

  • Management stated that available liquidity should fund operations for the next 12 months and the foreseeable future. No numerical revenue or earnings guidance was provided.
  • Management intends to continue monetizing its patent portfolios and evaluating patent acquisitions and strategic opportunities. It cautioned that litigation outcomes, licensing revenue, acquisition opportunities, and returns from ILiAD are uncertain; results may fluctuate significantly.
  • Five Remote Power Patent defendants settled during the first nine months of 2023. On October 9, 2023, after quarter-end, another defendant agreed to pay $1.5 million, to be recorded as revenue in Q4 2023.
  • Netgear obtained summary judgment dismissing Network-1’s claims in August 2023; the company appealed. The Meta appeal remains pending, and the Google/YouTube litigation has no trial date. These matters could affect future monetization, but outcomes are uncertain.
  • Network-1 has invested $7 million in clinical-stage ILiAD and held approximately 6.8% of its units on a non-fully diluted basis. The company recorded a $1.597 million share of ILiAD losses for the nine months. ILiAD’s development and the investment’s recoverability remain uncertain.
  • The company said it did not meet the personal holding company ownership test as of September 30, 2023, but could be classified as a personal holding company in 2023 or a future year. If so, undistributed personal holding company income could incur a 20% tax; a special dividend could reduce cash available for operations and strategic transactions.
  • The company exercised an early termination right on its office lease; the lease is to end December 31, 2023, and new office space is planned. The filing reports no off-balance-sheet arrangements and no long-term debt.

Important facts for investors to verify

  • Whether the conditional $150,000 payment and the $1.5 million post-quarter settlement are received and recognized as expected.
  • Developments and potential recoveries in the Google/YouTube, Meta, Netgear, and remaining Remote Power Patent proceedings.
  • ILiAD’s operating and financing progress, the carrying value of Network-1’s investment, and the prospects for a return.
  • Future licensing revenue, patent-portfolio monetization plans, and the company’s ability to sustain dividends and share repurchases amid irregular revenue.
  • Any personal holding company determination and resulting tax or distribution requirements.