Business context and reporting period
Network-1 Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Its business centers on developing, licensing and protecting intellectual property, with revenue dependent on patent licensing and litigation outcomes. The company also holds an equity-method investment in clinical-stage biotechnology company ILiAD.
Financial performance and condition
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Revenue | $283,000 | $820,000 |
| Operating expenses | $832,000 | $2,145,000 |
| Operating loss | $(549,000) | $(1,325,000) |
| Net loss | $(476,000); $(0.02) per share | $(1,099,000); $(0.05) per share |
- All 2023 revenue came from settlements relating to the expired Remote Power Patent. Costs of revenue were $81,000 for the quarter and $232,000 for the six months; gross profit was therefore $202,000 and $588,000, respectively.
- Other income was $370,000 in the quarter and $1.044 million for the six months. It included interest and dividend income of $445,000 and $755,000, respectively, and marketable-security gains or losses of $(75,000) and $289,000.
- The share of ILiAD’s net losses was $391,000 for the quarter and $1.065 million for the six months. A deferred tax benefit of $94,000 and $247,000, respectively, reduced reported losses.
- At June 30, cash and cash equivalents were $16.615 million and marketable securities were $29.755 million, totaling $46.370 million. Working capital was $45.884 million. Total liabilities were $1.725 million, including lease obligations; the company reported no long-term debt.
- For the six months, operating cash use was $553,000, investing activities provided $5.326 million, and financing activities used $1.606 million. Cash increased $3.167 million to $16.615 million.
- Total assets were $54.391 million and stockholders’ equity was $52.666 million. The ILiAD investment carrying value was $6.187 million, down from $7.252 million at year-end 2022.
Material changes versus the prior comparable period
- Revenue increased from zero in both 2022 comparison periods, reflecting Remote Power Patent litigation settlements.
- Quarterly net loss narrowed to $476,000 from $1.532 million; six-month net loss narrowed to $1.099 million from $2.844 million. Improved investment-related results and interest income contributed to the comparisons, alongside settlement revenue; ILiAD losses increased year over year.
- Six-month operating expenses rose $414,000, primarily from $232,000 of settlement-related legal and incentive costs and higher general and administrative expenses, including payroll taxes and former-CFO severance and benefits.
- Cash and cash equivalents rose from $13.448 million at December 31, 2022, while marketable securities declined from $34.991 million. Management attributed the investing cash-flow change mainly to shifting funds from marketable securities to cash equivalents.
Outlook, risks and unusual items
- Management said available liquidity should fund operations for the next 12 months and foreseeable future. No specific earnings or revenue guidance was provided.
- The company recognized $820,000 from settlements with five defendants during the first half; a further $150,000 conditional payment was not recognized because its conditions had not been met by June 30.
- Material litigation remains unresolved: the Google/YouTube Cox Patent cases await a trial date after summary-judgment motions; the Meta appeal and cross-appeal are pending; and the Netgear royalty dispute remains pending. Outcomes and future patent monetization are uncertain.
- Fifty-three of the company’s 98 U.S. patents have expired. The Remote Power Patent expired in 2020; related current revenue is from claims for past infringement. The company intends to pursue monetization of M2M/IoT and HFT portfolios, but success is uncertain.
- The $7 million ILiAD investment is high risk; the company recorded a $1.065 million share of ILiAD losses in the first half. The company also cautions that it could be classified as a personal holding company in 2023 or a later year, potentially resulting in tax or a special dividend.
- The board extended and increased the share repurchase authorization to up to $5 million over 24 months. First-half repurchases totaled $327,887. The semiannual $0.05-per-share dividend policy is subject to board review and 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
- Settlement collections, remaining conditions and the status of the Remote Power Patent cases, particularly the unrecognized $150,000 conditional payment.
- Procedural developments and potential costs or recoveries in the Google/YouTube, Meta and Netgear matters.
- ILiAD’s financial condition, the assumptions underlying the investment’s carrying value and any future impairment or additional losses.
- Cash and investment balances, future operating cash needs, and the board’s decisions on dividends and repurchases.
- Whether the company meets personal holding company tests for 2023 or later years, and any resulting tax or distribution implications.