Network-1 Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company develops, licenses and protects intellectual property; it reported 72 patents and relies substantially on patent-licensing income. Results are unaudited.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $599,000 | $471,000 | $1.205 million | $19.934 million |
| Operating income (loss) | $(516,000) | $(1.004) million | $(1.049) million | $9.879 million |
| Net income (loss) | $(208,000) | $(564,000) | $(448,000) | $8.037 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(1.342) million | $8.379 million |
Q2 revenue was royalty-bearing license revenue. The filing reports Q2 basic and diluted loss per share of $0.01; six-month loss per share was $0.02. Q2 operating expenses were $1.115 million, including $175,000 of cost of revenue. Calculated gross margin after cost of revenue was approximately 71% for Q2 and 73% for the first half.
At June 30, cash and cash equivalents were $18.923 million and marketable securities were $32.116 million, totaling $51.039 million. Working capital was $50.753 million. Total liabilities were $985,000; the company reported no long-term debt. Total assets were $57.368 million and stockholders’ equity was $56.383 million. Cash declined $4.840 million in the first half. Investing cash outflow was $1.715 million and financing cash outflow was $1.783 million, including $1.191 million of dividends paid.
Changes versus comparable periods
- Q2 revenue rose $128,000 year over year, reflecting higher Remote Power Patent royalties; the net loss narrowed by $356,000, primarily as legal costs declined and revenue increased.
- First-half revenue fell $18.729 million and results shifted from $8.037 million net income to a $448,000 net loss. The 2018 comparison included a $12.7 million Juniper fully paid license and $6.32 million from selling the Avaya bankruptcy claim. Excluding these items, royalty-bearing revenue increased from $914,000 to $1.075 million.
- First-half operating cash flow fell from $8.379 million provided to $1.342 million used, largely reflecting the lower net income. Cash and cash equivalents fell from $23.763 million at year-end 2018; marketable securities rose to $32.116 million from $31.228 million.
Outlook, risks and notable items
- Management said available cash and securities should fund operations for the foreseeable future. The filing gives no quantified revenue or earnings guidance and states that future revenue is uncertain.
- The key risk is the Remote Power Patent litigation. The patent expires in March 2020. The company appealed the ruling that certain claims were not infringed by HP; HP cross-appealed the ruling that the patent was valid. Several major licensees, including Cisco, had stopped ongoing royalty payments following the 2017 jury verdict. An adverse outcome could materially harm revenue and cash flow; recovery of withheld royalties depends on litigation and, potentially, arbitration.
- The company sued Dell over unpaid royalties; Dell denied the claims and asserted a counterclaim exceeding $1 million. The company also has pending Google/YouTube patent litigation and an appeal of the Facebook non-infringement judgment.
- The company’s Mirror Worlds patents were near expiry: eight of nine had expired, and the remaining patent was due to expire in February 2020. The QoS patents expired in June 2019. The Cox portfolio expires from 2021 to 2023; M2M/IoT patents from 2033 to 2034.
- The board authorized a further $5 million share repurchase over 24 months. The company maintained a semiannual $0.05-per-share dividend policy, but said dividends could be modified or discontinued depending on Remote Power Patent royalties and litigation outcomes. A further $0.05 dividend was declared after quarter-end for payment in September 2019.
- The company had invested $3.5 million in ILiAD Biotechnologies by June 30 and recorded a $149,000 first-half equity-method loss. After quarter-end, ILiAD reported satisfactory safety data; the company then became obligated to invest an additional $1.5 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and outcome of the HP appeal and cross-appeal, and any arbitration affecting royalty obligations, especially Cisco’s.
- Collection prospects for unpaid Remote Power royalties, including the Dell dispute and remaining Polycom payments, before the March 2020 patent expiry.
- Timing and potential financial impact of the Google/YouTube and Facebook proceedings and the remaining monetization opportunities in the patent portfolio.
- Cash and investment balances, future operating cash use, and whether the dividend and repurchase program remain supportable amid uncertain licensing revenue.
- Funding and development milestones for ILiAD, including the additional $1.5 million investment obligation.