Network-1 Technologies, Inc. — Q3 2021 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2021. Network-1 develops, licenses and protects intellectual property. Its portfolio includes Remote Power, Mirror Worlds, Cox and M2M/IoT patents. The Remote Power Patent expired March 7, 2020; the company states it receives no royalties for periods after expiration.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $17.000 million | $4.150 million | $35.692 million | $4.366 million |
| Operating income | $9.037 million | $1.660 million | $20.407 million | $0.055 million |
| Net income (loss) | $6.589 million | $1.687 million | $15.257 million | $(0.234) million |
| Diluted EPS | $0.27 | $0.07 | $0.62 | $(0.01) |
Margins: Gross margin was approximately 61% in Q3 and 66% for the nine months, calculated as revenue less costs of revenue. Operating margin was approximately 53% and 57%, respectively.
Cash, liquidity and debt: At September 30, cash and cash equivalents were $43.173 million and marketable securities were $17.667 million, totaling $60.840 million. Working capital was $57.251 million; total liabilities were $4.295 million. The company reported no long-term debt or off-balance-sheet arrangements. Nine-month operating cash flow was $19.601 million, investing cash flow was $0.608 million, and financing cash flow was $(2.541) million. Cash dividends paid were $2.410 million.
Changes and notable items
- Nine-month revenue rose $31.326 million year over year, primarily from a $18.692 million Cisco royalty dispute resolution and a $17.000 million Hewlett-Packard litigation settlement. Q3 revenue growth was driven by the HP settlement.
- Costs of revenue increased to $12.030 million for nine months, including $10.245 million of contingent legal fees and $1.785 million of CEO incentive compensation. Higher revenue nevertheless drove operating income and net income sharply higher.
- All reported 2021 revenue came from the Remote Power Patent. Two licensees accounted for nine-month revenue and one accounted for Q3 revenue, highlighting significant revenue concentration and dependence on past-period royalties and settlements.
- The company invested $1.000 million in an ILiAD Biotechnologies convertible note in March; its total ILiAD investment was $6.000 million. The company recorded a $0.632 million share of ILiAD losses for the nine months.
- The board declared semiannual dividends of $0.05 per share in March and September. The dividend policy is subject to board review and may change. A share repurchase authorization permits up to $5.000 million over 24 months; $4.869 million remained available at quarter-end.
Outlook, risks and contingencies
Management said available liquidity should fund operations for the foreseeable future, but provided no quantitative revenue or earnings guidance. Future revenue is uncertain and, apart from potential Netgear royalties for periods before the Remote Power Patent expired, depends on monetizing the Mirror Worlds, Cox and M2M/IoT portfolios and any future acquisitions. Management cited unpredictable litigation outcomes, timing of licensing agreements, patent protection and acquisition opportunities, the return on the ILiAD investment, and COVID-19-related court delays as risks.
Pending matters include Cox portfolio litigation against Google and YouTube and Mirror Worlds litigation against Facebook; trial dates had not been set. Network-1 had also sued Netgear over alleged unpaid royalties. The company settled its Plantronics litigation on October 26, 2021 for $337,000. The filing warns that the company could meet personal holding company tests and incur a 20% tax on undistributed personal holding company income; it may instead distribute a special dividend, reducing cash available for operations and strategic transactions. The filing also identifies contingent legal fees and other settlement-related obligations.
Investor verification priorities
- Verify the sustainability and timing of revenue after the large Cisco and HP settlements, given the expired Remote Power Patent and concentration in that portfolio.
- Track outcomes and timing of Netgear, Google/YouTube and Facebook litigation, including any resulting revenue, costs or settlements.
- Review the personal holding company tax tests, potential undistributed income and any special-dividend decision.
- Assess ILiAD’s financial and clinical progress, conversion or repayment terms of the convertible note, and the carrying value of the investment.
- Monitor the board’s dividend policy and remaining share-repurchase authorization against future cash needs.