Network-1 Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results. The company develops, licenses, and protects intellectual property; it reported 87 patents. Its Remote Power Patent expired March 7, 2020, and the Mirror Worlds patents have expired.
Financial performance and liquidity
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $0 | $18.692 million | Q2: $55,000; six months: $216,000 |
| Operating income (loss) | ($901,000) | $11.370 million | Q2: ($705,000); six months: ($1.605 million) |
| Net income (loss) | ($783,000), or ($0.03) per share | $8.668 million, or $0.36 basic and $0.35 diluted per share | Q2: ($584,000), or ($0.02) per share; six months: ($1.921 million), or ($0.08) per share |
| Operating cash flow | Not reported separately | $11.270 million | Six months: ($2.073 million) |
- Six-month 2021 revenue was a one-time $18.692 million payment from Cisco resolving a royalty dispute. There was no Q2 revenue. Recurring revenue and conventional operating margins are therefore not indicative of ongoing performance.
- Six-month costs of revenue were $5.420 million, including $4.485 million in contingent legal fees and $935,000 in CEO incentive compensation. Total operating expenses were $7.322 million.
- At June 30, cash and cash equivalents were $39.050 million and marketable securities were $14.725 million, totaling $53.775 million. Working capital was $51.611 million; total liabilities were $2.939 million. The company reported no long-term debt or off-balance-sheet arrangements.
- Six-month investing cash flow was $3.612 million and financing cash flow was ($1.337 million), including dividends paid and share repurchases. The company invested $1 million in an ILiAD convertible note.
- At June 30, total assets were $59.548 million and stockholders’ equity was $56.609 million. The company declared dividends of $0.05 per share for the six-month period.
Changes and material developments
- Revenue rose sharply year over year for the first half because of the Cisco settlement; excluding that payment, reported revenue was minimal. The company said its Remote Power Patent can no longer generate royalties for periods after its expiration.
- Q2 operating expenses increased to $901,000 from $760,000, primarily due to higher patent-litigation costs. Q2 net loss widened to $783,000 from $584,000.
- On July 26, 2021, after quarter-end, HP agreed to pay $17 million to settle litigation and receive a fully paid license and release for the expired Remote Power Patent. This settlement is not included in June 30 results.
- Cash and marketable securities increased from $44.871 million at year-end 2020 to $53.775 million at June 30, 2021. Management stated that available cash should fund operations for the foreseeable future.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance was provided. Management described future revenue as uncertain and dependent on monetizing the Mirror Worlds, Cox, and M2M/IoT portfolios, potential additional intellectual property, and outcomes of licensing efforts and litigation.
- Litigation remains uncertain. The company is pursuing royalty claims against Netgear and Plantronics, and patent cases involving Google/YouTube and Facebook remain pending. Court delays related to COVID-19 could affect timing.
- The company warned it could meet the tests to be classified as a personal holding company in 2021; undistributed personal holding company income could incur a 20% tax. A special dividend may be considered to avoid that tax, if applicable.
- The $6 million ILiAD investment is described as risky; the company recorded a $446,000 share of ILiAD losses in the first half. The $1 million convertible note bears 6% interest and has a three-year maturity, subject to conversion provisions.
- The board extended and increased the share repurchase authorization to $5 million over 24 months; $4.869 million remained available at June 30. Management said the semiannual $0.05-per-share dividend policy is subject to board review and may change.
Key facts for investors to verify
- Whether any further royalties are recoverable from Netgear or Plantronics and the timing and outcomes of pending patent litigation.
- How the post-quarter $17 million HP settlement is recognized and how much remains after contingent legal fees, other contractual payments, and taxes.
- The company’s ability to generate revenue from its remaining patent portfolios after expiration of the Remote Power and Mirror Worlds patents.
- Potential personal holding company status, any related tax exposure or special dividend, and the sustainability of regular dividends and repurchases.
- ILiAD’s financing, clinical and business progress, and prospects for repayment or conversion of the company’s note and recovery on its equity investment.