Network-1 Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are presented against the comparable 2019 periods. Network-1 develops, licenses and protects intellectual property; its revenue has been heavily dependent on patent licensing.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $55,000 | $599,000 | $216,000 | $1,205,000 |
| Operating expenses | $760,000 | $1,115,000 | $1,821,000 | $2,254,000 |
| Operating loss | $705,000 | $516,000 | $1,605,000 | $1,049,000 |
| Net loss | $584,000 | $208,000 | $1,921,000 | $448,000 |
| Loss per share, basic and diluted | $0.02 | $0.01 | $0.08 | $0.02 |
| Operating cash flow | Not separately stated | Not separately stated | $(2,073,000) | $(1,342,000) |
- Q2 other income was $326,000, including $120,000 of interest and dividend income and a $206,000 net gain on marketable securities. For the first half, total other income was $182,000; interest and dividend income was $298,000 and the net securities loss was $116,000.
- At June 30, cash and cash equivalents were $20.972 million and marketable securities were $23.763 million. Working capital was $44.589 million; current liabilities were $325,000. Total assets were $50.587 million and total liabilities were $325,000. The company reported no long-term debt or other long-term liabilities.
- First-half investing cash flow was positive $1.921 million, principally reflecting net marketable-security sales. Financing cash outflow was $1.463 million, including $1.211 million in dividends and $252,000 in share repurchases. Cash declined $1.615 million to $20.972 million.
Changes versus the prior comparable periods
- Revenue fell 91% in Q2 and 82% for the first half, primarily because the Remote Power Patent expired March 7, 2020; no licensing revenue accrues for periods after expiration. The $55,000 Q2 revenue related to an amended first-quarter royalty report.
- Despite lower operating expenses, operating and net losses widened as the revenue decline outweighed cost reductions. First-half interest and dividend income also decreased by $304,000, while the equity-method loss from ILiAD increased to $498,000 from $149,000.
- Cash used in operations increased to $2.073 million from $1.342 million in the first half of 2019. Marketable securities declined from $25.730 million at year-end 2019 to $23.763 million at June 30, 2020.
Outlook, commentary and risks
- Management said available cash and marketable securities should fund operations for the foreseeable future, while noting future revenue is uncertain. No quantified revenue or earnings guidance was provided.
- A July 28, 2020 settlement resolved the Dell litigation; Dell paid $4.150 million on August 7, after quarter-end. This is a material subsequent event, not Q2-period revenue or cash receipt.
- The appeal involving Hewlett-Packard and the Remote Power Patent remained pending. A favorable outcome could support recovery of unpaid royalties from certain licensees for periods before patent expiration; an unfavorable outcome could limit those recoveries. The company had not recorded revenue from certain nonpaying licensees, including Cisco.
- Other unresolved patent cases included litigation against Google/YouTube and Facebook. COVID-19-related court delays could affect litigation timing and future licensing activity.
- The Remote Power Patent generated more than $147 million in licensing revenue from May 2007 through expiration. Q2 2020 revenue came from one licensee; four licensees accounted for about 90% of first-half revenue. This underscores concentration and replacement-revenue risk.
- The company continued a semiannual dividend policy of $0.05 per share, subject to Board review and change. First-half dividends declared were $1.221 million. Management disclosed possible personal holding company status; if applicable, a 20% tax could apply to undistributed personal holding company income. The determination remained under evaluation.
- The company held an approximately 9.5% non-fully diluted interest in ILiAD Biotechnologies and recorded a $498,000 first-half equity-method loss. ILiAD had reported positive safety and colonization results in its Phase 2b study but had not finalized certain immunological data.
Most important facts for investors to verify
- Subsequent-period accounting and cash receipt for Dell’s $4.150 million settlement.
- Status and potential financial impact of the HP appeal and any unpaid Remote Power Patent royalties.
- Progress and outcomes in the Google/YouTube and Facebook patent cases, and the timing effects of court delays.
- Whether the company meets personal holding company tests and any resulting distribution or tax obligations.
- Ability to generate licensing revenue from other portfolios after Remote Power Patent expiration, given low current revenue and licensee concentration.