Network-1 Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company develops, licenses, and protects intellectual property. Its revenue is dependent on patent licensing and litigation outcomes. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.150 million | $0.520 million | $4.366 million | $1.725 million |
| Operating income (loss) | $1.660 million | $(0.576) million | $0.055 million | $(1.625) million |
| Net income (loss) | $1.687 million | $(0.411) million | $(0.234) million | $(0.859) million |
| Basic and diluted EPS | $0.07 | $(0.02) | $(0.01) | $(0.04) |
| Operating cash flow | Not separately provided | Not separately provided | $0.107 million | $(1.388) million |
- Q3 revenue included a $4.150 million Dell litigation settlement; the company recorded no revenue from that settlement in the prior-year quarter. For the first nine months, the settlement accounted for nearly all revenue.
- Costs of revenue were $1.593 million in Q3 and $1.645 million for the nine months, including contingent legal fees and CEO incentive compensation. On a simple revenue less cost-of-revenue basis, gross margin was approximately 61.6% for Q3 and 62.3% year to date; these figures reflect the settlement and associated costs.
- At September 30, cash and cash equivalents were $24.221 million and marketable securities were $21.271 million. Working capital was $45.178 million; total current liabilities were $0.344 million. The company reported no long-term debt or off-balance-sheet arrangements.
- Nine-month investing cash flow was $4.344 million, principally reflecting net sales of marketable securities; financing cash flow was $(2.817) million, including $2.456 million of dividends paid and $0.252 million of share repurchases. Cash increased $1.634 million to $24.221 million.
- Total assets were $50.989 million and stockholders’ equity was $50.645 million at September 30. The $3.793 million ILiAD equity-method investment generated a $0.644 million share of loss for the nine months.
Changes versus comparable periods
- Q3 net income improved from a $0.411 million loss to $1.687 million of income, primarily due to the Dell settlement. Nine-month net loss narrowed from $0.859 million to $0.234 million, also primarily due to the settlement.
- Nine-month operating cash flow improved by $1.495 million, from cash used of $1.388 million to cash provided of $0.107 million.
- Interest and dividend income fell to $0.105 million in Q3 from $0.270 million, and to $0.403 million for nine months from $0.872 million, primarily because of lower short-term investment rates.
- Marketable securities declined from $25.730 million at year-end 2019 to $21.271 million; cash rose from $22.587 million to $24.221 million. Working capital decreased by $2.011 million.
Outlook, risks, and unusual items
- Management provided no quantitative earnings or revenue guidance. It said available cash should fund operations for the foreseeable future and continues to assess IP acquisitions and other strategic opportunities.
- The Remote Power Patent expired March 7, 2020, ending the ability to earn royalties on sales after expiration. Revenue from the patent was 100% of reported revenue in both periods compared; Q3 2020 revenue came entirely from one licensee/settlement.
- On September 24, 2020, the Federal Circuit overturned the HP non-infringement judgment, vacated the district court’s validity judgment, and remanded for a new infringement trial and further validity proceedings. Both parties’ rehearing petitions were pending as of the filing. The company believes Cisco and other licensees owe pre-expiration royalties, but states there is no certainty of collection; no such disputed royalties were recorded.
- Dell paid $4.150 million in August 2020 to settle a contract dispute, recognized as Q3 revenue. Litigation-related contingent legal fees were $1.385 million in Q3 and $1.421 million year to date.
- Other patent cases against Google/YouTube and Facebook remained in progress. COVID-19-related court delays could affect litigation timing and future licensing revenue.
- The company continued its stated semiannual dividend policy of $0.05 per share, subject to board review and change. It repurchased 115,889 shares for $0.249 million during the nine months; no shares were repurchased in Q3.
- The company was evaluating whether it might qualify as a personal holding company. If applicable, a 20% tax could apply to undistributed PHC income; the company had engaged tax counsel to assess the issue.
- ILiAD reported positive topline Phase 2b results for its vaccine candidate in September 2020. This is an investee development, not company operating revenue, and the investment remains subject to development and valuation risks.
Important facts for investors to verify
- Whether HP rehearing proceedings or the remanded trial establish infringement and patent validity, and whether Cisco or other licensees pay disputed pre-expiration royalties.
- How much future revenue can be generated from the company’s remaining patent portfolios after expiration of the Remote Power Patent and all Mirror Worlds patents.
- Whether the Dell settlement is a one-time event and how contingent litigation costs affect cash generation from future recoveries.
- The company’s revenue concentration, litigation-dependent business model, and the timing impact of court delays.
- The outcome of the personal holding company tax analysis and whether it affects tax obligations or the dividend policy.
- ILiAD’s subsequent clinical, financing, and valuation developments and their effect on the company’s equity-method investment.