NETWORK-1 TECHNOLOGIES, INC. annual report, FY2022

Network-1 Technologies, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Network-1 develops, licenses and protects intellectual-property assets; its revenue is highly dependent on licensing and patent-enforcement outcomes.

Financial performance and position

Metric	FY2022	FY2021
Revenue	$0	$36.029 million
Operating expenses	$3.903 million	$16.443 million
Operating income (loss)	$(3.903) million	$19.586 million
Net income (loss)	$(2.326) million; $(0.10) per diluted share	$14.281 million; $0.58 per diluted share
Net cash from (used in) operating activities	$(5.436) million	$19.499 million

• FY2021 revenue reflected a $17.0 million Hewlett-Packard litigation settlement and $19.029 million of royalty-bearing revenue, principally from resolution of a Cisco dispute. Remote Power licensing accounted for all FY2021 revenue; the company received no revenue in FY2022.
• FY2022 other income included a $3.883 million gain on the ILiAD equity investment, a $271,000 gain on conversion of an ILiAD note, and $1.020 million of interest and dividend income. These were partly offset by $1.351 million of realized and unrealized marketable-securities losses, $607,000 of income-tax expense and a $1.639 million share of ILiAD losses.
• At year-end, cash and cash equivalents were $13.448 million and marketable securities were $34.991 million, totaling $48.439 million. Working capital was $47.359 million, down from $55.665 million a year earlier. Total assets were $57.969 million; total liabilities were $2.860 million. The company reported no long-term debt.
• Investing activities used $22.271 million, mainly reflecting net purchases of marketable securities; financing activities used $3.342 million, including $2.453 million in cash dividends and $534,000 in share repurchases. The company paid $3.004 million in income taxes.

Material changes and business developments

• Revenue fell from $36.029 million to zero, and the company moved from net income of $14.281 million to a net loss of $2.326 million. Management attributes the change principally to the absence of FY2021 licensing and settlement revenue; FY2021 also included $12.147 million of costs of revenue, including contingent legal fees and CEO incentive compensation.
• The company acquired its HFT patent portfolio in March 2022 for $500,000 upfront. Potential additional consideration includes $500,000 cash and up to $375,000 in common stock upon milestones, plus a share of future net proceeds.
• Network-1 invested a further $1 million in ILiAD during 2022 and converted a $1 million convertible note plus accrued interest into ILiAD equity. Following ILiAD’s $42.836 million financing, Network-1 reported ownership of approximately 6.8% on a non-fully diluted basis and 6.3% fully diluted.
• The Remote Power Patent expired in March 2020, ending licensing revenue for periods after expiration; the company continues to seek damages for alleged pre-expiration infringement. Of its 97 U.S. patents, 52 had expired by year-end.

Outlook, risks and contingencies

• Management says available liquidity should fund operations for the foreseeable future, including the next 12 months. It provided no quantified revenue, earnings or other operating guidance. Future liquidity and results depend substantially on litigation outcomes, licensing, patent acquisitions and potential returns from ILiAD.
• Key proceedings include the Google/YouTube Cox portfolio case, where discovery was complete and summary-judgment motions had been submitted, with no trial date set; the appeal of the Meta non-infringement dismissal; the pending Netgear contract dispute; and nine Remote Power Patent suits against ten defendants.
• After year-end, four Remote Power defendants settled, generating $537,300 in aggregate payments and a conditional $150,000 payment. These are subsequent events, not FY2022 revenue.
• Major risks include unpredictable and costly patent litigation, uncertainty monetizing newer portfolios, technology obsolescence, competition for patent assets, and the uncertain clinical and commercial outcome of ILiAD’s vaccine investment. Network-1 recorded no revenue in 2022, highlighting its exposure to irregular licensing receipts.
• The company declared $0.10 per share in dividends for 2022 and said it anticipates continuing its semiannual dividend policy, but the board may change it. A 2023 dividend of $0.05 per share was declared after year-end. The company was not a personal holding company in 2022, but could face a 20% tax on undistributed personal holding company income if it meets the applicable tests in a future year.

Important facts for investors to verify

• Current status, likely timing and potential economics of the Google/YouTube litigation, Meta appeal, Netgear dispute and remaining Remote Power cases.
• Whether the post-year-end settlements were collected, including the conditional $150,000, and whether further settlements or judgments result.
• Cash and marketable-securities composition, liquidity needs, portfolio valuation and investment losses; confirm that cash-generation assumptions remain appropriate given zero FY2022 revenue.
• ILiAD’s latest financial position, vaccine development and regulatory progress, and the basis and realizability of Network-1’s reported investment valuation and gains.
• Potential dilution from outstanding restricted stock units, the 2.3 million shares available under the 2022 incentive plan, and any milestone-based HFT consideration.
• Continuation of dividends and repurchases, and any future personal holding company tax exposure.