Network-1 Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Network-1 develops, licenses, and protects intellectual property. It reported owning 83 patents across several portfolios. Its Remote Power Patent, the source of all revenue in both comparative quarters, expired on March 7, 2020.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $161,000 | $606,000; down $445,000 (73%) |
| Operating expenses | $1.061 million | $1.139 million |
| Operating loss | $900,000 | $533,000 |
| Net loss | $1.337 million; $0.06 per share | $240,000; $0.01 per share |
| Operating cash flow | $(1.538) million | $(1.415) million |
| Cash and cash equivalents | $26.594 million | $22.587 million at Dec. 31, 2019 |
| Marketable securities | $18.409 million | $25.730 million at Dec. 31, 2019 |
| Working capital | $44.755 million | $47.189 million at Dec. 31, 2019 |
| Total liabilities | $467,000; no long-term debt reported | $1.569 million at Dec. 31, 2019 |
Gross profit was approximately $129,000, or 80% of revenue, versus approximately $460,000, or 76%, in Q1 2019. The filing does not present gross margin as a reported metric. Interest and dividend income was $178,000, down from $301,000. Marketable securities generated a net realized and unrealized loss of $322,000, compared with a $23,000 gain. The company also recorded a $293,000 equity-method loss from ILiAD Biotechnologies, versus $96,000 a year earlier.
Cash increased by $4.007 million during the quarter, primarily alongside $6.910 million of net investing cash inflow from securities activity. Financing cash outflow was $1.365 million, including $1.211 million of dividends paid and $154,000 of stock repurchases. The company declared a $0.05-per-share dividend paid March 31; the board is reviewing the dividend policy. It repurchased 72,300 shares for approximately $152,000.
Material changes and outlook
- Revenue fell 73%, reflecting lower licensing revenue, the absence of a $130,000 license conversion recognized in Q1 2019, and the March 2020 expiration of the Remote Power Patent. No revenue from new license agreements was recorded in either comparative quarter.
- Management said future revenue is uncertain and may depend on litigation outcomes, monetization of other patent portfolios, or acquiring additional intellectual property. The filing provides no revenue or earnings guidance.
- Several licensees, including Cisco, stopped paying ongoing Remote Power royalties after the 2017 Hewlett-Packard jury verdict. The company’s Federal Circuit appeal remained pending; potential pre-expiration royalties are uncertain and were not recorded.
- In March 2020, a Texas court granted the company summary judgment on its breach-of-contract claim against Dell and denied Dell’s motion. The company asserts Dell owes unpaid royalties through patent expiration, but recorded no revenue because the decision is subject to appeal. Dell had asserted a counterclaim exceeding $1 million.
- The Federal Circuit reversed the dismissal of the company’s Facebook patent case in January 2020 and remanded it for further proceedings. The Google/YouTube cases remained pending after a claim-construction hearing, with a ruling not yet issued.
- COVID-19 was causing court delays that could defer trials and future licensing agreements. Management said it did not expect other direct material business risks at that time, while cautioning that pandemic risks could evolve.
- ILiAD reported in April 2020 that its Phase 2b vaccine study showed favorable safety and colonization results, but final immunological data remained under analysis. Network-1’s approximately 9.5% investment was carried at $4.144 million at quarter-end.
Management reported $45.003 million in cash and marketable securities, sufficient, in its view, to fund operations for the foreseeable future. The company reported no off-balance-sheet arrangements and no long-term debt or other long-term contractual obligations.
Key facts investors should verify
- Outcome and financial consequences of the Remote Power Patent appeal, and whether Cisco or other licensees will pay royalties accrued before March 7, 2020.
- Appeals, collection prospects, and any further proceedings in the Dell matter; assess the counterclaim exposure and the basis for any future royalty recognition.
- Progress and potential monetization of the Facebook, Google/YouTube, Cox, and M2M/IoT patent matters, including the effect of court delays.
- Post-expiration revenue sources, licensee concentration, and whether the company will continue its dividend and share repurchase program.
- ILiAD’s final clinical results and any effect on the carrying value or prospects of Network-1’s investment.