Network-1 Technologies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report. Network-1 develops, licenses and protects intellectual property; results depend heavily on patent licensing, enforcement and litigation outcomes. The financial statements received an unqualified audit opinion.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $22.106 million | $16.451 million |
| Operating income | $9.167 million | $6.014 million |
| Net income | $7.706 million | $4.133 million |
| Basic / diluted EPS | $0.32 / $0.30 | $0.17 / $0.16 |
| Operating margin | 41.5% | 36.6% |
| Net margin | 34.9% | 25.1% |
| Cash provided by operations | $8.093 million | $6.774 million |
| Cash and marketable securities at year-end | $54.991 million | $54.155 million |
| Working capital at year-end | $53.486 million | $52.056 million |
Revenue comprised $12.700 million from fully paid licenses, $3.086 million from royalty-bearing licenses and $6.320 million from selling the Avaya unsecured claim. Operating expenses were $12.939 million, including $8.072 million of costs of revenue. The company reported no long-term debt and stated it had sufficient cash to fund operations for the foreseeable future. Cash and cash equivalents declined to $18.680 million from $43.351 million, while marketable securities increased to $36.311 million from $10.804 million.
Changes versus 2017
- Revenue rose 34% and net income rose 86%, primarily because of the $12.7 million Juniper settlement license and $6.32 million Avaya claim sale; these are not evidence of stronger recurring royalty income.
- Royalty-bearing license revenue fell to $3.086 million from $12.053 million as several major licensees stopped paying following the HP patent verdict. Network-1 recorded no 2018 revenue from certain nonpaying licensees, including Cisco.
- Operating cash flow increased by $1.319 million. Investing cash outflow was $28.197 million, including $25.546 million of net purchases of marketable securities and a $2.541 million ILiAD investment. Financing cash outflow was $4.567 million, including $2.444 million of dividends and $1.608 million of share repurchases.
Outlook, risks and unusual items
- Remote Power Patent litigation and royalties: The patent expires in March 2020. In August 2018, the district court upheld patent validity but denied a new trial on non-infringement in the HP case; both sides appealed. Network-1’s ability to restore ongoing and withheld royalties, including from Cisco, depends on litigation and potentially arbitration. The company identified this uncertainty as materially adverse to results and cash flow.
- Other patent cases: Network-1 appealed the dismissal of its Facebook case. Its consolidated Google/YouTube litigation resumed in January 2019, with a claim-construction hearing scheduled for August 2019. The company’s lawsuit against Dell seeks unpaid and future royalties; Dell denied the claims, counterclaimed for more than $1 million, and sought a stay.
- Revenue concentration: Juniper and Polycom represented 57% and 9% of 2018 revenue, respectively; the Avaya claim sale represented about 29%. The company warned that revenue is difficult to predict and dependent on a small number of licensees and litigation outcomes.
- ILiAD investment: Network-1 invested $2.5 million in a development-stage biotechnology company and conditionally committed another $2.5 million if ILiAD receives an FDA “allowed-to-proceed” notification for a Phase 2b study by December 31, 2019. The filing warns the investment could be lost in full.
- Capital returns: The company paid $0.10 per share in dividends in 2018 and declared a further $0.05 dividend payable in March 2019. Its stated intention to continue semiannual dividends through March 2020 is conditional on royalty receipts and may change. It repurchased 578,845 shares for approximately $1.597 million during 2018.
- Other risks: An IRS examination of the 2016 federal tax return was disclosed. Patent enforcement costs, possible patent-law changes, technology obsolescence, customer concentration and dependence on the CEO are also cited. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to attest to internal controls.
Important facts for investors to verify
- Current status and outcomes of the HP appeals, any related arbitration, and whether Cisco and other licensees resume or remit royalty payments.
- Amounts and timing of royalties claimed from Dell, the status of Dell’s counterclaim and stay request, and the remaining Polycom installments.
- Whether recurring royalties can replace the Remote Power Patent revenue stream before its March 2020 expiration, and the progress and likely costs of the Google/YouTube and Facebook cases.
- ILiAD’s FDA milestone, the condition for the second $2.5 million tranche, and the valuation and impairment risk of the investment.
- Whether revenue concentration, cash deployment, dividends and repurchases remain consistent with liquidity needs as litigation-related revenue fluctuates.