Network-1 Technologies, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company develops, licenses and protects intellectual property; it reported 51 patents across Remote Power, Mirror Worlds, Cox, M2M/IoT and QoS portfolios.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $16.451 million | $65.088 million |
| Operating income | $6.014 million | $32.100 million |
| Net income | $4.133 million | $23.223 million |
| Basic / diluted earnings per share | $0.17 / $0.16 | $1.00 / $0.93 |
| Operating margin | 36.6% | 49.3% |
| Net margin | 25.1% | 35.7% |
| Cash flow from operations | $6.774 million | $29.906 million |
Revenue consisted of $12.053 million in recurring royalties from Remote Power royalty-bearing licenses and approximately $4.398 million from fully paid licenses and license initiation fees. The filing says royalty revenue from Remote Power increased 12% year over year, excluding settlement-related revenue and the one-time 2016 professional-liability settlement.
At year-end, cash and cash equivalents were $53.101 million, marketable securities were $1.054 million, working capital was $52.056 million, and total liabilities were $2.882 million. The company reported no long-term debt. Investing activities used $1.144 million, primarily for patent purchases; financing activities used $3.447 million, including $2.420 million in dividends and $2.096 million in share repurchases. Cash increased by $2.183 million.
Changes versus 2016
- Revenue fell $48.637 million, or about 74.7%; operating income fell about 81.3% and net income about 82.2%.
- The comparison reflects $36.8 million of 2016 fully paid licenses and initiation fees and a $17.5 million professional-liability settlement in 2016, versus approximately $4.398 million of such license-related revenue in 2017.
- Operating cash flow declined $23.132 million. Cash nevertheless rose from $50.918 million to $53.101 million.
- The company acquired the M2M/IoT portfolio for $1 million in December 2017, adding 12 issued U.S. patents and related pending applications.
Outlook, risks and unusual items
- Remote Power litigation and royalties: A November 2017 jury verdict found certain Remote Power Patent claims invalid and not infringed by Hewlett-Packard. Cisco, Dell and Netgear advised that they would stop ongoing royalty payments; the company disputed their positions. It did not recognize fourth-quarter 2017 royalties from certain licensees, including these companies. The company filed post-trial motions, with a hearing scheduled for May 14, 2018, and said it may pursue arbitration. The patent expires in March 2020.
- Remote Power royalty-bearing licenses generated $12.053 million in recurring revenue in 2017. Cisco accounted for 43% of total revenue and 58% of recurring royalty revenue; three licensees together accounted for 67% of revenue. The company warned that loss of royalties could materially harm results and cash flow.
- Subsequent events: In January 2018, the company sold its $37.5 million Avaya unsecured bankruptcy claim for $6.32 million and received $12.7 million from a revised Juniper settlement. These are post-year-end events, not 2017 revenue.
- The company had pending Cox portfolio litigation against Google and YouTube and Mirror Worlds litigation against Facebook. It reported no revenue to date from the Cox portfolio and no near-term revenue expected from the newly acquired M2M/IoT portfolio. Outcomes and monetization timing are uncertain.
- Management said current cash should fund operations for the foreseeable future, but provided no quantified revenue or earnings guidance. The $0.10 annual dividend policy was conditional on continued Remote Power royalties and could be modified or discontinued.
- Other risks include reliance on a small number of licensees, patent validity and enforcement costs, patent expirations, potential technology obsolescence, and uncertainty in applying the 2017 Tax Cuts and Jobs Act. The filing states the company did not meet the personal-holding-company ownership test in 2017.
Most important facts for investors to verify
- Whether the court upheld, set aside or otherwise changed the HP jury verdict, and the outcome of any appeal or arbitration.
- Whether Cisco, Dell, Netgear and other licensees resumed payments, and the amount and timing of any unpaid royalties.
- Actual cash receipts and costs from the Avaya claim sale and Juniper settlement, and any conditions affecting remaining Polycom payments.
- Progress, expenses and potential recoveries in the Facebook, Google and YouTube matters, as well as the commercial prospects of the M2M/IoT portfolio.
- Whether dividend payments continue and how cash is allocated as the Remote Power Patent approaches its March 2020 expiration.