Network-1 Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company develops, licenses and protects intellectual property; revenue is primarily generated from patent licenses. Financial statements are unaudited.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $520,000 | $1,798,000 | $1,725,000 | $21,732,000 |
| Operating income (loss) | $(576,000) | $169,000 | $(1,625,000) | $10,048,000 |
| Net income (loss) | $(411,000) | $246,000 | $(859,000) | $8,283,000 |
| Basic and diluted EPS | $(0.02) | $0.01 | $(0.04) basic and diluted | $0.35 basic; $0.33 diluted |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(1,388,000) | $7,292,000 |
- Q3 revenue fell $1.278 million year over year, reflecting $1.0 million of Polycom installment revenue in Q3 2018 and a $278,000 decline in royalty-bearing license revenue.
- Nine-month revenue fell $20.007 million, principally because 2018 included a $12.7 million Juniper fully paid license and $6.32 million from selling the Avaya bankruptcy claim. Royalty-bearing revenue was $1.595 million versus $1.712 million.
- Operating expenses were $1.096 million in Q3 and $3.350 million for nine months, down from $1.629 million and $11.684 million, respectively. Lower contingent legal fees and other costs tied to 2018’s large licensing and claim-sale revenue were key factors.
- Interest and dividend income was $270,000 for Q3 and $872,000 for nine months, compared with $244,000 and $590,000. Nine-month equity-method losses from ILiAD Biotechnologies were $345,000.
Liquidity, balance sheet and cash flow
- At September 30, 2019, cash and cash equivalents were $16.737 million and marketable securities were $31.283 million, totaling $48.020 million. Working capital was $47.906 million, down from $53.486 million at December 31, 2018.
- Total assets were $55.349 million; total liabilities were $638,000, including $53,000 of current operating lease obligations. The company reported no long-term debt or other long-term liabilities.
- Nine-month cash decreased $7.026 million to $16.737 million. Investing activities used $2.410 million, including the $2.5 million additional ILiAD investment; financing activities used $3.228 million, including $2.428 million of dividends and $408,000 of stock repurchases.
- Management said available cash was sufficient to fund operations for the foreseeable future. Cash and short-term fixed-income investments are the principal liquidity sources.
Business developments, outlook and risks
- The company reported 72 patents and 27 Remote Power Patent licenses. It had 16 royalty-bearing Remote Power licenses at September 30, 2019; one license converted to fully paid in March 2019. The Remote Power Patent expires in March 2020.
- The central uncertainty is the appeal concerning the HP jury’s non-infringement finding. Oral argument occurred November 4, 2019 and a decision was pending when the filing was signed. The company warned that an unfavorable result, or an arbitration ruling relieving licensees of royalty obligations, could materially adversely affect its business, results and cash flow.
- Several licensees, including Cisco, had stopped paying ongoing Remote Power royalties following the HP jury verdict. The company recorded no revenue from certain such licensees during the periods presented. Cisco is identified as its largest licensee.
- Other material litigation includes the company’s royalty-payment dispute with Dell, which asserted a counterclaim exceeding $1 million; appeals in the Facebook patent case; and pending Google/YouTube patent litigation. No outcomes or recoveries are assured.
- Polycom paid a $1 million installment in November 2019; the company expected to record it as Q4 2019 revenue. The filing also described the possibility that the board may modify or discontinue semiannual dividends if the HP-related appeal or royalty disputes are not resolved favorably. No specific earnings or revenue guidance was provided.
- The company invested a total of $5 million in ILiAD, a private development-stage biotechnology company, and owned approximately 10.4% of its units at quarter-end. The investment is exposed to development and valuation uncertainty.
- Revenue remains concentrated: five licensees accounted for approximately 41%, 18%, 12%, 12% and 10% of Q3 revenue. Five licensees represented approximately 97% of royalty receivables at quarter-end.
Most important facts for investors to verify
- Federal Circuit decisions and any arbitration outcomes concerning HP, Cisco and other Remote Power licensees, including whether withheld royalties become payable.
- Actual royalty collections and revenue after the Remote Power Patent expires in March 2020, and the ability of other patent portfolios or new acquisitions to generate replacement revenue.
- Resolution and potential financial impact of the Dell counterclaim, Facebook appeal, and Google/YouTube litigation.
- ILiAD’s clinical and funding progress, and whether the carrying value of the investment remains supportable.
- Continuation of dividends and share repurchases in light of cash use, uncertain royalty revenue and management’s stated conditions on the dividend policy.