Network-1 Technologies, Inc 10-Q for FY2023 Q2
Network-1 Technologies, Inc. (NTIP)
About this 10-Q
Network-1 Technologies, Inc filed this 10-Q on August 10, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $283K
- Net loss
- $476K
- compared with a net loss of $1.53M a year earlier
- Diluted EPS
- -$0.02
- compared with -$0.06 a year earlier
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
_________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________ |
Commission
File Number
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§223.405) of this chapter during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company |
||
| Emerging growth company |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the registrant’s common stock, $.01 par value per share, outstanding as of August 7, 2023 was .
1
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future performance and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Factors that could cause or contribute to such differences include various risks and uncertainties described below and elsewhere in this Quarterly Report on Form 10-Q as well as in our Annual Report on Form 10-K for the year ended December 31, 2022 (filed with the SEC on March 30, 2023). Furthermore, such forward-looking statements speak only as of the date of this report. Such risks and uncertainties include, but are not limited to, the following:
| • | our uncertain revenue from licensing our intellectual property; |
| • | uncertainty of the outcome of our pending litigations; |
| • | our ability to achieve future revenue from our patent portfolios; |
| • | our ability to protect our patents; |
| • | our ability to execute our strategy to acquire or make investments in high quality patents with significant licensing opportunities; |
| • | our ability to enter into strategic relationships with third parties to license or otherwise monetize their intellectual property; |
| • | our ability to achieve a return on our investment in ILiAD Biotechnologies, LLC; |
| • | our ability to continue to acquire additional intellectual property; |
| • | uncertainty as to whether cash dividends will continue to be paid; |
| • | variations in our quarterly and annual operating results; |
| • | the risk that we may be determined to be a personal holding company in 2023 or future years which may result in our issuing a special cash dividend to our stockholders to the extent we have undistributed personal holding company income resulting in less cash available for our operations and strategic transactions; and |
| • | legislative, regulatory and competitive developments. |
3
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2023 | December 31, 2022 | |||||||
ASSETS
| ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities, at fair value | ||||||||
| Prepaid taxes | ||||||||
| Other current assets | ||||||||
TOTAL CURRENT ASSETS | ||||||||
OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | ||||||||
| Equity investment | ||||||||
| Operating leases right-of-use asset | ||||||||
| Security deposit | ||||||||
Total Other Assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Income taxes payable | ||||||||
| Accrued contingency fees and related costs | ||||||||
| Accrued payroll | ||||||||
| Other accrued expenses | ||||||||
| Operating lease obligation, current | ||||||||
Total Current Liabilities | ||||||||
LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | ||||||||
| Operating lease obligation, non-current | ||||||||
TOTAL LIABILITIES | $ | $ | ||||||
COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at June 30, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | ||||||||||||||||
| Professional fees and related costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Amortization of patents | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
OTHER INCOME (LOSS): | ||||||||||||||||
| Interest and dividend income, net | ||||||||||||||||
| Net realized and unrealized gain (loss) on marketable securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (loss) income, net | ( | ) | ( | ) | ||||||||||||
LOSS BEFORE INCOME TAXES AND SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAXES PROVISION: | ||||||||||||||||
| Current | ||||||||||||||||
| Deferred taxes, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE SHARE OF NET LOSS OF EQUITY METHOD INVESTEE: | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| SHARE OF NET LOSS OF EQUITY METHOD INVESTEE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Cash dividends declared per share | $ | $ | ||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
OTHER COMPREHENSIVE LOSS Net unrealized holding loss on corporate bonds and notes during the period, net of tax | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2023
| Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||
| Additional Paid-in Capital | Accumulated Deficit | Accumulated | ||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance – January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
THREE AND SIX MONTHS ENDED JUNE 30, 2022
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance – January 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividend equivalents rights paid | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Amortization of patents | ||||||||
| Stock-based compensation | ||||||||
| Loss allocated from equity method investment | ||||||||
| Unrealized (gain) loss on marketable securities | ( | ) | ||||||
| Deferred tax benefit | ( | ) | ( | ) | ||||
| Amortization of operating leases – right of use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Other current assets | ( | ) | ||||||
| Security deposit | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | ||||||||
| Purchases of marketable securities | ( | ) | ( | ) | ||||
| Development of patents | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Value of shares delivered to fund withholding taxes | ( | ) | ( | ) | ||||
| Repurchases of common stock, inclusive of commissions | ( | ) | ( | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES: | ( | ) | ( | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| NON-CASH FINANCING ACTIVITIES | ||||||||
| Accrued dividend rights on restricted stock units | $ | $ | ||||||
| Right of use asset obtained in exchange for lease liability | $ | |||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS
[1] BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the “Company”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company’s financial position as of June 30, 2023, and the results of its operations and comprehensive loss for the three and six month periods ended June 30, 2023 and June 30, 2022, changes in stockholders’ equity for the three and six month periods ended June 30, 2023 and June 30, 2022, and its cash flows for the six month periods ended June 30, 2023 and June 30, 2022. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2023. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Mirror Worlds Technologies, LLC. and HFT Solutions, LLC. All intercompany balances and transactions have been eliminated in consolidation.
[2] BUSINESS
The
Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns ninety-eight
(
8
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
The Company’s current strategy includes continuing to pursue licensing opportunities for its patent portfolios. In addition, the Company reviews opportunities to acquire or license additional intellectual property as well as other strategic alternatives. The Company’s patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds Patent Portfolio. In addition, the Company may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
The
Company has made equity investments totaling $
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| [1] | Use of Estimates and Assumptions |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include costs related to the Company’s assertion of litigation, valuation of the Company’s patent portfolios, stock-based compensation, the recoverability of deferred tax assets and the carrying value of the Company’s equity method investments. Actual results could be materially different from those estimates upon which the carrying values were based.
Certain amounts recorded to reflect the Company’s share of income or losses of its equity method investee, accounted for under the equity method, are based on estimates and the unaudited results of operations of the equity method investee and may require adjustment in the future when the audit of the equity method investee is complete. The Company reports its share of the results of its equity method investee on a one quarter lag basis.
| [2] | Revenue Recognition |
Under ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
The Company determines revenue recognition through the following steps:
| • | identification of the license agreement; |
| • | identification of the performance obligations in the license agreement; |
| • | determination of the consideration for the license; |
| • | allocation of the transaction price to the performance obligations in the contract; and |
| • | recognition of revenue when the Company satisfies its performance obligations. |
9
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue disaggregated by source is as follows:
| Schedule of disaggregation of revenue | ||||||||||||||||
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Litigation settlements | $ | $ | $ | $ | ||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
During
the three months ended June 30, 2023, the Company entered into a settlement agreement with an additional defendant with respect to patent
infringement litigation involving its Remote Power Patent resulting in a payment of $
Revenue from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of a litigation settlement related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license, or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent.
| [3] | Equity Method Investments |
Equity method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
10
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [4] | Income Taxes |
The
Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 740, Income Taxes (ASC 740), which requires the Company to use the assets and liability method of accounting for income
taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary (timing) differences
by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect
on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. As of
June 30, 2023, the Company had total deferred tax assets generated from its activities totaling $
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“UPHCI”), which means, in general, taxable income subject to certain adjustments and reduced by certain distributions to shareholders. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by five or fewer individuals at any time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the “Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). At July 14, 2023, based on available information concerning the Company’s shareholder ownership, the Company did not satisfy the Ownership Test. However, the Company may subsequently be determined to be a PHC in 2023 or in future years if it satisfies both the Ownership Test and Income Test. If the Company were to become a PHC in 2023 or any future year, it would be subject to the 20% tax on its UPHCI. In such event, the Company may issue a special cash dividend to its shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company had no uncertain tax positions as of June 30, 2023.
The Company recognizes interest and penalties related to income tax in the income tax provision in the unaudited condensed consolidated statements of operations and comprehensive loss.
11
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
U.S. federal, state and local income tax returns prior to 2019 are not subject to examination by any applicable tax authorities, except that tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent they generated loss carry-forwards that are available for those future years.
| [5] | Reclassifications |
Stock-based compensation in the unaudited condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2022 has been recast and reclassified to conform to the current period presentation.
| [6] | New Accounting Standards |
There are no new accounting standards that have had a material impact on the Company’s unaudited condensed consolidated financial statements.
NOTE C – PATENTS
The
Company’s intangible assets at June 30, 2023 include patents with estimated remaining economic useful lives ranging from
| Schedule of patent | ||||||||
| June 30, 2023 | December 31, 2022 | |||||||
| Gross carrying amount – patents | $ | $ | ||||||
| Accumulated amortization – patents | ( | ) | ( | ) | ||||
| Patents, net | $ | $ | ||||||
Amortization
expense for the three months ended June 30, 2023 and 2022 was $
| Schedule of future amortization of current intangible | ||||||
| Twelve Months Ended June 30, | ||||||
| 2024 | $ | |||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Two
patents within the Cox Patent Portfolio expire in
12
Restricted Stock Units
The Company adopted the 2022 Stock Incentive Plan, (the “2022 Plan”), approved by its Board of Directors on July 25, 2022 and its stockholders on September 20, 2022. The 2022 Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock units.
As
of June 30, 2023, there were
As
of June 30, 2023, there were
A summary of restricted stock unit activity for the six months ended June 30, 2023 is as follows (each restricted stock unit issued by the Company represents the right to receive one share of the Company’s common stock):
| Schedule of restricted stock unit activity | ||||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2022 | $ | |||||||
| Grants of restricted stock units | ||||||||
| Vested restricted stock units | ( | ) | ( | ) | ||||
| Balance of restricted stock units outstanding at June 30, 2023 | $ | |||||||
Restricted stock unit compensation expense was $ and $ for the three months ended June 30, 2023 and 2022, respectively, and $ and $ for the six months ended June 30, 2023 and 2022, respectively. Stock-based compensation expense is included in general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive loss.
The Company has an aggregate of $ of unrecognized restricted stock unit compensation as of June 30, 2023 to be expensed over a weighted average period of years.
All
of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of June 30, 2023 and December
31, 2022, there was $
13
Basic loss per share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted per share data includes the dilutive effects of options and restricted stock units. Potentially dilutive shares of and at June 30, 2023 and 2022, respectively, consisted of restricted stock units and stock options. However, as the Company generated a net loss in 2023 and 2022, all potentially dilutive shares were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
Computations of basic and diluted weighted average common shares outstanding were as follows:
| Schedule of earnings per share, basic and diluted | ||||||||||||||||
Six Months Ended | Three Months Ended | |||||||||||||||
2023 | 2022 | 2022 | 2022 | |||||||||||||
| Weighted-average common shares outstanding – basic | ||||||||||||||||
| Dilutive effect of restricted stock units and stock options | ||||||||||||||||
| Weighted-average common shares outstanding – diluted | ||||||||||||||||
| Restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | ||||||||||||||||
NOTE F – MARKETABLE SECURITIES
Marketable securities as of June 30, 2023 and December 31, 2022 were composed of the following:
| Schedule of marketable securities | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||
Cost | Gross | Gross | Fair Value | |||||||||||||
| Certificates of deposit | $ | $ | $ | ( | ) | $ | ||||||||||
| Government securities | ( | ) | ||||||||||||||
| Fixed income mutual funds | ( | ) | ||||||||||||||
| Corporate bond | ( | ) | ||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
Cost | Gross | Gross | Fair Value | |||||||||||||
| Government Securities | $ | $ | $ | $ | ||||||||||||
| Fixed income mutual funds | ( | ) | ||||||||||||||
| Certificates of Deposit | ( | ) | ||||||||||||||
| Corporate bonds and notes | ( | ) | ||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
The Company’s marketable securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.
14
NOTE G – COMMITMENTS AND CONTINGENCIES
[1] Legal Fees
Russ,
August & Kabat provides legal services to the Company with respect to its patent litigation filed in May 2017 against Facebook, Inc.
(now Meta Platforms, Inc.) in the U.S. District Court for the Southern District of New York relating to several patents within the Company’s
Mirror Worlds Patent Portfolio (see Note I[2] hereof). The terms of the Company’s agreement with Russ, August & Kabat provide
for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between
Russ,
August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014 and
December 2014 against Google Inc. and YouTube, LLC in the U.S. District Court for the Southern District of New York relating to certain
patents within the Company’s Cox Patent Portfolio (see Note I[1] hereof). The terms of the Company’s agreement with
Russ, August & Kabat provide for legal fees on a full contingency basis ranging from
[2] Patent Acquisitions
On
March 25, 2022, the Company completed the acquisition of a new patent portfolio (HFT Patent Portfolio) currently consisting of nine U.S.
patents and two pending U.S. patents covering certain advanced technologies relating to high frequency trading, which inventions specifically
address technological problems associated with speed and latency and provide critical latency gains in trading systems where the difference
between success and failure may be measured in nanoseconds. The Company paid the seller $
In
connection with the Company’s acquisition of its Cox Patent Portfolio, the Company is obligated to pay Dr. Cox
As
part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition
Interface, LLC (“Recognition”) pursuant to which Recognition received from the Company an interest in the net proceeds
realized from the monetization of the Mirror Worlds Patent Portfolio, as follows: Obligated to pay Recognition, net proceeds (i)
In
connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M
15
NOTE G – COMMITMENTS AND CONTINGENCIES (continued)
[3] Leases
The Company has one operating lease for its principal office space in New Canaan, Connecticut that will expire on April 30, 2025.
There are no material residual guarantees associated with any of the Company’s leases and there are no significant restrictions or covenants included in the Company’s lease agreements.
The
calculated incremental borrowing rate was approximately
There was no sublease rental income for the three and six months ended June 30, 2023, and the Company is not the lessor in any lease arrangement, and there were no related-party lease agreements.
Right of use lease assets and related lease obligations for the Company’s operating leases were recorded in the unaudited condensed consolidated balance sheets as follows:
| Schedule of operating leases obligations | ||||||||
| As
of June 30, 2023 | As
of December 31, 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease obligations – current | ||||||||
| Operating lease obligations – non-current | ||||||||
| Total lease obligations | $ | $ | ||||||
The table below presents certain information related to the Company’s lease costs for the period ended:
| Schedule of leases cost | ||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of June 30, 2023, were as follows:
| Schedule of future minimum leases payments | ||||
| Operating Leases | ||||
| 2023 – remaining period | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
16
NOTE H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
On
March 22, 2022, the Company entered into an employment agreement (“Agreement”) with its Chairman and Chief Executive Officer,
pursuant to which he continues to serve as the Company’s Chairman and Chief Executive Officer for a four year term (“Term”),
at an annual base salary of $
Under
the terms of the Agreement (which terms are substantially the same as the prior employment agreement with the Chairman and Chief Executive
Officer), so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant
to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal
to 5% of the Company’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees
or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction
of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less
than 6.25% of the gross recovery) of the Company’s royalties and other payments relating to Licensing Activities with respect to
patents other than the Remote Power Patent (including all of the Company’s patent portfolios and its investment in ILiAD Biotechnologies)
(collectively, the “Incentive Compensation”). During the three and six months ended June 30, 2023, the Chairman and Chief
Executive Officer earned Incentive Compensation of $
NOTE I – LEGAL PROCEEDINGS
[1]
On April 4, 2014 and December 3, 2014, the
[2]
On May 9, 2017, Mirror Worlds Technologies, LLC, the
17
NOTE I – LEGAL PROCEEDINGS (continued)
summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit ruled in the Company’s favor and reversed the summary judgment finding of the District Court and remanded the litigation to the Southern District of New York for further proceedings.
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Meta. In its ruling the Court (i) denied Meta’s motion that the asserted patents were invalid by concluding that all asserted claims were patent eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Meta and dismissed the case. The Company strongly disagrees with the decision of the District Court on non-infringement and on April 4, 2022, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Meta filed a notice of cross-appeal with respect to the Court’s ruling on validity. The appeal is pending.
[3]
On December 15, 2020, the
[4]
In October and November 2022, the
During
the three months ended June 30, 2023, the Company entered into a settlement agreement with an additional defendant, resulting in a settlement
payment of $
18
NOTE J – INVESTMENT
During
the period December 2018 through August 2022, the Company made an aggregate investment of $
For
the three months ended June 30, 2023 and 2022, the Company recorded an allocated net loss from its equity method investment in ILiAD
of $
The
difference between the Company’s share of equity in ILiAD’s net assets and the purchase price of the investment is due to
an excess amount paid over the book value of the investment of $
The
following table provides certain summarized financial information for ILiAD (the equity method investee) for the periods presented and
has been compiled from ILiAD’s financial statements, reported on one quarter lag. The table below includes an additional comprehensive
loss of $
| Schedule of equity method investments | ||||||||||||||||
| Six Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
| Loss from continuing operations | $ | $ | $ | $ | ||||||||||||
| Comprehensive loss | $ | $ | $ | $ | ||||||||||||
On
June 13, 2023, the Board of Directors authorized an extension and increase of the Company’s share repurchase program (the “Share
Repurchase Program”) to repurchase up to $
19
NOTE K – STOCK REPURCHASES (continued)
cost
of $
On
August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for,
among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and
certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed
on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally
1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise
tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value
of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of Treasury
has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
NOTE L – CONCENTRATIONS
The
Company maintains cash deposits in accounts at financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $
Revenue
from one party constituted
NOTE M – DIVIDEND POLICY
The
Company’s dividend policy consists of semi-annual cash dividends of $ per share ($ per share annually) which have been
paid in March and September of each year. The Company has paid semi-annual cash dividends consistent with its policy, including a cash
dividend in March 2023 of $
20
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own ninety-eight (98) U.S. patents and fourteen (14) foreign patents relating to: (i) our Cox Patent Portfolio relating to enabling technology for identifying media content on the Internet and taking further action to be performed after such identification; (ii) our M2M/IoT Patent Portfolio relating to, among other things, enabling technology for authenticating, provisioning and using embedded Sim (Subscriber Identification Module) technology in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; (iii) our HFT Patent Portfolio covering certain advanced technologies relating to high frequency trading, which inventions specifically address technological problems associated with speed and latency and provide critical latency gains in trading systems where the difference between success and failure may be measured in nanoseconds; (iv) our Mirror Worlds Patent Portfolio relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; and (v) our Remote Power Patent covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras. In addition, we continually review opportunities to acquire or license additional intellectual property as well as other strategic alternatives.
With respect to our ninety-eight (98) U.S. patents, fifty-three (53) of such patents have expired. However, we can assert expired patents against third parties but only for past damages up to the patent expiration date. We currently have pending litigation involving expired patents including our Remote Power Patent and certain patents within our Cox and Mirror Worlds Patent Portfolios (see Note I to our unaudited condensed consolidated financial statements included herein).
At June 30, 2023, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $46,370,000 and working capital of $45,884,000. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
To date we have invested $7,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to sixty-six (66) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment continues to involve significant risk and the outcome is uncertain.
We have been dependent upon our Remote Power Patent for a significant portion of our revenue. Our Remote Power Patent generated licensing revenue in excess of $187,000,000 from May 2007 through June 30, 2023. We no longer receive licensing revenue for our Remote Power Patent for any period subsequent to March 7, 2020 (the expiration date of the patent). During the fourth quarter of 2022, we commenced separate litigation against ten defendants involving our Remote Power Patent for patent infringement for the period prior to March 7, 2020. During the three months ended June 30, 2023, we entered into a settlement agreement with an additional defendant resulting in a settlement payment of $283,000. During the six months ended June 30, 2023, we entered into settlement agreements with five defendants with respect to the aforementioned litigation resulting in aggregate settlement payments made to the Company of $820,000 and a future conditional payment of $150,000 (see Note I[4] hereof). All of our revenue for the three and six months ended June 30, 2023 was from these settlements.
21
In addition, we have pending litigation involving certain patents within our Cox Patent Portfolio and have appealed the judgment of the District Court dismissing our litigation against Meta (Facebook) on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio. We also intend to commence efforts to monetize certain patents within our M2M/IoT Patent Portfolio and HFT Patent Portfolio. We may not achieve successful outcomes of such litigation, the appeal, or future litigation involving our patent assets.
Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets and the monetization of our patent portfolios. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize. Our strategy includes working with inventors and patent owners to assist in the development and monetization of their patented technologies. We may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. Our patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as we have achieved with respect to our Remote Power Patent and Mirror Worlds Patent Portfolio.
On March 25, 2022, we completed the acquisition of a new patent portfolio (the HFT Patent Portfolio) currently consisting of nine U.S. patents and two pending U.S. patents (see Note G[2] to our unaudited condensed consolidated financial statements included in this Quarterly Report).
The significant components of expenses impacting our net loss related to contingent legal fees and expenses related to our patent litigation (see Note G[1] to our unaudited condensed consolidated financial statements included herein) and incentive compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H to our unaudited condensed consolidated financial statements included herein), both such components of expenses are based on a percentage of the revenue received by us as a result of litigation or otherwise.
Our annual and quarterly operating and financial results may fluctuate significantly from period to period as a result of a variety of factors that are outside our control, including the timing and our ability to achieve successful outcomes of our patent litigation, our ability and timing of consummating future license agreements for our intellectual property, and whether we will achieve a return on our investment in ILiAD and the timing of any such return.
Our future operating results may also be materially impacted by our ability to acquire high quality patents which management believes have the potential to generate significant licensing opportunities. In the future, we may not be able to identify or consummate such patent acquisitions or, if consummated, achieve significant licensing revenue with respect to such acquisitions.
In 2023 and future years we could be classified as a Personal Holding Company. If this is the case, we would be subject to a 20% tax on the amount of any undistributed personal holding company income (as defined) for such year that we do not distribute to our shareholders (see Note B[4] to our unaudited condensed consolidated financial statements included in this Quarterly Report).
22
RESULTS OF OPERATIONS
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Revenue. We had revenue of $283,000 for the three months ended June 30, 2023 as compared to no revenue for the three months ended June 30, 2022. Our revenue for the three months ended June 30, 2023 was from a litigation settlement involving our Remote Power Patent (see Note I[4] to our unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the three months ended June 30, 2023 were $832,000 as compared to $834,000 for the three months ended June 30, 2022.
We had costs of revenue of $81,000 and $0 for the three months ended June 30, 2023 and 2022, respectively. Included in the costs of revenue for the three months ended June 30, 2023 were contingent legal fees of $67,000 and incentive bonus compensation of $14,000 payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H to our unaudited condensed consolidated financial statements included herein), each contingent upon the litigation settlement.
Stock-based compensation, included in general and administrative expenses, was $106,000 for the three months ended June 30, 2023 as compared to $161,000 for the three months ended June 30, 2022.
Operating Loss. We had an operating loss of $549,000 for the three months ended June 30, 2023 compared with an operating loss of $834,000 for the three months ended June 30, 2022. The operating loss decrease of $285,000 was due primarily to revenue from a litigation settlement.
Income Taxes. For the three months ended June 30, 2023, we had a current tax expense for federal, state and local income taxes of $0 and a deferred tax benefit of $94,000. For the three months ended June 30, 2022, we had a current tax expense for federal, state and local income taxes of $0 and a deferred tax benefit of $102,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $391,000 during the three month period ended June 30, 2023 related to our equity share in ILiAD as compared to a net loss of $355,000 for the three months ended June 30, 2022 (see Note J to our unaudited condensed consolidated financial statements included herein).
Net Loss. As a result of the foregoing, we realized a net loss of $476,000 or $0.02 per share basic and diluted for the three months ended June 30, 2023 compared with a net loss of $1,532,000 or $0.06 per share basic and diluted for the three months ended June 30, 2022.
23
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Revenue. We had revenue of $820,000 for the six months ended June 30, 2023 as compared to no revenue for the six months ended June 30, 2022. Our revenue for the six months ended June 30, 2023 was from litigation settlements involving our Remote Power Patent (see Note I[4] to our unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the six months ended June 30, 2023 were $2,145,000 as compared to $1,731,000 for the six months ended June 30, 2022. The increase in operating expenses of $414,000 for the six months ended June 30, 2023 was primarily due to an increase in costs of revenue of $232,000 related to contingent legal fees and incentive bonus compensation associated with litigation settlements and an increase in general and administrative expenses of $218,000.
We had costs of revenue of $232,000 and $0 for the six months ended June 30, 2023 and 2022, respectively. Included in the costs of revenue for the six months ended June 30, 2023 were contingent legal fees of $191,000 and incentive bonus compensation of $41,000 payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H to our unaudited condensed consolidated financial statements included herein), each contingent upon the litigation settlements.
General and administrative expenses increased by $218,000 for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily as a result of increased payroll and franchise taxes of $129,000 and severance and other benefits in the amount of $112,000 paid to our former Chief Financial Officer, offset by reductions in certain other expenses.
Stock-based compensation, included in general and administrative expenses, was $267,000 for the six months ended June 30, 2023 as compared to $233,000 for the six months ended June 30, 2022.
Operating Loss. We had an operating loss of $1,325,000 for the six months ended June 30, 2023 compared with an operating loss of $1,731,000 for the six months ended June 30, 2022. The operating loss decrease of $406,000 was due primarily to revenue from litigation settlements offset by increased operating expenses.
Income Taxes. For the six months ended June 30, 2023, we had a current tax expense for federal, state and local income taxes of $0 and a deferred tax benefit of $247,000. For the six months ended June 30, 2022, we had a current tax expense for federal, state and local income taxes of $0 and a deferred tax benefit of $554,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $1,065,000 during the six month period ended June 30, 2023 related to our equity share in ILiAD as compared to a net loss of $788,000 for the six months ended June 30, 2022 (see Note J to our unaudited condensed consolidated financial statements included herein). The increase of $277,000 in net losses of ILiAD includes an additional loss of $42,000 recorded on a one quarter lag basis as a result of audited financial information received from ILiAD for the year ended December 31, 2022 (see Note B[1]).
Net Loss. As a result of the foregoing, we realized a net loss of $1,099,000 or $0.05 per share basic and diluted for the six months ended June 30, 2023 compared with a net loss of $2,844,000 or $0.12 per share basic and diluted for the six months ended June 30, 2022.
24
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At June 30, 2023, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $46,370,000 and working capital of $45,884,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the next twelve months and the foreseeable future.
Working capital decreased by $1,475,000 at June 30, 2023 to $45,884,000 as compared to working capital of $47,359,000 at December 31, 2022. The decrease in working capital of $1,475,000 for the six months ended June 30, 2023 was primarily due to operating expenses incurred and a reduction of accrued expenses of $486,000, offset somewhat by interest income of $755,000.
Net cash used in operating activities for the six months ended June 30, 2023 decreased by $4,055,000 from $4,608,000 for the six months ended June 30, 2022 to $553,000 for the six months ended June 30, 2023, primarily as a result of reductions in the net loss of $1,745,000 and income taxes payable of $2,833,000.
Net cash provided by (used in) investing activities during the six months ended June 30, 2023 increased by $18,129,000 to $5,326,000, as compared to $(12,803,000) for the six months ended June 30, 2022, primarily as a result of net investment shifting from marketable securities to investments in securities classified as cash and cash equivalents.
Net cash used in financing activities for the six months ended June 30, 2023 and 2022 was $1,606,000 and $1,554,000, respectively. The change of $52,000 primarily resulted from an increase in repurchases of treasury shares of $83,000 in 2023.
We maintain our cash in money market funds, government securities, certificates of deposit and short-term fixed income securities. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, purchase obligations or other long-term liabilities except for our lease obligations for our principal office space (see Note G[3] to our unaudited condensed consolidated financial statement included herein).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements included in this Quarterly Report on Form 10-Q requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of our unaudited condensed consolidated financial statements include revenue recognition, contingent legal fees and related expenses, income taxes, valuation of patents and equity method investments, including the evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based. See also Note B to our unaudited condensed consolidated financial statements included in this quarterly report.
25
We believe our most critical accounting policies and estimates to be the following:
Equity Method Investments
Equity method investments are equity securities in entities that we do not control but over which we have the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus our share of an investee’s income or loss, and adjustments based on the investees observable price transactions, if any. Our proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When our carrying value in an equity method investment is reduced to zero, no further losses are recorded in our financial statements unless we guaranteed obligations of the investee company or have committed additional funding. When the investee company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized. In the event the equity method investee enters into an observable price transaction, we will increase or decrease the carrying value in its equity method investment based on the transaction price. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount of the equity investment is recognized in profit or loss. In determining whether an equity method investment is impaired, we take into consideration a variety of factors including the operating and financial performance of the investee, the investee’s future business plans and projections, discussions with the investee’s management, and our intent and ability to hold the investment until it recovers in value. Accordingly, we make assumptions and estimates in assessing whether an impairment has occurred and if, in the future, our assumptions and estimates made in assessing the fair value of these investments change, this could result in a material decrease in the carrying value of the investment. This would cause us to write-down the carrying value of the investment and could have a material adverse effect on our results of operations in the period the impairment charge is taken.
Income Taxes
We account for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes (ASC 740), which requires us to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary (timing) differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management business plans. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws, we have identified the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this review, these officers concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our legal proceedings see Note I to our unaudited condensed consolidated financial statements included in this Quarterly Report and Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2022 (filed with the SEC on March 30, 2023). During the three months ended June 30, 2023, no material events occurred with respect to our legal proceedings, except for the settlement with respect to an additional defendant in our litigation involving our Remote Power Patent (see Note I[4] to our unaudited condensed consolidated financial statements).
ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. Investors should carefully consider the risks described in this Quarterly Report on Form 10-Q for the three months ended June 30, 2023, and our Annual Report on Form 10-K for the year ended December 31, 2022 (pages 19-21), filed with the SEC on March 30, 2023.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended June 30, 2023.
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Stock Repurchases
On June 13, 2023, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of shares of our common stock over the subsequent 24 month period. The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. Since inception of the Share Repurchase Program in August 2011 through June 30, 2023, we have repurchased an aggregate of 9,360,944 shares of our common stock at an aggregate cost of $18,085,981 (exclusive of commissions) or an average per share price of $1.93. During the three months ended June 30, 2023, we repurchased an aggregate of 11,495 shares of our common stock at an aggregate cost of $25,685 or an average per share price of $2.23. During the six months ended June 30, 2023, we repurchased an aggregate of 148,280 shares of our common stock at an aggregate cost of $327,887 or an average per share price of $2.21. At June 30, 2023, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $5,000,000.
During the months of April, May and June 2023, we purchased common stock pursuant to our Share Repurchase Program as indicated below:
Period |
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs1 |
| April 1 to April 30, 2023 | 11,495 | 2.23 | 11,495 | — |
| May 1 to May 30, 2023 | — | — | — | — |
| June 1 to June 30, 2023 | — | — | — | 5,000,0001 |
| Total | 11,495 | 2.23 | 11,495 |
| ______________________________ |
| 1. | On June 13, 2023, our Board of Directors authorized an extension and increase of our Share Repurchase Program to repurchase up to $5,000,000 shares of our common stock over the subsequent 24 month period. |
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ITEM 3. Defaults Upon Senior Securities
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. Exhibits
(a) Exhibits
| 31.1 | Controls and Procedure Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 31.2 | Controls and Procedure Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 101 | Interactive data files:** |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Scheme Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
_____________________________
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETWORK-1 TECHNOLOGIES, INC. | ||
| ||
| Date: August 10, 2023 | By: | /s/ Corey M. Horowitz |
Corey M. Horowitz (Principal Executive Officer) |
||
| ||
| Date: August 10, 2023 | By: | /s/ Robert Mahan |
Robert Mahan (Principal Financial Officer) |
||
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EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
I, Corey M. Horowitz, Chairman and Chief Executive Officer of Network-1 Technologies, Inc. (the “Registrant”), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2023 of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (that Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
| Date: August 10, 2023 | /s/ Corey M. Horowitz | |
Corey M. Horowitz (Principal Executive Officer) |
||
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
I, Robert Mahan, Chief Financial Officer of Network-1 Technologies, Inc. (the “Registrant”), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2023 of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
| Date: August 10, 2023 | /s/ Robert Mahan | |
| Robert Mahan Chief Financial Officer (Principal Financial Officer) |
||
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), the undersigned, Corey M. Horowitz, Chief Executive Officer and Chairman of Network-1 Technologies, Inc., a Delaware corporation (the “Company”), does hereby certify to his knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Corey M. Horowitz |
Chairman and Chief Executive Officer (Principal Executive Officer)
August 10, 2023 |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), the undersigned, David C. Kahn, Chief Financial Officer of Network-1 Technologies, Inc., a Delaware corporation (the “Company”), does hereby certify to his knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Robert Mahan |
Chief Financial Officer
August 10, 2023
|