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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
_________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended
|
or
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 Number) | |
| (Address of Principal Executive Offices) | ||
Registrant's
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
_________________
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ☐
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 (§ 232.405 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, 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.
| 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 has filed a report on and
attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes ☐
The aggregate market value of the voting and non-voting common stock held
by non-affiliates computed by reference to the price at which the common stock was last sold as of June 30, 2021 was approximately $
The number of shares outstanding of Registrant's common stock as of March 28, 2022 was .
NETWORK-1 TECHNOLOGIES, INC.
2021 FORM 10-K
TABLE OF CONTENTS
Page No.
PART I
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PART I
Forward-looking statements:
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND EXPECTATIONS WHICH ARE “FORWARD-LOOKING STATEMENTS”. ANY STATEMENT IN THIS 10-K THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING STATEMENT WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED, OR SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS PROVIDE CURRENT EXPECTATIONS OF FUTURE EVENTS BASED ON CERTAIN ASSUMPTIONS AND INCLUDE ANY STATEMENT THAT DOES NOT DIRECTLY RELATE TO ANY HISTORICAL OR CURRENT FACT. STATEMENTS CONTAINING SUCH WORDS AS “MAY,” “WILL,” “EXPECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “COULD,” “ESTIMATE,” “CONTINUE” OR “PLAN” AND SIMILAR EXPRESSIONS OR VARIATIONS ARE 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 CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO VARIOUS FACTORS SET FORTH IN THIS REPORT AND IN OTHER FILINGS MADE BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, INCLUDING THOSE DISCUSSED AS “RISK FACTORS” IN ITEM 1A AND ELSEWHERE IN THIS REPORT, OR SHOULD ANY OF OUR UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED IN THIS REPORT. WE UNDERTAKE NO OBLIGATION TO UPDATE, AND WE DO NOT HAVE A POLICY OF UPDATING OR REVISING THESE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT WAS MADE. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS “NETWORK-1,” “COMPANY,” “WE,” “OUR,” “US” MEAN NETWORK-1 TECHNOLOGIES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES, MIRROR WORLDS TECHNOLOGIES, LLC AND HFT SOLUTIONS, LLC.
ITEM 1. BUSINESS
Overview
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own ninety-five (95) patents including (i) our Cox patent portfolio (the “Cox Patent Portfolio”) relating to enabling technology for identifying media content on the Internet and taking further actions to be performed after such identification; (ii) our M2M/IoT patent portfolio (the “M2M/IoT Patent Portfolio”) relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim cards in next generation IoT, Machine-to-Machine, and other
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mobile devices, including smartphones tablets and computers; (iii) our HFT patent portfolio (the “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 (the “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 (“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.
To date, we have invested $6,000,000 in ILiAD Biotechnologies, LLC, a clinical stage biotechnology company with an exclusive license to fifty-eight (58) patents (see “Investment in ILiAD Biotechnologies” at page 10 of this Annual Report).
Until March 7, 2020, when our Remote Power Patent expired, we had been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930) which generated licensing revenue in excess of $187,000,000 since May 2007. We achieved twenty-eight (28) license agreements with respect to our Remote Power Patent which, among others, included license agreements with Cisco Systems, Inc. (“Cisco”), Dell Inc., Hewlett-Packard Enterprise Company and Hewlett Packard Company (collectively, “Hewlett-Packard”), Extreme Networks, Inc., NETGEAR, Inc. (“Netgear”), Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd, Huawei Technologies Co., Ltd., ShoreTel, Inc., Juniper Networks, Inc., Polycom, Inc. and Avaya, Inc.
As a result of the expiration of our Remote Power Patent, we no longer receive licensing revenue for such patent for any period subsequent to the expiration date (March 7,2020). However, subsequent to the expiration date of our Remote Power Patent, we received licensing revenue from certain licensees for periods prior to March 7, 2020. On March 30, 2021, we entered into an amendment to our Settlement and License Agreement, dated May 25, 2011, with Cisco (the “Agreement”) pursuant to which Cisco paid $18,692,000 to us to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement pertaining to the Remote Power Patent for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note K[2] to our consolidated financial statements included in this Annual Report). In addition, on July 26, 2021, we entered into a settlement agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid us $17,000,000 in full settlement of a patent litigation involving our Remote Power Patent (see Note K[1] to our consolidated financial statements included in this Annual Report). We believe that NETGEAR, Inc. (“Netgear”), another licensee of our Remote Power Patent, is obligated to pay us royalties that accrued but were not paid since the fourth quarter of 2017 through March 7, 2020. We have pending litigation against Netgear to recover such royalties (see Note K[5] to our consolidated financial statements included in this Annual Report).
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Since acquisition of our Mirror Worlds Patent Portfolio in May 2013, we have received licensing and other revenue from the Mirror Worlds Patent Portfolio of $47,150,000 through December 31, 2021 including license agreements with Apple and Microsoft.
Our current strategy includes continuing our efforts to monetize our intellectual property. 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. 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. In addition, we may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
We have pending litigation involving our assertion of infringement claims concerning certain patents within our Cox Patent Portfolio and intend to appeal to the U.S. Court of Appeals for the Federal Circuit the District Court judgment of non-infringement dismissing our case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 of this Annual Report).
At December 31, 2021, we had cash and cash equivalents and marketable securities of $59,623,000 and working capital of $55,665,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the foreseeable future. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic alternatives.
Overview of Our Patents
Cox Patent Portfolio
Our Cox Patent Portfolio, acquired from Dr. Ingemar Cox in February 2013, currently consists of thirty-nine (39) patents, relating to enabling technology for identifying media content on the Internet, such as audio and video, and taking further actions to be performed based on such identification. All of the patents within our Cox patent portfolio expired in September 2021 except for two patents which expire in July 2023 and November 2023. We have pending litigation against Google Inc. and YouTube, LLC involving assertion of certain patents within our Cox Patent Portfolio (see “Legal Proceedings” at pages 21-22 hereof). The patents within our Cox Patent Portfolio are based on a patent application filed in 2000. Since the acquisition of the Cox Patent Portfolio in February 2013, we have been issued thirty-four (34) additional patents relating to this portfolio. The claims in these thirty-four (34) additional patents are generally directed towards systems of content identification and performing actions following therefrom.
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We are obligated to pay Dr. Cox 12.5% of the net proceeds generated by us from licensing, sale or enforcement of the Cox Patent Portfolio. Dr. Cox provides consulting services to us with respect to the Cox Patent Portfolio and assists our efforts to develop the patent portfolio.
Dr. Cox is currently a Professor at the University of Copenhagen and University College London where he is head of its Media Futures Group. Dr. Cox was formerly a member of the Technical Staff at ATT Bell Labs and a Fellow at NEC Research Institute. He is a Fellow of the ACM, IEEE, the IET (formerly IEE), and the British Computer Society and is a member of the UK Computing Research Committee. In 2019, Dr. Cox was the recipient of the Tony Kent Strix Award in recognition of his contribution to the field of information retrieval. He was founding co-editor in chief of the IEE Proc. on Information Security and was an associate editor of the IEEE Trans. on Information Forensics and Security. He is co-author of a book entitled “Digital Watermarking” and its second edition “Digital Watermarking and Steganography”. He is an inventor or co-inventor of over seventy (70) U.S. Patents.
M2M/IoT Patent Portfolio
Our M2M/IoT Patent Portfolio acquired in December 2017 relates to, among other things, enabling technology for authenticating, provisioning and using embedded SIM cards in next generation IoT, Machine-to-Machine and other mobile devices including smartphones, tablets and computers as well as automobiles and drones. The M2M/IoT Patent Portfolio currently consists of thirty (30) issued U.S. patents, five pending U.S. patent applications and seven additional pending non-U.S. patent applications. Since we acquired the M2M/IoT Patent Portfolio in December 2017 we have been issued eighteen (18) additional U.S. patents. We anticipate further issuances of additional claims for this portfolio. The expiration dates of the thirty (30) issued U.S. patents currently within our M2M/IoT Patent Portfolio range from September 2033 to May 2034. During the year ended December 31, 2021, we were issued one new U.S. patent and three non-U.S. patents for the M2M/IoT Portfolio.
We have an obligation to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as defined) related to our M2M/IoT Patent Portfolio. In addition, M2M will be entitled to receive from us $250,000 of additional consideration upon the occurrence of certain future events related to the patent portfolio.
John Nix, the Managing Member of M2M, provides consulting services to us with respect to our M2M/IoT Patent Portfolio. Mr. Nix is an entrepreneur and inventor, and founder and Chief Executive Officer of Vobal Technologies, LLC. In 2016, Mr. Nix was recognized as “Creator of the Year” by the Intellectual Property Law Association of Chicago for his intellectual property related to embedded SIM technology.
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HFT Patent Portfolio
On March 25, 2022, we acquired the HFT Patent Portfolio from Nima Badizadegan. The newly acquired portfolio covers 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 HFT Patent Portfolio currently includes six issued U.S. patents and two pending U.S. patents.
In addition to the purchase price of that we paid to the seller at closing, we have an obligation to pay the seller an additional cash payment of $500,000 and $375,000 of our common stock contingent upon achieving certain milestones with respect to the patent portfolio. We also have an obligation to pay the seller 15% of the first $50 million of net proceeds (after deduction of expenses) generated from the patent portfolio and 17.5% of net proceeds greater than $50 million.
Mirror Worlds Patent Portfolio
Our Mirror Worlds Patent Portfolio acquired in May 2013 covers foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system. All of our patents within our Mirror Worlds Patent Portfolio expired. The Mirror Worlds Patent Portfolio includes U.S. Patent No. 6,006,227 (the “227 Patent”) and U.S. Patent No. 8,255,439 which are currently being asserted in our litigation against Facebook, Inc. (see “Legal Proceedings” at pages 21-22 hereof). Our 227 Patent was previously asserted in litigations against Apple Inc. and Microsoft Corporation which were settled resulting in aggregate payments to us of $29,650,000.
The inventions relating to document stream operating systems covered by our Mirror Worlds Patent Portfolio resulted from the work done by Yale University computer scientist, Professor David Gelernter, and his then graduate student, Dr. Eric Freeman, in the mid-1990s. Certain aspects of the technologies developed by David Gelernter were commercialized in their company's product offering called “Scopeware.” Technologies embodied in Scopeware are now common in various computer and web-based operating systems. Professor Gelernter and Dr. Freeman each entered into consulting agreements with us as part of our acquisition of the Mirror Worlds Patent Portfolio.
As part of our acquisition of the Mirror Worlds Patent Portfolio in 2013, we also entered into an agreement with Recognition Interface, LLC (“Recognition”), an entity that financed the commercialization of the Mirror Worlds patent portfolio prior to its sale to Mirror Worlds, LLC and also retained an interest in the licensing proceeds of the Mirror Worlds patent portfolio. Pursuant to the terms of the agreement with us, we are obligated to pay Recognition an interest in the net proceeds realized from our monetization of the Mirror Worlds Patent Portfolio as follows: (i) 10% of the first $125
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million of net proceeds; (ii) 15% of the next $125 million of net proceeds; and (iii) 20% of any portion of the net proceeds in excess of $250 million. Since entering into the agreement with Recognition in May 2013, we have paid Recognition an aggregate of $3,127,000 with respect to such net proceeds interest in our Mirror Worlds Patent Portfolio (no such payments were made during the years 2021 and 2020). In addition to the net proceeds interest, we also issued to Recognition (and its affiliate) warrants to purchase an aggregate of 1,250,000 shares of our common stock at exercise prices ranging from $1.40 to $2.10 per share, which warrants were exercised in full.
Remote Power Patent
Our Remote Power Patent (U.S. Patent No. 6,218,930) covers the delivery of power over Ethernet cables for the purpose of remotely powering network devices such as wireless access ports, IP phones and network based cameras. Our Remote Power Patent expired on March 7, 2020. Notwithstanding the expiration of the Remote Power Patent in March 2020, we received in 2021 aggregate licensing revenue of $36,029,000 relating to periods prior to expiration of the patent.
The Institute of Electrical and Electronic Engineers (IEEE) is a non-profit, technical professional association. The Standards Association of the IEEE is responsible for the creation of global industry standards for a broad range of technology industries. In 2000, at the urging of several industry vendors, the IEEE formed a task force to facilitate the adoption of a standardized methodology for the delivery of remote power over Ethernet networks which would ensure interoperability among vendors of switches and terminal devices. On June 13, 2003, the IEEE Standards Association approved the 802.3af Power over Ethernet standard (the “Standard”), which covers technologies deployed in delivering power over Ethernet networks. The Standard provides for the Power Sourcing Equipment (PSE) to be deployed in switches or as standalone midspan hubs to provide power to remote devices such as wireless access points, IP phones and network-based cameras. The technology is commonly referred to as Power over Ethernet (“PoE”). In 2009, the IEEE Standards Association approved 802.3at, a new PoE standard which, among other things, increased the available power for delivery over Ethernet networks. We believe that our Remote Power Patent covers several of the key technologies covered by both the 802.3af and 802.3at standards.
Patent Acquisitions or Strategic Relationships
We seek to acquire additional intellectual property assets in order to develop, commercialize, license or otherwise monetize such intellectual property. We review opportunities to acquire or license additional intellectual property assets from individual inventors, technology companies and others for the purpose of pursuing licensing opportunities related to our existing intellectual property portfolio or otherwise. In addition, we may enter into strategic relationships with such parties to develop, commercialize, license or otherwise monetize their intellectual property. The form of such relationships may vary depending upon the opportunity and may include, among other things, a strategic investment in such third party, the provision of financing to such third party or the formation of a joint venture for the purpose of monetizing such third party's intellectual property assets.
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Network-1 Strategy
Our strategy is to capitalize on our intellectual property assets by entering into licensing arrangements with third parties including manufacturers and users that utilize our intellectual property's proprietary technologies as well as any additional proprietary technologies covered by patents which may be acquired by us in the future. Our current 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 has been the case with our Remote Power Patent and Mirror Worlds Patent Portfolio. Our Remote Power Patent has generated licensing revenue in excess of $187,000,000 from May 2007 through December 31, 2021. Since acquisition of our Mirror Worlds Patent Portfolio in May 2013, we have received licensing and other revenue of $47,150,000 through December 31, 2021. In addition, we may enter into third party strategic relationships with inventors and patent owners to assist in the development and monetization of their patent technologies. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic alternatives.
In connection with our activities relating to the protection of our intellectual property assets, or the intellectual property assets of third parties with whom we have strategic relationships in the future, it may be necessary to assert patent infringement claims against third parties whom we believe are infringing our patents or those of our strategic partners. We are currently involved in several litigations to protect our patents including certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 hereof). We have previously successfully asserted litigation with respect to our Remote Power Patent and our Mirror Worlds Patent Portfolio and have also been successful in defending proceedings at the USPTO challenging the validity of our Remote Power Patent and certain patents within our Cox Patent Portfolio.
Significant Licensees
Revenue from our Remote Power Patent constituted 100% of our revenue for the years ended December 31, 2021 and December 31, 2020. For the year ended December 31, 2021, two licensees constituted 99% of our revenue. For the year ended December 31, 2020, one licensee constituted an aggregate of 94% of our revenue. It is anticipated that one or a few of our licensees or other third parties will continue to constitute a significant portion of our revenue for the foreseeable future.
Competition
With respect to our ability to acquire additional intellectual property assets or enter into strategic relationships with third parties to monetize their intellectual property assets, we face considerable competition from other companies, many of
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which have significantly greater financial and other resources than we have. The patent licensing and enforcement industry has grown and there has been a material increase in the number of companies seeking to acquire intellectual property assets from third parties or to provide financing to third parties seeking to monetize their intellectual property. Entities including, among others, Acacia Research Corporation (NASDAQ:ACTG), Intellectual Ventures, WI-LAN Inc., a subsidiary of Quarterhill Inc. (NASDAQ:QTRH), VirnetX Holdings Corporation (NYSE MKT:VHC) and RPX Corporation, seek to acquire intellectual property or partner with third parties to license or enforce intellectual property rights. In addition, we also compete with strategic corporate buyers with respect to the acquisition of intellectual property assets. It is expected that others will enter this market as well. Many of these competitors have significantly greater financial and human resources than us.
We may also compete with litigation funding firms such as Burford Capital Limited, Validity Finance, LLC, Fortress Investment Group, LLC, Parabellum Capital LLC and Bentham Capital LLC, venture capital firms and hedge funds for intellectual property acquisitions and licensing opportunities. Many of these competitors also have greater financial resources and human resources than us.
The industries and markets covered by our intellectual property are characterized by intense competition and rapidly changing business conditions, customer requirements and technologies. Other companies may develop competing technologies that offer better or less expensive alternatives to the technologies covered by our intellectual property assets. Such competing technologies may adversely impact our licensing revenue. Moreover, technological advances or entirely different approaches developed by one or more of our competitors or adopted by various standards groups could render our intellectual property assets obsolete, less marketable or unenforceable.
Regulatory Environment
If new legislation, regulations or rules are implemented either by Congress, the USPTO or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our business, financial condition and results of operations. Certain legislation, regulations, and rulings by the courts and actions by the USPTO have materially increased the risk and cost of enforcement of patents. U.S. patent laws were amended by the Leahy-Smith America Invents Act, referred to as the “America Invents Act”, which became effective on March 16, 2013. The America Invents Act included a number of significant changes to U.S. patent law. In general, it addressed issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation and new administrative post-grant review procedures to challenge the patentability of issued patents outside of litigation, including Inter Partes Review (IPR) and Covered Business Method Review (CBM) proceedings which provide third parties a timely, cost effective alternative to district court litigation to challenge the validity of an issued patent. The America Invents Act and its implementation has increased the uncertainties and costs surrounding the enforcement of patent rights which could have a material adverse effect on our business, financial condition and results of operations.
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In addition, future changes in patent law could adversely impact our business. Such changes may not be advantageous to us and may make it more difficult to obtain adequate patent protection to enforce our patents. Increased focus on the growing number of patent lawsuits, particularly by non-practicing entities (NPEs), may result in legislative changes which increase the risk and costs of asserting patent litigation.
Investment in ILiAD Biotechnologies
During the period December 2018 – March 2021, we made an aggregate investment of $6,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held clinical stage biotechnology company dedicated to the prevention and treatment of human disease caused by Bordetella pertussis. The aggregate investment of $6,000,000 by the Company includes a $5,000,000 equity investment and $1,0000,000 investment in convertible notes (see below). On December 31, 2021, we owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis and 7.2% of the outstanding units on a fully diluted basis (after giving effect to the exercise of all outstanding options, warrants and convertible notes). In connection with our investment, Corey Horowitz, our Chairman and Chief Executive Officer, became a member of ILiAD’s Board of Managers. ILiAD is developing key technologies and working with leading scientists to investigate the impact of Bordetella pertussis in a range of human disease and is currently focused on validating its proprietary intranasal vaccine, BPZE1, for the prevention of Pertussis (whooping cough). Pertussis is a life-threatening disease caused by the highly contagious respiratory bacterium Bordetella pertussis. According to the U.S. Centers for Disease Control and Prevention, each year pertussis affects approximately 16 million people globally, accounting for nearly 200,000 deaths. ILiAD has the exclusive license to fifty-eight (58) issued patents and has thirty-three (33) pending patent applications.
BPZE1 was developed in the laboratory of Camille Locht, PhD, at the Institut Pasteur de Lille (IPL) and French National Institute of Health and Medical research. BPZE1 is a live-attenuated intranasal vaccine designed to overcome deficiencies of current pertussis vaccines, including poor durability of protection and failure to prevent nasopharyngeal Bordetella pertussis infections that lead to escape mutants and transmission to vulnerable infants. Four clinical trials studying BPZE1 in healthy adults have been completed by ILiAD to date, including positive topline results from a 300-participant adult Phase 2b trial demonstrating that BPZE1 induced durable mucosal immunity and reduced nasal colonization — two key factors necessary for the prevention of transmission and reduction of epidemic pertussis cycles.
On March 12, 2021, we invested $1,000,000 in ILiAD as part of its private offering of up to $23,500,000 of convertible notes (the “Notes”). The Notes have a maturity of three years with interest accruing at 6% per annum. The Notes are required to be converted into a Qualified Financing (minimum financing of $15 million) at the lesser of (i) 80% of the price paid per unit in such offering or (ii) a price based on an enterprise value of $176,000,000. In addition, the Notes shall convert in the event of a merger at the lower of an enterprise value of $176,000,000 or the stated valuation of ILiAD in the merger transaction. In the event of a change-in-control, noteholders will also have the option to have the Notes repaid except in a Qualified Financing or a stock-for-stock merger.
In December 2021, ILiAD announced the initiation and enrollment of the first participants in a BPZE1 study involving school age children. On January 3, 2022, ILiAD announced that the U.S. Food and Drug Administration (FDA) granted Fast Track designation for BPZE1.
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Corporate Information
We were incorporated under the laws of the State of Delaware in July 1990. Our principal offices are located at 65 Locust Avenue, New Canaan, Connecticut 06840 and our telephone number is (203) 920-1055.
Available Information
We file or furnish various reports, such as registration statements, quarterly and current reports, proxy statements and other materials with the SEC. Our Internet website address is www.network-1.com. You may obtain, free of charge on our Internet website, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information we post on our website is intended for reference purposes only; none of the information posted on our website is part of this Annual Report or incorporated by reference herein.
In addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov.
Employees and Consultants
On March 28, 2022, we had three employees and two consultants providing monthly services to us.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various material risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flow, and the trading price of our common stock. You should carefully consider the material risks and uncertainties described below in addition to the other information set forth in this Annual Report on Form 10-K, including, but not limited to, the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The material risks described below are not the only risks we face. Additional risks that we do not know of or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, results of operations and cash flow could be materially adversely affected, and the trading price of our common stock could decline significantly.
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Risks Related to Our Business
Our revenue is uncertain.
Since March 2020 (the expiration of our Remote Power Patent), we no longer receive ongoing licensing revenue on a quarterly basis from licensees. Accordingly, except for our pending litigation against Netgear involving our Remote Power Patent (see Note K[5] to our consolidated financial statements included in this Annual Report), our revenue will be dependent upon litigation outcomes involving our Cox Patent Portfolio and Mirror Worlds Patent Portfolio, our ability to monetize our other patent portfolios or new patents to be acquired in the future. We currently have pending litigation against Google and YouTube involving certain patents within our Cox Patent Portfolio and we intend to appeal the District Court judgment granting Facebook summary judgment of non-infringement and dismissing our case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 hereof). Patent litigation is inherently risky and the outcome is uncertain. Accordingly, our future revenue is uncertain.
We have been dependent upon our Remote Power Patent for a significant portion of our revenue and the patent has expired.
Our Remote Power Patent has generated licensing revenue for us in excess of $187,000,000 from May 2007 through December 31, 2021. Revenue for the years ended December 31, 2021 ($36,029,000), 2020 ($4,403,000) and 2019 ($3,037,000) from license agreements for our Remote Power Patent constituted 100% of our revenue. As a result of the expiration of our Remote Power Patent on March 7, 2020, we no longer receive licensing revenue for our Remote Power Patent for any period subsequent to the expiration date. However, in April 2021, Cisco paid us $18,691,890 in licensing royalties for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note K[2] to our consolidated financial statements included in this Annual Report). In addition, in July 2021, we entered into a settlement agreement with Hewlett-Packard pursuant to which we were paid $17,000,000 in settlement of patent infringement litigation. Furthermore, we have pending litigation against Netgear, another licensee of our Remote Power Patent, for unpaid royalties for a period prior to March 2020 (see Note K[5] to our consolidated financial statements included in this Annual Report). Except for our pending litigation against Netgear involving our Remote Power Patent, our future revenue will be entirely dependent on our ability to monetize our patent portfolios or patents we acquire in the future.
| -12- |
Our success is substantially dependent upon our ability to protect our patents.
Our success is substantially dependent upon our proprietary technologies and our ability to protect our intellectual property rights. We currently own ninety-five (95) patents that relate to various technologies including our Remote Power Patent, Cox Patent Portfolio, Mirror Worlds Patent Portfolio, M2M/IoT Patent Portfolio and HFT Patent Portfolio. Certain patents within our Mirror Worlds Patent Portfolio and Cox Patent Portfolio are currently being challenged in patent infringement litigation pending in the courts (see “Legal Proceedings” at pages 21-22 of this Annual Report). The uncertainty of the outcome of litigation creates risks that our efforts to protect our intellectual property assets may not be successful. If we are not successful in protecting our patents, our business would be negatively impacted.
We may not be able to capitalize in the future on our strategy to acquire high quality patents with significant licensing opportunities or enter into strategic relationships with third parties to license or otherwise monetize their intellectual property.
Based upon the success we achieved from licensing our Remote Power Patent (twenty-eight (28) license agreements which generated in excess of $187,000,000 of revenue), the revenue we generated from our Mirror Worlds Patent Portfolio ($47,150,000) and establishing a patent portfolio currently consisting of ninety-five (95) patents as well as our cash position, we believe we have the expertise and sufficient capital to compete in the intellectual property monetization market and to enter strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. However, we may not be able to acquire additional intellectual property or, if acquired, we may not achieve material revenue or profit from such intellectual property. Acquisitions of patent assets are competitive, time consuming, complex and costly to consummate. Our strategy is to focus on acquiring high quality patent assets which management believes have the potential for significant licensing opportunities. These high quality patent opportunities are difficult to find and are often very competitive to acquire. In addition, such acquisitions present material risks. Even if we acquire additional patent assets, we may not be able to achieve significant licensing revenue or even generate sufficient revenue related to such patent assets to offset the acquisition costs and the legal fees and expenses which may be incurred to enforce, license or otherwise monetize such patents. In addition, we may not be able to enter into strategic relationships with third parties to license or otherwise monetize their intellectual property and, even if we consummate such strategic relationships, we may not achieve material revenue or profit from such relationships.
| -13- |
We may not be successful in enforcing or defending our Cox Patent Portfolio, generating additional revenue from our Mirror Worlds Patent Portfolio or generating revenue from our M2M/IoT Patent Portfolio and HFT Patent Portfolio.
We acquired our Cox Patent Portfolio in 2013, which currently consists of thirty-nine (39) patents. We have not yet achieved any revenue from our Cox Patent Portfolio. We are currently enforcing certain patents within our Cox Patent Portfolio against Google and YouTube, who are challenging these patents (see “Legal Proceedings” at page 22 hereof). We also intend to appeal the District Court decision granting Facebook summary judgment of non-infringement and dismissing our case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings at pages 21-22 hereof). In addition, our M2M/IoT Patent Portfolio, currently consisting of thirty (30) patents, is not currently being asserted and thus it is not anticipated that this portfolio will generate revenue for at least the next twelve months. We also recently acquired our HFT Patent Portfolio, consisting of six patents and two pending patents. We may not have future success in enforcing or defending our Cox Patent Portfolio, Mirror Worlds Patent Portfolio, M2M/IoT Patent Portfolio and HFT Patent Portfolio, which would have a negative impact on our business.
Our quarterly and annual operating and financial results and our revenue are difficult to predict and are likely to fluctuate significantly in future periods.
Our quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to period. We had revenue of $36,029,000 and net income of $14,281,000 for the year ended December 31, 2021. We had revenue of $4,403,000 and incurred a net loss of $1,709,000 for the year ended December 31, 2020 as compared to revenue of $3,037,000 and a net loss of $1,792,000 for the year ended December 31, 2019. Our revenue and net income was $22,106,000 and $7,706,000, respectively, for the year ended December 31, 2018 and $16,451,000 and $4,133,000 for the year ended December 31, 2017. Accordingly, our revenue, net income and results of operations may widely fluctuate as a result of a variety of factors that are outside our control including our ability and timing in consummating future license agreements for our intellectual property assets, the timing and extent of payments received by us from licensees, the timing and our ability to achieve successful outcomes from current and future patent litigation, whether we will achieve a return on our investment in ILiAD Biotechnologies and the timing of any such gains, and the timing and our ability to achieve revenue from future strategic relationships.
| -14- |
The patent monetization cycle is long, costly and unpredictable.
There is generally a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During this time lag, significant costs are likely to be incurred which may have a negative impact on our results of operations, cash flow and financial position. Furthermore, the outcome of our efforts to monetize our patents is uncertain and we may not be successful.
In the future we could be classified as a Personal Holding Company resulting in a 20% tax on our PHC Income that we do not distribute to our shareholders.
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: (1) 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 (2) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). During the second half of 2021, based on available information concerning our shareholder ownership, we did not satisfy the Ownership Test and thus we were not a PHC for 2021. However, we may be determined to be a PHC in the future. If we were determined to be a PHC in any future year, we would be subject to an additional 20% tax on our UPHCI. In such event, we may issue a special cash dividend to our shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
We are dependent upon our CEO and Chairman.
Our success is largely dependent upon the personal efforts of Corey M. Horowitz, our Chairman, Chief Executive Officer and Chairman of our Board of Directors. On March 22, 2022, we entered into a new four year employment agreement with M. Horowitz pursuant to which he continues to serve as our Chairman and Chief Executive Officer. The loss of the services of Mr. Horowitz would have a material adverse effect on our business and prospects. We do not maintain key-man life insurance on the life of Mr. Horowitz.
Our investment in ILiAD Biotechnologies involves a high degree of risk and we may lose our entire investment.
We have invested $6,000,000 in ILiAD Biotechnologies, LLC, a privately held clinical stage biotechnology company, dedicated to the prevention and treatment of human disease caused by Bordetella pertussis with a current focus on its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough). As a clinical stage biotechnology investment, our investment involves a high degree of risk including the potential loss of our entire investment.
| -15- |
Cash dividends may not be continued to be paid.
Our dividend policy consists of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. We have paid such semi-annual dividends since our dividend policy was enacted in December 2016. Our dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time depending upon our earnings, financial requirements and other factors existing at the time. We may not be in a position to continue to pay dividends in the future.
The global COVID-19 pandemic could have an adverse impact on our business.
The COVID-19 pandemic has and continues to impact economic activities and the financial markets around the world. As to the impact on our Company, COVID-19 has and continues to cause some delays in the courts including the scheduling of trial dates, which could adversely affect the timing of outcomes of our litigations. COVID-19 has not presented other direct material risks to our business. Our cash is held at major financial institutions in money-market funds, certificates of deposit, or in short-term fixed income securities. With only three employees, our employees are able to work remotely. However, the ongoing pandemic may present risks that we have not currently considered material or risks that may evolve quickly that could have a material adverse effect on our business, financial condition, operating results and prospects.
Legislation, regulations, court rulings and actions by the USPTO have materially increased the risk and cost of enforcement of patents and may continue to do so in the future.
Legislation, regulations, court rulings and actions by the USPTO have materially increased the risk and cost of enforcing patents. U.S. patent laws were amended by the Leahy-Smith America Invents Act, referred to as the America Invents Act, which became effective on March 16, 2013. The America Invents Act included a number of significant changes to U.S. patent law. In general, it addressed issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, established new procedures for patent litigation and new administrative post-grant review procedures to challenge the patentability of issued patents outside of litigation, including Inter Partes Review (IPR) and Covered Business Method Review (CBM) proceedings which provide third parties a timely, cost effective alternative to district court litigation to challenge the validity of an issued patent. In addition, the America Invents Act changed the way that parties may be joined in patent infringement actions, increased the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. The America Invents Act and its implementation also increased the uncertainties and costs surrounding the enforcement of patent rights, which could have a material adverse effect on our business, financial condition and results of operations.
| -16- |
Changes in patent law could adversely impact our business.
Patent laws may continue to change and may alter the protections afforded to owners of patent rights. Such changes may not be advantageous to us and may make it more difficult to obtain adequate patent protection to enforce our patents. Increased focus on the growing number of patent lawsuits, particularly by non-practicing entities (NPEs), may result in further legislative changes which increase the risk and costs of asserting patent litigation.
Our pending patent infringement litigations are time consuming and costly.
We have pending litigation against Google and YouTube involving certain patents within our Cox Patent Portfolio and intend to appeal the decision of District Court granting Facebook’s motion for summary judgment of non-infringement and dismissing our case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 of this Annual Report). While we have contingent legal fee arrangements, or a contingency plus a fixed cash amount arrangement, with our patent litigation counsel in each litigation, we are responsible for all or a portion of the expenses which are anticipated to be material. In addition, the time and effort required of our management to effectively pursue these litigations is likely to be significant and it may adversely affect other business opportunities.
We face intense competition to acquire intellectual property and enter into strategic relationships.
With respect to our ability to acquire additional intellectual property or enter into strategic relationships with third parties to monetize their intellectual property, we face considerable competition from other companies, many of which have significantly greater financial and other resources than we have. The patent licensing and enforcement business has grown significantly over the past years and there has been an increase in the number of companies seeking to acquire intellectual property rights from third parties. It is expected that others will enter this market as well. Many of these competitors have significantly more financial and human resources than us.
We may also compete with strategic corporate buyers, litigation funding firms, venture capital firms and hedge funds for intellectual property acquisitions and licensing opportunities. Many of these competitors have greater financial resources and human resources than us.
| -17- |
Our markets are subject to rapid technological change and our technologies face potential technology obsolescence.
The markets covered by our intellectual property are characterized by rapid technological changes, changing customer requirements, frequent new product introductions and enhancements, and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards may render our technologies obsolete or less marketable.
In addition, other companies may develop competing technologies that offer better or less expensive alternatives to the technologies covered by our intellectual property. Moreover, technological advances or entirely different approaches developed by other companies or adopted by various standards groups could render our patents obsolete, less marketable or unenforceable.
The burdens of being a public company may adversely affect us including our ability to pursue litigation.
As a public company, our management must devote substantial time, attention and financial resources to comply with U.S. securities laws. This may have a material adverse effect on management's ability to effectively and efficiently pursue its business. In addition, our disclosure obligations under U.S. securities laws require us to disclose information publicly that will be available to litigation opponents. We may, from time to time, be required to disclose information that may have a material adverse effect on our litigation strategies. This information may enable our litigation opponents to develop effective litigation strategies that are contrary to our interests.
Risks Related to Our Common Stock
Investors may have limited influence on stockholder decisions because ownership of our common stock is concentrated.
As of March 15, 2022, our executive officers and directors beneficially owned 31.6% of our outstanding common stock. As a result, these stockholders may be able to exercise substantial control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership will limit other stockholders' ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
| -18- |
Our common stock may be delisted from the NYSE American Exchange if we fail to comply with continued listing standards.
Our common stock is currently traded on the NYSE American Exchange under the symbol “NTIP”. If we fail to meet any of the continued listing standards of the NYSE American Exchange, our common stock could be delisted. Such delisting could adversely affect the price and trading (including liquidity) of our common stock.
Provisions in our corporate charter, by-laws and in Delaware law could make it more difficult for a third party to acquire us, discourage a takeover and adversely affect existing stockholders.
Our certificate of incorporation authorizes the board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors, without further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions, any of which could adversely affect holders of our common stock. Although there are currently no shares of preferred stock outstanding, future holders of preferred stock may have rights superior to our common stock and such rights could also be used to restrict our ability to merge with, or sell our assets to third parties.
We are also subject to the “anti takeover” provisions of Section 203 of the Delaware General Corporation Law, which could prevent us from engaging in a “business combination” with a 15% or greater stockholder for a period of three years from the date such person acquired that status unless appropriate board or stockholder approvals are obtained.
In addition, our By-laws contain advance notice requirements for director nominations and for new business to be brought up at stockholder meetings. Stockholders wishing to submit director nominations or raise matters to a vote of stockholders must provide notice to us within specified date windows and in very specific forms in order to have that matter voted on at a stockholders meeting.
The aforementioned provisions could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market price. These provisions may also limit the ability of stockholders to delay, deter or prevent a change of control, or approve transactions that they may deem to be in their best interests.
| -19- |
Our stock price may be volatile.
The market price of our common stock may be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
| • | the outcome of our litigation against Google and YouTube involving certain patents within our Cox Patent Portfolio; |
| • | our ability to further develop, license and monetize our M2M/IoT Patent Portfolio; |
| • | our ability to further develop, license and monetize our recently acquired HFT Patent Portfolio; |
| • | the outcome of our intended appeal to the Federal Circuit of the District Court ruling granting Facebook summary judgment of non-infringement and dismissing our case involving certain patents within our Mirror Worlds Patent Portfolio; |
| • | our ability to acquire additional intellectual property; |
| • | 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; |
| • | variations in our quarterly and annual operating results; |
| • | our ability to continue to pay cash dividends; |
| • | our ability to raise capital if needed; |
| • | sales of our common stock; |
| • | technology changes; |
| • | legislative, regulatory and competitive developments; and |
| • | economic and other external factors. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also have a material and adverse effect on the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in New Canaan, Connecticut, where we lease approximately 2,000 square feet of office space on a monthly basis at a base rent of $7,300 per month. We believe that our office facility is suitable and appropriate to support our current needs.
| -20- |
ITEM 3. LEGAL PROCEEDINGS
Remote Power Patent Litigation
Hewlett-Packard Litigation
On July 26, 2021, we agreed to settle our patent litigation against Hewlett-Packard Company and Hewlett-Packard Enterprise Company (collectively, “Hewlett-Packard”) pending in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power Patent. Under the terms of the settlement agreement, Hewlett-Packard Enterprise Company paid us $17,000,000 in full settlement of the litigation and Hewlett-Packard received a fully paid license and release to the Remote Power Patent for its full term, which applies to sales of Power over Ethernet (“PoE”) products by Hewlett-Packard and its wholly-owned subsidiary Aruba Networks, LLC.
Netgear Litigation
On December 15, 2020, we filed a lawsuit against Netgear in the Supreme Court of the State of New York, County of New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with us for Netgear’s failure to make royalty payments, and provide corresponding royalty reports to us based on sales of Netgear’s PoE products. On October 22, 2021, Netgear filed a Demand for Arbitration with the American Arbitration Association (“AAA”) seeking to arbitrate certain issues raised in the litigation in the Supreme Court, State of New York, County of New York. We have objected to jurisdiction at the AAA and the dispute is pending.
Plantronics Litigation
On January 7, 2021, we filed a lawsuit against Plantronics, Inc., the successor to Polycom, Inc., in the Superior Court of the State of California, County of Santa Clara, for breach of a Settlement and License Agreement, dated September 2016, with us for the failure of Plantronics and Polycom to make royalty payments, and provide corresponding royalty reports, to us based on sales of PoE products. On October 26, 2021, Plantronics agreed to settle the litigation in consideration of a payment to us of $337,000.
Mirror Worlds Patent Portfolio Litigation
Facebook Litigation
On May 9, 2017, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, initiated litigation against Facebook, Inc. (“Facebook”) in the U.S. District Court for the Southern District of New York, for infringement of U.S. Patent No. 6,006,227, U.S. Patent No. 7,865,538 and U.S. Patent No. 8,255,439 (among the patents within our Mirror Worlds Patent Portfolio). The lawsuit alleged that the asserted patents are infringed by Facebook’s core technologies that enable Facebook’s Newsfeed and Timeline features. The lawsuit further alleged that Facebook’s unauthorized use of the stream-based solutions of our asserted patents has helped Facebook become the most popular social networking site in the world. We seek, among other things, monetary damages based upon reasonable royalties.
| -21- |
On May 7, 2018, Facebook filed a motion for summary judgment on non-infringement. On August 11, 2018, the Court issued an order granting Facebook’s motion for summary judgment of non-infringement and dismissed the case. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit ruled in our favor and reversed the summary judgment finding on non-infringement 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 Facebook. In its ruling the Court (i) denied Facebook’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 Facebook and dismissed the case. We strongly disagree with the decision on non-infringement and intend to file an appeal to the U.S. Court of Appeals for the Federal Circuit.
Cox Patent Portfolio Litigation
On April 4, 2014 and December 3, 2014, we initiated litigation against Google Inc. (“Google”) and YouTube, LLC (“YouTube”) in the U.S. District Court for the Southern District of New York for infringement of several of our patents within our Cox Patent Portfolio which relate to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s Content ID system.
The litigations against Google and YouTube were subject to court ordered stays which were in effect from July 2, 2015 until January 2, 2019 as a result of proceedings then pending at the Patent Trial and Appeal Board (PTAB) and the appeals to the U.S. District Court of Appeals for the Federal Circuit. Pursuant to a joint stipulation and order, entered on January 2, 2019, the parties agreed, among other things, that the stays with respect to the litigations were lifted. In January 2019, the two litigations against Google and YouTube were consolidated. Discovery is complete and a trial date has not yet been set.
ITEM 4. MINE SAFETY DISCLOSURES
None.
| -22- |
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information. Our common stock is listed for trading on the NYSE American Exchange under the symbol “NTIP”. On March 28, 2022, the closing price for our common stock as reported on the NYSE American Exchange was $2.45 per share. The number of record holders of our common stock was 38 as of March 28, 2022. In addition, we believe there were in excess of approximately 1,300 holders of our common stock in “street name” as of March 28, 2022.
Dividend Policy. Our dividend policy consists of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. On February 23, 2021, our Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of March 31, 2021 to all common shareholders of record as of March 16, 2021. On September 10, 2021, our Board of Directors declared a semi-annual dividend of $0.05 per share with a payment date of September 30, 2021 to all common shareholders of record as of September 21, 2021. Our dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time depending upon our earnings, financial requirements and other factors existing at the time.
As of December 31, 2021, we accrued dividends of $72,000 for unvested restricted stock units with dividend equivalent rights.
Recent Issuances of Unregistered Securities. There were no unregistered sales of equity securities during the quarter ended December 31, 2021.
Stock Repurchases. On June 11, 2021, our Board of Directors authorized an extension and increase of the share repurchase program (“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.
| -23- |
During the months of October, November and December 2021, we repurchased 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 Programs |
| October
1, 2021 to October 31, 2021 |
— | — | — | $4,869,200 |
| November
1, 2021 to November 30, 2021 |
57,600 | $2.78 | 57,600 | $4,709,163 |
| December
1, 2021 to December 31, 2021 |
280,875 | $2.77 | 280,875 | $3,930,729 |
| Total | 338,475 | $2.77 | 338,475 |
During the year ended December 31, 2021, we repurchased an aggregate of 378,475 shares of our common stock pursuant to our Share Repurchase Program at a cost of $1,069,271 (exclusive of commissions) or an average price per share of $2.83.
Since inception of our Share Repurchase Program (August 2011) to December 31, 2021, we repurchased an aggregate of 8,984,134 shares of our common stock at a cost of $17,225,276 (exclusive of commissions) or an average per share price of $1.92.
Equity Compensation Plan Information
The following table summarizes share and exercise price information for our equity compensation plans as of December 31, 2021.
Number of securities to be issued upon exercise of outstanding options and rights |
Weighted-average exercise price of outstanding options and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | ||||
|---|---|---|---|---|---|---|
| (a) | (b) | (c) | ||||
| Equity compensation plans approved by security holders | 12,500(1) |
$ —(3) | 1,837,500 | |||
| Equity compensation plans not approved by security holders | 500,000(2) |
$1.19 |
— | |||
| Total | 512,500 | $1.19(3) | 1,837,500 |
________________________________
(1) Consists of shares issuable upon vesting of outstanding restricted stock units.
(2) Represents an individual option grant to our Chairman and Chief Executive Officer outside of, and prior to the establishment of, the 2013 Stock Incentive Plan in October 2013 referred to in the above table. The option agreement pertaining to such option grant contains customary anti-dilution provisions.
(3) Does not take into account outstanding restricted stock units as these awards have no exercise price.
| -24- |
Our 2013 Stock Incentive Plan (“2013 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. Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as provided in the 2013 Plan, the 2013 Plan provides for an aggregate of 2,600,000 shares of our common stock to be available for distribution pursuant to the 2013 Plan. The Compensation Committee (or the Board of Directors) will generally have the authority to administer the 2013 Plan, determine participants who will be granted awards under the 2013 Plan, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2013 Plan may be granted to our employees, directors and consultants. As of December 31, 2021, there were options to purchase an aggregate of 500,000 shares of common stock outstanding and 12,500 shares issuable upon settlement of outstanding restricted stock units granted under the 2013 Plan, and a balance of 1,837,500 shares of common stock are reserved for issuance under the 2013 Plan.
ITEM 6. (RESERVED)
Not applicable.
ITEM 7. 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 Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the “Risk Factors” Section on pages 11-20 hereof.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own ninety-five (95) patents including: (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 cards 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.
| -25- |
During the period December 2018 through March 2021, we made an aggregate investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to fifty-eight (58) patents (see Note H to our consolidated financial statements included herein). Our investment in ILiAD involves significant risk (see “Risk Factors” at page 15 hereof).
Until March 7, 2020, when our Remote Power Patent expired, we had been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930) which generated licensing revenue in excess of $187,000,000 from May 2007 through December 31, 2021. As a result of the expiration of our Remote Power Patent, we no longer receive licensing revenue for our Remote Power Patent for any period subsequent to the expiration date (March 7, 2020). However, subsequent to the expiration date of our Remote Power Patent, we received licensing revenue from certain licensees for periods prior to March 7, 2020 as referenced below.
On March 30, 2021, we entered into an amendment (the “Amendment”) to the Settlement and License Agreement, dated May 25, 2011, between us and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco agreed to pay $18,692,000 to us to resolve a dispute relating to Cisco’s contractual obligation to pay us royalties under the Agreement for the period beginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired) with respect to licensing the Remote Power Patent (see Note K[2] to our consolidated financial statements included in this Annual Report).
On July 26, 2021, we entered into a settlement agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid us $17,000,000 in full settlement of a patent litigation involving our Remote Power Patent (see Note K[1] to our consolidated financial statements included in this Annual Report). We believe that Netgear, another licensee of our Remote Power Patent, is obligated to pay us royalties that accrued but were not paid since the fourth quarter of 2017 through March 7, 2020. In December 2020, we commenced litigation against Netgear for such unpaid royalties (see Note K[5] to our consolidated financial statements included herein).
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) consisting of six U.S. patents and two pending U.S. patents (see Note P[5] to our consolidated financial statements included in this Annual Report).
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Our future operating results may 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 achieve significant licensing revenue with respect to such patent acquisitions.
We have been dependent upon our Remote Power Patent for a significant portion of our revenue. Our Remote Power Patent has generated licensing revenue in excess of $187,000,000 from May 2007 through December 31, 2021. Revenue for the years ended December 31, 2021 of $36,029,000, 2020 of $4,403,000 and 2019 of $3,037,000 from license agreements for our Remote Power Patent constituted 100% of our revenue. As a result of the expiration of our Remote Power Patent on March 7, 2020, we no longer receive licensing revenue for our Remote Power Patent for any period subsequent to the expiration date. Except for our pending litigation against Netgear involving our Remote Power Patent, our future revenue will be entirely dependent on our ability to monetize our Cox, M2M/IoT, HFT and Mirror Worlds patent portfolios as well as any new patents we may acquire.
Our operating results for 2021 included revenue of $36,029,000 and net income of $14,281,000 which was primarily the result of the resolution of our contractual dispute with Cisco in which we received $18,692,000 and our litigation settlement of $17,000,000 with Hewlett-Packard. While we have pending litigation involving certain patents within our Cox Patent Portfolio against Google and YouTube and intend to appeal the judgment of the District Court dismissing our litigation against Facebook on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio, we may not achieve successful outcomes of the litigation or the appeal. Accordingly, our operating results for 2021 may not be indicative of operating results in 2022 or future years.
The significant components of expenses impacting our net income include contingent legal fees and expenses related to our patent litigation (see Note B[8] to our consolidated financial statements included herein) and incentive compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note J[1] to our consolidated financial statements included herein), both such components of expenses are based on a percentage of the licensing 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 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 Biotechnologies, LLC (“ILiAD”) and the timing of any such distributions.
At December 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $59,623,000 and working capital of $55,665,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the next twelve months and for the foreseeable future. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
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In 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 PHC Income (as defined) for such year that we do not distribute to our shareholders (see Note E to our consolidated financial statements included in this Annual Report).
As to the impact of the global COVID-19 pandemic on us, COVID-19 has and continues to cause some delays in the courts including the scheduling of trial dates, which could adversely affect the timing of our consummation of future license agreements (see “Risk Factors – The global COVID-19 pandemic could have an adverse impact on our Business”) at page 16 hereof.
On June 9, 2021, our Board of Directors approved the continuation of our dividend policy consisting of semi-annual cash dividends of $0.05 per share ($0.10 per share annually) which are anticipated to be paid in March and September of each year. In 2021, we paid semi-annual cash dividends in accordance with our dividend policy. Our dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time depending upon our financial requirements, earnings and other factors existing at the time (see Note O to our consolidated financial statements included herein).
RESULTS OF OPERATIONS
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue. We had revenue of $36,029,000 for the year ended December 31, 2021 (“2021”) as compared to revenue of $4,403,000 for the year ended December 31, 2020 (“2020”). The increase in revenue of $31,626,000 for 2021 was primarily due to revenue of $18,692,000 from our resolution of a contractual dispute with Cisco concerning licensing of our Remote Power Patent and revenue of $17,000,000 from our litigation settlement with Hewlett-Packard (see Notes K[1] and K[2] to our consolidated financial statements included herein).
Operating Expenses. Operating expenses for 2021 were $16,443,000 as compared to $6,816,000 for 2020. The increase in operating expenses for 2021 was primarily due to an increase in costs of revenue of $10,494,000 as a result of revenue of $18,692,000 from resolution of our contractual dispute with Cisco concerning licensing of our Remote Power Patent and revenue of $17,000,000 from our litigation settlement with Hewlett-Packard (see Notes K[1] and K[2] to our consolidated financial statements included herein). We had costs of revenue of $12,147,000 and $1,653,000 for 2021 and 2020, respectively. Included in the costs of revenue for 2021 were contingent legal fees
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of $10,346,000 and $1,801,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note J[1] to our consolidated financial statements included herein). Included in the costs of revenue for 2020 were contingent legal fees of $1,433,000 and $220,000 of incentive bonus compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement.
Professional fees and related costs decreased by $907,000 for 2021 compared to 2020 primarily as a result of decreased expenses related to patent litigation.
Operating Income (Loss). We had operating income of $19,586,000 for 2021 compared with an operating loss of $2,413,000 for 2020. The increase in operating income of $21,999,000 for 2021 was primarily due to our increase in revenue of $31,626,000 for 2021 from the resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard.
Interest and Dividend Income. Interest and dividend income for 2021 was $327,000 as compared to interest and dividend income of $522,000 for 2020 which decrease was primarily as a result of a change in the mix of our short-term fixed income investments and cash equivalents.
Income Taxes. In 2021, we had a current tax expense for federal, state and local income taxes of $2,952,000 and a deferred tax expense of $1,508,000. In 2020, we had a deferred tax benefit for federal, state and local income taxes of $490,000 related to the relief of our valuation allowance and a current tax benefit of $464,000 in connection with prior year losses. The difference between 2021 and 2020 was primarily as a result of an increase in operating income for 2021 of $21,999,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of $999,000 for 2021 related to our equity share in ILiAD Biotechnologies, a clinical stage biotechnology company, as compared to a net loss of $787,000 for 2020 as ILiAD Biotechnologies has no revenue from operations and continues to sustain losses (see Note H to our consolidated financial statements included herein).
Net Income (Loss). As a result of the foregoing, we realized a net income of $14,281,000 or $0.59 per share basic and $0.58 diluted for 2021 compared with a net loss of $1,709,000 or $(0.07) per share basic and diluted for 2020. The increase in net income of $15,990,000 during 2021 was primarily due to income associated with our increased revenue of $36,029,000 from the resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard (see Notes K[1] and K[2] to our consolidated financial statements included herein).
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At December 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $59,623,000 and working capital of $55,665,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the next twelve months and for the foreseeable future. Material increases in our liquidity and capital resources are primarily dependent upon litigation outcomes and licensing of our intellectual property as well as whether we will be able to achieve returns on our investment in ILiAD Biotechnologies.
Working capital increased by $12,706,000 at December 31, 2021 to $55,665,000 as compared to working capital of $42,959,000 at December 31, 2020. The increase in working capital of $12,706,000 for 2021 was primarily due to net income of $14,281,000 during 2021.
Net cash provided by (used in) operating activities for 2021 increased by $20,002,000 from $(503,000) for 2020 to $19,499,000 for 2021 primarily due to revenue of $36,029,000 from resolution of our contractual dispute with Cisco and our litigation settlement with Hewlett-Packard during 2021.
Net cash provided by investing activities during 2021 was $2,994,000 as compared to $6,306,000 for 2020 primarily as a result of the differential of purchases and sales of marketable securities and partially offset by our $1,000,000 convertible note investment in ILiAD Biotechnologies (see Note H to our consolidated financial statements included in this Annual Report).
Net cash used in financing activities for 2021 and 2020 was $3,501,000 and $2,885,000, respectively. The change of $616,000 primarily resulted from an increase of $824,000 in repurchases of our common stock offset by a decrease of $147,000 in the value of shares delivered to fund withholding taxes and a decrease of $61,000 in cash dividends paid.
We maintain our cash in money market funds 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, operating lease obligations, or other long-term liabilities.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition, results of operations and cash flows are based on our audited consolidated financial statements which have been prepared in accordance with GAAP. The preparation of our financial statements included in this Annual Report on Form 10-K 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 consolidated financial statements include revenue recognition, contingent legal fees and related expenses, income taxes, valuation of patents and equity method investments. Actual results could be materially different from those estimates, upon which the carrying values were based. See also Note B to our consolidated financial statements included in this Annual Report for full disclosure of our accounting policies.
We believe our most critical accounting policies to be the following:
Revenue Recognition
Under ASC 606, revenue is recognized when we complete the licensing of our intellectual property to our licensees, in an amount that reflects the consideration we expect to be entitled to in exchange for licensing our intellectual property. Revenue from our 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 settlement of litigation related to our assertion of patent infringement involving our intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a “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 us for the life of the licensed patent (a “Royalty Bearing License”).
We recognize revenue from our Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement, and in accordance with the royalty recognition constraint that applies to licenses of IP for which some or all of the consideration is in the form of sales or usage based royalty. Consequently, we recognize revenue at the later of when (1) the subsequent sale occurs or (2) the performance obligation to which some or all of the sales based royalty has been satisfied.
Fully-Paid Licenses provide for a non-refundable up-front payment, for which we have no future obligations or performance requirements, revenue is generally recognized when we have obtained the signed license agreement, all performance obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably assured. Revenue from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
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Costs of Revenue and Related Costs
We include in costs of revenue for the year ended December 31, 2021 and 2020 contingent legal fees payable to patent litigation counsel, any other contractual payments related to net proceeds from settlements (see Note I[1] hereof) and incentive bonus compensation payable to its Chairman and Chief Executive Officer.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements required hereby are located on pages F-1 through F-22 which follow Part III.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | 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 Annual Report on Form 10-K. Based upon this review, our executive officers concluded that, as of the end of the period covered by this Annual Report on Form 10-K, 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.
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| (b) | Internal Control Over Financial Reporting |
| (i) | Management’s Annual Report on Internal Control over Financial Reporting |
Our management is also responsible for establishing and maintaining adequate “internal control over financial reporting” of the Company, as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officer and effected by the board of directors, management and other personnel, 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal controls over financial reporting were effective as of the end of the period covered by this report.
| (ii) | Attestation Report of Registered Public Accounting Firm |
We are a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, and as such, are not required to provide the information contained in this sub-section pursuant to Item 308(b) of Regulation S-K. Accordingly, this Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
| (iii) | Changes in Internal Control over Financial Reporting |
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There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not Applicable
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following information includes information each director and executive officer has given us about his or her age, all positions he or she holds, his or her principal occupation and business experience for at least the past five years, and the names of other publicly-held companies of which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented regarding each director’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that he or she should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen, exercise sound judgment, and a commitment of service to Network-1 and our Board.
Information about the number of shares of our common stock beneficially owned by each executive officer and director appears in this Annual Report under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” beginning on page 44 hereof. There are no family relationships among any of our directors and executive officers.
| NAME | AGE | POSITION |
| Corey M. Horowitz | 67 | Chairman, Chief Executive Officer and Chairman of the Board of Directors |
| David C. Kahn | 70 | Chief Financial Officer, Secretary and a Director |
| Jonathan Greene | 60 | Executive Vice President |
| Emanuel Pearlman | 62 | Director |
| Niv Harizman | 57 | Director |
| Allison Hoffman | 51 | Director |
Corey M. Horowitz has been our Chairman and Chief Executive Officer since December 2003. Mr. Horowitz has also served as Chairman of our Board of Directors since January 1996 and has been a member of our Board of Directors since April 1994. In December 2018, Mr. Horowitz became a member of the Board of Managers of ILiAD Biotechnologies, LLC, a privately held biotechnology company, in connection with our investment in the company (see “Business-Investment in ILiAD Biotechnologies” at page 10 of this Annual Report). Mr. Horowitz is also a member of the Life Sciences Institute Leadership Council at the University of Michigan. We believe Mr. Horowitz’s qualifications to serve on our Board of Directors include his significant experience and expertise as an executive in the intellectual property field, his understanding of our intellectual property and the patent acquisition, licensing and enforcement business combined with his private equity and corporate transactional experience.
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David C. Kahn, CPA, has been our Chief Financial Officer since January 2004 and our Secretary since August 2012. Mr. Kahn was elected to our Board in April 2012. Since December 1989, Mr. Kahn has provided accounting and tax services on a consulting basis to private and public companies. From August 2000 until August 2012, Mr. Kahn served as a full-time faculty member of Yeshiva University in New York. We believe Mr. Kahn’s qualifications to serve on our Board include his background and expertise in accounting and tax matters.
Jonathan Greene became our Executive Vice President in October 2013. He served as a consultant to the Company from December 2004 until March 2013, providing technical and marketing analysis for our intellectual property portfolio. Mr. Greene became an employee of Network-1 in March 2013. From April 2006 to February 2009, Mr. Greene served as a marketing consultant for Avatier Corporation, a developer of identity management software. From August 2003 until December 2004, he served as a consultant to Neartek, Inc., a storage management software company (August 2003 until October 2003) and Kavado Inc., a security software company (November 2003 until December 2004). From January 2003 until July 2003, Mr. Greene served as Director of Product Management for FalconStor Software, Inc. (OTC:FALC), a storage management software company. From December 2001 through December 2002, Mr. Greene served as Senior Vice President of Marketing and Business Development of Network-1, at a time when Network-1 was engaged in the development, marketing and licensing of security software. From December 1999 until September 2001, he served as Senior Vice President of Marketing for Panacya Inc., a vendor of service management software.
Emanuel R. Pearlman has been a member of our Board of Directors since January 2012, where he serves as Chairman of our Audit Committee and a member of our Nominating and Corporate Governance Committee. Mr. Pearlman currently serves as the Chairman and Chief Executive Officer of Liberation Investment Group, a New York based investment management and financial consulting firm, which he founded in January 2003. In March 2022, Mr. Pearlman became a member of the Board of Directors and Chair of the Strategic Review Committee of Red Box Entertainment, Inc. (NASDAQ: RDBX), an entertainment company that provides consumers access to a large variety of content across digital and physical media. In October 2020 and February 2021, Mr. Pearlman became a member of the Board of Directors of Atlas Crest Investment Corp. (NYSE:ACIC) and Atlas Crest Investment Corp. II (NYSE: ACII), each a special purpose acquisition company (SPAC). Mr. Pearlman also serves as Chairman of the Audit Committee and a member of the Compensation Committee and Nomination Governance Committee of both Atlas Crest Investment Corp. and Atlas Crest Investment Corp. II. Mr. Pearlman served as Executive Chairman of Empire Resorts, Inc. (NASDAQ: NYNY) from June 2016 until November 2019, served as Non-Executive Chairman of the Board from September 2010 through May 2016, and served on the Board of Directors from May 2010 to November 2019. Mr. Pearlman was a member of the Board of Directors of CEVA Logistics, AG (SIX:CEVA) from May 2018 until October 2019 and served on its Audit Committee from May 2018 through October 2019 and its Nomination and Governance Committee from May 2018 through May 2019. From June 2013 through May 2018, he served on the Board of Directors of CEVA Holdings, LLC. From May 2017 through September 2017, Mr. Pearlman served on the Board of Directors of ClubCorp Holdings, Inc. (NYSE:MYCC), where he served on the Strategic Review Committee. We believe Mr. Pearlman’s qualifications to serve on our Board include his significant investment and financial experience and expertise combined with his Board experience.
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Niv Harizman has been a director of our company since December 2012. Mr. Harizman is a Managing Member of Tyto Capital Partners LLC, a private investment firm specializing in debt and equity investments in middle market companies and special situations, a position he has held since August 2010. Since March 2010, Mr. Harizman has also been the Managing Member of NHK Partners LLC, an entity that makes private investments and provides consulting services. Since November 2013, Mr. Harizman has been affiliated with Riverside Management Group, a merchant banking firm, and BCW Securities LLC, its affiliated broker-dealer. From May 2005 to March 2010, Mr. Harizman was a Founding Partner and Head of Corporate Finance at Plainfield Asset Management LLC, which was a privately held registered investment adviser focused on alternative investments. From May 2000 until May 2005, Mr. Harizman was a member of the Mergers Acquisitions Group of Credit Suisse First Boston LLC, where he was a Managing Director from 2001-2005 and a Director from 2000 to 2001. From 1995 until 2000, Mr. Harizman was employed by Bankers Trust and its successors including BT Alex. Brown Incorporated and Deutsche Bank in various investment banking positions in the Mergers Acquisitions Group and Leveraged Finance Group. We believe Mr. Harizman’s qualifications to serve on our Board include his significant investment and financial transactional experience and expertise.
Allison Hoffman has been a director of our company since December 2012. Since August 2020, Ms. Hoffman has served as General Counsel of Phreesia, Inc. (NYSE:PHR), a leading provider of software solutions that healthcare organizations use to manage the patient intake process. From January 2016 until August 2020, Ms. Hoffman served as Chief Legal Officer and Chief Administrative Officer at Intersection Parent, Inc., an urban experience company that utilizes technology to make cities better, including bringing free Wi-Fi throughout New York City. From September 2013 to December 2015, Ms. Hoffman served as Executive Vice President, General Counsel and Corporate Secretary of Martha Stewart Living Omnimedia, Inc. (NYSE:MSO), a media and merchandising company providing consumers with high quality life style content and products. From December 2012 until September 2013, she provided legal services to Martha Stewart Living Omnimedia, Inc. From January 2007 until September 2012, Ms. Hoffman served as Senior Vice President, Chief Legal Officer and Secretary of ALM Media, LLC, a leading provider of specialized news and information for the legal and commercial real estate sectors. We believe that Ms. Hoffman’s qualifications to serve on our Board include her extensive legal background and transactional experience.
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Committees of the Board of Directors
Our Board of Directors currently has four standing committees: an Audit Committee; a Compensation Committee; a Nominating and Corporate Governance Committee and a Strategic Development Committee. Each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee has a charter. These charters are available on our website at: http://ir.Network-1.com/governance-docs. Each member of each committee is an “independent” director under the standards of the NYSE American LLC Company Guide. Three of our current five directors, Emanuel Pearlman, Allison Hoffman and Niv Harizman, are considered independent directors under Rule 803A(2) of the NYSE American LLC Company Guide.
Audit Committee
Our Board of Directors has a separately standing audit committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, and Section 803B of the NYSE American Company LLC Guide consisting of Emanuel Pearlman (Chairman) and Allison Hoffman. Emanuel Pearlman and Allison Hoffman each qualify as an audit committee financial expert under applicable SEC rules. Mr. Pearlman and Ms. Hoffman also qualify as “independent” as independence for audit committee members is defined under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 803B(2) of the NYSE American LLC Company Guide.
The Audit Committee is appointed by our Board of Directors to provide assistance to the Board in fulfilling its oversight responsibility with respect to, among other things, (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) selecting and evaluating the qualifications and independence of our independent registered public accounting firm, (iv) evaluating the performance of our internal audit function and independent registered public accounting firm, and (v) our internal controls and procedures.
Compensation Committee
The Compensation Committee consists of Allison Hoffman (Chairperson) and Niv Harizman. The Compensation Committee is appointed by our Board of Directors to assist the Board in carrying out its responsibilities relating to compensation of our executive officers and directors. The Committee has overall responsibility for evaluating and approving the officer and director compensation plans, policies and our programs.
Nominating and Corporate Governance Committee
Our Board has a Nominating and Corporate Governance Committee consisting of Niv Harizman (Chairman) and Emanuel Pearlman. The Nominating and Corporate Governance Committee is responsible for, among other things, developing and recommending to the Board a set of corporate governance policies for the Company, establishing criteria for selecting new directors, and identifying, screening and recruiting new directors. The Committee also recommends to the Board nominees for directors and recommends directors for committee membership to the Board.
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Strategic Development Committee
We also have a Strategic Development Committee to assist our Chairman and Chief Executive Officer in strategic development and planning of our business relating to identifying potential strategic partners, the acquisition of new IP and other acquisition opportunities. The Committee also assists in capital markets related activities. Niv Harizman is the sole member of the Strategic Development Committee.
Code of Ethics
We have adopted a Code of Ethics that applies to our executive officers, directors and employees. Copies of the Code of Ethics may be obtained, without charge, upon written request addressed to: Network-1 Technologies, Inc., 65 Locust Avenue, New Canaan, Connecticut 06840, Attn: Chief Executive Officer.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes compensation for the years ended December 31, 2021 and December 31, 2020, awarded to, earned by or paid to our Chief Executive Officer (“CEO”) and to each of our executive officers who received total compensation in excess of $100,000 for the year ended December 31, 2021 for services rendered in all capacities to us (collectively, the “Named Executive Officers”).
Summary Compensation Table
| Name
and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards($)(3) | All
Other Compensation($)(1) | Total($) | |||||||||||||||||
| Corey M. Horowitz | 2021 | $ | 535,000 | $ | 1,976,000 | (2) | $ | — | $ | 38,500 | (4) | $ | 2,549,500 | ||||||||||
Chairman and Chief Executive Officer | 2020 | $ | 527,000 | $ | 345,000 | (2) | $ | — | $ | 81,250 | (4) | $ | 953,250 | ||||||||||
| David C. Kahn | 2021 | $ | 175,000 | $ | 22,500 | $ | — | (3) | $ | 29,291 | (5) | $ | 226,791 | ||||||||||
| Chief Financial Officer | 2020 | $ | 175,000 | $ | 15,000 | $ | 25,200 | (3) | $ | 34,828 | (5) | $ | 250,028 | ||||||||||
| Jonathan Greene | 2021 | $ | 200,000 | $ | 40,000 | $ | — | (3) | $ | 36,120 | (6) | $ | 276,120 | ||||||||||
| Executive Vice President | 2020 | $ | 200,000 | $ | 25,000 | $ | 33,600 | (3) | $ | 43,000 | (6) | $ | 301,600 | ||||||||||
__________________________
| (1) | We have concluded that the aggregate amount of perquisites and other personal benefits paid in 2021 and 2020 to either Mr. Horowitz, Mr. Kahn or Mr. Greene did not exceed $10,000. |
| (2) | Mr. Horowitz received the following cash incentive bonus payments for 2021: (i) an annual discretionary bonus of $175,000 and (ii) incentive bonus compensation of $1,801,000 pursuant to his employment agreement (see “Employment Agreements-Termination of Employment and Change In-Control Arrangements” below). Mr. Horowitz received the following cash incentive bonus payments for 2020: (i) an annual discretionary bonus of $125,000 and (ii) incentive bonus compensation of $220,000 pursuant to his employment agreement. |
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| (3) | The amounts in this column represent the aggregate grant date fair value of restricted stock units awards granted to the Named Executive Officers computed in accordance with FASB ASC Topic 718. In accordance with SEC rules, the grant date fair value of an award that is subject to a performance condition is based on the probable outcome of the performance condition. See Note B[10] to our consolidated financial statements included in this Annual Report for a discussion of the assumptions made by the Company in determining the grant date fair value. |
| (4) | Includes 401 (k) matching funds contributions by the Company and profit sharing under the Company's 401 (k) Plan for the benefit of Mr. Horowitz of $38,500 for 2021 and $37,500 for 2020, respectively. Also includes dividends (dividend equivalent rights) on restricted stock units owned by Mr. Horowitz for 2021 of $-0- and 2020 of $43,750. |
| (5) | Includes 401 (k) matching funds contributions by the Company and profit sharing under the Company's 401 (k) Plan for the benefit of Mr. Kahn of $28,728 for 2021 and $30,453 for 2020. Also includes dividends (dividend equivalent rights) on restricted stock units owned by Mr. Kahn for 2021 and 2020 of $563 and $4,375, respectively. |
| (6) | Represents 401 (k) matching funds contributions by the Company and profit sharing under the Company's 401 (k) Plan for the benefit of Mr. Greene of $35,201 for 2021 and $37,500 for 2020. Also includes dividends (dividend equivalent rights) on restricted stock units owned by Mr. Greene for 2021 and 2020 of $919 and $5,500, respectively. |
Narrative Disclosure to Summary Compensation Table
Employment Agreements, Termination of Employment and Change-In-Control Arrangements
On March 22, 2022, we entered into a new employment agreement (“Agreement”) with Corey M. Horowitz, our Chairman and Chief Executive Officer, pursuant to which he continues to serve as our Chairman and Chief Executive Officer for a four year term (“Term”), at an annual base salary of $535,000 which shall be increased by 3% per annum during the Term. The Agreement established an annual target bonus of $175,000 for our Chairman and Chief Executive Officer based upon performance. During the year ended December 31, 2021 and December 31, 2020, our Chairman and Chief Executive Officer received an annual discretionary bonus of $175,000 and $125,000, respectively.
In addition, pursuant to the Agreement, we granted to our Chairman and Chief Executive Officer, under our 2013 Plan, 600,000 restricted stock units (the “RSUs”, each RSU awarded by us to our officers, directors and consultants represents a contingent right to receive one share of our common stock) which terms provided for vesting in four tranches, as follows: (1) 175,000 RSUs which shall vest 100,000 RSUs on March 22, 2023 and 75,000 RSUs on March 22, 2024, subject to Mr. Horowitz’s continued employment by us through each such vesting date (the “Employment Condition”) (“Tranche 1”); (2) 150,000 RSUs shall vest if at any time during the Term our common stock (the “Common Stock”) achieves a closing price for twenty (20) consecutive trading days (“Closing Price”) of a minimum of $3.50 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 2”); (3) 150,000 RSUs shall vest if at any time during the Term of the Agreement our Common Stock achieves a Closing Price (as defined above) of a minimum of $4.00 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 3”); and (4) 125,000 RSUs shall vest if at any time during the term of the Agreement, our Common Stock achieves a Closing Price of a
| -40- |
minimum of $4.50 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 4”). In the event of a Change of Control (as defined), Termination Other Than for Cause (as defined) or a termination by you for Good Reason (as defined) in each case prior to the last day of the Term, the vesting of all RSUs (Tranches 1, 2, 3 and 4) shall accelerate (and not be subject to any conditions) and all RSUs shall become immediately fully vested. All RSUs granted by us to our officers, directors or consultants have dividend equivalent rights.
Under the terms of the Agreement, so long as Mr. Horowitz continues to serve as an executive officer of the Company, whether pursuant to the Agreement or otherwise, Mr. Horowitz shall also receive incentive compensation in an amount equal to 5% of our gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to our 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 our royalties and other payments relating to Licensing Activities with respect to patents other than our Remote Power Patent (including all of our existing patent portfolios and our investment in ILiAD Biotechnologies) (collectively, the “Incentive Compensation”). During the year ended December 31, 2021 and December 31, 2020, Mr. Horowitz earned Incentive Compensation of $1,801,000 and $220,000, respectively.
The Incentive Compensation shall continue to be paid to Mr. Horowitz for the life of each of our patents with respect to licenses entered into with third parties during the Term or at any time thereafter, whether he is employed by us or not; provided, that, the employment of Mr. Horowitz has not been terminated by us “For Cause” (as defined) or terminated by him without “Good Reason” (as defined). In the event of a merger or sale of substantially all of our assets, we have the option to extinguish the right of Mr. Horowitz to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to such value. In the event that Mr. Horowitz’s employment is terminated by us “Other Than For Cause” (as defined) or by him for “Good Reason” (as defined), Mr. Horowitz shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated portion of the $175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and (iii) accelerated vesting of all unvested options, RSUs or other awards.
In connection with the Agreement, Mr. Horowitz has also agreed not to compete with us as follows: (i) during the Term and for a period of 12 months thereafter if his employment is terminated “Other Than For Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two years from the termination date, if terminated “For Cause” by us or “Without Good Reason” by Mr. Horowitz.
| -41- |
David Kahn serves as our Chief Financial Officer on an at-will basis at a current annual base salary of $175,000. Mr. Kahn received a discretionary annual bonus of $22,500 for 2021 and $15,000 for 2020. On December 29, 2020, Mr. Kahn was granted 7,500 RSUs under the 2013 Plan, 50% of such RSUs vested on the one year anniversary of the grant (December 29, 2021) and 50% of such RSUs vest on the two year anniversary of the grant (December 29, 2022) subject to his continued employment. In addition, in the event Mr. Kahn’s employment is terminated without “Good Cause” (as defined), he shall receive (i) (a) 6 months base salary or (b) 12 months base salary in the event of a termination without “Good Cause” within 6 months following a “Change of Control” of the Company (as defined) and (ii) accelerated vesting of all remaining unvested shares underlying his options, RSUs or any other awards he may receive in the future.
Jonathan Greene serves as our Executive Vice President on an at-will basis at an annual base salary of $200,000. Mr. Greene received a discretionary annual bonus of $40,000 for 2021 and $25,000 in 2020. On December 29, 2020, Mr. Greene was granted 10,000 RSUs under the 2013 Plan, 50% of such RSUs vest on the one year anniversary of the date of grant (December 29, 2021) and 50% of such RSUs vest on the two year anniversary of the grant (December 29, 2022) subject to his continued employment. On January 18, 2022, Mr. Greene was granted 15,000 RSUs under the 2013 Plan, 50% of such RSUs vest on the one year anniversary of the date of grant (January 18, 2023) and 50% of such RSUs vest on the two year anniversary of the grant (January 18, 2024).
Profit Sharing 401(k) Plan
We offer all employees who have completed a year of service (as defined) participation in a 401(k) retirement savings plan, 401(k) plans provide a tax-advantaged method of saving for retirement. We expensed matching contributions and profit sharing of $102,500 and $105,500 under the 401(k) plan for the years ended December 31, 2021 and 2020, respectively.
Director Compensation
In 2021, we compensated each non-management director of our Company by granting to each such outside director 15,000 RSUs. The RSUs vested in equal amounts of 3,750 RSUs on each of March 15, 2021, June 15, 2021, September 15, 2021 and December 15, 2021. In addition, we pay our non-management directors cash director fees of $40,000 per annum ($10,000 per quarter). Non-management directors also receive additional cash compensation on an annual basis for serving on the following Board committees: The Audit Committee Chairperson receives $7,500 and members receive $5,000; the Chairperson and members of each of the Compensation Committee and Nominating and Corporate Governance Committee receive annual fees of $3,750 and $2,500, respectively.
In consideration for serving as the sole member of our Strategic Development Committee, in June 2013 we issued to Niv Harizman a five-year stock option to purchase 300,000 shares of our common stock, at an exercise price of $1.88 per share and such option was exercised in full in June 2018.
| -42- |
The following table sets forth the compensation awarded to, earned by or paid to all persons who served as members of our board of directors (other than our Named Executive Officers) during the year ended December 31, 2021. No director who is also a Named Executive Officer received any compensation for services as a director in 2021.
Name |
Fees
earned or |
Stock Awards ($)(2) (3) |
All
other |
Total ($) | ||||
| Emanuel Pearlman | $ 50,000 | $ 46,988 | $ 1,125 | $ 98,113 | ||||
| Niv Harizman | $ 46,250 | $ 46,988 | $ 1,125 | $ 94,363 | ||||
| Allison Hoffman | $ 48,830 | $ 46,988 | $ 1,125 | $ 96,943 |
___________________________
| (1) | Represents directors’ fees payable in cash to each non-management director of $10,000 per quarter ($40,000 per annum) for 2021 plus additional cash fees for serving on Board committees as disclosed above. |
| (2) | The amounts included in this column represent the grant date fair value of restricted stock unit awards (RSUs) granted to directors, computed in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions see Note B[10] to our consolidated financial statements included in this Annual Report. The 15,000 RSUs granted to each non-management director vested on a quarterly basis beginning March 15, 2021. Each restricted stock unit represents the contingent right to receive one share of common stock. |
| (3) | As of December 31, 2021, no stock options were owned by any of the above listed directors. |
| (4) | Includes payment of dividends (dividend equivalent rights) on RSUs for 2021. |
Outstanding Equity Awards at December 31, 2021
The following table sets forth information relating to unexercised options and unvested restricted stock units for each Named Executive Officer as of December 31, 2021:
Option Awards |
Stock Awards | |||||
Name |
|
Option
Exercise |
Option
Expiration |
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested |
Equity incentive plan awards: Market value of unearned shares, units or other rights that have not vested(1) ($) | |
|
Unexercisable | |||||
Corey M. Horowitz Chairman and CEO
|
500,000
|
—
|
$1.19
|
11/01/22
|
— | $ — |
David Kahn Chief Financial Officer
|
—
|
— | —
|
—
|
3,750(2) | $10,575 |
Jonathan Greene Executive Vice President |
—
|
— | —
|
—
|
5,000(3) | $14,100 |
_________________________________
| (1) | In accordance with SEC rules, market value is based on $2.82 per share representing the closing price of our common stock on the last trading day of the year. |
| (2) | Represents 3,750 restricted stock units, which vest on December 29, 2022, subject to Mr. Kahn’s continued employment by us. |
| (3) | Represents 5,000 restricted stock units, which vest on December 29, 2022, subject to Mr. Greene’s continued employment by us. |
| -43- |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information regarding the beneficial ownership of our common stock as of March 15, 2022 for (i) each of our directors, (ii) each of our executive officers, (iii) each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, and (iv) all of our executive officers and directors as a group.
NAME AND ADDRESS OF BENEFICIAL OWNER |
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)(2) |
PERCENTAGE OF COMMON STOCK BENEFICIALLY OWNED(2) | ||||||
Executive Officers and Directors: Corey M. Horowitz(3) |
7,016,751 |
28.8% |
||||||
| CMH Capital Management Corp(4) | 2,291,372 | 9.6% | ||||||
| Niv Harizman(5) | 275,985 | 1.2% | ||||||
| David C. Kahn(6) | 116,053 | * | ||||||
| Allison Hoffman(7) | 105,811 | * | ||||||
| Emanuel Pearlman (8) | 102,059 | * | ||||||
| Jonathan E. Greene(9) | 85,717 | * | ||||||
| All
officers and directors as a group (6 Persons) |
7,702,376 | 31.6% | ||||||
| 5% Stockholders: | ||||||||
| Steven D. Heinemann(10) | 1,961,201 | 8.2% | ||||||
| Goose Hill Capital LLC(11) | 1,376,068 | 5.8% | ||||||
_____________________________________
* Less than 1%.
| (1) | Unless otherwise indicated, we believe that all persons named in the above table have sole voting and investment power with respect to all shares of our common stock beneficially owned by them. Unless otherwise indicated the address for each listed beneficial owner is c/o Network-1 Technologies, Inc., 65 Locust Avenue, New Canaan, Connecticut 06840. |
| (2) | A person is deemed to be the beneficial owner of shares of common stock that can be acquired by such person within 60 days from March 15, 2022 upon the exercise of stock options or restricted stock units that vest within such 60 day period. Each beneficial owner's percentage ownership is determined by assuming that all stock options and restricted stock units held by such person (but not those held by any other person) and which are exercisable or vest within 60 days from March 15, 2022 have been exercised or vested. Assumes a base of 23,883,024 shares of our common stock outstanding as of March 15, 2022. |
| -44- |
| (3) | Includes (i) 3,703,368 shares of common stock held by Mr. Horowitz, (ii) 500,000 shares of common stock subject to currently exercisable stock options held by Mr. Horowitz, (iii) 2,157,097 shares of common stock held by CMH Capital Management Corp., an entity solely owned by Mr. Horowitz, (iv) 134,275 shares of common stock owned by the CMH Capital Management Corp. Profit Sharing Plan, of which Mr. Horowitz is the trustee, (v) 67,470 shares of common stock owned by Donna Slavitt, the wife of Mr. Horowitz, (vi) an aggregate of 452,250 shares of common stock held by two trusts and a custodian account for the benefit of Mr. Horowitz’s three children, and (vii) 2,291 shares of common stock held by Horowitz Partners, a general partnership of which Mr. Horowitz is a partner. |
| (4) | Includes 2,157,097 shares of common stock owned by CMH Capital Management Corp. and 134,275 shares of common stock owned by CMH Capital Management Corp. Profit Sharing Plan. Corey M. Horowitz, by virtue of being the sole officer, director and shareholder of CMH Capital Management Corp. and the trustee of the CMH Capital Management Corp. Profit Sharing Plan, has the sole power to vote and dispose of the shares of common stock owned by CMH Capital Management Corp. and the CMH Capital Management Corp. Profit Sharing Plan. |
| (5) | Includes (i) 275,985 shares of common stock. Does not include 11,250 shares of common stock subject to restricted stock units owned by Mr. Harizman that do not vest within 60 days from March 15, 2022. |
| (6) | Includes 116,053 shares of common stock. Does not include 3,750 shares of common stock subject to restricted stock units owned by Mr. Kahn that do not vest within 60 days from March 15, 2022. |
| (7) | Includes (i) 105,811 shares of common stock. Does not include 11,250 shares of common stock subject to restricted stock units owned by Ms. Hoffman that do not vest within 60 days from March 15, 2022. |
| (8) | Includes (i) 102,059 shares of common stock. Does not include 11,250 shares of common stock subject to restricted stock units owned by Mr. Pearlman that do not vest within 60 days from March 15, 2022. |
| (9) | Includes 85,717 shares of common stock. Does not include 20,000 shares of common stock subjected to restricted stock units owned by Mr. Greene that do not vest within 60 days from March 15, 2022. |
| (10) | Includes 585,133 shares of common stock owned by Mr. Heinemann and 1,376,068 shares of common stock owned by Goose Hill Capital LLC. Goose Hill Capital LLC is a limited liability company of which Mr. Heinemann is the sole member. Mr. Heinemann, by virtue of being the sole member of Goose Hill Capital LLC, has the sole power to vote and dispose of the shares of common stock owned by Goose Hill Capital LLC. The aforementioned beneficial ownership is based upon Amendment No. 9 to Schedule 13G filed by Mr. Heinemann with the SEC on February 4, 2022. The address for Mr. Heinemann is c/o Goose Hill Capital, LLC, 12378 Indian Road, North Palm Beach, Florida 33408. |
| (11) | Includes 1,376,068 shares of common stock. Steven D. Heinemann, by virtue of being the sole member of Goose Hill Capital LLC, has the sole power to vote and dispose of the shares of common stock owned by Goose Hill Capital LLC. The aforementioned beneficial ownership is based upon Amendment No. 9 to Schedule 13G filed by Mr. Heinemann with the SEC on February 4, 2022. The address for Goose Hill Capital LLC is 12378 Indian Road, North Palm Beach, Florida 33408. |
| -45- |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
On May 27, 2021, we repurchased from Emanuel Pearlman, a director of the Company, 40,000 shares of its common stock at a purchase price of $3.27 per share for an aggregate purchase price of $130,800.
Review, Approval or Ratification of Transactions with Related Persons
The Audit Committee has responsibility for reviewing and approving related-persons transactions in accordance with its charter. A related person is any executive officer, director, nominee for director or more than 5% stockholder of the Company, including immediate family members, and any entity owned or controlled by such persons. In addition, pursuant to our Codes of Ethics, all of our officers, directors and employees are to avoid conflicts of interest and to refrain from taking part or exercising influence in any transaction in which such party’s personal interest may conflict with the best interest of the Company. Except for provisions of the Audit Committee Charter, there are no written procedures governing review of related-persons transactions.
Director Independence
Three of our five directors, Emanuel Pearlman, Niv Harizman and Allison Hoffman, are considered independent directors in compliance with the standard of independence in Section 803A(2) of the NYSE American LLC Company Guide.
| -46- |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Friedman LLP, our independent registered public accounting firm, billed us aggregate fees of $135,535 and $125,211 for the years ended December 31, 2021 and December 31, 2020, respectively, for the audit of our annual financial statements, review of our financial statements included in our Form 10-Qs and for other services in connection with statutory or regulatory filings.
Audit Related Fees, Tax Fees and All Other Fees
Friedman LLP provided various tax compliance services for which it billed us $22,890 and $33,577, respectively, for the years ended December 31, 2021 and December 31, 2020. Friedman LLP did not render any other professional services other than those discussed above for 2021 and 2020.
Audit Committee Pre-Approval Policies and Procedures
Our audit committee charter provides that our audit committee must comply with SEC rules to maintain auditor independence as set forth in Rule 2-01(c)(7)(i) of Regulation S-X. The Audit Committee has a policy to pre-approve all audit and permissible non-audit services to be provided by our independent registered public accounting firm. All the services above were approved in advance by our Board of Directors.
| -47- |
NETWORK-1 TECHNOLOGIES, INC.
|
Index to Consolidated Financial Statements |
PAGE |
| Report of Independent Registered Public Accounting Firm (PCAOB Firm ID #711) | F-1 |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | F-2 |
| Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020 | F-3 |
| Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2021 and 2020 | F-4 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 | F-5 |
| Notes to Consolidated Financial Statements | F-6 |
| -48- |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Network-1 Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Network-1 Technologies, Inc. and Subsidiary (“the Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years ended December 31, 2021 and 2020, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are not critical audit matters.
/s/
We have served as the Company’s auditor since 2014.
March 30, 2022
| F-1 |
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2021 | 2020 | |||||||
| ASSETS: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities, at fair value | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Deferred tax assets, net | ||||||||
| Patents, net of accumulated amortization | ||||||||
| Equity investment | ||||||||
| Convertible note investment | ||||||||
| Security deposits | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Income taxes payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued contingency fees and related costs | ||||||||
| Accrued payroll | ||||||||
| Other accrued expenses | ||||||||
| Total Current Liabilities | $ | $ | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $ par value; authorized shares; issued and outstanding at December 31, 2021 and December 31, 2020 | ||||||||
Common stock, $ par value; authorized shares; and shares issued and outstanding at December 31, 2021 and December 31, 2020, 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 consolidated financial statements
| F-2 |
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended | ||||||||
2021 | 2020 | |||||||
| REVENUE | $ | $ | ||||||
| OPERATING EXPENSES: | ||||||||
| Costs of revenue | ||||||||
| Professional fees and related costs | ||||||||
| General and administrative | ||||||||
| Amortization of patents | ||||||||
| Stock-based compensation | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING INCOME (LOSS) | ( | ) | ||||||
OTHER INCOME | ||||||||
| Interest and dividend income, net | ||||||||
| Net realized and unrealized gain (loss) on marketable securities | ( | ) | ||||||
| Total other income, net | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES AND SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | ( | ) | ||||||
| INCOME TAXES PROVISION (BENEFIT): | ||||||||
| Current | ( | ) | ||||||
| Deferred taxes, net | ( | ) | ||||||
| Total income taxes (benefit) | ( | ) | ||||||
INCOME (LOSS) BEFORE SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE: | ( | ) | ||||||
SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE
| $ |
( | ) | $ | ( | ) | ||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| Net Income (Loss) Per Share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Cash dividends declared per share | $ | $ | ||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Net unrealized holding loss on corporate bonds and notes arising during the year, net of tax | ( | ) | ( | ) | ||||
| COMPREHENSIVE INCOME (LOSS) | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements
| F-3 |
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated
Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||
| Balance – January 1, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Cashless exercise of options | ||||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Treasury shares purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net unrealized loss on corporate bonds and notes | — | ( | ) | ( | ) | |||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-4 |
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years
Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Amortization of patents | ||||||||
| Stock-based compensation | ||||||||
| Loss from equity investment | ||||||||
| Deferred tax expense (benefit) | ( | ) | ||||||
| Amortization of right of use asset | ||||||||
| Unrealized (gain) loss on marketable securities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Royalty receivables | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Income taxes payable | ||||||||
| Security deposit | ||||||||
| Operating lease obligations | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | ||||||||
| Purchases of marketable securities | ( | ) | ( | ) | ||||
| Development of patents | ( | ) | ( | ) | ||||
| Convertible note investment | ( | ) | ||||||
NET CASH PROVIDED BY 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 IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of year | ||||||||
| CASH AND CASH EQUIVALENTS, end of year | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the years for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| NON-CASH FINANCING ACTIVITY | ||||||||
| Accrued dividend rights on restricted stock units | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-5 |
NETWORK-1 TECHNOLOGIES, INC.
Note A – Business
Network-1
Technologies, Inc. (the “Company”) is engaged in the development, licensing and protection of its intellectual property assets.
The Company presently owns ninety-five (
Until
March 7, 2020, when the Remote Power Patent expired, the Company had been actively engaged in licensing its Remote Power Patent (U.S.
Patent No. 6,218,930). As of March 7, 2020, the Company had twenty-seven (27) license agreements with respect to its Remote Power Patent.
As a result of the expiration of the Remote Power Patent, the Company no longer receives licensing revenue for its Remote Power Patent
for any period subsequent to the expiration date (March 7, 2020). However, subsequent to the expiration date of the Remote Power Patent,
the Company received licensing revenue from certain licensees for periods prior to March 7, 2020. On March
30, 2021, the Company entered into an amendment (the “Amendment”) to the Settlement and License Agreement, dated May 25,
2011, between the Company and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco paid $
The Company’s current strategy includes continuing to pursue licensing opportunities for its intellectual property assets. In addition, the Company continually 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.
| F-6 |
NETWORK-1 TECHNOLOGIES, INC.
Note B – Summary of Significant Accounting Policies
| [1] | Principles of Consolidation |
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiary, Mirror Worlds Technologies, LLC. All intercompany transactions and balances are eliminated in consolidation.
| [2] | Use of Estimates and Assumptions |
The preparation of the 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 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 consolidated financial statements include revenue recognition, contingent legal fees and related costs, income taxes, valuation of patents and equity method investments, including evaluation of the Company’s basis difference. Actual results could be materially different from those estimates, upon which the carrying values were based.
| [3] | Cash and Cash Equivalents |
The
Company maintains cash deposits in high quality financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC").
Accounts at each institution are insured by the FDIC up to $
The Company considers all highly liquid short-term investments, including certificates of deposit and money market funds, that are purchased with an original maturity of three months or less to be cash equivalents.
| [4] | Marketable Securities |
The
Company’s marketable securities are comprised of certificates of deposit with original maturity greater than three months from
date of purchase, fixed income mutual funds, and corporate bonds and notes (see Note G). At December 31, 2021 and December 31, 2020,
included in marketable securities, the Company had aggregate certificates of deposit of $ and $
| [5] | 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 follow 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. |
| F-7 |
NETWORK-1 TECHNOLOGIES, INC.
Note B – Summary of Significant Accounting Policies (continued)
Revenue disaggregated by source is as follows:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Fully-Paid Licenses | $ | (1) | $ | |||||
| Royalty Bearing Licenses | (2) | (3) | ||||||
| Total Revenue | $ | $ | ||||||
__________________________
| (1) |
| (2) |
| (3) |
The Company relied on royalty reports received from third party licensees to record its revenue. From time to time, the Company may audit or otherwise dispute royalties reported from licensees. Any adjusted royalty revenue as a result of such audits or dispute is recorded by the Company in the period in which such adjustment is agreed to by the Company and the licensee or otherwise determined.
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 settlement of litigation 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 (a “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 (a “Royalty Bearing License”).
The Company’s license agreements, both Fully-Paid Licenses and Royalty Bearing Licenses, typically include some combination of the following: (i) the grant of a non-exclusive license to manufacture and/or sell products covered by its patented technologies; (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted pursuant to these licenses typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company typically has no further performance obligations with respect to the grant of the non-exclusive licenses. Generally, the license agreements provide for the grant of the licenses, releases, and other obligations following execution of the agreement and the receipt of the up-front lump sum payment for a Fully-Paid License or a license initiation fee for a Royalty Bearing License.
The Company recognizes revenue from their Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement, and in accordance with the royalty recognition constraint that applies to licenses of IP for which some or all of the consideration is in the form of sales or usage based royalty. Consequently, the Company recognizes revenue at the later of when (1) the subsequent sale occurs or (2) the performance obligation to which some or all of the sales based royalty has been satisfied.
Non-Refundable Up-Front Fees: Fully-Paid Licenses provide for a non-refundable up-front payment, for which the Company has no future obligations or performance requirements, revenue is generally recognized when the Company has obtained the signed license agreement, all performance obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably assured. Revenue from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
| F-8 |
NETWORK-1 TECHNOLOGIES, INC.
Note B – Summary of Significant Accounting Policies (continued)
| [6] | 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 H 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. 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.
| [7] | Patents |
The Company owns patents that relate to various technologies. The Company capitalizes the costs associated with acquisition, registration and maintenance of its acquired patents and amortizes these assets over their remaining useful lives on a straight-line basis. Any further payments made to maintain or develop the patents would be capitalized and amortized over the balance of the useful life for the patents.
| [8] | Costs of Revenue and Related Costs |
The Company includes in costs of revenue for the year ended December 31, 2021 and 2020 contingent legal fees payable to patent litigation counsel, any other contractual payments related to net proceeds from settlements (see Note I[1] hereof) and incentive bonus compensation payable to its Chairman and Chief Executive Officer.
During
the year ended December 31, 2020, the Company had a change in estimate related to accrued contingency fees and related costs. The change
was the result of the Company receiving new information reflecting additional legal costs in connection with certain contingent litigation.
The effect of this change in estimate for the year ended December 31, 2020 was an increase in professional fees and related costs of
$
| [9] | 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.
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 December 31, 2021 and 2020.
| F-9 |
NETWORK-1 TECHNOLOGIES, INC.
Note B – Summary of Significant Accounting Policies (continued)
U.S. federal, state and local income tax returns prior to 2018 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.
| [10] | Stock-Based Compensation |
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires all stock-based compensation to employees, including grants of employee stock options and restricted stock units, to be recognized in the consolidated statements of operations and comprehensive income based on their grant date fair values.
Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of options granted. The fair value of restricted stock units is determined based on the number of shares underlying the grant and either the quoted market price of the Company’s common stock on the date of grant for time-based and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model for market-based awards.
| [11] | Earnings Per Share |
The Company reports earnings per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and options to purchase common stock were exercised and shares were issued pursuant to outstanding restricted stock units. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share.
| [12] | Fair Value Measurements |
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that are supported by little or no market activity; therefore, the inputs are developed by the Company using estimates and assumptions that the Company expects a market participant would use, including pricing models, discounted cash flow methodologies, or similar techniques.
The carrying value of the Company’s financial instruments, including cash and cash equivalents, royalty receivable, other assets, accounts payable, and accrued expenses approximates fair value because of the short-term nature of these financial instruments.
| F-10 |
NETWORK-1 TECHNOLOGIES, INC.
Note B – Summary of Significant Accounting Policies (continued)
The Company’s marketable securities are classified within Level 1 because they are valued using quoted market prices in an active market.
The Company’s equity investment in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held development stage biotechnology company, is measured on a non-recurring basis and is classified within Level 3 as it is valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity.
| [13] | Carrying Value, Recoverability and Impairment of Long-Lived Assets |
An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. If an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. At December 31, 2021 and 2020, there was no impairment to the Company’s patents and equity investment.
The Company’s equity investment in ILiAD is evaluated on a non-recurring basis for impairment, when and if a triggering event occurs.
| [14] | Dividend Policy |
Cash dividends are recorded when declared by the Company’s Board of Directors. Common stock dividends are charged against retained earnings when declared or paid (see Note O hereof).
| [15] | New Accounting Standards |
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the interim period and making improvements for income taxes related to employee stock ownership plans. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. The adoption of this standard did not have a material effect on its consolidated financial statements.
Equity Securities
In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The ASU amends and clarifies certain interactions between the guidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability of the accounting for these interactions. The amendments in the ASU should be applied on a prospective basis. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
| F-11 |
NETWORK-1 TECHNOLOGIES, INC.
Note C – Patents
The
Company’s intangible assets at December 31, 2021 include patents with estimated remaining economic useful lives ranging from
2021 | 2020 | |||||||
| Gross carrying amount | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Patents, net | $ | $ | ||||||
Amortization
expense for the years ended December 31, 2021 and 2020 was $
| For the years ended December 31, | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 and thereafter | |||||
| Total | $ | ||||
The
Company’s Remote Power Patent expired on March 7, 2020. All patents within our Mirror Worlds Patent Portfolio and QoS Patents have
also expired. All patents within the Cox Patent Portfolio expired in September 2021 except for two patents which expire in
Basic Income (Loss) per share is calculated by dividing the net income (loss) by the weighted average number of outstanding common shares during the period. Diluted per share data included the dilutive effects of stock options and restricted stock units. Potential shares of and at December 31, 2021 and 2020, respectively, consist of options and restricted stock units. Computations of basic and diluted weighted average common shares outstanding are as follows:
| 2021 | 2020 | |||||||
| Weighted-average common shares outstanding – basic | ||||||||
Dilutive effect of stock options and restricted stock units |
| |||||||
| Weighted-average common shares outstanding – diluted | ||||||||
| Stock option and restricted stock units excluded from the computation of diluted income per share because the effect of inclusion would have been anti-dilutive | ||||||||
| F-12 |
NETWORK-1 TECHNOLOGIES, INC.
Note E – Income Taxes
Significant components of the income taxes were as follows for the years ended December 31, 2021 and 2020.
| 2021 | 2020 | |||||||
| Current | ||||||||
| State and local | $ | $ | ( | ) | ||||
| Federal | ( | ) | ||||||
| Total Current Tax Expense (Benefit) | $ | $ | ( | ) | ||||
| Deferred | ||||||||
| State and local | ( | ) | ||||||
| Federal | ( | ) | ||||||
| Total Deferred Tax Expense (Benefit) | ( | ) | ||||||
| Total Income Taxes | $ | $ | ( | ) | ||||
Significant components of deferred tax assets as of December 31, 2021 and 2020 consisted of the following:
| Schedule of components of deferred tax assets | 2021 | 2020 | ||||||
Deferred tax assets (liability): | $ | $ | ||||||
| Deferred Tax Liability(1) | ( | ) | ( | ) | ||||
| Total deferred tax assets (liability) | $ | ( | ) | $ | ||||
_________________________
| (1) |
There
was
The reconciliation between the taxes as shown and the amount that would be computed by applying the statutory federal income tax rate to the net income before income taxes is as follows:
| Years Ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
| Income tax - statutory rate | % | % | ||||||
| Permanent difference | % | ( | )% | |||||
| State and other | % | % | ||||||
| Valuation allowance on deferred tax assets | % | % | ||||||
| Total | % | % | ||||||
While only the tax returns for the three years ended prior to December 31, 2021 are open for examination for taxes payable for those years, tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent that they generated loss carry-forwards that are available for those future years.
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. 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
| F-13 |
NETWORK-1 TECHNOLOGIES, INC.
Note E – Income Taxes (continued)
and rents (the “Income Test”). During the second half of 2021, based on available information concerning the Company’s shareholder ownership, the Company did not satisfy the Ownership Test and thus the Company was not a PHC for 2021. If the Company were to become a PHC in any future year, we would be subject to an additional 20% tax on our 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 additional 20% tax.
Note F – Stockholders’ Equity
The 2013 Stock Incentive Plan (“2013 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. Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as provided, the 2013 Plan provides for an aggregate of 2,600,000 shares of the Company’s common stock to be available for distribution. The Company’s Compensation Committee generally has the authority to administer the 2013 Plan, determine participants who will be granted awards, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2013 Plan may be granted to employees, directors and consultants of the Company and its subsidiaries. As of December 31, 2021, there were shares of common stock available for issuance under the 2013 Plan.
| [1] | Restricted Stock Units |
A summary of restricted stock units granted during the years ended December 31, 2021 and December 31, 2020 is as follows (each restricted stock unit represents the contingent right to receive one share of the Company’s common stock):
| 2021 | 2020 | |||||||||||||||
Number of Shares | Weighted-Average
Grant Date Fair Value | Number of Shares | Weighted-Average
Grant Date Fair Value | |||||||||||||
| Balance of restricted stock units outstanding at beginning of year | $ | $ | ||||||||||||||
| Grants of restricted stock units | ||||||||||||||||
| Vested restricted stock units(1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance of restricted stock units outstanding at end of year | $ | $ | ||||||||||||||
| __________________________ |
(1) Includes 125,000 shares of common stock subject to restricted stock units owned by the Company’s Chairman and Chief Executive Officer which vested on July 14, 2021 and settled on March 11, 2022.
Restricted stock unit compensation expense was $ for the year ended December 31, 2021 and $ for the year ended December 31, 2020.
The Company has an aggregate of $of unrecognized restricted stock unit compensation expense as of December 31, 2021 to be expensed over a weighted average period of years.
The fair value of restricted stock units is determined based on the number of shares granted and the quoted market price of the Company’s common stock on the date of grant for time-based and performance-based awards.
All
of the Company’s issued restricted stock units have dividend equivalent rights. As of December 31, 2021 and 2020, there was $
| F-14 |
NETWORK-1 TECHNOLOGIES, INC.
Note F – Stockholders’ Equity (continued)
| [2] | Stock Options |
At December 31, 2021, one stock option to purchase 500,000 shares of common stock was outstanding representing an option grant outside of the 2013 Plan (issued prior to the establishment of the 2013 Plan). The one stock option has a weighted average exercise price of $1.19 and a weighted average remaining life of 0.84 years. There were no grants of stock options during the years ended December 31, 2021 and 2020.
The following table summarizes stock option activity for the years ended December 31:
2021 | 2020 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Options | Exercise | Options | Exercise | |||||||||||||
Outstanding | Price | Outstanding | Price | |||||||||||||
| Options outstanding at beginning of year | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Expired | ||||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Options outstanding at end of year | $ | $ | ||||||||||||||
| Options exercisable at end of year | $ | $ | ||||||||||||||
During the year ended December 31, 2021 and 2020, the Company did not recognize any stock-based compensation related to the vesting of prior issued stock options to employees and directors. The Company at December 31, 2021 and 2020 had no remaining unrecognized expenses related to unvested stock options to employees and directors. The aggregate intrinsic value of all stock options exercisable at December 31, 2021 and 2020 was $ and $, respectively.
During
the year ended December 31, 2020, stock options to purchase an aggregate of shares of the Company’s Common Stock at an
exercise price of $
| F-15 |
NETWORK-1 TECHNOLOGIES, INC.
Note G – Marketable Securities
Marketable securities as of December 31, 2021 and 2020 were composed of:
| December 31, 2021 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Fixed income mutual funds | $ | $ | $ | ( | ) | $ | ||||||||||
| Corporate bonds and notes | ( | ) | ||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2020 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | $ | $ | $ | ||||||||||||
| Fixed income mutual funds | ||||||||||||||||
| Corporate bonds and notes | ( | ) | ||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
Note H – Equity Investment
During
the period December 2018 – March 2021, the Company made an aggregate investment of $
On
March 12, 2021, the Company invested $
For
the years ended December 31, 2021 and 2020, the Company recorded a 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 equity investment carrying value reported
on the Company’s consolidated balance sheet at December 31, 2021 is due to an excess amount paid over the book value of the investment
totaling approximately $
| F-16 |
NETWORK-1 TECHNOLOGIES, INC.
Note I – Commitments and Contingencies
| [1] | Legal fees: |
Russ, August Kabat provides legal services to the Company with respect to its pending patent litigation filed in May 2017 against Facebook, 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 K[4] 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 15% and 24% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all expenses incurred with respect to this litigation.
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 Cox Patent Portfolio acquired by the Company from Dr. Cox (see Note K[3] hereof). The terms of the Company’s agreement with Russ, August Kabat provide for legal fees on a full contingency basis ranging from 15% to 30% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved. The Company is responsible for all expenses incurred with respect to this litigation.
Dovel
Luner, LLP provided legal services to the Company with respect to the Company’s patent litigation filed in September 2011
against sixteen (16) data networking equipment manufacturers in the U.S. District Court for the Eastern District of Texas, (Tyler Division)
(see Note K[1]). The terms of the Company’s agreement with Dovel Luner LLP essentially provided for legal fees on a full
contingency basis ranging from 12.5% to 35% (with certain exceptions) of the net recovery (after deduction for expenses) depending on
the stage of the preceding in which a result (settlement or judgment) is achieved. The Company was responsible for a portion of the expenses
incurred with respect to this litigation. For the year ended December 31, 2021 and 2020, the Company incurred contingent legal fees
and expenses to Dovel Luner of $
Dovel
Luner, LLP also provided legal services to the Company with respect to the Company’s patent litigation settled in July 2010
against several major data networking equipment manufacturers including Cisco (see Note K[3]). The terms of the Company’s agreement
with Dovel Luner, LLP provided for legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of up
to 24% (based on the settlement being achieved at the trial stage) including legal fees of local counsel in Texas. With respect to any
royalty payments payable by Cisco relating to royalties for the period prior to the expiration of the Remote Power Patent (March 7, 2020),
the Company had an obligation to pay Dovel Luner contingency fees of 24% (see Note K[2] hereof). During the year ended December
31, 2021, the Company paid Dovel and Luner contingency fees and expenses of $
| [2] | Patent Acquisitions: |
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: (i)
| F-17 |
NETWORK-1 TECHNOLOGIES, INC.
Note I – Commitments and Contingencies (continued)
In
connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M
| [3] | Savings and investment plan: |
The
Company has a Savings and Investment Plan which allows participants to make contributions by salary reduction pursuant to Section 401(k)
of the Internal Revenue Code of 1986. The Company also may make discretionary annual matching contributions and profit sharing in amounts
determined by the Board of Directors, subject to statutory limits. The 401(k) Plan expense for the years ended December 31, 2021
and 2020 was $
Note J - Employment Arrangements and Other Agreements
[1]
On March 22, 2022, the Company entered into a new employment agreement (“Agreement”) with its Chairman and Chief Executive
Officer, pursuant to which he continues to serve as our Chairman and Chief Executive Officer for a four year term (“Term”),
at an annual base salary of $
In addition, pursuant to the Agreement, the Company granted the Chairman and Chief Executive Officer, under its 2013 Plan, 600,000 restricted stock units (the “RSUs”, each RSU awarded by the Company to its officers, directors and consultants represents a contingent right to receive one share of the Company’s common stock) which terms provided for vesting in four tranches, as follows: (1) 175,000 RSUs which shall vest 100,000 RSUs on March 22, 2023 and 75,000 RSUs on March 22, 2024, subject to the Chairman and Chief Executive Officer’s continued employment by the Company through each such vesting date (the “Employment Condition”) (“Tranche 1”); (2) 150,000 RSUs shall vest if at any time during the term of the Agreement that the Company’s common stock (the “Common Stock”) achieves a closing price for twenty (20) consecutive trading days (“Closing Price”) of a minimum of $3.50 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 2”); (3) 150,000 RSUs shall vest if at any time during the term of the Agreement that the Common Stock achieves a Closing Price (as defined above) of a minimum of $4.00 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 3”); and (4) 125,000 RSUs shall vest if at any time during the term of the Agreement, that the Common Stock achieves a Closing Price of a minimum of $4.50 per share (subject to adjustment for stock splits) and the Employment Condition is satisfied through the date such minimum per share Closing Price is achieved (“Tranche 4”). In the event of a Change of Control (as defined), Termination Other Than for Cause (as defined) or a termination by you for Good Reason (as defined) in each case prior to the last day of the term of the Agreement, the vesting of all RSUs (Tranches 1, 2, 3 and 4) shall accelerate (and not be subject to any conditions) and all RSUs shall become immediately fully vested. All RSUs granted by the Company to its officers, directors or consultants have dividend equivalent rights.
Under the terms of the Agreement, 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 our 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
| F-18 |
NETWORK-1 TECHNOLOGIES, INC.
Note J - Employment Arrangements and Other Agreements (continued)
Power
Patent (including all of the Company’s patent portfolios and its investment in ILiAD Biotechnologies) (collectively, the “Incentive
Compensation”). During the year ended December 31, 2021 and December 31, 2020, the Chairman and Chief Executive Officer earned
Incentive Compensation of $
The Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer for the life of each of the Company’s patents with respect to licenses entered into with third parties during the term of his employment or at anytime thereafter, whether he is employed by us or not; provided, that, the employment of the Chairman and Chief Executive Officer has not been terminated by the Company “For Cause” (as defined) or terminated by him without “Good Reason” (as defined). In the event of a merger or sale of substantially all of the Company’s assets, the Company has the option to extinguish the right of the Chairman and Chief Executive Officer to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to such value. In the event that the Chairman and Chief Executive Officer’s employment is terminated by us “Other Than For Cause” (as defined) or by him for “Good Reason” (as defined), the Chairman and Chief Executive Officer shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated portion of the $175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in which the termination occurs and (iii) accelerated vesting of all unvested options, RSUs or other awards.
In connection with the Agreement, the Chairman and Chief Executive Officer has also agreed not to compete with the Company as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated “Other Than For Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two years from the termination date, if terminated “For Cause” by us or “Without Good Reason” by the Chairman and Chief Executive Officer.
[2]
The Company’s Chief Financial Officer serves on an at-will basis at an annual base salary of $
[3]
The Company’s Executive Vice President serves on an at-will basis at an annual base salary of $
Note K – Legal Proceedings
[1]
On July 26, 2021, the Company agreed to settle its patent litigation against Hewlett-Packard Company and Hewlett-Packard Enterprise
Company (collectively, “Hewlett-Packard”) pending in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement
of the Company’s Remote Power Patent. Under the terms of the settlement agreement, Hewlett-Packard Enterprise Company paid the
Company $
| F-19 |
NETWORK-1 TECHNOLOGIES, INC.
Note K – Legal Proceedings (continued)
[2]
On March 30, 2021, the Company entered into an amendment (the “Amendment”) to the Settlement and License Agreement, dated
May 25, 2011, between the Company and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco paid $
[3]
On April 4, 2014 and December 3, 2014, the
[4]
On May 9, 2017, Mirror Worlds Technologies, LLC, the
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Facebook. In its ruling the Court (i) denied Facebook’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 Facebook and dismissed the case. The Company strongly disagrees with the decision on non-infringement and intends to file an appeal to the U.S. Court of Appeals for the Federal Circuit.
[5] On December 15, 2020, the Company filed a lawsuit against Netgear in the Supreme Court of the State of New York, County of New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with the Company for failure to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of Netgear’s PoE products. On October 22, 2021, Netgear filed a Demand for Arbitration at the American Arbitration Association (AAA) seeking to arbitrate certain issues raised in the litigation. The Company has objected to jurisdiction at the AAA and the dispute is pending.
[6]
On January 7, 2021, the Company filed a lawsuit against Plantronics, Inc., the successor entity to Polycom, Inc., in the Supreme
Court of the State of California, County of Santa Clara, for breach of a Settlement and License Agreement, dated September 29, 2016,
with the Company for the failure of Plantronics and Polycom to make royalty payments, and provide corresponding royalty reports, to the
Company based on sales of PoE products. On October 26, 2021, the Company settled its litigation with Plantronics, Inc. in consideration
for payment of $
| F-20 |
NETWORK-1 TECHNOLOGIES, INC.
Note L - Concentrations
Revenue
from the Company’s Remote Power Patent constituted
Note M – Related Party Transaction
On
May 27, 2021, the Company repurchased from a director of the Company shares of its common stock at a purchase price of $ per
share or aggregate consideration of $
On June 11, 2021, the Company’s Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $ of the Company’s 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 the Company’s discretion. The timing and amount of the shares repurchased are determined by management based on its evaluation of market conditions and other factors. The repurchase program may be increased, suspended or discontinued at any time.
During
the year ended December 31, 2021, the Company repurchased an aggregate of shares of its common stock pursuant to the Share Repurchase
Program at a cost of approximately $
Since
inception of the Share Repurchase Program (August 2011) through December 31, 2021, the Company has repurchased an aggregate of
shares of its common stock at a cost of approximately $
Note O – Dividend Policy
On
June 9, 2020, the Company’s Board of Directors approved the continuation of the Company’s dividend policy which consists
of a semi-annual cash dividend of $per common share ($0.10 per common share annually)
which are anticipated to be paid in March and September of each year. On February 23, 2021, the Board of Directors declared a semi-annual
cash dividend of $per share with a payment date of
Note P – Subsequent Events
[1]
On February 23, 2022, the Company’s Board of Directors declared a semi-annual cash dividend of $ per share with a payment
date of
[2]
On February 23, 2022, the Company’s Board of Directors approved the grant of
[3]
On March 11, 2022,
[4] On March 22, 2022, the Company
entered into a new four year employment agreement with its Chairman and Chief Executive Officer. In connection with the agreement the
Company granted to its Chairman and Chief Executive Officer
| F-21 |
NETWORK-1 TECHNOLOGIES, INC.
Note P – Subsequent Events (continued)
[5]
On March 25, 2022, the Company completed the acquisition of a new patent portfolio (HFT Patent Portfolio) consisting of six 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 $
| F-22 |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The following are included under Item 8 “Financial Statements and Supplementary Data”:
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets as of December 31, 2021 and 2020
Consolidated statements of operations and comprehensive (loss) income for the years ended December 31, 2021 and 2020
Consolidated statements of changes in stockholders' equity for the years ended December 31, 2021 and 2020
Consolidated statements of cash flows for the years ended December 31, 2021 and 2020
Notes to consolidated financial statements
(a)(2) Financial Statements Schedules:
Financial statement schedules are omitted because the information is not applicable.
(a)(3) Exhibits:
| 4.1 | Form of Common Stock certificate. Previously filed as Exhibit 4.1 to the 1998 Registration Statement and incorporated herein by reference. |
| 10.1+ | 2013 Stock Incentive Plan. Previously filed as Appendix B to the Company’s Schedule 14A (Proxy Statement) filed on August 20, 2013 and incorporated herein by reference. |
| 10.2 | Form of stock option agreement, previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8, filed on October 14, 2009 and incorporated herein by reference. |
| -48- |
| 14 | Code of Ethics. Previously filed as Exhibit 14 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on April 14, 2004 and incorporated herein by reference. |
| 21.1* | List of Subsidiaries of Registrant. |
| 23.1* | Consent of Friedman, LLP, Independent Registered Public Accounting Firm. |
| 31.1* | Section 302 Certification of Chief Executive Officer. |
| 31.2* | Section 302 Certification of Chief Financial Officer. |
| 32.1* | Section 906 Certification of Chief Executive Officer. |
| 32.2* | Section 906 Certification of Chief Financial Officer. |
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
+ Management contract or compensatory plan or arrangement
| -49- |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Corey M. Horowitz
Corey M. Horowitz
Chairman and Chief Executive Officer
March 30, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| NAME | TITLE | DATE | ||
/s/ Corey M. Horowitz Corey M. Horowitz |
Chairman and Chief Executive Officer, Chairman of the Board of Directors (principal executive officer) |
March 30, 2022 | ||
/s/ David Kahn David Kahn |
Chief Financial Officer, Secretary and a Director (principal financial officer and principal accounting officer) |
March 30, 2022 | ||
/s/ Emanuel Pearlman Emanuel Pearlman |
Director |
March 30, 2022 | ||
/s/ Niv Harizman Niv Harizman |
Director |
March 30, 2022 | ||
/s/ Allison Hoffman Allison Hoffman |
Director |
March 30, 2022 |
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