UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
_________________
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________ |
Commission
File Number
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§223.405) of this chapter during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting Company |
||
| Emerging growth Company |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares of the registrant’s common stock, $.01 par value per share, outstanding as of October 21, 2024 was .
1
NETWORK-1 TECHNOLOGIES, INC.
Form 10-Q Index
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future performance and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Factors that could cause or contribute to such differences include various risks and uncertainties described below and elsewhere in this Quarterly Report on Form 10-Q as well as in our Annual Report on Form 10-K for the year ended December 31, 2023 (filed with the SEC on March 8, 2024). Furthermore, such forward-looking statements speak only as of the date of this report. Such risks and uncertainties include, but are not limited to, the following:
| • | our uncertain revenue from licensing our intellectual property; |
| • | uncertainty of the outcome of our pending litigations; |
| • | our ability to achieve future revenue from our patent portfolios; |
| • | our ability to protect our patents; |
| • | our ability to execute our strategy to acquire or make investments in high quality patents with significant licensing opportunities; |
| • | our ability to enter into strategic relationships with third parties to license or otherwise monetize their intellectual property; |
| • | our ability to achieve a return on our investment in ILiAD Biotechnologies, LLC; |
| • | our ability to continue to acquire additional intellectual property; |
| • | uncertainty as to whether cash dividends will continue to be paid; |
| • | variations in our quarterly and annual operating results; |
| • | the increasing development of artificial intelligence could materially impact our business; |
| • | the risk that we may be determined to be a personal holding company in 2024 or future years which may result in our issuing a special cash dividend to our stockholders to the extent we have undistributed personal holding company income resulting in less cash available for our operations and strategic transactions; and |
| • | legislative, regulatory and competitive developments. |
3
Item 1. Condensed Consolidated Financial Statements
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2024 | December
31, | |||||||
ASSETS
CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities, at fair value | ||||||||
| Other current assets | ||||||||
TOTAL CURRENT ASSETS | ||||||||
OTHER ASSETS: | ||||||||
| Patents, net of accumulated amortization | ||||||||
| Equity investment | ||||||||
| Operating leases right-of-use asset | ||||||||
| Security deposit | ||||||||
Total Other Assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY:
CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Other accrued expenses | ||||||||
| Operating lease obligation, current | ||||||||
Total Current Liabilities | ||||||||
LONG TERM LIABILITIES: | ||||||||
| Deferred tax liability | ||||||||
TOTAL LIABILITIES | ||||||||
COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding at September 30, 2024 and December 31, 2023 | ||||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| Three Months Ended September, | Nine Months Ended September, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Costs of revenue | ||||||||||||||||
| Professional fees and related costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Amortization of patents | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
OTHER INCOME: | ||||||||||||||||
| Interest and dividend income, net | ||||||||||||||||
| Net realized and unrealized gain on marketable securities | ||||||||||||||||
| Total other income, net | ||||||||||||||||
LOSS BEFORE INCOME TAXES AND SHARE OF NET LOSSES OF EQUITY METHOD INVESTEE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAXES PROVISION: | ||||||||||||||||
| Current | ( | ) | ( | ) | ||||||||||||
| Deferred taxes, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE SHARE OF NET LOSS OF EQUITY METHOD INVESTEE: | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
SHARE OF NET LOSS OF EQUITY METHOD INVESTEE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Net loss per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Cash dividends declared per share | $ | $ | $ | $ | ||||||||||||
NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Net unrealized holding gain on corporate bonds and notes during the period, net of tax | ||||||||||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance – January 1, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance – January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Value of shares delivered to pay withholding taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Dividends and dividend equivalents declared | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Treasury stock purchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Realized gain on corporate bond | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance – September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
NETWORK-1 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Amortization of patents | ||||||||
| Stock-based compensation | ||||||||
| Loss allocated from equity method investment | ||||||||
| Unrealized gain on marketable securities | ( | ) | ( | ) | ||||
| Deferred tax (benefit) expense | ( | ) | ( | ) | ||||
| Amortization of operating leases – right of use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Other current assets | ||||||||
| Prepaid taxes | ( | ) | ||||||
| Security deposit | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Sales of marketable securities | ||||||||
| Purchases of marketable securities | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Value of shares delivered to fund payment of withholding taxes | ( | ) | ( | ) | ||||
| Repurchases of common stock, inclusive of commissions and excise tax | ( | ) | ( | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES: | ( | ) | ( | ) | ||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | ||||||||
| Income taxes | $ | |||||||
| NON-CASH FINANCING ACTIVITIES | ||||||||
| Accrued dividend rights on restricted stock units | $ | $ | ||||||
| Right of use asset for lease liability | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
8
NETWORK-1 TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS
[1] BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the “Company”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company’s financial position as of September 30, 2024, and the results of its operations and comprehensive loss and its changes in stockholders’ equity for the three and nine months periods ended September 30, 2024 and September 30, 2023, and the statement of cash flows for the nine months ended September 30, 2024 and September 30, 2023. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2024. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations to be expected for the full year.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Mirror Worlds Technologies, LLC and HFT Solutions, LLC. All intercompany balances and transactions have been eliminated in consolidation.
[2] BUSINESS
The
Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns one-hundred
four (
9
NOTE A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
The Company’s current strategy includes continuing to pursue licensing opportunities for its patent portfolios. In addition, the Company reviews opportunities to acquire or license additional intellectual property as well as other strategic alternatives. The Company’s patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds Patent Portfolio. In addition, the Company may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
The
Company has also made equity investments totaling $
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| [1] | Use of Estimates and Assumptions |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include costs related to the Company’s assertion of litigation, valuation of the Company’s patent portfolios, stock-based compensation, the recoverability of deferred tax assets and the carrying value of the Company’s equity method investments. Actual results could be materially different from those estimates upon which the carrying values were based.
Certain amounts recorded to reflect the Company’s share of income or losses of its equity method investee, accounted for under the equity method, are based on estimates and the unaudited results of operations of the equity method investee and may require adjustment in the future when the audit of the equity method investee is complete. The Company reports its share of the results of its equity method investee on a one quarter lag basis.
| [2] | Revenue Recognition |
Under ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, obtains a final judgment awarding damages or enters into a litigation settlement agreement involving its patents. With respect to licensing its intellectual property, obtaining a final judgment or entering into a litigation settlement agreement, revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property, obtaining a final judgment or in a settlement of the litigation.
The Company determines revenue recognition through the following steps:
| • | identification of the license agreement, the final judgment or the litigation settlement agreement; |
| • | identification of the performance obligations in the license agreement, the final judgment or the litigation settlement agreement; |
| • | determination of the consideration for the license, final judgment or settlement; |
| • | allocation of the transaction price to the performance obligations in the contract; and |
| • | recognition of revenue when the Company satisfies its performance obligations. |
10
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue disaggregated by source is as follows:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Litigation settlements | $ | $ | $ | $ | ||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
During
the three months ended September 30, 2024 and 2023, the Company had
Revenue from the Company’s patent licensing and enforcement business is typically generated from negotiated license agreements or settlement agreements with respect to any of the Company’s patents. The timing and amount of revenue recognized from each licensee or such settlement agreement depends upon a variety of factors, including the terms of each agreement and the nature of the obligations of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of a litigation settlement related to the Company’s assertion of patent infringement involving its intellectual property, defendants may either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license, (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, or (iii) a lump sum settlement payment with respect to litigation involving the Company’s expired patents.
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.
| [3] | Equity Method Investments |
Equity method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company has 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.
| [4] | Income Taxes |
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes (ASC 740), which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of
11
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
temporary
(timing) differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting
standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be
realized. As of September 30, 2024, the Company had total deferred tax assets generated from its activities of $
The personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal holding company income (“UPHCI”), which means, in general, taxable income subject to certain adjustments and reduced by certain distributions to shareholders. For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned directly or indirectly by five or fewer individuals at any time during the second half of the year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members and other related parties) (the “Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). At September 30, 2024, based on available information concerning the Company’s shareholder ownership, the Company did not satisfy the Ownership Test. However, during the second half of 2024 the Company may subsequently be determined to be a PHC in 2024 or in future years if it satisfies both the Ownership Test and Income Test. If the Company were to become a PHC in 2024 or any future year, it would be subject to the 20% tax on its UPHCI. In such event, the Company may issue a special cash dividend to its shareholders in an amount equal to the UPHCI rather than incur the 20% tax.
ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company had no uncertain tax positions as of September 30, 2024.
The Company recognizes interest and penalties, if any, related to income tax in the income tax provision in the unaudited condensed consolidated statements of operations and comprehensive loss.
U.S. federal, state and local income tax returns prior to 2020 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.
12
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| [5] | New Accounting Standards |
Segments
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for all entities for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating ASU 2023-07 to determine its impact on the Company's disclosures, however, the Company does not expect ASU 2023-07 to have a material impact on the Company’s consolidated financial statements.
Income Tax Disclosure
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating ASU 2023-09 to determine its impact on the Company's disclosures, however, the Company does not expect ASU 2023-09 to have a material impact on the Company’s consolidated financial statements.
NOTE C – PATENTS
The
Company’s intangible assets at September 30, 2024, include patents with estimated remaining economic useful lives ranging from
| September 30, 2024 | December 31, 2023 | |||||||
| Gross carrying amount – patents | $ | $ | ||||||
| Accumulated amortization – patents | ( | ) | ( | ) | ||||
| Patents, net | $ | $ | ||||||
Amortization
expense for the three months ended September 30, 2024 and 2023 was $
| For the Years Ended December 31, | ||||||
2024 – remaining | $ | |||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
13
NOTE C – PATENTS (CONTINUED)
The
expiration dates of patents within the Company’s M2M/IoT Patent Portfolio range from
Restricted Stock Units
The Company adopted the 2022 Stock Incentive Plan, (the “2022 Plan”), approved by its Board of Directors on July 25, 2022 and its stockholders on September 20, 2022. The 2022 Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock units.
As
of September 30, 2024, there were
A summary of restricted stock unit activity for the nine months ended September 30, 2024 is as follows (each restricted stock unit issued by the Company represents the right to receive one share of the Company’s common stock):
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Balance of restricted stock units outstanding at December 31, 2023 | $ | |||||||
| Grants of restricted stock units | ||||||||
| Vested restricted stock units | ( | ) | ( | ) | ||||
| Balance of restricted stock units outstanding at September 30, 2024 | $ | |||||||
Restricted stock unit compensation expense was $ and $ for the three months ended September 30, 2024 and 2023, respectively. Restricted stock unit expense was $ and $ for the nine months ended September 30, 2024 and 2023, respectively. Stock-based compensation expense is included in general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive loss.
The Company had an aggregate of $ of unrecognized restricted stock unit compensation as of September 30, 2024 to be expensed over a weighted average period of years.
All
of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. During the three and nine months
ended September 30, 2024, the Company paid a total of $
14
Basic loss per share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted per share data includes the dilutive effects of options and restricted stock units. Potentially dilutive shares of and at September 30, 2024 and 2023, respectively, consisted of outstanding restricted stock units. and stock options. However, since the Company generated a net loss in 2024 and 2023, all potentially dilutive shares were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
Computations of basic and diluted weighted average common shares outstanding were as follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Weighted-average common shares outstanding – basic | ||||||||||||||||
Dilutive effect of restricted stock units and stock options | ||||||||||||||||
Weighted-average common shares outstanding – diluted | ||||||||||||||||
Restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | ||||||||||||||||
NOTE F – MARKETABLE SECURITIES
Marketable securities as of September 30, 2024 and December 31, 2023 were composed of the following:
| September 30, 2024 | ||||||||||||||||
Cost | Unrealized | Unrealized Losses | Fair Value | |||||||||||||
| Certificates of deposit | $ | $ | $ | $ | ||||||||||||
| Government securities | ( | ) | ||||||||||||||
| Fixed income mutual funds | ||||||||||||||||
| Corporate bonds and notes | ||||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2023 | ||||||||||||||||
Cost | Unrealized | Unrealized | Fair Value | |||||||||||||
| Certificates of deposit | $ | $ | $ | ( | ) | $ | ||||||||||
| Government securities | ( | ) | ||||||||||||||
| Fixed income mutual funds | ||||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
The Company’s marketable securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market.
15
NOTE G – COMMITMENTS AND CONTINGENCIES
[1] Legal Fees
Russ,
August & Kabat provides legal services to the Company with respect to its patent litigation filed in May 2017 against Facebook, Inc.
(now Meta Platforms, Inc.) in the U.S. District Court for the Southern District of New York relating to several patents within the Company’s
Mirror Worlds Patent Portfolio (see Note I[2] hereof). The terms of the Company’s agreement with Russ, August & Kabat provide
for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between
Russ,
August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014 and
December 2014 against Google Inc. and YouTube, LLC in the U.S. District Court for the Southern District of New York relating to certain
patents within the Company’s Cox Patent Portfolio (see Note I[1] hereof). The terms of the Company’s agreement with
Russ, August & Kabat provide for legal fees on a full contingency basis ranging from
Dovel
& Luner, LLP (“Dovel”) provides legal services to the Company with respect to its patent litigation related to the Remote
Power Patent (See Note I[4] hereof). The terms of the Company’s agreement with Dovel provide, among other things, for legal fees
on a contingency basis ranging from
[2] Patent Acquisitions
On
March 25, 2022, the Company completed the acquisition of a new patent portfolio (HFT Patent Portfolio) currently consisting of nine U.S.
patents and two pending U.S. patents covering certain advanced technologies relating to high frequency trading, which inventions specifically
address technological problems associated with speed and latency and provide critical latency gains in trading systems where the difference
between success and failure may be measured in nanoseconds. The Company paid the seller $
In
connection with the Company’s acquisition of its Cox Patent Portfolio, the Company is obligated to pay Dr. Cox
As
part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition Interface,
LLC (“Recognition”) pursuant to which Recognition received from the Company an interest in the net proceeds realized from
the monetization of the Mirror Worlds Patent Portfolio, as follows: (i)
16
NOTE G – 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] Leases
The
Company has one operating lease for its principal office space in New Canaan, Connecticut that expires on April 30, 2025. The Company
pays a base rent of $
The
calculated incremental borrowing rate was approximately
The remaining lease term as of September 30, 2024 is seven (7) months.
Right of use lease assets and related lease obligations for the Company’s operating leases were recorded in the unaudited condensed consolidated balance sheets as follows:
As of September 30, 2024 | As
of December 31, 2023 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease obligations – current | $ | $ | ||||||
The table below presents certain information related to the Company’s lease costs for the period ended:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
17
NOTE G – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of September 30, 2024, were as follows:
| Operating Leases | ||||
| 2024 – remaining period | $ | |||
| 2025 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( |
) | ||
| Total operating lease liability | $ | |||
NOTE–H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
On
March 22, 2022, the Company entered into an employment agreement (“Agreement”) with its Chairman and Chief Executive Officer,
pursuant to which he continues to serve as the Company’s Chairman and Chief Executive Officer for a four-year term (“Term”),
at an annual base salary of $
Under
the terms of the Agreement (which terms are substantially the same as the prior employment agreement with the Chairman and Chief
Executive Officer), so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company,
whether pursuant to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation
in an amount equal to
NOTE I – LEGAL PROCEEDINGS
[1]
On April 4, 2014 and December 3, 2014,
18
NOTE I – LEGAL PROCEEDINGS (CONTINUED)
On April 24, 2024, the U.S. District Court for the Southern District of New York issued a judgment dismissing the Company’s patent infringement claims finding that the asserted claims of two of the patents are invalid for indefiniteness and granting summary judgment that the asserted claims of another asserted patent are not infringed by Google’s accused system. The Court’s ruling disposes of all of the Company’s claims in the case. On May 14, 2024, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit.
[2] On
May 9, 2017, Mirror Worlds Technologies, LLC,
On March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Meta. In its ruling the Court (i) denied Meta’s motion that the asserted patents were invalid by concluding that all asserted claims were patent eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Meta and dismissed the case. The Company strongly disagrees with the decision of the District Court on non-infringement and on April 4, 2022, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Meta filed a notice of cross-appeal with respect to the Court’s ruling on validity. Oral argument on the appeal took place on October 11, 2024 and a decision is pending.
[3]
In October and November 2022,
The
Company has entered into settlement agreements for an aggregate of $
19
NOTE I – LEGAL PROCEEDINGS (CONTINUED)
During
the three months ended September 30, 2024 and 2023, the Company did not enter into any settlement agreements with defendants. During
the nine months ended September 30, 2024 and 2023, the Company entered into settlement agreements with defendants resulting in aggregate
settlements payments of $
[4] On August 6, 2024, plaintiff Mitchell Mizel filed a putative class action against the Company and its Chairman and Chief Executive Officer in the United States District Court, Southern District of New York, alleging, among other things, that the Company is required to register as an “investment company” under the Investment Company Act of 1940 (the “Act”). The Company strongly disagreed with the allegations in the complaint. On October 3, 2024, the litigation was settled on terms not material to the Company and the complaint was withdrawn with prejudice.
NOTE J – INVESTMENT
During
the period December 2018 through August 2022, the Company made aggregate investments of $
For
the three months ended September 30, 2024 and 2023, the Company recorded an allocated net loss from its equity method investment in ILiAD
of $
The
difference between the Company’s share of equity in ILiAD’s net assets and the purchase price of the investment is due to
an excess amount paid over the book value of the investment of $
The following table provides certain summarized financial information for ILiAD (the equity method investee) for the periods presented and has been compiled from ILiAD’s unaudited financial statements, reported on one quarter lag.
Nine Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
| Loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
20
On
June 13, 2023, the Board of Directors authorized an extension and increase of the Company’s share repurchase program (the “Share
Repurchase Program”) to repurchase up to $
During
the three months ended September 30, 2024, the Company repurchased an aggregate of shares of its common stock at an aggregate
cost of $
On June 28, 2024, the Company entered into a written trading plan (the “10b5-1 Plan”) under Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”). Adopting a trading plan that satisfies the conditions of Rule 10b5-1 allows a company to repurchase its shares at times when it might otherwise be prevented from doing so due to self-imposed trading black-outs or pursuant to insider trading laws. Purchases under the 10b5-1 Plan may be made during the following periods: (1) beginning on July 8, 2024 until two trading days after the Company issues a press release announcing its financial results for the quarter ended June 30, 2024, and (2) beginning on October 1, 2024 until two trading days after the Company issues a press release announcing its financial results for the quarter ended September 30, 2024. Under the 10b5-1 Plan, the Company’s third party broker may purchase up to 1,000,000 shares of the Company’s common stock, subject to certain price, market, volume and timing constraints, in accordance with the terms of the plan and subject to Rule 10b5-1 and Rule 10b-18 of the Exchange Act.
On
August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for,
among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations occurring
on or after January 1, 2023. The amount of the excise tax is generally 1% of the net fair market value of the net shares repurchased
(repurchases net of new share issuances) at the time of the repurchase.
At September 30, 2024, the dollar value of remaining shares that may be repurchased under the Share Repurchase Program was $.
NOTE L – CONCENTRATIONS
The
Company maintains cash and certificates of deposit in accounts at financial institutions. The accounts are insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $
21
NOTE M – DIVIDEND POLICY
The Company’s dividend policy consists of semi-annual cash dividends of $ per share ($ per share annually) anticipated to be paid in March and September of each year. The Company has paid semi-annual cash dividends consistent with its policy. The Company’s dividend policy undergoes a periodic review by the Board of Directors and is subject to change at any time depending upon the Company’s earnings, financial requirements and other factors existing at the time.
22
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own one-hundred four (104) U.S. patents and sixteen (16) foreign patents relating to:(i) our Cox Patent Portfolio relating to enabling technology for identifying media content on the Internet and taking further action to be performed after such identification; (ii) our M2M/IoT Patent Portfolio relating to, among other things, enabling technology for authenticating and using eSim (embedded Subscriber Identification Module) technology in IoT, Machine-to-Machine and other mobile devices, including smartphones, tablets and computers as well as automobiles; (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.
With respect to our one-hundred four (104) U.S. patents, fifty-four (54) of such patents have expired. However, we can assert expired patents against third parties but only for past damages up to the patent expiration date. We currently have pending litigation involving expired patents including our Remote Power Patent and certain patents within our Cox and Mirror Worlds Patent Portfolios (see Note I to our unaudited condensed consolidated financial statements included herein). Our revenue is largely dependent upon our ability to achieve successful litigation outcomes.
At September 30, 2024, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $41,516,000 and working capital of $41,058,000. Based on our cash position, we review opportunities to acquire additional intellectual property as well as evaluate other strategic opportunities.
To date we have invested $7,000,000 in ILiAD, a clinical stage biotechnology company with an exclusive license to seventy-two (72) patents (see Note J to our unaudited condensed consolidated financial statements included herein). Our investment continues to involve significant risk and the outcome is uncertain.
We have been dependent upon our Remote Power Patent for a significant portion of our revenue. Our Remote Power Patent has generated licensing revenue in excess of $188,000,000 from May 2007 through September 30, 2024. We no longer receive licensing revenue for our Remote Power Patent for any period subsequent to March 7, 2020 (the expiration date of the patent). During the fourth quarter of 2022, we commenced nine separate litigations against ten defendants involving our Remote Power Patent for patent infringement for the period prior to March 7, 2020. As of September 30, 2024, we entered into settlements with nine defendants with respect to the aforementioned litigation, including one defendant for $100,000 for the nine months ended September 30, 2024, resulting in aggregate settlement payments made to us of $2,701,000 and a future conditional payment of $150,000 (see Note I[3] hereof). All of our revenue for 2023 and for the nine months ended September 30, 2024 was from these settlements involving our Remote Power Patent. If we are unable to successfully monetize our other patent portfolios or achieve a successful outcome of our investment in ILiAD, our business, financial condition and results of operations will be negatively impacted.
23
In addition, we have appealed the judgment of the District Court dismissing our litigation against Google and YouTube involving certain patents within our Cox Patent Portfolio and have also appealed the judgment of the District Court dismissing our litigation against Meta (Facebook) on the grounds of non-infringement involving certain patents within our Mirror Worlds Portfolio. We also intend to commence efforts to monetize certain patents within our HFT and M2M/IoT patent portfolios. We may not achieve successful outcomes of such appeals or litigation involving our patent assets.
Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets and the monetization of our patent portfolios. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize. Our strategy includes working with inventors and patent owners to assist in the development and monetization of their patented technologies. We may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. Our patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as we have achieved with respect to our Remote Power Patent and Mirror Worlds Patent Portfolio.
The significant components of expenses, when revenue is recorded, that may impact our net income (loss) relate to contingent legal fees and expenses related to our patent litigation (see Note G[1] to our unaudited condensed consolidated financial statements included herein) and incentive compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note H to our unaudited condensed consolidated financial statements included herein). Both such components of expenses are based on a percentage of the revenue received by us as a result of litigation or otherwise.
Our annual and quarterly operating and financial results may fluctuate significantly from period to period as a result of a variety of factors that are outside our control, including the timing and our ability to achieve successful outcomes of our patent litigation, our ability and timing of consummating future license agreements for our intellectual property, and whether we will achieve a return on our investment in ILiAD and the timing of any such return.
Our future operating results may also be materially impacted by our ability to acquire high quality patents which management believes have the potential to generate significant licensing opportunities. In the future, we may not be able to identify or consummate such patent acquisitions or, if consummated, achieve significant licensing revenue with respect to such acquisitions.
In 2024 and future years we could be classified as a Personal Holding Company. If this is the case, we would be subject to a 20% tax on the amount of any undistributed personal holding company income (as defined) for such year that we do not distribute to our shareholders (see Note B[4] to our unaudited condensed consolidated financial statements included in this Quarterly Report).
24
RESULTS OF OPERATIONS
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Revenue. We had no revenue for the three months ended September 30, 2024 and September 30, 2023 as we had no litigation outcomes during such periods.
Operating Expenses. Operating expenses for the three months ended September 30, 2024 were $896,000 as compared to $859,000 for the three months ended September 30, 2023. The increase in operating expenses of $37,000 was primarily as a result of increased professional fees of $181,000 offset by decreases in general and administrative expenses of $85,000, amortization of patents of $41,000 and stock-based compensation of $18,000.
General and administrative expenses were $473,000 for the three months ended September 30, 2024 as compared to $558,000 for the three months ended September 30, 2023. The decrease in general and administrative expenses of $85,000 was primarily due to decreased state franchise and capital-based taxes of $100,000.
Interest and Dividend Income. Interest and dividend income for the three months ended September 30, 2024 was $524,000 as compared to $406,000 for the three months ended September 30, 2023 as a result of higher yielding fixed income investments with longer maturities.
Realized and Unrealized Gain on Marketable Securities. For the three months ended September 30, 2024, we recorded realized and unrealized gains on marketable securities of $293,000, as compared to $131,000 for the three months ended September 30, 2023 largely due to the timing of the maturities of fixed income investments and a relatively stable interest rate environment.
Income Taxes. For the three months ended September 30, 2024, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $71,000. For the three months ended September 30, 2023, we had a current tax benefit of $13,000 for federal, state and local income taxes and a deferred tax benefit of $31,000.
Share of Net Losses of Equity Method Investee. We recognized $308,000 of net losses during the three month period ended September 30, 2024 related to our equity share of ILiAD net losses, as compared to a recognized net loss of $532,000 for the three months ended September 30, 2023. We expect to continue to record our share of net losses from ILiAD as ILiAD is a privately held clinical stage biotechnology company.
Net Loss. As a result of the foregoing, we realized a net loss of $316,000 or $0.01 per share basic and diluted for the three months ended September 30, 2024, compared with a net loss of $810,000 or $0.03 per share basic and diluted for the three months ended September 30, 2023. Our decreased net loss for the three months ended September 30, 2024 was primarily due to increases in interest income of $118,000 and in realized and unrealized gains from investments of $162,000, along with a decrease in our equity share of ILiAD net losses of $224,000.
25
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Revenue. We had revenue of $100,000 for the nine months ended September 30, 2024 compared to revenue of $820,000 for the nine months ended September 30, 2023. All such revenue was from litigation settlements involving our Remote Power Patent (see Note I[3] and B[2] to our unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the nine months ended September 30, 2024 were $2,538,000 as compared to $3,004,000 for the nine months ended September 30, 2023. The decrease in operating expenses of $466,000 was primarily as a result of decreases in costs of revenue of $204,000 related to litigation settlements, amortization of patents of $146,000 and general and administrative expenses of $306,000, offset by increased professional fees of $190,000.
General and administrative expenses were $1,764,000 for the nine months ended September 30, 2024 as compared to $2,070,000 for the nine months ended September 30, 2023. The decrease in general and administrative expenses of $306,000 was primarily due to decreases in payroll and payroll taxes of $188,000, exchange listing fees of $43,000, stock-based compensation of $75,000 and the timing of recording certain state franchise and capital-based taxes of $37,000.
Interest and Dividend Income. Interest and dividend income for the nine months ended September 30, 2024 was $1,407,000 as compared to $1,161,000 for the nine months ended September 30, 2023. The increase in interest and dividend income of $246,000 for the nine months ended September 30, 2024 was primarily due to higher yielding fixed income investments with long maturities.
Realized and Unrealized Gain on Marketable Securities. For the nine months ended September 30, 2024, we recorded realized and unrealized gains on marketable securities of $395,000 as compared to gains of $420,000 for the nine months ended September 30, 2023 largely due to a relatively stable interest rate environment.
Income Taxes. For the nine months ended September 30, 2024, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $355,000. For the nine months ended September 30, 2023, we had a current tax benefit of $13,000 for federal, state and local income taxes and a deferred tax benefit of $278,000.
Share of Net Losses of Equity Method Investee. We recognized $1,613,000 of net losses during the nine month period ended September 30, 2024 related to our equity share of ILiAD net losses, as compared to a recognized net loss of $1,597,000 for the nine months ended September 30, 2023. We expect to continue to record our share of net losses from ILiAD as ILiAD is a privately held clinical stage biotechnology company.
Net Loss. As a result of the foregoing, we realized a net loss of $1,894,000 or $0.08 per share basic and diluted for the nine months ended September 30, 2024, compared with a net loss of $1,909,000 or $0.08 per share basic and diluted for the nine months ended September 30, 2023.
26
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At September 30, 2024, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $41,516,000 and working capital of $41,058,000. Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the next twelve months and the foreseeable future. Our patent infringement litigation or realization of our investment in ILiAD may result in a material increase in our liquidity and capital resources.
Working capital decreased by $3,792,000 at September 30, 2024 to $41,058,000 as compared to working capital of $44,850,000 at December 31, 2023. The decrease in working capital was primarily due to payment of dividends of $2,366,000 and repurchases of common stock of $1,083,000.
Net cash used in operating activities for the nine months ended September 30, 2024 decreased by $68,000 from $753,000 for the nine months ended September 30, 2023, to $685,000 for the nine months ended September 30, 2024.
Net cash provided by investing activities during the nine months ended September 30, 2024 decreased by $9,736,000 to $1,614,000 as compared to $11,350,000 for the nine months ended September 30, 2023, primarily as a result of net investment shifting materially in 2023 from marketable securities to investments in securities classified as cash and cash equivalents.
Net cash used in financing activities for the nine months ended September 30, 2024 and 2023 was $3,510,000 and $3,159,000, respectively. The change of $351,000 primarily resulted from an increase in repurchases of common stock of $378,000 in 2024.
We maintain our cash in money market funds, government securities, certificates of deposit and short-term fixed income securities. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, purchase obligations or other long-term liabilities.
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements included in this Quarterly Report on Form 10-Q requires management to make estimates that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
27
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from the period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above.
For a detailed discussion of our significant accounting policies and related judgements, see Note B to our consolidated financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this review, these officers concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our legal proceedings see Note I and Note N to our unaudited condensed consolidated financial statements included in this Quarterly Report and Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2023 (filed with the SEC on March 8, 2024). During the three months ended September 30, 2024 and to date, no material events occurred with respect to our legal proceedings, except for the following: (i) with respect to our litigation against Meta(Facebook) involving certain of our Mirror Worlds patents, the oral argument on appeal to the U.S. Court of Appeals for the Federal Circuit took place on October 11. 2024 and a decision is pending (see Note I[2] to our unaudited condensed consolidated financial statements included herein), and (ii) on August 6, 2024, plaintiff Mitchell Mizel filed a putative class action against the Company and its Chairman and Chief Executive Officer in the United States District Court, Southern District of New York, alleging, among other things, that the Company is required to register as an “investment company” under the Investment Company Act of 1940. The Company strongly denied the allegations. On October 3, 2024, the litigation was settled on terms not material to the Company and the putative class action complaint was withdrawn with prejudice (see Note I[4] to our unaudited condensed consolidated financial statements included herein).
ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. Investors should carefully consider the risks described in this Quarterly Report on Form 10-Q for the three months ended September 30, 2024, and our Annual Report on Form 10-K for the year ended December 31, 2023 (pages 10-19), filed with the SEC on March 8, 2024.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Issuances of Unregistered Securities
There were no such issuances during the three months ended September 30, 2024.
Stock Repurchases
On June 13, 2023, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of shares of our common stock over the subsequent 24 month period. The common stock may be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion. The timing and amount of the shares repurchased is determined by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased, suspended or discontinued at any time. Since inception of the Share Repurchase Program in August 2011 through September 30, 2024, we have repurchased an aggregate of 10,217,856 shares of our common stock at an aggregate cost of $19,772,820 (exclusive of commissions and excise taxes) or an average per share price of $1.94. During the three months ended September 30, 2024, we repurchased an aggregate of 119,615 shares of our common stock at an aggregate cost of $189,424 (exclusive of commissions and excise taxes) or an average per share price of $1.58. During the nine months ended September 30, 2024, we repurchased an aggregate of 577,060 shares of our common stock at an aggregate cost of $1,059,904 (exclusive of commissions and excise taxes) or an average per share price of $1.84. At September 30, 2024, the remaining dollar value of shares that may be repurchased under the Share Repurchase Program was $3,312,801.
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During the months of July, August and September 2024, we purchased common stock pursuant to our Share Repurchase Program as indicated below:
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum
Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| July
1 to July 31, 2024 |
47,228 | $1.59 | 47,228 | $3,427,067 |
| August
1 to August 31, 2024 |
59,573 | $1.59 | 59,573 | $3,332,105 |
| September
1 to September 30, 2024 |
12,814 | $1.51 | 12,814 | $3,312,801 |
| Total | 119,615 | $1.58 | 119,615 |
ITEM 3. Defaults Upon Senior Securities
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. Exhibits
(a) Exhibits
| 31.1 | Controls and Procedure Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 31.2 | Controls and Procedure Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 101 | Interactive data files:** |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Scheme Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
_____________________________
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETWORK-1 TECHNOLOGIES, INC. | ||
| ||
| Date: October 24, 2024 | By: | /s/ Corey M. Horowitz |
Corey
M. Horowitz (Principal Executive Officer) |
||
| ||
| Date: October 24, 2024 | By: | /s/ Robert Mahan |
Robert
Mahan (Principal Financial Officer) |
||
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