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 March 31, 2022, and the results of its operations and
comprehensive income (loss) for the three month periods ended March 31, 2022 and March 31, 2021, changes in stockholders’
equity for the three month periods ended March 31, 2022 and March 31, 2021, and its cash flows for the three month
periods ended March 31, 2022 and March 31, 2021. 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, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 30, 2022. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the
results of operations to be expected for the full year.
The
accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries,
Mirror Worlds Technologies, LLC. and HFT Solutions, LLC.
On
March 17, 2022, the Company formed HFT Solutions, LLC for the purpose of acquiring its HFT patent portfolio (see Note G[2] hereof). All
intercompany balances and transactions have been eliminated on consolidation.
[2]
BUSINESS
The
Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns ninety-six
(96) patents including (i) the 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) the 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 mobile devices, including smartphones, tablets and computers;
(iii) the 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) the 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) the remote power patent (the “Remote Power Patent”) covering
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.
NOTE
A – BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
The
Company had been dependent upon its Remote Power Patent for a significant portion of its revenue. The Company no longer receives licensing
revenue for its Remote Power Patent for any period subsequent March 7, 2020 (the expiration date of the patent). Except for the Company’s
pending legal proceeding against NETGEAR, Inc. involving its Remote Power Patent, the Company’s future revenue is entirely dependent
on its ability to monetize its other patent assets.
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.
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 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.
| [2] | 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 $250,000. At March 31, 2022, the Company maintained a cash balance of $8,325,000
in excess of the FDIC insured limit.
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.
The
Company’s marketable securities are comprised of fixed income mutual funds, corporate bonds and notes. The Company’s marketable
securities are measured at fair value and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on fixed
income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the unaudited condensed consolidated
statements of operations and comprehensive income (loss). Unrealized holding gains and losses, net of the related tax effect, on corporate
bonds and notes are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Dividend
and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific
identification method for determining the cost of the marketable securities.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Under
ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount that
reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
The
Company determines revenue recognition through the following steps:
| • | identification
of the license agreement; |
| • | identification
of the performance obligations in the license agreement; |
| • | determination
of the consideration for the license; |
| • | allocation
of the transaction price to the performance obligations in the contract; and |
| • | recognition
of revenue when the Company satisfies its performance obligations. |
The
Company relies 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 a litigation settlement
related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a
non-refundable lump sum payment for a non-exclusive fully-paid license, or (ii) a non-refundable lump sum payment (license initiation
fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent.
| [5] | 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 unaudited condensed consolidated statements
of operations and comprehensive income (loss) 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.
[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 J hereof). Equity method investments are measured at cost minus impairment,
if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the
income or loss from equity method investments is recognized on
a one-quarter lag. When the Company’s carrying value in an equity method investment is reduced to zero, no further losses are recorded
in the Company’s financial statements unless the Company guaranteed obligations of the investee company or has committed additional
funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals
the amount of its share of losses not previously recognized. 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.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
Company includes in costs of revenue contingent legal fees payable to patent litigation counsel (see Note G[1] hereof), any other contractual
payments to third parties related to net proceeds from settlements (see Note G[2] hereof) and incentive bonus compensation payable to
its Chairman and Chief Executive Officer (see Note H[1] hereof).
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 March 31, 2022.
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.
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 anytime
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”).
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. However, the Company may be determined to be a PHC in 2022
or in future years. If the Company were to become a PHC in 2022 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.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
[9] | New Accounting
Standards |
There
are no new accounting standards that had a material impact on the Company's unaudited condensed consolidated financial statements.
NOTE
C – PATENTS
The
Company’s intangible assets at March 31, 2022 include patents with estimated remaining economic useful lives ranging from 1 to
17.25 years (see Note G[2] hereof). For all periods presented, all of the Company’s patents were subject to amortization. The
gross carrying amounts and accumulated amortization related to acquired intangible assets as of March 31, 2022 and December 31, 2021
were as follows:
Schedule of patent | |
| | | |
| | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Gross carrying amount – patents | |
$ | 8,473,000 | | |
$ | 7,949,000 | |
Accumulated amortization – patents | |
| (6,640,000 | ) | |
| (6,565,000 | ) |
Patents, net | |
$ | 1,833,000 | | |
$ | 1,384,000 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $75,000 and $74,000, respectively. Future amortization of intangible assets,
net is as follows:
|
|
Schedule of future amortization of current intangible |
|
|
|
|
| |
Twelve Months Ended March 31, | |
| 2023 | | |
$ | 330,000 | |
| 2024 | | |
| 215,000 | |
| 2025 | | |
| 120,000 | |
| 2026 | | |
| 120,000 | |
| 2027 and thereafter | | |
| 1,048,000 | |
| Total | | |
$ | 1,833,000 | |
| | | |
| | |
| | | |
| | |
All
of the patents within the Cox Patent Portfolio expired in September 2021 except for two patents which expire in July 2023 and November
2023. The expiration dates of patents within the Company’s M2M/IoT Patent Portfolio range from September 2033 to May 2034. The
expiration dates within the Company’s HFT Patent Portfolio range from October 31, 2039 to November 1, 2039. All of the patents
within the Company’s Mirror Worlds Patent Portfolio expired. The Company’s Remote Power Patent expired on March 7, 2020.
NOTE
D – STOCK-BASED COMPENSATION
Restricted
Stock Units
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
March 31, 2022, there were 1,212,938 shares of common stock available for issuance under the 2013 Plan.
A
summary of restricted stock unit activity for the three months ended March 31, 2022 is as follows (each restricted stock unit issued
by the Company represents the right to receive one share of the Company’s common stock):
Schedule of restricted stock unit activity | |
| | | |
| | |
| |
Number of Shares | | |
Weighted-Average
Grant Date Fair Value | |
Balance of restricted stock units outstanding at December 31, 2021 | |
| 12,500 | | |
$ | 3.36 | |
Grants of restricted stock units | |
| 670,000 | | |
| 1.94 | |
Vested restricted stock units | |
| (11,250 | ) | |
| (2.55 | ) |
Balance of restricted stock units outstanding at March 31, 2022 | |
| 671,250 | | |
$ | 1.94 | |
On
January 18, 2022, the Company approved the grant of an aggregate of 25,000 restricted stock units to Jon Greene (15,000 restricted stock
units), the Company’s Executive Vice President, and Jonathan Maslow (10,000 restricted stock units), a consultant to the Company. The
restricted stock units vest 50% on the one year anniversary of the date of grant (January 18, 2023) and 50% on the two year anniversary
of the date of grant (January 18, 2024).
On
February 23, 2022, the Company’s Board of Directors approved the grant of 15,000 restricted stock units to each of the Company’s
three non-management directors. The restricted stock units vest over a one year period in equal quarterly installments of 3,750 shares
of common stock on each of March 15, 2022, June 15, 2022, September 15, 2022 and December 15, 2022.
On
March 11, 2022, 125,000 shares of the Company’s common stock subject to restricted stock units owned by the Company’s Chairman
and Chief Executive Officer were settled (such restricted stock units vested in July 2021). With respect to the restricted stock unit
settlement, the Chairman and Chief Executive Officer delivered 45,438 shares to satisfy withholding taxes and received 79,562 net shares
of common stock.
NOTE
D – STOCK-BASED COMPENSATION (continued)
On
March 22, 2022, in connection with the Company entering into a new four year employment agreement with its Chairman and Chief Executive
Officer, the Company granted to its Chairman and Chief Executive Officer 600,000
restricted stock units which vest in four tranches
subject to certain conditions (see Note H[1]). The Company valued the grant of these 600,000
restricted stock units using a Monte
Carlo simulation due to certain
market-based conditions included in the vesting terms (see Note B[5] hereof). The key inputs into the Monte Carlo simulation used to
value the restricted stock units was a risk-free rate of 2.39%,
expected term of 4
four years, expected volatility of 40%
and a stock price of $2.47.
Restricted
stock unit compensation expense was $55,000 and $59,000 for the three months ended March 31, 2022 and 2021, respectively.
The
Company has an aggregate of $1,266,000 of unrecognized restricted stock unit compensation as of March 31, 2022 to be expensed over a
weighted average period of 2.71 years.
All
of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of March 31, 2022 and December 31, 2021,
there was $72,000
accrued for dividend equivalent rights
which were included in other accrued expenses.
NOTE
E – EARNINGS (LOSS) PER SHARE
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 includes the dilutive effects of options and restricted stock units. Potentially dilutive shares of
1,171,250 and 696,250 at March 31, 2022 and 2021, respectively, consisted of options and restricted stock units.
Computations
of basic and diluted weighted average common shares outstanding were as follows:
Schedule of Earnings per share | |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Weighted-average common shares outstanding – basic | |
| 23,909,115 | | |
| 24,107,879 | |
Dilutive effect of options and restricted stock units | |
| — | | |
| 508,505 | |
Weighted-average common shares outstanding – diluted | |
| 23,909,115 | | |
| 24,616,379 | |
Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | |
| 1,171,250 | | |
| — | |
NOTE
F – MARKETABLE SECURITIES
Marketable
securities as of March 31, 2022 and December 31, 2021 were composed of:
Schedule of Marketable Securities | |
| | | |
| | | |
| | | |
| | |
| |
March 31, 2022 | |
| |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Fixed income mutual funds | |
$ | 14,389,000 | | |
$ | — | | |
$ | (490,000 | ) | |
$ | 13,899,000 | |
Corporate bonds and notes | |
| 192,000 | | |
| — | | |
| (15,000 | ) | |
| 177,000 | |
Total marketable securities | |
$ | 14,581,000 | | |
$ | — | | |
$ | (505,000 | ) | |
$ | 14,076,000 | |
| |
December 31, 2021 | |
| |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Fixed income mutual funds | |
$ | 14,462,000 | | |
$ | — | | |
$ | (137,000 | ) | |
$ | 14,325,000 | |
Corporate bonds and notes | |
| 813,000 | | |
| — | | |
| (12,000 | ) | |
| 801,000 | |
Total marketable securities | |
$ | 15,275,000 | | |
$ | — | | |
$ | (149,000 | ) | |
$ | 15,126,000 | |
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.
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[3] 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 Company’s Cox Patent Portfolio (see Note I[2] 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 of the expenses incurred with respect to this litigation.
[2]
Patent Acquisitions
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
NOTE
G – COMMITMENTS AND CONTINGENCIES (continued)
trading
systems where the difference between success and failure may be measured in nanoseconds. The Company paid the seller $500,000
at the closing and has an obligation to pay the
seller an additional $500,000
in cash and $375,000
of the Company's common stock (up to a maximum
of 375,000 shares) upon achieving certain milestones with respect to the patent portfolio. The Company also has an additional obligation
to pay the seller 15%
of the first $50 million of net proceeds (after deduction of expenses) generated by the patent portfolio and 17.5%
of net proceeds greater than $50 million. On May 10, 2022, the Company received an additional patent issuance from the U.S. Patent and
Trademark Office related to the HFT Patent Portfolio.
In
connection with the Company’s acquisition of its Cox Patent Portfolio, the Company is obligated to pay Dr. Cox 12.5% of the
net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the patent portfolio.
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) 10% of the first $125 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, the Company has paid Recognition an aggregate of $3,127,000 with respect to such net
proceeds interest related to the Mirror Worlds Patent Portfolio. No such payments were made by the Company to Recognition
during the three months ended March 31, 2022 and 2021.
In
connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated 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 the patent portfolio. In addition, M2M will be entitled to receive from the Company $250,000 of additional consideration
upon the occurrence of certain future events related to the patent portfolio.
NOTE
H - 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 the Company’s 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 of the Agreement. The Agreement established
an annual target bonus of $175,000 for the Chairman and Chief Executive Officer based upon performance.
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)
NOTE
H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
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 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 the Chairman and Chief
Executive Officer for Good Reason (as defined), in each case prior to the last day of the term of the Agreement, the vesting of all unvested
RSUs 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 its Remote Power Patent and a 10% net interest (gross royalties and other payments
after deduction of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall
he receive less than 6.25% of the gross recovery) of the Company’s royalties and other payments relating to Licensing Activities
with respect to patents other than the Remote Power Patent (including all of the Company’s patent portfolios and its investment
in ILiAD Biotechnologies) (collectively, the “Incentive Compensation”). During the three months ended March 31, 2022 and
2021, the Chairman and Chief Executive Officer earned Incentive Compensation of $0 and $935,000, respectively.
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 any time 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 the Company “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.
NOTE
H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (continued)
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 the Company 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 $175,000 and is eligible to receive
incentive or bonus compensation on an annual basis in the discretion of the Company’s Compensation Committee.
[3]
The Company’s Executive Vice President serves on an at-will basis at an annual base salary of $200,000 and is eligible to receive
incentive or bonus compensation on an annual basis in the discretion of the Company’s Compensation Committee.
NOTE
I – LEGAL PROCEEDINGS AND DISPUTES
[1]
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 $18,692,000 to the Company
to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement to the Company 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.
[2]
On April 4, 2014 and December 3, 2014, the Company 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 its patents
within its Cox Patent Portfolio acquired from Dr. Cox 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 the Company’s 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 at the Patent Trial and Appeal Board (PTAB) and the appeals of PTAB Final Written Decisions to the U.S. Court
of Appeals for the Federal Circuit. Pursuant to a Joint Stipulation and Order Regarding Lifting of Stays, 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 has been substantially completed and a trial date has not yet been set.
[3]
On May 9, 2017, Mirror Worlds Technologies, LLC, the Company’s 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 the Company’s 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 the Company’s
asserted patents has helped Facebook become the most popular social networking site in the world. On August 11, 2018, the Court issued
an order granting Facebook’s motion for summary judgment of non-infringement and dismissed the case. On August 17, 2018, the Company
filed a Notice of Appeal
NOTE
I – LEGAL PROCEEDINGS AND DISPUTES (continued)
to
appeal the summary judgment decision to the U.S. Court of Appeals for the Federal Circuit. On January 23, 2020, the U.S. Court of Appeals
for the Federal Circuit reversed the summary judgment finding of the District Court and remanded the litigation to the Southern District
of New York for further proceedings.
On
March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by 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 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, Facebook filed a notice
of cross-appeal with respect to the Court’s ruling on validity.
[4]
On December 15, 2020, the Company filed a lawsuit against NETGEAR, Inc. (“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 (the “Agreement”)
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. On April 1,
2022, the Court denied Netgear’s motion to compel arbitration. On April 22, 2022, Netgear filed a counterclaim in the Court action
alleging that the Company breached the Agreement by not offering Netgear lower royalties.
NOTE
J – INVESTMENT
During
the period December 2018 – March 2021, the Company 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. ILiAD is developing key technologies that focus on validating its proprietary intranasal vaccine, BPZE1, for the prevention
of pertussis (whooping cough). The aggregate investment of $6,000,000 by the Company includes a $5,000,000 equity investment and a $1,000,000
investment in a convertible note (see below). At March 31, 2022, the Company 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 its investment, the Company’s Chairman and Chief Executive Officer
obtained a seat on ILiAD’s Board of Managers and receives the same compensation for service on the Board of Managers as other non-management
Board members.
On
March 12, 2021, the Company 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.
NOTE
J – INVESTMENT (continued)
For
the three months ended March 31, 2022 and 2021, the Company recorded a net loss from its equity investment in ILiAD of $433,000 and $210,000,
respectively.
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 unaudited condensed consolidated balance sheet at March 31, 2022 is due to an excess amount paid over the book
value of the investment totaling approximately $5,000,000 which is accounted for as equity method goodwill.
NOTE
K – STOCK REPURCHASES
On
June 8, 2021, the Board of Directors authorized an extension and increase of the Company’s share repurchase program (the “Share
Repurchase Program”) to repurchase up to $5,000,000 of 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 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
through March 31, 2022, the Company has repurchased an aggregate of 8,984,134 shares of its common stock at an aggregate cost of $17,225,276
(exclusive of commissions) or an average per share price of $1.92. The Company did not repurchase any shares of its common stock during
the three months ended March 31, 2022. At March 31, 2022, the dollar value of remaining shares that may be repurchased under the Share
Repurchase Program was $3,930,729.
NOTE
L – CONCENTRATIONS
The
Company had no revenue for the three months ended March 31, 2022. Revenue from one licensee constituted 100% of the Company’s revenue
of the three months ended March 31, 2021. At March 31, 2022 and December 31, 2021, the Company had no royalty receivables.
NOTE
M – DIVIDEND POLICY
The
Company’s 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. The Company paid dividends consistent with its policy in 2021 and the first quarter of
2022. 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.
NOTE
N – SUBSEQUENT EVENTS
On
May 1, 2022, the Company signed a new three-year lease for its principal office space in New Canaan, Connecticut, pursuant to which the
Company pays a base rent and additional expenses of an aggregate of $6,000 per month.