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, 2023, and the results of its operations and
comprehensive loss for the three month periods ended March 31, 2023 and March 31, 2022, changes in stockholders’ equity
for the three month periods ended March 31, 2023 and March 31, 2022, and its cash flows for the three month periods ended March
31, 2023 and March 31, 2022. The unaudited condensed consolidated financial statements included herein have been
prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial
information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules
and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 30, 2023. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the
results of operations to be expected for the full year.
The
accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries,
Mirror Worlds Technologies, LLC. and HFT Solutions, LLC. All intercompany balances and transactions have been eliminated in consolidation.
[2]
BUSINESS
The
Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns
ninety-seven (97)
U.S. patents, fifty-two (52) of
such patents have expired, and eight 8 foreign patents related to (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 (Subscriber Identification Module) technology 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’s current strategy includes continuing to pursue licensing opportunities for its patent portfolios. In addition, the Company
reviews opportunities to acquire or license additional intellectual property as well as other strategic alternatives. The Company’s
patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential
to generate significant licensing opportunities as the Company has achieved with respect to its Remote Power Patent and Mirror Worlds
Patent Portfolio. In addition, the Company may also enter into strategic relationships with third parties to develop, commercialize,
license or otherwise monetize their intellectual property.
The
Company has made equity investments totaling $7,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”), a clinical stage biotechnology
company with an exclusive license to sixty-five (65) patents (see Note J hereof).
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| [1] | Use
of Estimates and Assumptions |
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting
periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial
statements include costs related to the Company’s assertion of litigation, valuation of the Company’s patent portfolios,
stock-based compensation, the recoverability of deferred tax assets and the carrying value of the Company’s equity method investments.
Actual results could be materially different from those estimates, upon which the carrying values were based.
Certain
amounts recorded to reflect the Company’s share of income or losses of its equity method investee, accounted for under the equity
method, are based on estimates and the unaudited results of operations of the equity method investee and may require adjustment in the
future when the audit of the equity method investee is complete. The Company reports its share of the results of its equity method investee
on a one quarter lag basis.
[2]
Revenue Recognition
Under
ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount that
reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
The
Company determines revenue recognition through the following steps:
| • | identification
of the license agreement; |
| • | identification
of the performance obligations in the license agreement; |
| • | determination
of the consideration for the license; |
| • | allocation
of the transaction price to the performance obligations in the contract; and |
| • | recognition
of revenue when the Company satisfies its performance obligations. |
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
disaggregated by source is as follows:
Schedule of disaggregation of revenue | |
| | |
| |
| |
Three months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Litigation
settlements | |
$ | 537,000 | | |
$ | — | |
Total Revenue | |
$ | 537,000 | | |
$ | — | |
During
the three months ended March 31, 2023, the Company entered into settlement agreements with Arista Networks, Inc., Antaira Technologies
LLC, Panasonic Holdings Corporation and TP-Link USA Corporation with respect to patent infringement litigation involving its Remote
Power Patent, resulting in aggregate settlements paid of $537,000 which are recognized as revenue during the three months ended March
31, 2023 and a conditional payment of $150,000 which has not been recognized as revenue as of March 31, 2023 because the terms of the
conditional payment have not yet been satisfied.
Revenue
from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue
recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations
of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable
upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of a litigation settlement
related to the Company’s assertion of patent infringement involving its intellectual property, defendants will either pay (i) a
non-refundable lump sum payment for a non-exclusive fully-paid license, or (ii) a non-refundable lump sum payment (license initiation
fee) together with an ongoing obligation to pay quarterly or monthly royalties to the Company for the life of the licensed patent.
[3]
Equity Method Investments
Equity
method investments are equity securities in entities the Company does not control but over which it has the ability to exercise significant
influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments —
Equity Method and Joint Ventures (see Note J hereof). Equity method investments are measured at cost minus impairment,
if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share of the
income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value in an equity
method investment is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed
obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company
will not record its share of such income until it equals the amount of its share of losses not previously recognized.
[4]
Income Taxes
The
Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 740, Income Taxes (ASC 740), which requires the Company to use the assets and liability method of accounting for income
taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary (timing) differences
by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities
and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in
tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely
than not that some portion, or all, of a deferred tax asset will not be realized. As of March 31, 2023, the Company had total deferred
tax assets generated from its activities totaling $1,006,000. The Company’s deferred tax assets were offset by a valuation allowance
of $1,006,000 as it was determined that it is more likely than not that certain deferred tax assets will not be realized. As of March
31, 2023, the Company also had a deferred tax liability of $1,008,000, resulting in a net deferred tax liability position of $1,008,000.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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”). During the second half
of 2022, based on available information concerning the Company’s shareholder ownership, the Company did not satisfy the Ownership
Test. However, the Company may subsequently be determined to be a PHC in 2023 or in future years if it satisfies both the Ownership Test
and Income Test. If the Company were to become a PHC in 2023 or any future year, it would be subject to the 20% tax on its UPHCI. In
such event, the Company may issue a special cash dividend to its shareholders in an amount equal to the UPHCI rather than incur the 20%
tax.
ASC
740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position as
a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure
a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements.
A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria
should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company had no
uncertain tax positions as of March 31, 2023.
The
Company recognizes interest and penalties related to income tax in the income tax provision in the unaudited condensed consolidated statements
of operations and comprehensive loss.
U.S.
federal, state and local income tax returns prior to 2019 are not subject to examination by any applicable tax authorities, except that
tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent they generated loss carry-forwards
that are available for those future years.
[5]
Reclassifications
Stock-based
compensation in the unaudited condensed consolidated statement of operations and comprehensive loss for the three months ended March
31, 2022 has been recast and reclassified to conform to the current period presentation.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
[6]
New Accounting Standards
There
are no new accounting standards that have had a material impact on the Company's unaudited condensed consolidated financial statements.
NOTE
C – PATENTS
The
Company’s intangible assets at March 31, 2023 include patents with estimated remaining economic useful lives ranging from 0.25
to 16.25 years. 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, 2023 and December 31, 2022 were as follows:
Schedule of patent | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Gross carrying
amount – patents | |
$ | 8,473,000 | | |
$ | 8,473,000 | |
Accumulated amortization – patents | |
| (6,964,000 | ) | |
| (6,881,000 | ) |
Patents, net | |
$ | 1,509,000 | | |
$ | 1,592,000 | |
Amortization
expense for the three months ended March 31, 2023 and 2022 was $83,000 and $75,000, respectively. Future amortization of intangible assets,
net is as follows:
Schedule of future amortization of current intangible | | | |
| | |
|
Twelve Months Ended March 31, | |
| 2023 | | |
$ | 214,000 | |
| 2024 | | |
| 120,000 | |
| 2025 | | |
| 120,000 | |
| 2026 | | |
| 120,000 | |
| 2027 | | |
| 118,000 | |
| Thereafter | | |
| 817,000 | |
| Total | | |
$ | 1,509,000 | |
| | | |
| | |
Two
patents within the Cox Patent Portfolio expire in July 2023 and November 2023, and the balance of the patents within such portfolio have
expired. 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 and the Remote Power Patent have expired.
NOTE
D – STOCK-BASED COMPENSATION
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 March 31, 2023, there were 58,750 shares of common stock subject to outstanding awards under the 2022 Plan and 2,230,000 shares of
common stock available for issuance under the 2022 Plan.
As
of March 31, 2023, there were 512,500 shares of common stock subject to outstanding awards under the Company’s 2013 Stock Incentive
Plan (“2013 Plan”). The Company discontinued issuing awards under its 2013 Plan as a result of the adoption of the 2022 Plan.
A
summary of restricted stock unit activity for the three months ended March 31, 2023 is as follows (each restricted stock unit issued
by the Company represents the right to receive one share of the Company’s common stock):
Schedule of restricted stock unit activity | |
| | | |
| | |
| |
Number
of Shares | | |
Weighted-Average
Grant Date Fair Value | |
Balance of restricted
stock units outstanding at December 31, 2022 | |
| 625,000 | | |
$ | 1.87 | |
Grants of restricted stock units | |
| 70,000 | | |
| 2.25 | |
Vested restricted stock units | |
| (123,750 | ) | |
| (2.48 | ) |
Balance of restricted stock units outstanding at March 31, 2023 | |
| 571,250 | | |
$ | 1.79 | |
Restricted
stock unit compensation expense was $161,000 and $55,000 for the three months ended March 31, 2023 and 2022, respectively. Stock-based
compensation expense is included in general and administrative expenses on the unaudited condensed consolidated statement of operations
and comprehensive loss.
The
Company has an aggregate of $740,000 of unrecognized restricted stock unit compensation as of March 31, 2023 to be expensed over a weighted
average period of 2.35 years.
All
of the Company’s outstanding (unvested) restricted stock units have dividend equivalent rights. As of March 31, 2023 and December
31, 2022, there was $44,000 and $37,000, respectively, accrued for dividend equivalent rights which were included in other accrued expenses.
NOTE
E – LOSS PER SHARE
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 571,250 and
1,171,250 at March 31, 2023 and 2022, respectively, consisted of restricted stock units and stock options. However, as the Company generated
a net loss in 2023 and 2022, all potentially dilutive shares were not reflected in diluted net loss per share because the impact of such
instruments was anti-dilutive.
Computations
of basic and diluted weighted average common shares outstanding were as follows:
Schedule of earnings per share, basic and diluted | |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Weighted-average common shares outstanding
– basic | |
| 23,866,821 | | |
| 23,909,115 | |
Dilutive effect of restricted stock units and stock options | |
| — | | |
| — | |
Weighted-average common shares outstanding – diluted | |
| 23,866,821 | | |
| 23,909,115 | |
Restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive | |
| 571,250 | | |
| 1,171,250 | |
NOTE
F – MARKETABLE SECURITIES
Marketable
securities as of March 31, 2023 and December 31, 2022 were composed of the following:
Schedule of marketable securities |
March
31, 2023 |
| |
| | | |
| | | |
| | | |
| | |
| |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Certificates of deposit | |
$ | 2,976,000 | | |
$ | 21,000 | | |
$ | — | | |
$ | 2,997,000 | |
Government securities | |
| 25,992,000 | | |
| 204,000 | | |
| — | | |
| 26,196,000 | |
Fixed income mutual funds | |
| 7,504,000 | | |
| 45,000 | | |
| — | | |
| 7,549,000 | |
Corporate bond | |
| 178,000 | | |
| — | | |
| — | | |
| 178,000 | |
| |
| | | |
| | | |
| | | |
| | |
Total marketable securities | |
$ | 36,650,000 | | |
$ | 270,000 | | |
$ | — | | |
$ | 36,920,000 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Government Securities | |
$ | 20,781,000 | | |
$ | 67,000 | | |
$ | — | | |
$ | 20,848,000 | |
Fixed income mutual funds | |
| 11,904,000 | | |
| — | | |
| (915,000 | ) | |
| 10,989,000 | |
Certificates of Deposit | |
| 3,019,000 | | |
| — | | |
| (43,000 | ) | |
| 2,976,000 | |
Corporate bonds and notes | |
| 192,000 | | |
| — | | |
| (14,000 | ) | |
| 178,000 | |
| |
| | | |
| | | |
| | | |
| | |
Total marketable securities | |
$ | 35,896,000 | | |
$ | 67,000 | | |
$ | (972,000 | ) | |
$ | 34,991,000 | |
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.
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 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[1] 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) 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 $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.
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: Obligated to pay recognition, net proceeds(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, 2023 and 2022.
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
G – COMMITMENTS AND CONTINGENCIES (continued)
[3]
Leases
The
Company has one operating lease for its principal office space in New Canaan, Connecticut that will expire on April 30, 2025.
There
are no material residual guarantees associated with any of the Company’s leases and there are no significant restrictions or covenants
included in the Company’s lease agreements.
The
calculated incremental borrowing rate was approximately 4.2%, which was calculated based on the remaining lease term of 3 years as of
May 1, 2022. The remaining lease term as of March 31, 2023 was approximately 2 years.
There
was no sublease rental income for the three months ended March 31, 2023, and the Company is not the lessor in any lease arrangement,
and there were no related-party lease agreements.
Right
of use lease assets and related lease obligations for the Company’s operating leases were recorded in the unaudited condensed consolidated
balance sheet as follows:
Schedule of operating leases obligations | |
| | | |
| | |
| |
As of | | |
As of | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Operating lease
right-of-use assets | |
$ | 145,000 | | |
$ | 161,000 | |
| |
| | | |
| | |
Operating lease obligations – current | |
| 79,000 | | |
| 79,000 | |
Operating lease obligations – non-current | |
| 77,000 | | |
| 94,000 | |
Total lease obligations | |
$ | 156,000 | | |
$ | 173,000 | |
| |
| | | |
| | |
The
table below presents certain information related to the Company’s lease costs for the period ended:
Schedule of leases cost | |
| | | |
| | |
| |
For the Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Operating lease
cost | |
$ | 19,000 | | |
$ | — | |
Short-term lease cost | |
| — | | |
| — | |
Total lease cost | |
$ | 19,000 | | |
$ | — | |
Future
lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of March 31,
2023, were as follows:
Schedule of future minimum leases payments | |
| | |
| |
Operating Leases | |
2023 – remaining
period | |
$ | 59,000 | |
2024 | |
| 78,000 | |
2025 | |
| 26,000 | |
Total future minimum lease payments | |
| 163,000 | |
Less imputed interest | |
| (7,000 | ) |
Total operating lease liability | |
$ | 156,000 | |
NOTE
H - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
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.
Under
the terms of the Agreement (which terms are substantially the same as the prior employment agreement with the Chairman and Chief Executive
Officer), so long as the Chairman and Chief Executive Officer continues to serve as an executive officer of the Company, whether pursuant
to the Agreement or otherwise, the Chairman and Chief Executive Officer shall also receive incentive compensation in an amount equal
to 5% of the Company’s gross royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees
or any other expenses) with respect to its Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction
of all legal fees and litigation expenses related to licensing, enforcement and sale activities, but in no event shall he receive less
than 6.25% of the gross recovery) of the Company’s royalties and other payments relating to Licensing Activities with respect to
patents other than the Remote Power Patent (including all of the Company’s patent portfolios and its investment in ILiAD Biotechnologies)
(collectively, the “Incentive Compensation”). During the three months ended March 31, 2023 and 2022, the Chairman and Chief
Executive Officer earned Incentive Compensation of $27,000 and $0.
NOTE
I – LEGAL PROCEEDINGS
[1]
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 completed and the parties have each submitted summary judgment motions.
A trial date has not yet been set.
[2] On
May 9, 2017, Mirror Worlds Technologies, LLC, the Company’s
wholly-owned subsidiary, initiated litigation against Facebook, Inc. (now Meta Platforms, Inc., “Meta”) 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 Meta’s core technologies that enable Meta’s Newsfeed and Timeline features.
On August 11, 2018, the Court issued an order granting Meta’s motion for summary judgment of non-infringement and dismissed
the case. On August 17, 2018, the Company filed a Notice of Appeal 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 ruled in the Company’s favor and reversed the summary judgment finding of the District Court and remanded the
litigation to the Southern District of New York for further proceedings.
NOTE
I – LEGAL PROCEEDINGS (continued)
On
March 7, 2022, the District Court entered a ruling granting in part and denying in part a motion for summary judgment by Meta. In its
ruling the Court (i) denied Meta’s motion that the asserted patents were invalid by concluding that all asserted claims were patent
eligible under §101 of the Patent Act and (ii) granted summary judgment of non-infringement in favor of Meta and dismissed the
case. The Company strongly disagrees with the decision of the District Court on non-infringement and on April 4, 2022, the Company
filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On April 18, 2022, Meta filed a notice of cross-appeal
with respect to the Court’s ruling on validity. The appeal is pending.
[3]
On December 15, 2020, the 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 objected to jurisdiction at the AAA. 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. On September 22, 2022, the arbitration brought by Netgear was dismissed
by the AAA on jurisdiction grounds. The case remains pending in the Supreme Court of the State of New York, County of New York.
[4]
In October and November 2022, the Company initiated separate litigation against ten defendants for infringement of its Remote Power
Patent seeking monetary damages based upon reasonable royalties, as follows: (i) On October 6, 2022, the Company initiated such litigation
against Arista Networks, Inc., Fortinet, Inc., Honeywell International Inc. and Ubiquiti Inc. in the United States District Court, District
of Delaware; (ii) On October 27, 2022, and November 3, 2022, the Company initiated such litigation against TP-Link USA Corporation and
Hikvision USA, Inc. in the United States District Court for the Central District of California; (iii) On November 4, 2022, the Company
initiated such litigation against Panasonic Holdings Corporation and Panasonic Corporation of North America in the United States District
Court for the Eastern District of Texas (Marshall Division); and (iv) On November 8, 2022 and November 16, 2022, the Company initiated
such litigation against Antaira Technologies, LLC and Dahua Technology USA in the United States District Court for the Central District
of California.
During
the three months ended March 31, 2023, the Company entered into settlement agreements with Arista Networks, Inc., Antaira Technologies
LLC, Panasonic Holdings Corporation and TP-Link USA Corporation with respect to patent infringement litigation involving its Remote
Power Patent, resulting in aggregate settlements paid of $537,000 which are recognized as revenue during the three months ended March
31, 2023 and a conditional payment of $150,000 which has not been recognized as revenue as of March 31, 2023 because the terms of the
conditional payment have not yet been satisfied.
NOTE
J – INVESTMENT
During
the period December 2018 through August 2022, the Company made an aggregate investment of $7,000,000 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 focused on validating its proprietary intranasal vaccine, BPZE1, for the prevention of pertussis (whooping cough).
At March 31, 2023, the Company owned approximately 6.8% of the outstanding units of ILiAD on a non-fully diluted basis and 6.1% of the
outstanding units on a fully diluted basis (after giving effect to the exercise all outstanding options and warrants). In connection
with its initial 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.
For
the three months ended March 31, 2023 and 2022, the Company recorded an allocated net loss from its equity method investment in ILiAD
of $674,000 and $433,000, respectively.
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 $4,254,000,
which is accounted for as equity method goodwill.
The following table provides certain summarized
financial information for the Company’s equity method investee for the periods presented and has been compiled from the equity
investee’s financial statement, reported on one quarter lag.
Schedule of equity method investments | |
| | | |
| | |
| |
Three Months Ended December 31, | |
| |
2022 | | |
2021 | |
Loss from continuing
operations | |
$ | 3,466,000 | | |
$ | 3,367,000 | |
Comprehensive loss | |
$ | 9,911,000 | | |
$ | 4,560,000 | |
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, 2023, the Company has repurchased an aggregate of 9,349,449 shares of its common stock at an aggregate cost of $18,060,296
(exclusive of commissions) or an average per share price of $1.93. During the three months ended March 31, 2023, the Company repurchased
an aggregate of 136,785 shares of its common stock at an aggregate cost of $302,202 (exclusive of commissions) or an average per share
price of $2.21. At March 31, 2023, the dollar value of remaining shares that may be repurchased under the Share Repurchase Program was
$3,095,688.
On
August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for,
among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and
certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed
on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally
1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise
tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value
of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of Treasury
has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
The excise tax applies in case where the total value of the stock repurchase during the taxable year exceeds $1,000,000.
NOTE
L – CONCENTRATIONS
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, 2023, the Company had $680,000 in excess of the FDIC
insured limit.
Revenue
from three parties constituted 94% of the Company’s revenue for the three months ended March 31, 2023 and all of such revenue was
derived from the Remote Power Patent portfolio. The Company had no revenue for the three months ended March 31, 2022.
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 have been
paid in March and September of each year. The Company has been paid semi-annual cash dividends consistent with its policy. On March 3,
2023, the Company’s Board of Directors declared a semi-annual cash dividend of $0.05 per share with a payment date of March 31,
2023 to all common shareholders of record as of March 15, 2023. 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.