NETWORK-1 Technologies, Inc.: Form 10-Q for the period ended Jun 30, 2024

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 two (102) 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 two (102) 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 June 30, 2024, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $42,599,000 and working capital of $42,369,000. 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-one (71) 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 June 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 June 30,2024, we entered into settlements with nine defendants with respect to the aforementioned litigation, including one defendant for $100,000 for the three months ended June 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 three and six months ended June 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.

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 M2M/IoT Patent Portfolio and HFT Patent Portfolio. We may not achieve successful outcomes of such appeals or future litigation involving our patent assets.

Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets and the monetization of our patent portfolios. In addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize. Our strategy includes working with inventors and patent owners to assist in the development and monetization of their patented technologies. We may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. Our patent acquisition and development strategy is to focus on acquiring high quality patents which management believes have the potential to generate significant licensing opportunities as we have achieved with respect to our Remote Power Patent and Mirror Worlds Patent Portfolio.

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).

RESULTS OF OPERATIONS

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenue. We had revenue of $100,000 for the three months ended June 30, 2024 as compared to revenue of $283,000 for the three months ended June 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).

Operating Expenses. Operating expenses for the three months ended June 30, 2024 were $724,000 as compared to $832,000 for the three months ended June 30, 2023. The decrease in operating expenses of $108,000 was primarily as a result of deceases in costs of revenue of $53,000 related to litigation settlements, general and administrative expenses of $91,000, and amortization of patents of $52,000 due to patent expirations, offset by increased professional fees of $88,000 related to contingent legal fees incurred with respect to litigation settlements and the timing of accounting and tax return preparation and compliance costs.

General and administrative expenses were $519,000 for the three months ended June 30, 2024 as compared to $610,000 for the three months ended June 30 , 2023. The decrease in 2024 general and administrative expenses of $91,000 was primarily due to higher 2023 payroll taxes of $92,000 related to the vesting of RSU’s. In addition, our 2024 exchange listing fees decreased by $52,000 and were offset by higher payroll costs of $43,000.

Realized and Unrealized Gain on Marketable Securities. For the three months ended June 30, 2024, we recorded realized and unrealized gains on marketable securities of $54,000, as compared to a loss of $75,000 for the three months ended June 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 June 30, 2024, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $137,000. For the three months ended June 30, 2023, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $94,000. The increase in the deferred tax benefit is primarily the result of an increase of $286,000 in our share of the net losses of our equity method investee in 2024.

Share of Net Losses of Equity Method Investee. We recognized $677,000 of net losses during the three month period ended June 30, 2024, related to our equity share of ILiAD net losses, as compared to a recognized net loss of $391,000 for the three months ended June 30, 2023.

Net Loss. As a result of the foregoing, we realized a net loss of $658,000 or $0.03 per share basic and diluted for the three months ended June 30, 2024, compared with a net loss of $476,000 or $0.02 per share basic and diluted for the three months ended June 30, 2023. Our increased net loss for the three months ended June 30, 2024 was primarily due to decreased revenue of $183,000 and the increased loss of $286,000 of our share of net losses of our equity method investee, offset in part by lower operating expenses of $108,000.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Revenue. We had revenue of $100,000 for the six months ended June 30, 2024 compared to revenue of $820,000 for the six months ended June 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).

Operating Expenses. Operating expenses for the six months ended June 30, 2024 were $1,642,000 as compared to $2,145,000 for the six months ended June 30, 2023. The decrease in operating expenses of $503,000 was primarily as a result of decreases in costs of revenue of $204,000 related to litigation settlements and general and administrative expenses of $203,000.

General and administrative expenses were $1,188,000 for the six months ended June 30, 2024 as compared to $1,391,000 for the six months ended June 30, 2023. The decrease in general and administrative expenses of $203,000 was primarily due to decreased payroll and payroll taxes of $178,000 and decreased exchange listing fees of $44,000, offset in part by increases in state franchise and capital taxes of $63,000 due to the timing of recognizing those costs.

Realized and Unrealized Gain on Marketable Securities. For the six months ended June 30, 2024, we recorded realized and unrealized gains on marketable securities of $102,000 as compared to a gain of $289,000 for the six months ended June 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 six months ended June 30, 2024, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $284,000. For the six months ended June 30, 2023, we had no current tax expense for federal, state and local income taxes and a deferred tax benefit of $247,000.

Share of Net Losses of Equity Method Investee. We recognized $1,305,000 of net losses during the six month period ended June 30, 2024 related to our equity share of ILiAD net losses, as compared to a recognized net loss of $1,065,000 for the six months ended June 30, 2023.

Net Loss. As a result of the foregoing, we realized a net loss of $1,578,000 or $0.07 per share basic and diluted for the six months ended June 30, 2024, compared with a net loss of $1,099,000 or $0.05 per share basic and diluted for the six months ended June 30, 2023. Our increased net loss for the six months ended June 30, 2024 was primarily due to a decrease in revenue of $720,000 and an increase our share of the net losses of our equity method investee of $240,000, offset in part by decreased operating expenses of $503,000.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily from revenue from licensing our patents. At June 30, 2024, our principal sources of liquidity consisted of cash and cash equivalents and marketable securities of $42,599,000 and working capital of $42,369,000. 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 $2,481,000 at June 30, 2024 to $42,369,000 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 $1,175,000 and repurchases of common stock of $883,000.

Net cash used in operating activities for the six months ended June 30, 2024 increased by $107,000 from $553,000 for the six months ended June 30, 2023, to $660,000 for the three months ended June 30, 2024, primarily as a result of a higher net loss in 2024 compared to 2023.

Net cash provided by investing activities during the six months ended June 30, 2024 increased by $533,000 to $5,859,000 as compared to $5,326,000 for the six months ended June 30, 2024, primarily as a result of net investment shifting from marketable securities to investments in securities classified as cash and cash equivalents.

Net cash used in financing activities for the six months ended June 30, 2024 and 2023 was $2,156,000 and $1,606,000, respectively. The change of $550,000 primarily resulted from an increase in repurchases of common stock of $551,000 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.

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.

(a) Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this review, these officers concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. Investors should carefully consider the risks described in this Quarterly Report on Form 10-Q for the three months ended June 30, 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.