UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number: 1-15288
NETWORK-1 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
11-3027591
(IRS Employer
Identification Number)
445 Park Avenue, Suite 912
New York, New York 10022
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (212) 829-5770
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock $.01 par value
Name of Each Exchange on Which Registered
NYSE American
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☐
Accelerated filer ☐
Smaller Reporting Company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the
price at which the common stock was last sold as of June 30, 2017 was $63,118,122. Shares of voting stock held by each officer and
director and by each person, who as of June 30, 2017, may be deemed to have beneficially owned more than 10% of the voting stock have
been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
The number of shares outstanding of Registrant's common stock as of March 26, 2018 was 23,749,312.
NETWORK-1 TECHNOLOGIES, INC.
2017 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements And Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls And Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page No.
1
15
27
27
27
32
32
35
35
46
46
46
46
47
48
52
57
59
60
61
63
Forward-looking statements:
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND EXPECTATIONS
WHICH ARE "FORWARD-LOOKING STATEMENTS". ANY STATEMENT IN THIS 10-K THAT IS NOT A STATEMENT OF
HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING STATEMENT. FORWARD-LOOKING STATEMENTS
PROVIDE CURRENT EXPECTATIONS OF FUTURE EVENTS BASED ON CERTAIN ASSUMPTIONS AND INCLUDE ANY
STATEMENT THAT DOES NOT DIRECTLY RELATE TO ANY HISTORICAL OR CURRENT FACT. STATEMENTS
CONTAINING SUCH WORDS AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD,"
"ESTIMATE," "CONTINUE" OR "PLAN" AND SIMILAR EXPRESSIONS OR VARIATIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATED TO VARIOUS FACTORS IN THIS REPORT AND IN OTHER FILINGS MADE BY US WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"). BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR
MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, INCLUDING THOSE DISCUSSED AS "RISK FACTORS" IN
ITEM 1A AND ELSEWHERE IN THIS REPORT, OR SHOULD ANY OF OUR UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED IN THIS REPORT. WE
UNDERTAKE NO OBLIGATION TO UPDATE, AND WE DO NOT HAVE A POLICY OF UPDATING OR REVISING THESE
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-
LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT WAS MADE. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "NETWORK-1," "COMPANY," "WE," "OUR," "US" MEAN NETWORK-1
TECHNOLOGIES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, MIRROR WORLDS TECHNOLOGIES, LLC.
ITEM 1. BUSINESS
Overview
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own fifty-one
(51) patents including (i) our remote power patent ("Remote Power Patent") covering the delivery of power over Ethernet (PoE) cables for
the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) our Mirror
Worlds patent portfolio (the "Mirror Worlds Patent Portfolio") relating to foundational technologies that enable unified search and
indexing, displaying and archiving of documents in a computer system; (iii) our Cox patent portfolio (the "Cox Patent Portfolio") relating
to enabling technology for identifying media content on the Internet and taking further action to be performed based on such identification;
(iv) our M2M/IoT patent portfolio (the "M2M/IoT Patent Portfolio") relating to, among other things, enabling technology for
authenticating and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices, including
smartphones, tablets and computers; and (v) the QoS patents (the "QoS Patents") covering systems and methods for the transmission of
audio, video and data in order to achieve high quality of service (QoS) over computer and telephony networks. In addition, we continually
review opportunities to acquire or license additional intellectual property.
We have been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930). As of March 15, 2018,
we have entered into twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, include
license agreements with Cisco Systems, Inc., Dell Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola
Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd, Huawei Technologies Co., Ltd., ShoreTel, Inc., Juniper Networks, Inc.,
Polycom, Inc. and Avaya, Inc. (see Notes I[1] and I[2] to our consolidated financial statements included in this Annual Report). We have
also entered into license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror Worlds Patent Portfolio (see
Note I[4] to our consolidated financial statements included in this Annual Report). Our current strategy includes continuing our licensing
efforts with respect to our intellectual property assets. 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. The form of such relationships may differ depending upon the
opportunity and may include, among other things, a strategic investment in such third party, the provision of financing to such third party
or the formation of a joint venture with such third party or others for the purpose of monetizing their intellectual property assets.
Our acquisition 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. Our
Remote Power Patent has generated licensing revenue in excess of $121,000,000 from May 2007 through December 31, 2017. As a result
of our acquisition of Mirror Worlds Patent Portfolio in May 2013, we have received licensing and other revenue of $47,150,000 through
December 31, 2017.
At December 31, 2017, we had cash and cash equivalents of $53,101,000 and working capital of $52,056,000. We believe based
on our current cash position that we will have sufficient cash to fund our operations for the foreseeable future. Based on our cash
position, we continually review opportunities to acquire additional intellectual property as well as evaluate other strategic alternatives.
On November 13, 2017, a jury empaneled in the United States District Court for the Eastern District of Texas found that certain
claims of our Remote Power Patent were invalid and not infringed by Hewlett-Packard (the "HP Jury Verdict"). We have depended on
our Remote Power Patent for a significant portion of our revenue. In addition, we have been entirely dependent upon royalty bearing
licenses for our Remote Power Patent for our recurring revenue. If the District Court enters an order confirming the HP Jury Verdict and
finding certain claims of our Remote Power Patent
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obvious (invalid) and either (i) we are unable to reverse the District Court order on appeal, or (ii) there is an arbitration ruling that the
District Court order relieves the obligation of certain of our licensees including Cisco Systems, Inc., our largest licensee, to continue to
pay us royalties and the District Court order is not subsequently reversed on appeal, our business, results of operations and cash-flow will
be materially adversely effected (see "Risk Factors" at pages 15 – 18 hereof), "Management's Discussion and Analysis of Financial
Condition and Results of Operations" at page 36 and "Legal Proceedings" at page 29 of this Annual Report).
In addition to litigation involving our Remote Power Patent, we also have pending litigation involving our assertion of infringement
claims concerning certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see "Legal Proceedings" at pages
30 – 32 of this Annual Report).
Our Patents
Our intellectual property currently consists of fifty-one (51) patents. as follows:
Remote Power Patent
A Patent (U.S. Patent No. 6,218,930) covering the delivery of power over Ethernet cables for the purpose of remotely powering
network devices such as wireless access ports, IP phones and network based cameras. Our Remote Power Patent expires in March 2020.
We currently have twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, include license
agreements with Cisco Systems, Inc. Dell Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc.,
NEC Corporation, Samsung Electronics Co., Ltd, Huawei Technologies Co., Ltd, ShoreTel, Inc., Juniper Networks, Inc., Polycom, Inc.
and Avaya, Inc.
Mirror Worlds Patent Portfolio
Our Mirror Worlds Patent Portfolio covers foundational technologies that enable unified search and indexing, displaying and
archiving of documents in a computer system. The expiration dates of the ten (10) issued patents within our Mirror Worlds Patent
Portfolio range from April 2018 to February 2020. Eight patents within our Mirror Worlds Patent Portfolio expired as of September 28,
2017 including U.S. Patent No. 6,006,227 (the "'227 Patent") and U.S. Patent No. 8,255,439 which are asserted in our litigation against
Facebook, Inc. and our 227 Patent was also asserted in litigation against Apple Inc. and Microsoft Corporation which were settled (see
"Legal Proceedings" at page 30 hereof).
Cox Patent Portfolio
Our Cox Patent Portfolio relates to identification of media content on the Internet and taking further action to be performed on such
identification. The expiration dates of our twenty-three (23) issued patents currently within the Cox Patent Portfolio range from
September 2021 to November 2023. We currently have six pending patent applications with the USPTO relating to the Cox Patent
Portfolio. We have pending litigation against Google Inc. and YouTube, LLC involving assertion of certain patents within our Cox
Patent Portfolio (see "Legal Proceedings" at pages 31-32 hereof.
- 3 -
M2M/IoT Patent Portfolio
Our M2M/IoT Patent Portfolio relates to among other things, enabling technology for authenticating and using embedded SIM
cards in next generation IoT, Machine-to-Machine and other mobile devices including smartphones, tablets and computers. We acquired
this patent portfolio in December 2017. The expiration dates of the twelve (12) issued patents currently within our M2M/IoT Patent
Portfolio range from January 2034 to May 2034.
QoS Patents
Our QoS Patents cover systems and methods for transmission of audio, video and data in order to achieve high quality service
(QoS) over computer and telephony networks. The expiration date for the patents within the QoS family of patents is June 2019. In
August 2008, we were issued European Patent No.1086556 titled "Integrated Voice and Data Communications over a Local Area
Network" which covers the same technology as covered by our QoS Patents. The patent has issued in France, Germany, Spain, the
United Kingdom, Ireland and Canada.
Our future success is largely dependent upon our ability to protect our intellectual property assets, including our ability to overturn
the jury verdict rendered in our trial with Hewlett-Packard which found that certain claims of our Remote Power Patent were invalid and
not infringed (see "Risk Factors" at page 15 hereof and "Legal Proceedings" at page 29 hereof), and to continue to receive royalties from
existing license agreements for our Remote Power Patent, consummate license agreements with respect to our intellectual property assets
as well as our ability to acquire additional intellectual property assets or enter into strategic relationships with third parties to license or
otherwise monetize their intellectual property. The complexity of patent law and the inherent risk and uncertainty of litigation creates
risks that our efforts to protect our intellectual property assets, or those of our strategic partners, may not be successful. We may not be
able to uphold our intellectual property assets, including that we may not be successful in overturning the adverse jury verdict in our trial
with Hewlett-Packard involving our Remote Power Patent, or that third parties will not invalidate our other intellectual property assets. In
addition, we may not be able to (i) acquire additional intellectual property assets or successfully license such assets or (ii) successfully
enter into strategic relationships with third parties to license or otherwise monetize their intellectual property (see "Risk Factors" pages
15–27 of this Annual Report).
Remote Power Patent- Market Overview
Our Remote Power Patent (U.S. Patent No. 6,218,930) relates to several technologies which describe a methodology for controlling
the delivery of power to certain devices over an Ethernet network.
The Institute of Electrical and Electronic Engineers (IEEE) is a non-profit, technical professional association of more than 420,000
members. The Standards Association of the IEEE is responsible for the creation of global industry standards for a broad range of
technology industries. In 2000, at the urging of several industry vendors, the IEEE formed a task force to facilitate the adoption of a
standardized
- 4 -
methodology for the delivery of remote power over Ethernet networks which would ensure interoperability among vendors of switches
and terminal devices. On June 13, 2003, the IEEE Standards Association approved the 802.3af Power over Ethernet standard (the
"Standard"), which covers technologies deployed in delivering power over Ethernet networks. The Standard provides for the Power
Sourcing Equipment (PSE) to be deployed in switches or as standalone midspan hubs to provide power to remote devices such as wireless
access points, IP phones and network-based cameras. The technology is commonly referred to as Power over Ethernet ("PoE"). In 2009,
the IEEE Standards Association approved 802.3 at, a new PoE standard which, among other things, increased the available power for
delivery over Ethernet networks. We believe that our Remote Power Patent covers several of the key technologies covered by both the
802.3af and 802.3at standards.
Ethernet is the leading local area networking technology in use today. PoE technology allows for the delivery of PoE cables rather
than by separate power cords. As a result, a variety of network devices, including IP telephones, wireless LAN Access Points, web-based
network security cameras, data collection terminals and other network devices, are able to receive power over existing data cables without
the need to modify the existing infrastructure to facilitate the provision of power for such devices through traditional AC outlets.
Advantages such as lower installation costs, remote management capabilities, lower maintenance costs, centralized power backup, and
flexibility of device location as well as the advent of worldwide power compatibility, led to PoE becoming widely adopted in networks
throughout the world.
PoE provides numerous benefits including quantifiable returns on investment. The cost of hiring electricians to pull power cables to
remote locations used for access points or security cameras can rival or exceed the cost of the devices. Another key benefit is the need for
Voice over IP power reliability in the face of power failures. Using PoE enables data center power supply systems to ensure ongoing
power - a function that would be difficult and expensive to implement if each phone required AC outlets.
These and other advantages such as remote management capabilities, lower maintenance costs, and flexibility of device location
have resulted in PoE technology being widely adopted in networks throughout the world.
Mirror Worlds Patent Portfolio - Patents Covering Document Stream Operating Systems
On May 21, 2013, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, acquired all of the patents previously owned
by Mirror Worlds, LLC (which subsequently changed its name to Looking Glass LLC), consisting of nine issued United States patents
and five pending applications (one of which was issued in November 2013) covering foundational technologies that enable unified search
and indexing, displaying and archiving of documents in a computer system. As consideration for the acquisition of the Mirror Worlds
Patent Portfolio, we paid Mirror Worlds, LLC $3,000,000 in cash and issued 5-year warrants to purchase an aggregate of 1,750,000 shares
of our common stock (875,000 shares of our common stock at an exercise price of $1.40 per share and 875,000 shares of our common
stock at an exercise price of $2.10 per share).
- 5 -
In June 2014, we repurchased from Looking Glass LLC for $505,000 all of the aforementioned warrants to purchase an aggregate
of 1,750,000 shares of our common stock. In November 2013, we received a new patent (U.S. Patent No. 8,572,139) from the USPTO
entitled "Desktop Streamed-Based, Information Management System". This new patent issuance related to one of the pending applications
acquired as part of the Mirror Worlds Patent Portfolio in May 2013.
The inventions relating to document stream operating systems covered by the Mirror Worlds Patent Portfolio resulted from the
work done by Yale University computer scientist, Professor David Gelernter, and his then graduate student, Dr. Eric Freeman, in the mid-
1990s. Certain aspects of the technologies developed by David Gelernter were commercialized in their company's product offering called
"Scopeware." Technologies embodied in Scopeware are now common in various computer and web-based operating systems. Professor
Gelernter and Dr. Freeman each entered into consulting agreements with us as part of our acquisition of the Mirror Worlds Patent
Portfolio.
As part of the acquisition of the Mirror Worlds Patent Portfolio, we also entered into an agreement with Recognition Interface,
LLC ("Recognition"), an entity that financed the commercialization of the Mirror Worlds patent portfolio prior to its sale to Mirror
Worlds, LLC and also retained an interest in the licensing proceeds of the Mirror Worlds patent portfolio. Pursuant to the terms of the
agreement with us, Recognition received (i) 5-year warrants to purchase 250,000 shares of our common stock at an exercise price of $1.40
per share, and (ii) 5-year warrants to purchase 250,000 shares of our common stock at an exercise price of $2.10 per share. In addition, we
issued to an affiliate of Recognition 5-year warrants to purchase 750,000 shares of our common stock at exercise prices ranging from
$1.40 per share to $2.10 per share.
Recognition also receives from us an interest in the net proceeds realized from our 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. During the year ended December 31, 2017 and December 31, 2016,
Recognition received from us $-0- and $2,909,000, respectively, with respect to their interest in the net proceeds realized from the
monetization of our Mirror Worlds Patent Portfolio.
Cox Patent Portfolio - Patents Related to Identification of Media Content on the Internet
On February 28, 2013, we acquired from Dr. Ingemar Cox four patents (as well as a pending patent application) pertaining to
enabling technology for identifying media content on the Internet (the "Cox Patent Portfolio") for a purchase price of $1,000,000 in cash
and 403,226 shares of our common stock. In addition, we are obligated to pay Dr. Cox 12.5% of the net proceeds generated by us from
licensing, sale or enforcement of the Cox Patent Portfolio. Dr. Cox provides consulting services to us with respect to the Cox Patent
Portfolio and future patent applications and assists our efforts to develop the patent portfolio.
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The Cox Patent Portfolio, currently consisting of twenty-three (23) patents, relates to enabling technology for identifying media
content on the Internet, such as audio and video, and taking further action to be performed based on such identification. The patents
within our Cox Patent Portfolio are based on a patent application filed in 2000 and have patent terms extending into 2023. Since the
acquisition of the Cox Patent Portfolio in February 2013, we have filed twenty-four (24) additional patent applications, eighteen (18) of
which have been issued and six of which are pending) relating to the Cox Patent Portfolio. The claims in these eighteen (18) additional
issued patents are generally directed towards systems of content identification and performing actions following therefrom.
There has been significant growth in the uploading of media content to the Internet over the past decade. We plan on further
developing the technology with Dr. Cox and pursuing licensing opportunities for these technologies.
Dr. Cox is currently a Professor at the University of Copenhagen and University College London where he is head of its Media
Futures Group. Dr. Cox was formerly a member of the Technical Staff at AT&T Bell Labs and a Fellow at NEC Research Institute. He is
a Fellow of the ACM, IEEE, the IET (formerly lEE), and the British Computer Society and is a member of the UK Computing Research
Committee. He was founding co-editor in chief of the lEE Proc. on Information Security and was an associate editor of the IEEE Trans. on
Information Forensics and Security. He is co-author of a book entitled "Digital Watermarking" and its second edition "Digital
Watermarking and Steganography". He is an inventor on forty-six (46) United States Patents.
M2M/IoT Patent Portfolio – Patents Related to Internet of Things and Machine-to-Machine Industries
On December 29, 2017, we acquired from M2M and IoT Technologies, LLC ("M2M") twelve (12) issued United States patents
relating to, among other things, the enabling technology for authenticating and using embedded SIM cards in next generation IoT,
Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers as well as automobiles and drones (the
"M2M/IoT Patent Portfolio"). We paid $1,000,000 to acquire the M2M patents and have an obligation to pay M2M 14% of the first $100
million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization Activities (as
defined) related to our M2M/IoT Patent Portfolio. In addition, M2M will be entitled to receive from us $250,000 of additional
consideration upon the occurrence of certain future events related to the patent portfolio.
In addition to the granted United States patents, our M2M/IoT Patent Portfolio also includes seven pending United States patent
applications and nine pending International patent applications. The patents are based on a series of patent applications filed as early as
2013 and have patent terms extending into 2033. We anticipate continuing to prosecute the pending patent applications and plan on filing
several new patent applications with the United States Patent and Trademark Office based on the inventions contemplated by the original
patent filings.
- 7 -
John Nix, the Managing Member of M2M, provides consulting services to us with respect to our M2M/IoT Patent Portfolio. Mr.
Nix is an entrepreneur and inventor, and CEO of Vobal Technologies, LLC. In 2016, Mr. Nix was recognized as "Creator of the Year" by
the Intellectual Property Law Association of Chicago for his intellectual property related to embedded SIM technology.
QoS Patents
We also own five additional patents as part of our QoS Patents, covering various methodologies that provide for allocating
bandwidth and establishing QoS for delay sensitive data, such as voice, on packet data networks. QoS issues become important when data
networks carry packets that contain audio and video which may require priority over data packets traveling over the same network.
Covered within these patents are also technologies that establish bi-directional communications control channels between network-
connected devices in order to support advanced applications on traditional data networks.
Patent Acquisitions or Strategic Relationships
We continually seek to acquire additional intellectual property assets in order to develop, commercialize, license or otherwise
monetize such intellectual property. We continually review opportunities to acquire or license additional intellectual property assets from
individual inventors, technology companies and others for the purpose of pursuing licensing opportunities related to our existing
intellectual property portfolio or otherwise. In addition, we may enter into strategic relationships with such parties to develop,
commercialize, license or otherwise monetize their intellectual property. The form of such relationships may vary depending upon the
opportunity and may include, among other things, a strategic investment in such third party, the provision of financing to such third party
or the formation of a joint venture for the purpose of monetizing such third party's intellectual property assets.
Network-1 Strategy
Our strategy is to capitalize on our intellectual property assets by entering into licensing arrangements with third parties including
manufacturers and users that utilize our intellectual property's proprietary technologies as well as any additional proprietary technologies
covered by patents which may be acquired by us in the future. Our current acquisition strategy is to focus on acquiring high quality
patents which management believes have the potential to generate significant licensing opportunities as has been the case with our
Remote Power Patent and Mirror Worlds Patent Portfolio. Our Remote Power Patent has generated licensing revenue in excess of
$121,000,000 from May 2007 through December 31, 2017. As a result of acquisition of our Mirror Worlds Patent Portfolio in May 2013,
we have received licensing and other revenue of $47,150,000 through December 31, 2017. In addition, we may enter into third party
strategic relationships with inventors and patent owners to assist in the development and monetization of their patent technologies.
- 8 -
In connection with our activities relating to the protection of our intellectual property assets, or the intellectual property assets of
third parties with whom we have strategic relationships in the future, it may be necessary to assert patent infringement claims against third
parties whom we believe are infringing our patents or those of our strategic partners. We are currently involved in several litigations to
protect our patents including our Remote Power Patent, certain patents within our Cox Patent Portfolio and our Mirror Worlds Patent
Portfolio (see "Legal Proceedings" at pages 27-32 hereof). We have in the past successfully asserted litigation with respect to our Remote
Power Patent and our Mirror Worlds Patent Portfolio and have also been successful in defending proceedings at the USPTO challenging
the validity of our Remote Power Patent and certain patents within our Cox Patent Portfolio (see "Legal Proceedings" at pages 30-32 of
this Annual Report).
Licensing - Remote Power Patent
To date we have entered into twenty-seven (27) license agreements with respect to our Remote Power Patent. Seventeen (17) of
our twenty-seven (27) license agreements are royalty bearing (payable either on a quarterly or monthly basis) for the life of the Remote
Power Patent (March 2020). Licensees of our Remote Power Patent include major data network equipment manufacturers and others as
follows:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Cisco Systems, Inc.*
Microsemi Corporation*
Dell, Inc.*
Extreme Networks, Inc.*
Samsung Electronics Co., Ltd
Netgear, Inc.*
Transition Networks, Inc.*
GarretCom,Inc.*
Shoretel,Inc.*
D-Link Corporation and D-Link Systems, Inc.*
BRG Precision Products, Inc.*
Alcatel-Lucent USA/Alcatel-Lucent Holdings, Inc.
Axis Communications, Inc.
Juniper Networks, Inc.
__________________________
•
•
•
•
•
•
•
•
•
•
•
•
•
Motorola Solutions, Inc.*
NEC Corporation*
Polycom, Inc.*
Adtran, Inc.
Huawei Technologies Co., Ltd.
Allied Telesis, Inc.*
Enterasys Networks, Inc.
Foundry Networks, Inc.
SEH Technology, Inc.*
Buffalo Technology (USA), Inc.*
Sony Corporation
ALE USA Inc.
Avaya, Inc.*
*Indicates license agreement provides for payment by licensee of ongoing royalties on a quarterly or monthly basis based on its
sales of PoE products subject to certain conditions.
Cisco License Agreement and July 2010 Settlement
In July 2010, we settled our patent litigation pending in the United States District Court for the Eastern District of Texas, Tyler
Division, against Adtran, Inc, Cisco Systems, Inc. and Cisco-Linksys, LLC, (collectively, "Cisco"), Enterasys Networks, Inc., Extreme
Networks, Inc., Foundry Networks, Inc., and 3Com Corporation, Inc. As part of the settlement, Adtran, Cisco, Enterasys, Extreme
- 9 -
Networks and Foundry Networks each entered into a settlement agreement with us and entered into non-exclusive licenses for our Remote
Power Patent (the "Licensed Defendants"). Under the terms of the licenses, the Licensed Defendants paid us aggregate payments of
approximately $32 million upon settlement and also agreed to license our Remote Power Patent for its full term, which expires in March
2020. In accordance with our Settlement and License Agreement, dated May 25, 2011 (the "Agreement"), Cisco is obligated to pay us
royalties (which began in the first quarter of 2011) based on its sales of PoE products up to maximum royalty payments per year of $9
million per year beginning in 2016 ($8 million through 2015) for the remaining term of the patent (March 2020). The actual royalty
amounts received may be less than the cap stated above. The royalty payments are subject to certain conditions including that there is no
"Adverse Ruling" (as defined in the Agreement) involving our Remote Power Patent (see below - "The Impact of the Jury Verdict in our
Hewlett-Packard Trial"). Under the terms of the Agreement, if we grant other licenses with lower royalty rates to third parties (as defined
in the Agreement), Cisco shall be entitled to the benefit of the lower royalty rates provided it agrees to the material terms of such other
license. Due to our annual royalty rate structure with Cisco which includes declining rates as the volume of PoE product sales increase
during the year, royalties from Cisco have been highest in the first quarter of the calendar year and decline for each of the remaining
calendar quarters of the year. Under the terms of the Agreement, we have certain obligations to Cisco and if we materially breach such
terms, Cisco will be entitled to stop paying royalties to us. This would have a material adverse effect on our business, financial condition
and results of operations.
The Impact of the Jury Verdict in our Hewlett-Packard Trial
On November 13, 2017, a jury empaneled in our litigation against Hewlett-Packard in the United States District Court for the
Eastern District of Texas found that certain claims of our Remote Power Patent are invalid and not infringed by Hewlett-Packard (the "HP
Jury Verdict"). On February 2, 2018, we moved to throw out the HP Jury Verdict and have the Court determine that certain claims of our
Remote Power Patent are not obvious (invalid) as a matter of law by filing a motion for judgment as a matter of law on validity and
motions for a new trial on validity and infringement. A hearing on our motions is currently scheduled for May 14, 2018. Our seventeen
(17) licensees with royalty bearing licenses are obligated to pay us ongoing royalties on a quarterly or monthly basis for the life of our
Remote Power Patent (through March 2020), subject to certain conditions. These conditions include the continued validity of certain
claims of our Remote Power Patent or a finding that a third party's PoE products are found not to infringe our Remote Power Patent and
such finding applies to our licensee's licensed products. As a result of the HP Jury Verdict, several of the largest licensees of our Remote
Power Patent, including Cisco, Dell, and Netgear, have advised us that they will no longer pay us ongoing royalties pursuant to their
license agreements. We disagree with the positions taken by such licensees because, among other reasons, the jury verdict is not an order
of the District Court and may be thrown out as a result of motion practice in the District Court. If we are unable to reach a satisfactory
resolution of the issue with such licensees, we intend to pursue arbitration. We may not prevail in arbitration. If the District Court
subsequently enters an order confirming the HP Jury Verdict and finding certain claims of our Remote Power Patent obvious (invalid) and
we are unable to overturn such order on appeal to the Federal Circuit, certain of our licensees will not be obligated to pay us ongoing
royalties and other licensees including Cisco, our largest licensee, will likely continue not to pay us ongoing royalties unless there is an
arbitration ruling that the District Court order does not affect the obligations of such licensees (including Cisco) to continue to pay us
royalties. In such an event, our business, results of operations and cash-flow will be materially adversely effected.
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If we are successful in our efforts (i) to throw out the HP Jury Verdict in the District Court, (ii) to overturn the jury verdict on
appeal if the District Court confirms the jury verdict and finding certain claims of our Remote Power Patent obvious (invalid), or
(iii) there is an arbitration ruling that the District Court order does not affect the obligations of certain of our licensees (including Cisco) to
continue to pay us royalties and the order is not overturned on appeal, licensees will be obligated to pay us ongoing royalties and all prior
royalties that were not previously paid following the HP Jury Verdict in November 2017.
Licensing – Mirror Worlds Patent Portfolio
We have entered into fully paid non-exclusive license agreements with respect to our Mirror Worlds Patent Portfolio with Apple
Inc. and Microsoft Corporation pursuant to which we have received aggregate licensing revenue of $29,650,000 since the acquisition of
the Mirror Worlds Patent Portfolio in May 2013.
On July 8, 2016, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, entered into a settlement agreement with Apple
Inc. in connection with litigation in the United States District Court for the Eastern District of Texas for infringement of one of our patents
(U.S. Patent No. 6,006,227 (the "'227 Patent")) included within our Mirror Worlds Patent Portfolio. Under the terms of the settlement
agreement, Apple received a fully paid non-exclusive license to our '227 Patent for its full term (which expired in June 2016), along with
certain rights to other patents in our patent portfolio. We received $25,000,000 from Apple for the settlement and the non-exclusive
license.
On November 6, 2015, we entered into a settlement with Microsoft with respect to litigation pending in the United States District
Court for the Eastern District of Texas for infringement of our '227 Patent. Under the terms of the settlement, Microsoft (including its
customers) received a fully paid non-exclusive license to our Mirror Worlds Patent Portfolio for the remaining life of its patents in
consideration for a lump sum payment of $4,650,000 to us. In addition, as customers of Microsoft the pending litigation was also
dismissed against Hewlett-Packard Corporation, Lenovo Group, Ltd, Lenovo (United States), Inc., Dell Inc., Best Buy Co., Inc., Samsung
Electronics of America, Inc. and Samsung Telecommunications America, LLC.
Significant Licensees
For the year ended December 31, 2017, three licensees constituted an aggregate of 67% of our revenue including Cisco Systems,
Inc. ("Cisco") (43%), ALE USA Inc. (14%) and Avaya, Inc. (10%). For the year ended December 31, 2017, Cisco constituted 58% of
our recurring revenue from royalty bearing license agreements and Dell, Inc. constituted 12% of such recurring revenue. For the year
ended December 31, 2016, Apple, Inc. accounted for 53% of our revenue, Cisco accounted for 17% of our revenue and Dell, Inc.
accounted for 13% of our revenue. For the year ended December 31, 2016, Cisco constituted 76% of our recurring royalty revenue from
royalty bearing license agreements. It is anticipated that one or a few of our licensees will continue to constitute a significant portion of
our revenue for the foreseeable future.
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Legal Representation – Contingency Fees/Patent Litigation
Russ, August & Kabat provides legal services to us with respect to our pending patent litigation filed in May 2017 against
Facebook, Inc. in the United States District Court for the Southern District of New York relating to several patents within our Mirror
Worlds Patent Portfolio (see Note G[1] to our consolidated financial statements included in this Annual Report). The terms of our
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. We are responsible for all of the expenses incurred with respect to this litigation.
Russ, August & Kabat also provides legal services to us with respect to our pending patent litigations filed in April 2014 and
December 2014 against Google Inc. and YouTube LLC in the United States District Court for the Southern District of New York relating
to certain patents within our Cox Patent Portfolio (see "Note G[2] to our consolidated financial statements included in this Annual
Report). The terms of our 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. We are responsible for all of the expenses incurred with respect to this litigation.
Dovel & Luner, LLP provides legal services to us with respect to our pending patent litigation originally filed in September 2011
against sixteen (16) data networking equipment manufacturers in the United States District Court for the Eastern District of Texas, Tyler
Division, relating to our Remote Power Patent (see Note G[1] to our consolidated financial statements included in this Annual Report).
We achieved settlements with fifteen(15) or the original sixteen (16) defendants. The terms of our agreement with Dovel & Luner LLP
essentially provide for legal fees on a full contingency basis ranging from 12.5% to 35% of the net recovery (after deduction for expenses)
depending on the stage of the proceeding in which a result (settlement or judgment) is achieved. We are responsible for a certain portion
of the expenses incurred with respect to the litigation. During the year ended December 31, 2017 and December 31, 2016, we incurred
legal fees and expenses of $2,954,000 and $4,626,000, respectively, to Dovel & Luner LLP with respect to this matter.
Dovel & Luner, LLP also provided legal services to us with respect to our litigation settled in July 2010 against Cisco and several
other major data networking equipment manufacturers relating to our Remote Power Patent (see Note G[1] to our consolidated financial
statements included in this Annual Report). The terms of our agreement with Dovel & Luner, LLP provided for us to pay legal fees of up
to a maximum aggregate cash payment of $1.5 million plus a contingency fee of up to 24% (based on the settlement being achieved at the
trial stage). Accordingly, we have a continuing obligation to pay Dovel & Luner LLP a contingency fee of 24% with respect to the
ongoing royalties we receive from Cisco. During the year ended December 31, 2017 and December 31, 2016, we incurred total
contingency fees and expenses of $1,801,000 and $2,117,000, respectively, to Dovel & Luner, LLP with respect to this matter.
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Competition
With respect to our ability to acquire additional intellectual property assets or enter into strategic relationships with third parties to
monetize their intellectual property assets, we face considerable competition from other companies, many of which have significantly
greater financial and other resources than we have. The patent licensing and enforcement industry has grown over the past several years
and there has been a material increase in the number of companies seeking to acquire intellectual property assets from third parties or to
provide financing to third parties seeking to monetize their intellectual property. Entities including, among others, Acacia Research
Corporation (NASDAQ:ACTG), Intellectual Ventures, Quarterhill Inc. (NASDAQ:QTRH), formerly Wi-Lan, VirnetX Holdings Corp.
(NYSE MKT:VHC), and RPX Corporation (NASDAQ:RPXC), seek to acquire intellectual property or partner with third parties to license
or enforce intellectual property rights. In addition, we also compete with strategic corporate buyers with respect to the acquisition of
intellectual property assets. It is expected that others will enter this market as well. Many of these competitors have significantly greater
financial and human resources than us.
We may also compete with litigation funding firms such as Burford Capital Limited, Fortress Investment Group, Parabellum
Capital LLC and Bentham Capital LLC, venture capital firms and hedge funds for intellectual property acquisitions and licensing
opportunities. Many of these competitors also have greater financial resources and human resources than us.
The industries and markets covered by our intellectual property are characterized by intense competition and rapidly changing
business conditions, customer requirements and technologies. Other companies may develop competing technologies that offer better or
less expensive alternatives to PoE (covered by our Remote Power Patent) or the technologies covered by our other intellectual property
assets. Such competing technologies may adversely impact our licensing revenue. Moreover, technological advances or entirely
different approaches developed by one or more of our competitors or adopted by various standards groups could render our Remote
Power Patent and our other intellectual property assets obsolete, less marketable or unenforceable.
Regulatory Environment
If new legislation, regulations or rules are implemented either by Congress, the U.S. Patent and Trademark Office or the courts that
impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect
our business, financial condition and results of operations. Certain legislation, regulations, and rulings by the courts and actions by the
U.S. Patent and Trademark Office have materially increased the risk and cost of enforcement of patents. United States patent laws were
amended by the Leahy-Smith America Invents Act, referred to as the "America Invents Act", which became effective on March 16, 2013.
The America Invents Act includes a number of significant changes to U.S. patent law. In general, it attempts to address issues surrounding
the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation
and new administrative post-grant review procedures to challenge the patentability of issued patents outside of litigation, including Inter
Partes Review (IPR) and Covered Business Method Review (CBM) proceedings which provide third parties a timely, cost effective
alternative to district court litigation to challenge the validity of an issued patent. The America Invents Act and its implementation has
increased the uncertainties and costs surrounding the enforcement of patent rights which could have a material adverse effect on our
business, financial condition and results of operations.
- 13 -
In addition, future changes in patent law could adversely impact our business. Such changes may not be advantageous to us and
may make it more difficult to obtain adequate patent protection to enforce our patents. Increased focus on the growing number of patent
lawsuits, particularly by non-practicing entities (NPEs), may result in legislative changes which increase the risk and costs of asserting
patent litigation.
Corporate Information
We were incorporated under the laws of the State of Delaware in July 1990. Our principal offices are located at 445 Park Avenue,
Suite 912, New York, New York 10022 and our telephone number is (212) 829-5770.
Available Information
We file or furnish various reports, such as registration statements, quarterly and current reports, proxy statements and other
materials with the SEC. Our Internet website address is www.network-1.com. You may obtain, free of charge on our Internet website,
copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information we post on our website is
intended for reference purposes only; none of the information posted on our website is part of this Annual Report or incorporated by
reference herein.
In addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other
information statements, and other information regarding issuers, including us, that file electronically with the SEC. The Internet address
of the SEC's Internet site is http://www.sec.gov.
Employees and Consultants
As of March 15, 2018, we had three employees and two consultants providing monthly services to us.
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ITEM 1A. RISK FACTORS
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially
adversely affect our operations. The following highlights some of the factors that have affected, and in the future could affect, our
operations.
Risks Related to our Business
We may not continue to receive royalties from our licensees for our Remote Power Patent which would have a material
adverse effect on our business, results of operations and cash-flow.
On November 13, 2017, a jury empaneled in our patent infringement litigation in the United States District Court for the Eastern
District of Texas found that certain claims of our Remote Power Patent are invalid and not infringed by Hewlett-Packard (the "HP Jury
Verdict"). On February 2, 2018, we moved to throw out the HP Jury Verdict and have the Court determine that certain claims of our
Remote Power Patent are not obvious (invalid) as a matter of law by filing motions for judgment as a matter of law on validity and a new
trial on validity and infringement. A hearing on our motions is currently scheduled for May 14, 2018. For the year ended December 31,
2017 and December 31, 2016, we achieved recurring royalty revenue of $12,053,000 and $10,788,000, respectively, from royalty bearing
license agreements for our Remote Power Patent. We currently have royalty bearing license agreements for our Remote Power Patent
with seventeen (17) licensees including, among others, Cisco Systems, Inc., Dell Inc., Netgear, Inc., Microsemi Corporation, Motorola
Solutions, Inc., NEC Corporation, ShoreTel Inc., Polycom, Inc. and Avaya, Inc., pursuant to which such licensees are obligated to pay us
ongoing royalties on a quarterly or monthly basis for the life of our Remote Power Patent (through March 2020), subject to certain
conditions including the continued validity of certain claims of our Remote Power Patent or a finding that a third party's PoE products are
found not to infringe our Remote Power Patent and such finding applies to our licensee's licensed products.
As a result of the HP Jury Verdict, several of our largest licensees of our Remote Power Patent, including Cisco, Dell, and Netgear,
have advised us that they will no longer pay us ongoing royalties pursuant to their license agreements. We disagree with the positions
taken by such licensees because, among other reasons, the HP Jury Verdict is not an order of the District Court and is subject to motion
practice in the District Court. If we are unable to achieve a satisfactory resolution of the issue with such licensees, we intend to pursue
arbitration. We may not prevail in arbitration. If the District Court subsequently issues an order confirming the HP Jury Verdict and
finding certain claims of our Remote Power Patent obvious (invalid), and we are unable to overturn such order on appeal to the United
States Court of Appeals for the Federal Circuit, certain of our licensees will not be obligated to pay us ongoing royalties and other
licensees including Cisco, our largest licensee, will likely continue not to pay us royalties unless there is an arbitration ruling that the
District Court order does not affect the obligation of such licensees (including Cisco) to continue to pay us royalties. In such event, our
business, results of operations and cash-flow will be materially adversely effected.
- 15 -
The HP Jury Verdict has had a material adverse effect on our results of operations and cash-flow and may continue to do
so in the future.
The HP Jury Verdict rendered on November 13, 2017 had a material adverse effect on our results of operations and cash-flow for
the quarter ended December 31, 2017 and may continue to do so in the future. Several of our largest licensees, Cisco, Dell and Netgear,
constituting 69% of our revenue from royalty bearing licenses for the year ended December 31, 2017, have advised us that as a result of
the HP Jury Verdict they will no longer pay us ongoing royalties pursuant to their license agreements with us. While we believe such
licensees remain obligated to pay us ongoing royalties for, among other reasons, the HP Jury Verdict by itself is not an order of the
District Court and may be thrown out as a result of motion practice in the District Court, our position may not prevail. If such licensees
continue not to pay us royalties our results of operations and cash-flow will be materially adversely effected until, if and when, we are
successful in our efforts to throw out the jury verdict in the District Court, we reverse the District Court order on appeal if the District
Court confirms the jury verdict and finding certain claims of our Remote Power Patent obvious (invalid), or there is an arbitration ruling
that the jury verdict, or the District Court order if entered confirming the jury verdict and finding certain claims of our Remote Power
Patent obvious (invalid), does not affect the obligations of certain of our licensees to continue to pay us royalties.
Our continued revenue stream is uncertain.
If we are unsuccessful in throwing out the HP Jury Verdict in the United States District Court for the Eastern District of Texas or
reversing the District Court order on appeal to the United States Court of Appeals for the Federal Circuit , certain of our licensees will not
be obligated to pay us ongoing royalties through March 2020 (the expiration of our Remote Power Patent) and other licensees including
Cisco, our largest licensee, will likely continue not to pay us ongoing royalties pursuant to their license agreements unless there is an
arbitration ruling that the District Court order does not affect the obligations of such licensees (including Cisco) to continue to pay us
royalties. Accordingly, we may not receive material royalty revenue from our royalty bearing licenses. We have been dependent on
royalties from licensing our Remote Power Patent for our recurring quarterly revenue. Such recurring revenue from royalty bearing
licenses for our Remote Power Patent for the year ended December 31, 2017 and December 31, 2016 was $12,053,000 and $10,788,000,
respectively. Without recurring revenue from our Remote Power Patent, our revenue will be dependent upon litigation outcomes
involving our Cox Patent Portfolio, Mirror Worlds Patent Portfolio and our ability to monetize our recently acquired M2M/IoT Patent
Portfolio or new patents to be acquired in the future. We currently have two pending litigations against Google and YouTube involving
patents within our Cox Patent Portfolio and a litigation against Facebook, Inc. involving certain patents within our Mirror Worlds Patent
Portfolio (see "Legal Proceedings" at pages 30-32 hereof). Patent litigation is inherently risky and the outcome is uncertain. Accordingly,
our future revenue stream is uncertain.
- 16 -
Our success is dependent upon our ability to protect our patents.
Our success is substantially dependent upon our proprietary technologies and our ability to protect our intellectual property rights.
We currently own fifty-one (51) patents that relate to various technologies including our Remote Power Patent, Mirror Worlds Patent
Portfolio, Cox Patent Portfolio and our M2M/IoT Patent Portfolio. We have successfully defended several challenges to certain claims of
our Remote Power Patent and our Cox Patent Portfolio at the USPTO (see "Legal Proceedings" at pages 27-32 hereof). However, in
November 2017, a jury in our Hewlett-Packard trial, in the United States District Court, Eastern District of Texas, found that certain
claims of our Remote Power Patent are invalid and not infringed by Hewlett-Packard. On February 2, 2018, in an effort to throw out the
jury award, we made motions for judgment as a matter of law and for a new trial on validity and infringement (see "Legal Proceedings" at
page 29 hereof). In addition, certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio are currently being
challenged in patent infringement litigation pending in the courts (see "Legal Proceedings" at pages 30-32 of this Annual Report). The
uncertainty of the outcome of litigation create risk that our efforts to protect our intellectual property assets may not be successful. We
cannot assure you that our efforts to overturn the jury verdict in our trial with Hewlett-Packard involving our Remote Power Patent will be
successful or that third parties will not invalidate claims of our other patent assets. If our intellectual property assets are not upheld,
particularly our Remote Power Patent, such an event may have a material adverse effect on our business and results of operations.
We have been dependent upon our Remote Power Patent for a significant portion of our revenue and profit and the patent
expires in March 2020.
Our Remote Power Patent has generated licensing revenue in excess of $121,000,000 from May 2007 through December 31, 2017.
Revenue for the year ended December 31, 2017 and December 31, 2016 from royalty bearing license agreements for our Remote Power
Patent constituted $16,451,000 (100% of our revenue) and $22,588,000 (34.7% of our revenue), respectively. If the HP Jury Verdict is
upheld by the District Court, the District Court determines that certain claims of our Remote Power Patent are obvious, and these
decisions are upheld on appeal to the Federal Circuit, certain of our licensees will no longer be obligated to pay us ongoing royalties and
other licensees including Cisco, our largest licensee, will likely continue not to pay us ongoing royalties unless there is an arbitration
ruling that the District Court order does not affect such licensees obligation to continue to pay us royalties. In such an event, our business
and results of operations will be materially adversely effected. In addition, even if we are successful in throwing out the HP Jury Verdict
or overturning it on appeal, licensees of our Remote Power Patent will have no further obligation to pay us royalties after the Remote
Power Patent expires in March 2020. Accordingly, if we are unable to enter into royalty bearing license agreements by March 2020 with
respect to our other patents, we will not receive any recurring royalty revenue and will be entirely dependent upon successful outcomes of
litigation involving our other patents for our revenue.
- 17 -
We are dependent upon our license agreement with Cisco for a significant portion of our revenue. The loss of Cisco as a
licensee would have a material adverse effect on our business, results of operations and cash-flow.
Cisco Systems, Inc. ("Cisco") accounted for 43% and 17% of our licensing revenue for the years ended December 31, 2017 and
December 31, 2016, respectively. In addition, Cisco accounted for 53% and 76% of our recurring revenue from royalty bearing license
agreements for the years ended December 31, 2017 and December 31, 2016, respectively. The Settlement and License Agreement, dated
May 25, 2011, with Cisco (the "Agreement") requires Cisco to pay us royalties on a quarterly basis (which began in the first quarter of
2011) based on its sale of PoE products in the United States, up to the maximum royalties per year of $9 million for the remaining term of
our Remote Power Patent (March 2020). The royalty payments are subject to certain conditions including that there is no "Adverse
Ruling" involving our Remote Power Patent as defined in the Agreement. Cisco notified us in January 2018 that, in its view, no further
royalty payments are due to us under the Agreement because the HP Jury Verdict constituted an "Adverse Ruling" under the Agreement.
We disagree with Cisco that the jury verdict in itself relieves Cisco of its obligation to pay us royalties because, among other reasons, the
jury verdict is not an order of the District Court and is subject to motion practice and the jury verdict finding of non-infringement by HP
does not apply to Cisco's products. Our position that the HP Jury Verdict is not an "Adverse Ruling" entitling Cisco to stop paying us
royalties may not prevail. In any event, we brought motions in the District Court to throw out the HP Jury Verdict and have the Court
determine that certain claims of our Remote Power Patent are not obvious (invalid). On February 2, 2018, we filed motions for judgment
as a matter of law and a new trial on validity and infringement. A hearing on our motions is scheduled for May 14, 2018. If the District
Court enters an order confirming the HP Jury Verdict, the District Court confirms certain claims of our Remote Power Patent are obvious
(invalid), and these decisions are upheld on appeal to the United States Court of Appeals for the Federal Circuit, Cisco will likely continue
not to pay us royalties unless we obtain an arbitration ruling that the District Court order does not affect the obligation of Cisco to pay us
royalties under its license agreement. The loss of Cisco as a licensee would have a material adverse effect on our business, results of
operations and cash-flow.
Cash dividends may not be continued to be paid.
On December 8, 2016, our Board of Directors approved the initiation of a dividend policy which provides for the payment
(anticipated in March and September of each year) of a semi-annual cash dividend of $0.05 per common share ($0.10 per common share
annually) which we anticipate paying through March 2020 (the life of our Remote Power Patent), provided that we continue to receive
royalties from licensees of our Remote Power Patent. In 2017 we paid semi-annual cash dividends aggregating $0.10 per common share
consistent with our dividend policy. In addition, on February 9, 2018, our Board of Directors declared a semi-annual cash dividend of
$0.05 per common share payable on March 23, 2018 to all common stockholders of record as of March 9, 2018. However, if we are
unable to throw out the HP Jury Verdict in the District Court, or there is not an arbitration ruling that the HP Jury Verdict finding of non-
infringement does not apply to certain of our licensees of our Remote Power Patent including Cisco Systems, Inc., our largest licensee,
our Board of Directors may choose to modify or discontinue the semi-annual cash dividends of $0.05 per common share.
- 18 -
We may not be able to capitalize in the future on our strategy to acquire high quality patents with significant licensing
opportunities or enter into strategic relationships with third parties to license or otherwise monetize their intellectual property.
Based upon the success we have achieved to date from licensing our Remote Power Patent (twenty-seven (27) license agreements
which have generated in excess of $121,000.00 in revenue), the revenue we have generated from our Mirror Worlds Patent Portfolio
($47,150,000) and establishing a patent portfolio currently consisting of fifty-one patents, we believe we have the expertise and sufficient
capital to compete in the intellectual property monetization market and to enter strategic relationships with third parties to develop,
commercialize, license or otherwise monetize their intellectual property. However, we may not be able to acquire additional intellectual
property or, if acquired, we may not achieve material revenue or profit from such intellectual property. Acquisitions of patent assets are
competitive, time consuming, complex and costly to consummate. Our strategy is to focus on acquiring high quality patent assets which
management believes have the potential for significant licensing opportunities. These high quality patent opportunities are difficult to find
and are often very competitive to acquire. In addition, such acquisitions present material risks. Even if we acquire additional patent assets,
we may not be able to achieve significant licensing revenue or even generate sufficient revenue related to such patent assets to offset the
acquisition costs and the legal fees and expenses which may be incurred to enforce, license or otherwise monetize such patents. In
addition, we may not be able to enter into strategic relationships with third parties to license or otherwise monetize their intellectual
property and, even if we consummate such strategic relationships, we may not achieve material revenue or profit from such relationships.
We may not be successful in enforcing or defending our Cox Patent Portfolio , generating additional revenue from our
Mirror Worlds Patent Portfolio or generating revenue from our M2M/IoT Patent Portfolio.
We acquired our Cox Patent Portfolio in 2013, which currently consists of twenty-three (23) patents. We have not yet achieved
any revenue from our Cox Patent Portfolio. We are currently enforcing patents within our Cox Patent Portfolio against Google and
YouTube, who are challenging these patents (see "Legal Proceedings" at pages 31-32 hereof). We are also currently enforcing patents
within our Mirror Worlds Patent Portfolio against Facebook, Inc., who is also challenging the asserted patents. In addition, our recently
acquired M2M/IoT Patent Portfolio is not currently being asserted and thus it is not anticipated that this portfolio will generate revenue in
the next twelve months. We may not have future success in enforcing or defending our Cox Patent Portfolio, Mirror Worlds Patent
Portfolio or M2M/IoT Patent Portfolio, which would have a negative impact on our revenue and profits.
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A limited number of our licensees for our Remote Power Patent account for a significant portion of our licensing revenue.
For the year ended December 31, 2017, three licensees constituted 67% of our licensing revenue including, Cisco Systems, Inc.
(43%), ALE USA Inc. (14%) and Avaya Inc. (10%). For the year ended December 31, 2016, Apple Inc. accounted for 53%, Cisco
Systems, Inc. 17% and Dell Inc. 13%. It is anticipated that a few licensees will continue to constitute a significant portion of our revenue
for the foreseeable future.
Legislation, regulations, court rulings and actions by the U.S. Patent and Trademark Office have materially increased the
risk and cost of enforcement of patents and may continue to do so in the future.
Legislation, regulations, court rulings and actions by the U.S. Patent and Trademark Office have materially increased the risk and
cost of enforcing patents. United States patent laws were amended by the Leahy-Smith America Invents Act, referred to as the America
Invents Act, which became effective on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent
law. In general, it attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other
things, establishing new procedures for patent litigation and new administrative post-grant review procedures to challenge the
patentability of issued patents outside of litigation, including Inter Partes Review (IPR) and Covered Business Method Review (CBM)
proceedings which provide third parties a timely, cost effective alternative to district court litigation to challenge the validity of an issued
patent. In addition, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the
likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or
activities. The America Invents Act and its implementation has increased the uncertainties and costs surrounding the enforcement of
patent rights, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, changes in patent law could adversely impact our business. Such changes may not be advantageous to us and may
make it more difficult to obtain adequate patent protection to enforce our patents. Increased focus on the growing number of patent
lawsuits, particularly by non-practicing entities (NPEs), may result in further legislative changes which increase the risk and costs of
asserting patent litigation.
Our pending patent infringement litigations in the courts involving our Remote Power Patent, Cox Patent Portfolio and
Mirror Worlds Patent Portfolio are time consuming and costly.
We have post-trial motions pending in the United States District Court for the Eastern District of Texas, Tyler Division to overturn
the HP Jury Verdict. In April 2014 and December 2014, we initiated patent litigation in the United States District Court for the Southern
District of New York against Google and YouTube for infringement of several of our patents within our Cox Patent Portfolio. A stay
related to the litigation has been in effect since July 2015 (see "Legal Proceedings"). In May 2017, Mirror Worlds Technologies, LLC,
our wholly-owned subsidiary, initiated litigation against Facebook, Inc. in the United States District for the Southern District of New
York for infringement of several patents within our Mirror Worlds Patent Portfolio.
- 20 -
While we have contingent legal fee arrangements, or a contingency plus a fixed cash amount arrangement, with our patent litigation
counsel in each litigation (excluding proceedings at the USPTO), we are responsible for all or a portion of the expenses which are
anticipated to be material. In addition, the time and effort required of our management to effectively pursue these litigations is likely to be
significant and it may adversely affect other business opportunities.
We face intense competition to acquire intellectual property and enter into strategic relationships.
With respect to our ability to acquire additional intellectual property or enter into strategic relationships with third parties to
monetize their intellectual property, we face considerable competition from other companies, many of which have significantly greater
financial and other resources than we have. The patent licensing and enforcement business has grown significantly over the past several
years and there has been an increase in the number of companies seeking to acquire intellectual property rights from third parties.
Companies including, among others, Acacia Research Corporation (NASDAQ:ACTG), Intellectual Ventures, Quarterhill Inc.
(NASDAQ:QTRH) formerly WiLan Inc., VirnetX Holdings Corp. (NYSE MKT:VHC), and RPX Corporation (NASDAQ:RPXC) seek to
acquire or partner with third parties to license or enforce intellectual property rights. It is expected that others will enter this market as
well. Many of these competitors have significantly more financial and human resources than us.
We may also compete with strategic corporate buyers, litigation funding firms such as Burford Capital Limited, Fortress
Investment Group, Parabellum Capital LLC and Bentham Capital LLC, venture capital firms and hedge funds for intellectual property
acquisitions and licensing opportunities. Many of these competitors have greater financial resources and human resources than us.
Our quarterly and annual operating and financial results and our revenue are difficult to predict and are likely to fluctuate
significantly in future periods.
Our quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to
period. Our revenue and net income was $16,451,000 and $4,133,000, respectively, for the year ended December 31, 2017 as compared
to $65,088,000 and $23,223,000, respectively, for the year ended December 31, 2016. Our revenue and net income was $16,565,000 and
$4,107,000, respectively, for the year ended December 31, 2015 and $12,309,000 and $1,766,000 for the year ended December 31, 2014.
Accordingly, our revenue, net income and results of operations may fluctuate as a result of a variety of factors that are outside our control
including, but not limited to, our ability to throw out the HP Jury Verdict in the District Court or overturn the District Court order on
appeal to the Federal Circuit, our ability and timing in consummating future license agreements for our intellectual property assets, the
timing and extent of payments received by us from licensees, the timing and our ability to achieve successful outcomes from current and
future patent litigation, and the timing and our ability to achieve revenue from future strategic relationships.
- 21 -
The patent monetization cycle is long, costly and unpredictable.
There is generally a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets.
During this time lag, significant costs are likely to be incurred which may have a negative impact on our results of operations, cash flow
and financial position. Furthermore, the outcome of our efforts to monetize our patents is uncertain and we may not be successful.
We are currently pursuing litigation to protect our patent rights as we have done in the past (see "Legal Proceedings" at pages 27-32
hereof). Such litigation is typically protracted and complex. The costs are typically substantial, and the outcomes are unpredictable. In
addition, the Federal courts are becoming more crowded and as a result patent litigation is taking longer.
Uncertainty in the interpretation and application of the 2017 Tax Cuts and Job Act could materially affect our tax
obligations.
Significant judgment is required in determining our provision for income taxes. In the course of our business, there may be
transactions and calculations where the ultimate tax determination is uncertain. For example, compliance with the 2017 United States
Tax Cut and Jobs Act ("TCJA") may require the collection of information not regularly produced within the Company, the use of
estimates in our consolidated financial statements, and the exercise of significant judgment in accounting for its provisions. As
regulations and guidance evolve with respect to TCJA, and as we gather more information and perform more analysis, our results may
differ from previous estimates and may materially affect our financial position.
We may be audited by tax authorities in different jurisdictions. Economic and political pressures to increase tax revenue in various
jurisdictions may make resolving tax disputes favorably more difficult. Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation in the jurisdictions where we are subject to taxation could be materially different
from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our
consolidated financial statements in the periods in which that determination is made.
In addition, changes in U.S. federal and state tax laws applicable to us and changes in taxing jurisdictions' administrative
interpretations, decisions, policies, and positions may materially adversely impact our tax expense and cash flows.
In the future we could be classified as a Personal Holding Company resulting in a 20% tax on our PHC Income that we do
not distribute to our shareholders.
The personal holding company ("PHC") rules under the Internal Revenue Code impose a 20% tax on a PHC's undistributed
personal holding company income ("PHC Income" which means, in general, taxable income subject to certain adjustments). For a
corporation to be classified as a PHC, it must satisfy two tests that (i) more than 50% in value of its outstanding shares must be owned
directly or
- 22 -
indirectly by 5 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 2017 (as well as prior years), we did not meet the Ownership Test. Due to the significant
number of shares held by our largest shareholders, we continually assess our share ownership to determine whether it meets the
Ownership Test. If the Ownership Test were met and the income generated by us were determined to constitute "royalties" within the
meaning of the Income Test, we would constitute a PHC and we would be subject to a 20% tax on the amount of any PHC Income that we
do not distribute to our shareholders.
Dependence upon CEO and Chairman.
Our success is largely dependent upon the personal efforts of Corey M. Horowitz, our Chairman, Chief Executive Officer and
Chairman of our Board of Directors. On July 14, 2016, we entered into a new employment agreement with Mr. Horowitz pursuant to
which he continues to serve as our Chairman and Chief Executive Officer for a five year term. The loss of the services of Mr. Horowitz
would have a material adverse effect on our business and prospects. We do not maintain key-man life insurance on the life of Mr.
Horowitz.
It may be difficult for us to verify royalty amounts owed to us under our license agreements with our licensees including
Cisco, and this may cause us to lose potential revenue.
The standard terms of our royalty bearing license agreements require our licensees to report the sale of licensed products and report
this data to us in most cases on a quarterly basis. Although our standard license terms give us the right to audit books and records of our
licensees to verify this information, audits can be expensive, time consuming, incomplete and subject to dispute. From time to time, we
may audit certain of our licensees (as we did with Cisco in 2014 resulting in additional licensing revenue of $3,281,000) to verify
independently the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not
receive the revenue to which we are entitled under the terms of our license agreements. However, we cannot give assurances that these
audits will be frequent enough and/or effective to that end. There is no certainty that we will receive additional revenue from an audit and
in some cases there may be an over-payment which will be credited against future royalties under our license agreements.
Our markets are subject to rapid technological change and our technologies face potential technology obsolescence.
The markets covered by our intellectual property are characterized by rapid technological changes, changing customer
requirements, frequent new product introductions and enhancements, and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards may render our technologies obsolete or less marketable.
- 23 -
In addition, other companies may develop competing technologies that offer better or less expensive alternatives to PoE and the
other technologies covered by our intellectual property. Moreover, technological advances or entirely different approaches developed by
other companies or adopted by various standards groups could render our Remote Power Patent and our other patents obsolete, less
marketable or unenforceable.
The burdens of being a public company may adversely affect us including our ability to pursue litigation.
As a public company, our management must devote substantial time, attention and financial resources to comply with U.S.
securities laws. This may have a material adverse effect on management's ability to effectively and efficiently pursue its business. In
addition, our disclosure obligations under U.S. securities laws require us to disclose information publicly that will be available to litigation
opponents. We may, from time to time, be required to disclose information that may have a material adverse affect on our litigation
strategies. This information may enable our litigation opponents to develop effective litigation strategies that are contrary to our interests.
Risks Related to Our Common Stock
Investors may have limited influence on stockholder decisions because ownership of our common stock is concentrated.
As of March 15, 2018, our executive officers and directors beneficially owned 31.5% of our outstanding common stock. As a
result, these stockholders may be able to exercise substantial control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This
concentration of ownership will limit other stockholders' ability to influence corporate matters and may have the effect of delaying or
preventing a third party from acquiring control over us.
Our common stock may be delisted from the NYSE American exchange if we fail to comply with continued listing
standards.
Our common stock is currently traded on the NYSE American market under the symbol "NTIP". If we fail to meet any of the
continued listing standards of the NYSE American, our common stock could be delisted from NYSE American. Such delisting could
adversely affect the price and trading (including liquidity) of our common stock.
The significant number of options and restricted stock units outstanding may adversely affect the market price for our
common stock.
As of March 15, 2018, there were outstanding options to purchase an aggregate of 1,935,000 shares of our common stock at
exercise prices ranging from $0.83 to $2.34. In addition, we have outstanding restricted stock units which if fully vested result in the
issuance of an additional 853,750 shares of common stock. To the extent that outstanding options are exercised and restricted stock units
become vested, existing stockholder percentage ownership will be diluted and any sales in the public market of the common stock
underlying such options or restricted stock units may adversely affect prevailing market prices for our common stock.
- 24 -
We may seek to raise additional funds, finance intellectual property acquisitions or develop strategic relationships by
issuing capital stock that would dilute your ownership.
We may elect to raise financing by issuing equity securities, which, if conducted in the future, would materially reduce the
percentage ownership of our existing stockholders. We may also issue common stock as consideration for intellectual property
acquisitions or other acquisitions. Furthermore, any newly issued securities could have rights, preferences and privileges senior to those of
our existing common stock. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our stock
and in any event may have a dilutive impact on your ownership interest, which could cause the market price of stock to decline. We may
also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our common
shares. The holders of any debt securities or instruments we may issue could have rights superior to the rights of our common
stockholders.
Future sales of shares of our common stock may cause the prevailing market price of our shares to decline and could harm
our ability to raise additional capital.
We have previously issued a substantial number of shares of restricted common stock, which are eligible for resale under Rule 144
of the Securities Act of 1933, and may become freely tradable. We have also registered a substantial number of shares including shares
that are issuable upon the exercise of options and pursuant to vested restricted stock units. In addition, if holders of options choose to
exercise their purchase rights or restricted stock units vest, and such parties sell shares of common stock in the public market or if holders
of currently restricted common stock or registered common stock sell such shares in the public market, or attempt to publicly sell such
shares in a short time period, the prevailing market price for our common stock may decline. Such decline in the price of our common
stock may also adversely affect our ability to raise additional capital.
Provisions in our corporate charter, by-laws and in Delaware law could make it more difficult for a third party to acquire
us, could discourage a takeover and adversely affect existing stockholders.
Our certificate of incorporation authorizes the board of directors to issue up to 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors,
without further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions, any of
which could adversely affect holders of our common stock. Although there are currently no shares of preferred stock outstanding, future
holders of preferred stock may have rights superior to our common stock and such rights could also be used to restrict our ability to merge
with, or sell our assets to third parties.
- 25 -
We are also subject to the "anti takeover" provisions of Section 203 of the Delaware General Corporation Law, which could
prevent us from engaging in a "business combination" with a 15% or greater stockholder for a period of three years from the date such
person acquired that status unless appropriate board or stockholder approvals are obtained.
In addition, our By-laws contain advance notice requirements for director nominations and for new business to be brought up at
stockholder meetings. Stockholders wishing to submit director nominations or raise matters to a vote of stockholders must provide notice
to us within specified date windows and in very specific forms in order to have that matter voted on at a stockholders meeting.
The aforementioned provisions could deter unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which stockholders might otherwise receive a premium for their shares over the then current market price. These
provisions may also limit the ability of stockholders to delay, deter or prevent a change of control, or approve transactions that they may
deem to be in their best interests.
Our stock price may be volatile.
The market price of our common stock may be highly volatile and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the following:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
our ability to overturn the HP Jury Verdict;
the outcome of our other legal proceedings;
our ability to receive future material revenue from licensees of our Remote Power Patent;
our ability to license and monetize our Cox Patent Portfolio;
our ability to further license or monetize our Mirror Worlds Patent Portfolio;
our ability to further develop, license and monetize our M2M/IoT Patent Portfolio;
our ability to acquire additional intellectual property;
our ability to continue to achieve material revenue and profits;
our ability to enter into strategic relationships with third parties to license or otherwise monetize their intellectual
property;
variations in our quarterly and annual operating results;
our ability to raise capital if needed;
sales of our common stock;
technology changes;
legislative, regulatory and competitive developments; and
economic and other external factors.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also have a material and adverse effect on the
market price of our common stock.
- 26 -
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently lease office space in New York City at a base rent of $3,700 per month under a lease which expires on May 31,
2018. Effective August 1, 2015, we entered into a four-year lease expiring September 30, 2019 for offices in New Canaan, Connecticut at
a base rent of $7,000 per month for the first year (increasing $100 per month each year) which is subject to annual adjustments to reflect
increases in real estate taxes and operating expenses. Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, entered into a one
year lease (expiring April 30, 2018), at a base rent of $620 per month, to rent office space consisting of approximately 420 square feet in
Tyler, Texas.
ITEM 3. LEGAL PROCEEDINGS
Remote Power Patent Litigation
In September 2011, we initiated patent litigation against sixteen (16) data networking equipment manufacturers (and affiliated
entities) in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power
Patent. Named as defendants in the lawsuit (excluding affiliated parties) were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc.,
AXIS Communications Inc., Dell, Inc., GarretCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc.,
Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and
Transition Networks, Inc. We seek monetary damages based upon reasonable royalties.
In March 2012, we reached settlement agreements with defendants Motorola Solutions, Inc. ("Motorola") and Transition Networks,
Inc. ("Transition Networks"). In October 2012, we reached a settlement with defendant GarretCom, Inc ("GarretCom"). In February
2013, we reached settlement agreements with Allied Telesis, Inc. ("Allied Telesis") and NEC Corporation ("NEC"). As part of the
settlements, Motorola, Transition Networks, GarretCom, Allied Telesis and NEC each entered into a non-exclusive license agreement for
our Remote Power Patent pursuant to which each such defendant agreed to license our Remote Power Patent for its full term (which
expires in March 2020) and pay a license initiation fee and ongoing royalties based on their sales of PoE products. In March 2015 and July
2015, we reached settlements with defendants Samsung Electronics Co., Ltd. ("Samsung"), Huawei Technologies Co., Ltd. ("Huawei")
and ShoreTel, Inc. ("ShoreTel"). Samsung and Huawei each entered into a non-exclusive fully-paid license agreement for our Remote
Power Patent for its full term. ShoreTel entered into a non-exclusive license agreement for our Remote Power Patent for its full term and
paid a license initiation fee and agreed to pay quarterly royalties based upon its sales of PoE products.
- 27 -
In June 2016, we reached a settlement with Sony Corporation and affiliated entities ("Sony"). With respect to the settlement, Sony
received a non-exclusive fully-paid license for our Remote Power Patent for its remaining life. In July 2016, we reached a settlement with
Dell, Inc. Under the terms of the settlement, Dell received a non-exclusive license for our Remote Power Patent for its full term, Dell
paid a license initiation fee of $6,000,000 and agreed to pay quarterly royalties based on its sales of PoE products.
In July 2016, we also reached settlement agreements with Alcatel-Lucent USA, Inc. and Alcatel-Lucent Holdings Inc. (collectively,
"Alcatel") and ALE, USA, Inc. ("ALE"). Under the terms of the settlement agreements, Alcatel and ALE received a non-exclusive fully-
paid license for our Remote Power Patent for its remaining life. We received aggregate consideration of $4,200,000 from ALE and
Alcatel for the fully-paid license of which an aggregate $1,900,000 was paid following the signing of the settlement agreements and the
balance of $2,300,000 was paid in three equal quarterly payments of $766,666 beginning on July 1, 2017.
In August 2017, we entered into a settlement agreement with Axis Communications, Inc. and affiliated entities ("Axis"). With
respect to the settlement, Axis received a fully-paid license for our Remote Power Patent for its remaining life.
In October 2016, we entered a settlement agreement with Polycom, Inc. ("Polycom"). Under the terms of the settlement, Polycom
entered into a non-exclusive license for our Remote Power Patent for its full term and is obligated to pay a license initiation fee of
$5,000,000 for past sales of its Power over Ethernet ("PoE") products and ongoing royalties based on its sales of PoE products.
$2,000,000 of the license initiation fee was paid within 30 days and the balance payable in three annual installments of $1,000,000
beginning in October 2017. Payments due in October 2018 and October 2019 need not be paid by Polycom if all asserted claims of our
Remote Power Patent have been found invalid. Accordingly, if the District Court in our litigation with Hewlett Packard (see below)
enters an order finding certain claims of our Remote Power Patent obvious (invalid) and we are unable to overturn such order on appeal to
the United States Court of Appeals for the Federal Circuit, Polycom will not be obligated to make the aforementioned remaining
aggregate payments of $2,000,000 to us.
On October 16, 2017, the U.S. Bankruptcy Court of the Southern District of New York approved our settlement with defendant
Avaya, Inc. ("Avaya"). As part of the settlement, Avaya, which on January 19, 2017 had filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code, entered into a non-exclusive license agreement for the full term of our Remote Power Patent.
Under the terms of the license, Avaya paid a lump sum amount for sales of certain designated Power over Ethernet ("PoE") products, and
agreed to pay ongoing royalty for other designated PoE products. In addition, Avaya agreed we shall have an allowed general unsecured
claim ("Allowed Claim") in the amount of $37,500,000, as amended, relating to all acts occurring on or before January 19, 2017.
- 28 -
Under the Debtors' (Avaya and certain of its affiliates) Second Amended Joint Chapter 11 Plan of Reorganization of Avaya Inc. and
its Debtor Affiliates, which was approved by the Bankruptcy Court on November 28, 2017 and became effective on December 15, 2017,
the Debtors estimated that the total amount of general unsecured claims that will ultimately be allowed will total approximately
$305,000,000 which, based on the treatment of general unsecured creditors therein, would result in estimated recoveries for the holders of
general unsecured claims of approximately 18.9% of their Allowed Claim. The Debtors acknowledged in the Plan that depending on its
ability to successfully prosecute or otherwise reduce the remaining outstanding claims, the total amount of the general unsecured claims
could be substantially higher which would decrease the percentage recoveries to the holders of general unsecured claims, including our
unsecured claim. In such an event, the amount recovered by us under our Allowed Claim could have been substantially lower than
18.9%. On January 9, 2018, we sold our Allowed Claim to a third party for $6,320,000.
On November 13, 2017, a jury empaneled in the United States District Court for the Eastern District of Texas, Tyler Division,
found that certain claims of our Remote Power Patent are invalid and not infringed by Hewlett-Packard. On February 2, 2018, we moved
to throw out the jury verdict and have the Court determine that certain claims of our Remote Power Patent are not obvious (invalid) as a
matter of law by filing motions for judgment as a matter of law on validity and a new trial on validity and infringement. A hearing on our
motions is scheduled for May 14, 2018. If the District Court enters an order confirming the HP Jury Verdict and finding certain claims of
our Remote Power Patent obvious (invalid) and either (i) we are unable to reverse the District Court order on appeal, or (ii) there is an
arbitration ruling that the District Court order relieves the obligation of certain of our licensees including Cisco Systems, Inc., our largest
licensee, to continue to pay us royalties and the District Court order is not subsequently reversed on appeal, our business, results of
operations and cash-flow will be materially adversely effected (see "Risk Factors" on pages 15-18 of this Annual Report).
On November 1, 2017, defendant Juniper Networks, Inc ("Juniper"). agreed to settle its litigation with us for $13,250,000 for a
fully-paid license to our Remote Power Patent. On December 8, 2017, we were advised by Juniper that it would not make the settlement
payment to the Company as a result of the HP Jury Verdict and that there was no binding settlement agreement. On January 16, 2018, we
revised and closed our settlement with defendant Juniper. We agreed to revise the settlement to avoid the possibility of protracted
litigation regarding enforcing the settlement. Under the terms of the revised settlement Juniper paid us $12,700,000 and received a fully-
paid license to our Remote Power Patent (and certain other patents owned by us) for its full term, which applies to its sales of PoE
products.
- 29 -
Mirror Worlds Patent Portfolio Litigation
Pending Facebook Litigation
On May 9, 2017, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, initiated litigation against Facebook, Inc.
("Facebook") in the United States District Court for the Southern District of New York, for infringement of U.S. Patent No. 6,006,227,
U.S. Patent No. 7,865,538 and U.S. Patent No. 8,255,439 (among the patents within our Mirror Worlds Patent Portfolio). The lawsuit
alleges that the asserted patents are infringed by Facebook's core technologies that enable Facebook's Newsfeed and Timeline features.
The lawsuit further alleges that Facebook's unauthorized use of the stream based solutions of our asserted patents has helped Facebook
become the most popular social networking site in the world. We seek, among other things, monetary damages based upon reasonable
royalties. On July 5, 2017, Facebook filed its Answer denying our claims and asserting various affirmative defenses.
Prior Litigation
On May 23, 2013, we initiated patent litigation in the United States District Court for the Eastern District of Texas, Tyler Division,
against Apple Inc., Microsoft Corporation, Hewlett-Packard Company, Lenovo Group Ltd., Lenovo (United States), Inc., Dell, Inc., Best
Buy Co., Inc., Samsung Electronics America, Inc. and Samsung Telecommunications America L.L.C., for infringement of U.S. Patent No.
6,006,227 (the "'227 Patent"). We sought, among other things, monetary damages based upon reasonable royalties. The lawsuit alleged
that the defendants have infringed and continue to infringe the claims of the '227 Patent by making, selling, offering to sell and using
infringing products including Mac OS and Windows operating systems and personal computers and tablets that include versions of those
operating systems, and by encouraging others to make, sell, and use these products. On December 10, 2013, the litigation was severed
into two consolidated actions, Mirror Worlds v. Apple, Inc. (Case No. 6:13-cv-419), and Mirror Worlds v. Microsoft, et al. (Case No.
6:13-cv-941).
On November 6, 2015, we entered into a settlement agreement with Microsoft pursuant to which Microsoft (including its
customers) received a non-exclusive fully-paid license for our Mirror Worlds Patent Portfolio for its remaining life in consideration of a
lump sum payment to us of $4,650,000. In addition, as customers of Microsoft, the pending litigation was also dismissed against Hewlett-
Packard Company, Lenovo Group Ltd., Lenovo, Inc., Dell, Inc., Best Buy Co., Inc., Samsung Electronics of America, Inc. and Samsung
Telecommunications America L.L.C.
On July 8, 2016, we entered into a settlement agreement with Apple Inc. in connection with litigation in the United States District
Court for the Eastern District of Texas, for infringement of our '227 Patent. Under the terms of the settlement agreement, Apple received
a fully-paid non-exclusive license to the '227 Patent for its full term (which expired in June 2016), along with certain rights to other
patents in our patent portfolio. We received $25,000,000 from Apple for the settlement and fully paid non-exclusive license.
- 30 -
Cox Patent Portfolio – Google and YouTube Legal Proceedings
On April 4, 2014, we initiated litigation against Google Inc. ("Google") and YouTube, LLC ("YouTube") in the United States
District Court for the Southern District of New York for infringement of several of our patents within our Cox Patent Portfolio which
relate to the identification of media content on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to
infringe certain of our patents by making, using, selling and offering to sell unlicensed systems and related products and services, which
include YouTube's Content ID system. In May 2014, the defendants filed an answer to our complaint and asserted defenses of non-
infringement and invalidity.
On December 3, 2014, we initiated a second litigation against Google and YouTube in the United States District Court for the
Southern District of New York for infringement of our then newly issued patent (part of the Cox Patent Portfolio) relating to the
identification and tagging of media content (U.S. Patent No. 8,904,464). The lawsuit alleges that Google and YouTube have infringed and
continue to infringe the patent by making, using, selling and offering to sell unlicensed systems and products and services related thereto,
which include YouTube's content ID system. In January 2015, the defendants filed an answer to our complaint and asserted defenses of
non-infringement and invalidity.
The above referenced litigations that we commenced in the United States District Court for the Southern District of New York in
April 2014 and December 2014 against Google and YouTube are currently subject to a court ordered stay which has been in effect since
July 2015 as a result of proceedings at the Patent Trial and Appeal Board (PTAB) and the appeals of PTAB Final Written Decisions to the
United States District Court of Appeals for the Federal Circuit as described below.
In December 2014, Google filed four petitions to institute Inter Partes Review proceedings (the "IPRs") at the PTAB pertaining to
certain patents within our Cox Patent Portfolio. In each of the IPRs, Google sought to invalidate certain claims of our patents within our
Cox Patent Portfolio which have been asserted in our litigations against Google and YouTube pending in the United States District Court
for the Southern District of New York as described above. On June 23, 2015, the PTAB issued an order instituting each of the four IPR
petitions for oral hearing. The consolidated oral hearing was held on March 9, 2016. On June 20, 2016, the PTAB issued its Final
Written Decisions in the four pending IPRs finding eighty-six (86) claims "not unpatentable" (valid) and in total, one hundred nineteen
(119) out of one hundred and twenty-nine (129) or 92% of the challenged claims of the patents survived. None of our asserted claims in
the pending litigations against Google and YouTube were found invalid. On August 18, 2016, Google filed Notices of Appeal to appeal
the PTAB's Final Written Decisions on the IPRs to the United States Court of Appeals for the Federal Circuit. On March 26, 2018, the
United States Court of Appeals for the Federal Circuit vacated certain rulings of the PTAB's Final Written Decisions in favor of us
determining that the PTAB erred in its construction of a certain claim term and remanded the four cases to the PTAB for further
proceedings to address the claims that contained the term that was erroneously construed. The Federal Circuit left undisturbed the
PTAB's findings that the remaining claims of the patents (that did not include this claim term) are not invalid.
- 31 -
On April 13, 2015, Google filed a Petition for Covered Business Method Review ("CBM") at the PTAB seeking to invalidate claims
pertaining to our U.S. Patent No. 8,904,464, the patent asserted in our litigation against Google and YouTube filed on December 3, 2014
as referenced above. On October 19, 2015, the PTAB issued an order instituting the CBM for oral hearing. The oral hearing was held on
May 11, 2016. On October 18, 2016, the PTAB issued its Final Written Decision in favor of us with respect to the CBM and ruled that
Google had failed to show that any of the thirty-four (34) claims of our U.S. Patent 8,904,464 were unpatentable. On December 20, 2016,
Google filed a Notice of Appeal to appeal the PTAB's Final Written Decision on the CBM to the United States Court of Appeals for the
Federal Circuit. On January 23, 2018, the United States Court of Appeals for the Federal Circuit affirmed the Final Written Decision of
the PTAB in favor of us relating to the CBM.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information. Our common stock is listed for trading on the NYSE American exchange under the symbol "NTIP". The
following table sets forth, for the periods indicated, the range of the high and low sales prices for our common stock as reported by the
NYSE American exchange.
YEAR ENDED DECEMBER 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
YEAR ENDED DECEMBER 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
HIGH
$4.60
$4.45
$5.00
$5.05
HIGH
$3.50
$3.29
$2.96
$2.17
LOW
$2.25
$3.50
$3.80
$3.30
LOW
$2.50
$2.33
$1.90
$1.70
On March 26, 2018, the closing price for our common stock as reported on the NYSE American exchange was $2.65 per share. The
number of record holders of our common stock was 43 as of March 26, 2018. In addition, we believe there are in excess of approximately
2,500 holders of our common stock in "street name" as of March 26, 2018.
Dividend Policy. On December 8, 2016, our Board of Directors approved the initiation of a dividend policy. The dividend policy
provides for the payment of a semi-annual cash dividend of $0.05 per common share ($0.10 per common share annually) which
commenced in 2017 and is anticipated to be paid in March and September of each year. It is anticipated that the semi-annual cash
dividend will continue to be paid through March 2020 (the expiration of our Remote Power Patent) provided that we continue to receive
royalties from licensees of our Remote Power Patent.
- 32 -
On February 2, 2017, our Board of Directors declared an initial semi-annual cash dividend of $0.05 per common share with a
payment date of March 24, 2017 to all common stockholders of record as of March 3, 2017. On July 25, 2017, our Board of Directors
declared a semi-annual cash dividend of $0.05 per share with a payment date of September 20, 2017 to all common stockholders of record
as of September 1, 2017.
On February 9, 2018, our Board of Directors declared a semi-annual cash dividend of $.05 per share with a payment date of March
23, 2018 to all common stockholders of record as March 9, 2018. However, if we are unable to throw out the HP Jury Verdict in the
District Court, or there is not an arbitration ruling that the HP Jury Verdict finding of non-infringement does not apply to certain licensees
of our Remote Power Patent, our Board of Directors may choose to modify or discontinue annual cash dividends of an aggregate of $0.10
per common share. Our dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time
depending on our earnings, financial requirements and other factors existing at the time. Future declarations of semi-annual cash
dividends and the establishment of future record and payment dates are subject to the final determination and discretion of our Board of
Directors.
As of December 31, 2017, we accrued dividends of $84,000 for unvested restricted stock units with dividend equivalent rights.
Recent Issuances of Unregistered Securities. There were no unregistered sales of equity securities during the quarter ended
December 31, 2017.
Stock Repurchases. On August 22, 2011, we established a share repurchase program ("Share Repurchase Program"). On June 14,
2017, our Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000 of
shares of our common stock over the subsequent 24 month period. The common stock may be repurchased from time to time in open
market transactions or privately negotiated transactions in our discretion. The timing and amount of the shares repurchased is determined
by management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be increased,
suspended or discontinued at any time.
- 33 -
During the months of October, November and December 2017, we repurchased common stock pursuant to our Share Repurchase
Program as indicated below:
Period
October 1, 2017 to
October 31, 2017
November 1, 2017 to
November 30, 2017
December 1, 2017 to
December 31, 2017
Total
Total Number of
Shares Purchased
Average Price
Paid Per Share
―
90,033
283,923
373,956
―
2.62
2.42
2.53
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
(or Approximate
Dollar Value) of
Shares) that May
Yet Be Purchased
Under the Plans
or Programs
―
$ 3,875,050
90,033
$ 3,639,191
283,923
$ 2,919,001
373,956
During the year ended December 31, 2017, we repurchased an aggregate of 649,549 shares of our common stock pursuant to our
Share Repurchase Program at a cost of $2,081,135 (exclusive of commissions) or an average price per share of $3.20.
Since inception of our Share Repurchase Program (August 2011) through March 1, 2018, we have repurchased an aggregate of
7,729,546 shares of our common stock at a cost of $13,941,232 (exclusive of commissions) or an average per share price of $1.80.
Equity Compensation Plan Information
The following table summarizes share and exercise price information about our equity compensation plans as of December 31,
2017.
(a)
Number of securities
to be issued upon
exercise of
outstanding options
and rights
Equity compensation plans approved by security
1,205,000(1)
holders
Equity compensation plans not approved by security
1,625,000(2)
holders
Total
2,830,000
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column)
(a)
1,253,099
—
1,253,099
Weighted-average
exercise price of
outstanding options
and rights
$1.84(3)
$1.15
$1.28 (3)
_________________________
(1)
Includes 385,000 shares of our common stock issuable upon exercise of outstanding stock options and 820,000 shares issuable
upon vesting of outstanding restricted stock units.
(2)
(3)
Represents aggregate individual option grants outside of, and prior to the establishment of , the 2013 Stock Incentive Plan in
October 2013 referred to in the above table which represents individual option grants issued to our officers, directors, employees
and consultants in consideration for certain services rendered to us. The option agreements pertaining to such individual option
grants contain customary anti-dilution provisions.
Does not take into account outstanding restricted stock units as these awards have no exercise price.
- 34 -
Our 2013 Stock Incentive Plan ("2013 Plan") provides for the grant of any or all of the following types of awards: (a) stock options,
(b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock
units. Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as
provided in the 2013 Plan, the 2013 Plan provides for an aggregate of 2,600,000 shares of the Company's common stock to be available
for distribution pursuant to the 2013 Plan. The Compensation Committee (or the Board of Directors) will generally have the authority to
administer the 2013 Plan, determine participants who will be granted awards under the 2013 Plan, the size and types of awards, the terms
and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2013 Plan may be
granted to our employees, directors and consultants. As of December 31, 2017, there were options to purchase an aggregate of 385,000
shares of common stock outstanding and 820,000 shares issuable upon vesting of outstanding restricted stock units granted under the 2013
Plan.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
Our principal business is the development, licensing and protection of our intellectual property assets. We presently own fifty-one
(51) patents including (i) our Remote Power Patent covering the delivery of power over Ethernet cables for the purpose of remotely
powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) our Mirror Worlds Patent Portfolio
relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer
system; (iii) our Cox Patent Portfolio relating to enabling technology for identifying media content on the Internet and taking further
action to be performed based on such identification; (iv) our M2M/IoT Patent Portfolio relating to, among other things, enabling
technology for authenticating and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices,
including smartphones, tablets and computers, and (v) our QoS Patents covering systems and methods for the transmission of audio, video
and data in order to achieve high quality of service (QoS) over computer and telephony networks. In addition, we continually review
opportunities to acquire or license additional intellectual property.
We have been actively engaged in the licensing of our Remote Power Patent (U.S. Patent No. 6,218,930). We currently have
twenty-seven (27) licensees for our Remote Power Patent which, among others, include license agreements with Cisco Systems, Inc.,
Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co.,
Ltd., Dell, Inc., Huawei Technologies Co., Ltd., ShoreTel, Inc., Polycom, Inc. and Avaya, Inc. and several other major data networking
equipment manufacturers. In addition, we have license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror
Worlds Patent Portfolio. Our current strategy includes continuing our licensing efforts with respect to our intellectual property assets. In
addition, we continue to seek to acquire additional intellectual property assets to develop, commercialize, license or otherwise monetize
such intellectual property. 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.
- 35 -
Our acquisition strategy focuses 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. Our
Remote Power Patent generated licensing revenue in excess of $121,000,000 from May 2007 through December 31, 2017. As a result of
our acquisition of the Mirror Worlds Patent Portfolio in May 2013, we achieved licensing and other revenue from the portfolio of an
aggregate of $47,150,000 through December 31, 2017.
On November 13, 2017, a jury empaneled in our patent infringement litigation in the United States District Court for the Eastern
District of Texas, Tyler Division, found that certain claims of our Remote Power Patent were invalid and not infringed by Hewlett-
Packard (the "HP Jury Verdict"). On February 2, 2017, we moved to throw out the HP Jury Verdict and have the Court determine that
certain claims of our Remote Power Patent are not obvious (invalid) as a matter of law by filing motions for judgment as a matter of law
on validity and a new trial on validity and infringement. A hearing on our motions is currently scheduled for May 14, 2018. The HP Jury
Verdict had a material adverse effect on our results of operations and cash-flow for the quarter ended December 31, 2017 and may
continue to do so in the future. Several of our largest licensees for our Remote Power Patent, Cisco, Dell and Netgear, constituting 76%
of our running royalty revenue from Royalty Bearing Licenses for 2017, have advised us that they will no longer pay us ongoing royalties
pursuant to their license agreements. We disagree with the position taken by such licensees for, among other reasons, that the HP Jury
Verdict has not been subject to an order of the District Court and may be thrown out as a result of motion practice in the District Court. If
we are unable to satisfactorily resolve the issue, we intend to pursue arbitration. However, our position may not prevail in arbitration. If
the District Court subsequently issues an order confirming the HP Jury Verdict and finding certain claims of our Remote Power Patent
obvious (invalid), and we are unable to overturn such order on appeal to the United States Court of Appeals for the Federal Circuit, certain
of our licensees will not be obligated to pay us ongoing royalties and other licensees including Cisco), our largest licensee, will likely
continue not to pay us royalties.
We have been largely dependent upon our Remote Power Patent for a significant amount of our revenue. Revenue for the year
ended December 31, 2017 and December 31, 2016 from royalty bearing license agreements for our Remote Power Patent constituting
$16,451,000 (100% of our revenue) and $22,588,000 (34.7% of our revenue), respectively. In addition, we have been dependent on
royalty bearing licenses for our Remote Power Patent for our recurring revenue (payable quarterly or monthly), which for the years ended
December 31, 2017 and December 31, 2016 was $12,053,000 and $10,788,000, respectively. Without revenue from our Remote Power
Patent, our revenue will be dependent upon the outcome of litigation involving our Cox Patent Portfolio, Mirror Worlds Patent Portfolio
and our ability to monetize our recently acquired IoT Patent Portfolio or new patents to be acquired in the future. Our future
- 36 -
revenue stream is uncertain. Accordingly, if the District Court enters an order confirming the HP Jury Verdict and finding certain claims
of our Remote Power Patent obvious (invalid) and either (i) we are unable to reverse the District Court order on appeal, or (ii) there is an
arbitration ruling that the District Court order relieves the obligation of certain of our licensees including Cisco Systems, Inc., our largest
licensee, to continue to pay us royalties and the District Court order is not subsequently reversed on appeal, our business, results of
operations and cash-flow will be materially adversely effected (see "Risk Factors" at pages 15–18 hereof).
If we are successful in our efforts (i) to throw out the HP Jury Verdict in the District Court, (ii) to overturn the jury verdict on
appeal if the District Court confirms the jury verdict and finding certain claims of our Remote Power Patent obvious, or (iii) there is an
arbitration ruling that the District Court order does not affect the obligations of certain of our licensees (including Cisco) to continue to
pay us royalties and the order is not overturned on appeal, licensees will be obligated to pay us ongoing royalties and all prior royalties that
were not previously paid following the HP Jury Verdict in November 2017.
At December 31, 2017, our principal sources of liquidity consisted of cash and cash equivalents of $53,101,000 and working
capital of $52,056,000. We believe based on our current cash position that we will have sufficient cash to fund our operations for the
foreseeable future. Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as
evaluate other strategic alternatives.
On December 7, 2016, our Board of Directors approved the initiation of a dividend policy. The policy provides for the payment of
regular semi-annual cash dividends of $0.05 per common share ($0.10 per common share annually) which are anticipated to be paid in
March and September of each year. It is anticipated that the semi-annual cash dividend will continue to be paid through March 2020
(expiration of our Remote Power Patent) provided that we continue to receive royalties from licensees of our Remote Power Patent. In
2017, we paid semi-annual cash dividends consistent with our dividend policy. On February 9, 2018, our Board of Directors declared a
semi-annual cash dividend of $0.05 per common share with a payment date of March 23, 2018 to all shareholders of record on March 9,
2018. However, if we are unable to overturn the HP Jury Verdict in the District Court or there is not an arbitration ruling that the HP Jury
Verdict finding of non-infringement does not apply to certain of our licensees of our Remote Power Patent, our Board of Directors may
choose to modify or discontinue regular semi-annual cash dividends of $0.05 per common share.
Our revenue from our patent licensing and enforcement business is generated from license agreements entered into as a result of
litigation settlements or judgments (after a jury verdict). Generally, in the event of settlement of litigation related to our assertion of patent
infringement involving our intellectual property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive
fully-paid license (a "Fully-Paid License"), or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing
obligation to pay quarterly or monthly royalties to us for the life of the licensed patent (a "Royalty Bearing License").
- 37 -
Royalty Bearing Licenses
We currently have Royalty Bearing Licenses for our Remote Power Patent with seventeen (17) licensees pursuant to which such
licensees are obligated to pay us ongoing royalties on a quarterly or monthly basis for the life of our Remote Power Patent (March 2020),
subject to certain conditions including the validity of certain claims of our Remote Power Patent or a finding that a third party's PoE
products are found not to infringe our Remote Power Patent and such finding applies to our particular licensee's licensed products.
Recurring revenue from our Royalty Bearing Licenses was $12,052,000 and $10,788,000 for the year ended December 31, 2017 and
December 31, 2016, respectively. At December 31, 2017, we had Royalty Bearing Licenses with seventeen (17) licensees as compared to
sixteen (16) such licensees at December 31, 2016. Cisco is our largest royalty bearing licensee. Cisco constituted 58% and 76% of our
recurring royalty revenue from our Royalty Bearing Licenses for the year ended December 31, 2017 and December 31, 2016,
respectively. Due to our annual royalty rate structure with Cisco, which includes declining rates as the volume of PoE products sales
increase during the year, royalties from Cisco have been highest in the first quarter of the calendar year and decline for each of the
remaining calendar quarters of the year.
Pending Litigation
We currently have pending patent infringement litigations involving our Remote Power Patent and certain patents within our Cox
Patent Portfolio and Mirror Worlds Patent Portfolio (see "Legal Proceedings" at pages 27–32 hereof).
In September 2011, we initiated patent litigation against sixteen (16) data equipment manufacturers in the United States District
Court for the Eastern District of Texas, Tyler Division, for infringement of our Remote Power Patent. We settled the litigation against
fifteen (15) of the sixteen (16) defendants. The remaining defendant in the litigation is Hewlett-Packard Company. On November 13,
2017, a jury determined that certain claims of our Remote Patent are invalid and not infringed by Hewlett-Packard. On February 2, 2018,
we moved to throw out the jury verdict and have the Court determine that certain claims of our Remote Power Patent are not obvious
(invalid) by filing a motion for judgment as a matter of law on validity and motions for a new trial on validity and infringement. A
hearing on our motions is currently scheduled for May 14, 2018 (see "Legal Proceedings" at pages 27-29 hereof).
In April 2014 and December 2014, we initiated patent infringement litigation against Google Inc. and YouTube, LLC in the United
States District Court for the Southern District of New York for infringement of several patents within our Cox Patent Portfolio (see
"Legal Proceedings" at pages 31-32 hereof). These litigations are currently subject to a court ordered stay pending appeal to the United
States Court of Appeals for the Federal Circuit of Final Written Decisions of the Patent Trial and Appeal Board (PTAB) of the USPTO in
our favor relating to four Inter Partes Review proceedings and a Covered Business Method Review (CBM) instituted by Google (see
"Legal Proceedings" at pages 31-32 of this Annual report).
In May 2017, we initiated patent infringement litigation against Facebook, Inc. ("Facebook") in the United States District Court for
the Southern District of New York, for infringement of our U.S. Patent No. 6,006,227, U.S. Patent No. 7,865,538 and U.S. Patent No.
8,225,439 (among the patents we acquired as part of our acquisition of our Mirror Worlds Patent Portfolio) (see "Legal Proceedings" at
page 30 hereof).
- 38 -
Settlements in the Periods
During the year ended December 31, 2017, we had revenue of approximately $4,398,000 from Fully-Paid Licenses and license
initiation fees related to patent litigation settlements. During the year ended December 31, 2016, we had revenue of $36,800,000 from
Fully-Paid Licenses and license initiation fees related to patent litigation settlements. In addition, during the year ended December 31,
2016, we received $17,500,000 in connection with settlement of a professional liability claim which we had acquired as part of our
acquisition of the Mirror Worlds Patent Portfolio in May 2013.
Taxes
Current federal, state and local income taxes of $2,057,000 and $4,187,000 were recorded for the year ended December 31, 2017
and December 31, 2016, respectively. The remaining deferred tax assets of $168,000 at December 31, 2017 relate to temporary (timing)
differences with respect to outstanding options and restricted stock units. We utilized our remaining net operating loss carry-forwards
(NOLs) during the year ended December 31, 2016.
On December 22, 2017, the 2017 Tax Cuts and Job Act was enacted into law and the new legislation contains key tax provisions
that affect us. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the
transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets
and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the
Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not extended beyond one
year of the enactment date.
The personal holding company ("PHC") rules under the Internal Revenue Code impose a 20% tax on a PHC's undistributed
personal holding company income ("PHC Income", which means, in general, taxable income subject to certain adjustments). For a
corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be owned
directly or indirectly by 5 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 2017 (as well as during the second half of prior years), we did not meet
the Ownership Test. Due to the significant number of shares held by our largest shareholders, we continually assess our share ownership
to determine whether it meets the Ownership Test. If the Ownership Test were met and the income generated by us were determined to
constitute "royalties" within the meaning of the Income Test, we would constitute a PHC and we would be subject to a 20% tax on the
amount of any PHC Income that we do not distribute to our shareholders.
- 39 -
RESULTS OF OPERATIONS
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue. We had revenue of $16,451,000 for the year ended December 31, 2017 ("2017") as compared to revenue of $65,088,000
for the year ended December 31, 2016 ("2016"). The decrease in revenue of $48,637,000 for 2017 was due primarily to revenue of
$36,800,000 for 2016 from Fully-Paid Licenses for our Remote Power Patent and Mirror Worlds Patent Portfolio and license initiation
fees related to litigation settlements as compared to $4,398,000 of such revenue for 2017 and our $17,500,000 settlement of a professional
liability claim in 2016 (see "Legal Proceedings" at pages 27-30 hereof and Note I to our consolidated financial statements included in this
Annual Report). Excluding revenue from Fully-Paid Licenses and license initiation fees related to litigation settlements and revenue from
our one-time professional liability settlement in 2016, revenue for 2017 from Royalty Bearing Licenses increased by $1,265,000 or 12%
compared to 2016 primarily due to one additional Royalty Bearing License for 2017.
Operating Expenses. Operating expenses for 2017 were $10,437,000 as compared to $32,988,000 for 2016. The decrease in
operating expenses of $22,551,000 was primarily due to a decrease in costs of revenue of $20,824,000 for 2017, primarily as a result of
greater 2016 revenue of $32,402,000 from Fully-Paid Licenses and license initiation fees related to patent litigation settlements and our
$17,500,000 professional liability settlement in 2016. We had costs of revenue of $4,970,000 and $25,794,000 for 2017 and 2016,
respectively.
Included in the costs of revenue for 2017 were contingent legal fees and expenses of $4,102,000 and $823,000 of incentive bonus
compensation payable to our Chairman and Chief Executive Officer pursuant to his employment agreement (see Note G[1] and Note H[1]
to our consolidated financial statements included in this Annual Report). Included in the costs of revenue for 2016 were contingent legal
fees and expenses of $18,196,000 payable to our patent litigation counsel, $4,252,000 of incentive bonus compensation payable to our
Chairman and Chief Executive Officer pursuant to his employment agreement and other contractual payments of $3,345,000 paid to
Recognition Interface LLC and others of certain percentages of net proceeds from the monetization of our Mirror Worlds Patent Portfolio
(see Note G[2] to our consolidated financial statements included in this Annual Report).
General and administrative expenses for 2017 decreased by $527,000 from $2,782,000 for 2016 to $2,255,000 for 2017, primarily
due to decreased bonuses for officers in 2017. Amortization of patents was $206,000 for 2017 as compared to $813,000 for 2016 due to
the expiration of certain patents during 2016. Stock-based compensation expense related to the issuance of restricted stock units was
$949,000 for 2017 as compared to $509,000 for the issuance of restricted stock units and the vesting of stock options for 2016.
Professional fees and related costs decreased by $533,000 for 2017 from $2,590,000 for 2016 to $2,057,000 primarily due to decreased
professional fees and related costs for proceedings at the U.S. Patent and Trademark Office.
Interest Income. Interest income for 2017 was $215,000 as compared to interest income of $61,000 for 2016, which was due to
increased cash as a result of litigation settlements and greater returns on invested cash.
- 40 -
Operating Income. We had operating income of $6,014,000 for 2017 compared with operating income of $32,100,000 for 2016.
The decreased operating income of $26,086,000 for 2017 was primarily due to operating income associated with greater 2016 revenue of
$32,402,000 from Fully-Paid Licenses and license initiation fees related to patent litigation settlements and revenue of $17,500,000 from
settlement of a professional liability claim.
Current Taxes. Federal, state and local income taxes of $2,057,000 and $4,187,000 were recorded for 2017 and 2016, respectively.
The decrease in such taxes of $2,130,000 for 2017 was due to taxes associated with taxable income of $32,161,000 for 2016 as compared
to taxable income of $6,229,000 for 2017 and utilization of our net operating loss carry-forwards in 2016.
Deferred Tax Expense. We recorded deferred tax expense of $39,000 and $4,751,000 for 2017 and 2016, respectively. The
deferred tax expense of $39,000 for 2017 relates to temporary (timing) differences with respect to outstanding stock options and restricted
stock units. The deferred tax expense of $4,751,000 for 2016 was due to utilization of our net operating loss carry-forwards. We had no
remaining net operating loss carry-forwards for 2017.
Net Income. As a result of the foregoing, we realized net income of $4,133,000 or $0.17 per share (basic) and $0.16 per share
(diluted) for 2017 compared with net income of $23,223,000 or $1.00 per share (basic) and $0.93 per share (diluted) for 2016. The
decrease in net income of $19,090,000 was primarily due to income associated with the greater revenue for 2016 of $32,402,000 for Fully-
Paid Licenses and license initiation fees related to patent litigation settlements and the $17,500,000 professional liability settlement.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our patents. At December 31, 2017, our principal sources
of liquidity consisted of cash and cash equivalents of $53,101,000 and working capital of $52,056,000. We believe based on our current
cash position that we will have sufficient cash to fund our operations for the foreseeable future.
At December 31, 2017, we had royalty receivables of $575,000 due from Royalty Bearing Licenses, which are typically paid within
sixty days of the end of the quarter.
Working capital increased by $641,000 to $52,056,000 at December 31, 2017 as compared to working capital of $51,415,000 at
December 31, 2016. The increase in working capital for 2017 was primarily due to increased cash and cash equivalents of $2,183,000 and
decreased accrued expenses of $2,000,000, offset by decreases in royalty receivables of $2,304,000 and prepaid taxes of $1,070,000.
- 41 -
Net cash provided by operating activities for 2017 decreased by $23,132,000 from $29,906,000 for 2016 to $6,774,000 for 2017.
The decrease in net cash provided by operating activities for 2017 compared with 2016 was primarily due to decreases in net income of
$19,090,000, changes in accrued expenses of $5,002,000, and changes in deferred taxes of $4,712,000.
Net cash used in investing activities for 2017 and 2016 was $1,144,000 and $42,000, respectively, related to the purchase of patents
and other related costs.
Net cash provided by (used in) financing activities for 2017 and 2016 was $(3,447,000) and $446,000, respectively. The change
primarily resulted from the repurchase of our common stock of $2,096,000 and cash dividends of $2,420,000 offset by $1,125,000 of
proceeds from the exercise of options and warrants for 2017.
We maintain our cash primarily in money market accounts. 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, operating lease obligations, purchase obligations or other long-term
liabilities except for the lease obligations set forth in Note G[3] to our condensed consolidated financial statements included in this
quarterly report.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of operations, and cash flows are based on our audited consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of financial statements included in this Annual Report on Form 10-K requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and
assumptions made in the preparation of our consolidated financial statements include revenue recognition, patents, and stock-based
compensation. Actual results could be materially different from those estimates, upon which the carrying values were based.
Our critical accounting policies include:
·
·
·
·
Revenue Recognition;
Patents;
Impairment of Long-Lived Assets; and
Stock-Based Compensation.
Revenue Recognition
We recognize revenue received from the licensing of our intellectual property and other related intellectual property activities.
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the
terms of the license or other applicable agreement, (iii) amounts are fixed or determinable, and (iv) collectability of amounts is reasonably
assured. In connection with recurring revenue from Royalty Bearing Licenses, we rely on royalty reports received from third party
licensees to record our revenue. From time to time we may audit or otherwise dispute royalties reported from our licensees. Any adjusted
royalty revenue as a result of such audits or dispute is recorded by us in the period in which such adjustment is agreed to by us and the
licensee or otherwise determined.
- 42 -
Consistent with our revenue recognition policy, we did not record revenue in the fourth quarter of 2017 from certain licensees,
including Cisco, Dell and Netgear, who advised us they would not pay us ongoing royalties as a result of the HP Jury Verdict. We
disagree with the position taken by such licensees and we intend to pursue arbitration if we do not achieve a satisfactory resolution (see
Note I[1] to our consolidated financial statements included in this Annual Report).
Revenue from our patent licensing and enforcement business is generated from negotiated license agreements for our intellectual
property. Generally, in the event of settlement of litigation related to our assertion of patent infringement involving our intellectual
property, defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a "Fully-Paid
License"), or (ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or
monthly royalties to us for the life of the licensed patent (a "Royalty Bearing License").
Our license agreements, both Fully-Paid Licenses and Royalty Bearing Licenses, typically include some combination of the
following: (i) the grant of a non-exclusive, license to manufacture and/or sell products covered by our patented technologies; (ii) the
release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted
pursuant to these licenses typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, we
typically have no further obligations with respect to the grant of the non-exclusive licenses. Generally, our license agreements provide for
the grant of the licenses, releases, and other significant deliverables following execution of the agreement and the receipt of the up-front
lump sum payment for a Fully-Paid License or a license initiation fee for a Royalty Bearing License.
Ongoing Royalty Payments: Certain of our revenue from Royalty Bearing Licenses results from the calculation of royalties based
on a licensee's actual quarterly or monthly sales or actual per unit activity, applied to a contractual royalty rate. Licensees that pay
royalties on a quarterly basis generally report actual quarterly sales and related quarterly royalties due within 45 days after the end of the
quarter in which such sales activity takes place. Licensees with Royalty Bearing Licenses are obligated to provide us with quarterly (or
monthly) royalty reports that summarize their sales of licensed products and their related royalty obligations to us. We receive these
royalty reports subsequent to the period in which our licensees underlying sales occurred. The amount of royalties due under Royalty
Bearing Licenses each quarter cannot be reasonably estimated by management. Consequently, we recognize revenue in the period in
which the royalty report is received in arrears and other revenue recognition criteria are met.
Non-Refundable Up-Front Fees: Fully-Paid Licenses provide for a non-refundable up-front payment, for which we have no future
obligations or performance requirements, revenue is generally recognized when we have obtained the signed license agreement, all
obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably assured. Revenue
from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee
depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
- 43 -
Patents
We own patents that relate to various technologies. We capitalize the costs associated with acquisition, registration and
maintenance of our acquired patents and amortize these assets over their remaining useful lives on a straight-line basis. Any further
payments made to maintain or develop the patents would be capitalized and amortized over the balance of the useful life for the patents.
Impairment of long-lived assets
Intangible assets with finite lives are tested for impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable. Accordingly, we record impairment losses on long-lived assets used in operations or expected to be disposed of
when indicators of impairment exist and the undiscounted cash flows expected to be derived from those assets are less than carrying
amounts of these assets.
Stock-Based Compensation
We account for our 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 payments to employees, including grants of
employee stock options and restricted stock units, to be recognized in the consolidated statements of income 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. Share-based
payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are
recognized as expense over the related service period and are expensed using an accelerated attribution model. We use 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 granted and either the quoted market price of our 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.
Effect of New Accounting Pronouncements
In August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15, Classification of Certain Cash Receipts
and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows
presentation of certain transactions where diversity in practice exists. The guidance is effective for interim and annual periods beginning
after December 15, 2017, and early adoption is permitted. The adoption of this ASU will have a material impact on our consolidated
financial statements.
- 44 -
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09
provides for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance. The new revenue standard allows for either full retrospective or modified retrospective
application. We are required to adopt the amendments in ASU No. 2014-09 using one of the two acceptable methods. In August 2015,
the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred
the effective date of ASU No. 2014-09 to annual periods beginning after December 2017, along with an option to permit early adoption as
of the original effective date. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing, which amends the guidance in 2014-09 related to identifying performance obligations
and accounting for licenses of intellectual property. The ASU does not change the core principle of the guidance in Topic 606. In May
2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients, related to disclosures of remaining performance obligations, as well as other amendments to guidance on
collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In September 2017,
the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic
840) and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606). In November 2017, the FASB issued ASU 2017-14, Income Statement-Reporting Comprehensive
Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), which provides
additional implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) The
effective date and transition requirements for the ASUs are the same as the effective date and transition requirements in Topic 606. The
ASUs apply for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1,
2018, for a calendar year entity). Early application is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period. We will adopt ASU 2014-09 on January 1, 2018 using the modified
retrospective approach. We do not anticipate a modified retrospective adjustment to be recorded upon adoption as it relates to the amount
and timing of revenue recognized from its existing license agreements of our intellectual property. We will continue to evaluate any new
license agreements entered into in the future relating to the new revenue recognition policy which will be adopted on January 1, 2018.
In May 2017, FASB issued ASU No. 2017-09 Compensation – Stock Compensation (Topic 718) which provides guidance on
determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting
in Topic 718. The new standard is effective beginning after December 15, 2017 with early adoption permitted. This standard, adopted on
a prospective basis, will not have a material impact on our consolidated financial statements.
Accounting Standards Adopted in the Period
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows.
Prior to this amendment, excess tax benefits resulting from the difference between the deduction for tax purposes and the
compensation costs recognized for financial reporting were not recognized until the deduction reduced taxes payable. We have evaluated
this on a modified retrospective basis and determined that no adjustment was necessary. Under the new method we recognize excess tax
benefits in the current accounting period. Additionally, ASU 2016-09 requires that we present excess tax benefits on the Statement of
Cash Flows as an operating activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. We adopted ASU 2016-
09 in the first quarter of 2017 and elected to apply this adoption prospectively. Prior periods have not been adjusted. The effective tax rate
for the year ended December 31, 2017 was not materially different from the federal statutory rate.
- 45 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required hereby are located on pages F-1 through F-27 which follow Part III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
and
Our
Chief
Officer
Executive
the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end
of the period covered by this Annual Report on Form 10-K. Based upon this review, our executive officers concluded that, as of the end
of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in applicable rules and forms and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
evaluated
Financial
Officer
Chief
have
(b) Internal Control Over Financial Reporting
(i) Management's Annual Report on Internal Control over Financial Reporting.
Our management is also responsible for establishing and maintaining adequate "internal control over financial reporting" of the
company, as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is defined as a process designed by,
or under the supervision of, the issuer's principal executive and principal financial officer and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.
- 46 -
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2017 using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our internal controls over financial reporting were effective as of the end of the period
covered by this report.
(ii) Attestation Report of Registered Public Accounting Firm
We are a "smaller reporting company" as defined in Rule 12b-2 promulgated under the Securities Act of 1934, as amended, and as
such, are not required to provide the information contained in this sub-section pursuant to Item 308(b) of Regulation S-K. Accordingly,
this Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control
over financial reporting.
(iii) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31,
2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
- 47 -
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following information includes information each director and executive officer has given us about his or her age, all positions
he or she holds, his or her principal occupation and business experience for at least the past five years, and the names of other publicly-
held companies of which he or she currently serves as a director or has served as a director during the past five years. In addition to the
information presented regarding each director's specific experience, qualifications, attributes and skills that led our Board to the
conclusion that he or she should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and
adherence to high ethical standards. They each have demonstrated business acumen, exercise sound judgment, and a commitment of
service to Network-1 and our Board.
Information about the number of shares of our common stock beneficially owned by each executive officer and director appears in
this Annual Report under the heading "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters" beginning on page 57 hereof There are no family relationships among any of our directors and executive officers.
NAME
Corey M. Horowitz
David C. Kahn
Jonathan Greene
Emanuel Pearlman
Niv Harizman
Allison Hoffman
AGE
POSITION
63
66
56
58
53
47
Chairman, Chief Executive Officer and Chairman of the
Board of Directors
Chief Financial Officer, Secretary and a Director
Executive Vice President
Director
Director
Director
Corey M. Horowitz became our Chairman and Chief Executive Officer in December 2003. Mr. Horowitz has also served as
Chairman of our Board of Directors since January 1996 and has been a member of our Board of Directors since April 1994. We believe
Mr. Horowitz's qualifications to serve on our Board of Directors include his significant experience and expertise as an executive in the
intellectual property field, his understanding of our intellectual property and the patent acquisition, licensing and enforcement business
combined with his private equity and corporate transactional experience.
- 48 -
David C. Kahn, CPA, became our Chief Financial Officer in January 2004 and our Secretary in August 2012. Mr. Kahn was
elected to our Board in April 2012. Since December 1989, Mr. Kahn has provided accounting and tax services on a consulting basis to
private and public companies. From August 2000 until August 2012, Mr. Kahn served as a full-time faculty member of Yeshiva
University in New York. We believe Mr. Kahn's qualifications to serve on our Board include his background and expertise in accounting
and tax matters.
Jonathan Greene became our Executive Vice President in October 2013. He served as a consultant to the Company from December
2004 until March 2013, providing technical and marketing analysis for our intellectual property portfolio. Mr. Greene became an
employee of Network-1 in March 2013. From April 2006 to February 2009, Mr. Greene served as a marketing consultant for Avatier
Corporation, a developer of identity management software. From August 2003 until December 2004, he served as a consultant to Neartek,
Inc., a storage management software company (August 2003 until October 2003) and Kavado Inc., a security software company
(November 2003 until December 2004). From January 2003 until July 2003, Mr. Greene served as Director of Product Management for
Falconstor Software, Inc. (OTC:FALC), a storage management software company. From December 2001 through December 2002, Mr.
Greene served as Senior Vice President of Marketing and Business Development of Network-1, at a time when Network-1 was engaged
in the development, marketing and licensing of security software. From December 1999 until September 2001, he served as Senior Vice
President of Marketing for Panacya Inc., a vendor of service management software.
Emanuel R. Pearlman has been a member of our board of directors since January 2012, where he serves as Chairman of our Audit
Committee and a member of our Nominating and Corporate Governance Committee. Mr. Pearlman currently serves as the Executive
Chairman of Empire Resorts, Inc., (NASDAQ: NYNY), where he has served as a director since May 2010 and previously served as Non-
Executive Chairman of the Board from September 2010 through May 2016. He is also the Chairman and Chief Executive Officer of
Liberation Investment Group, LLC, a New York based investment management and financial consulting firm, which he founded in
January 2003. Mr. Pearlman has been a member of the board of directors of CEVA Holdings, LLC since June 2013. From May 2017
through September 2017, Mr. Pearlman served on the board of directors of ClubCorp Holdings, Inc. (NYSE:MYCC), where he served on
the Strategic Review Committee, and from 2009-2014 he served as the sole independent director of the Fontainebleau Miami JV LLC,
which currently owns and operates the Fontainebleau Hotel in Miami Beach. Mr. Pearlman served as a member of the board of directors
of Dune Energy (OTCBB: DUNR.OB) and Jameson Inns, Inc. from 2012-2013. He also served as a director of Multimedia Games, Inc.,
(NASDAQ-GS:MGAM) from October 2006 to March 2010. We believe Mr. Pearlman's qualifications to serve on our Board include his
significant investment and financial experience and expertise combined with his Board experience.
Niv Harizman became a director of our company in December 2012. Mr. Harizman is a Managing Member of Tyto Capital
Partners LLC, a private investment firm specializing in debt and equity investments in middle market companies and special situations, a
position he has held since August 2010. Since March 2010, Mr. Harizman has also been the Managing Member of NHK Partners LLC,
an entity that makes private investments and provides consulting services. Since November 2013, Mr. Harizman
- 49 -
has been affiliated with Riverside Management Group, a merchant banking firm, and BCW Securities LLC, its affiliated broker-dealer.
From May 2005 to March 2010, Mr. Harizman was a Founding Partner and Head of Corporate Finance at Plainfield Asset Management
LLC, which was a privately held registered investment adviser focused on alternative investments. From May 2000 until May 2005, Mr.
Harizman was a member of the Mergers & Acquisitions Group of Credit Suisse First Boston LLC where he was a Managing Director
from 2001-2005 and a Director from 2000 to 2001. From 1995 until 2000, Mr. Harizman was employed by Bankers Trust and its
successors including BT Alex. Brown Incorporated and Deutsche Bank in various investment banking positions in the Mergers &
Acquisitions Group and Leveraged Finance Group. We believe Mr. Harizman's qualifications to serve on our Board include his
significant investment and financial transactional experience and expertise.
Allison Hoffman became a director of our company in December 2012. Since January 2016, Ms. Hoffman has served as Chief
Legal Officer and Chief People Officer at Intersection Parent, Inc., an urban experience company that utilizes technology to make cities
better, including bringing free Wi-Fi throughout New York City. From September 2013 to December 2015, Ms. Hoffman served as
Executive Vice President, General Counsel and Corporate Secretary of Martha Stewart Living Omnimedia, Inc. (NYSE:MSO), a media
and merchandising company providing consumers with high quality life style content and products. From December 2012 until
September 2013, she provided legal services to Martha Stewart Living Omnimedia, Inc. From January 2007 until September 2012, Ms.
Hoffman served as Senior Vice President, Chief Legal Officer and Secretary of ALM Media, LLC, a leading provider of specialized news
and information for the legal and commercial real estate sectors. We believe that Ms. Hoffman's qualifications to serve on our Board
include her extensive legal background and transactional experience.
Committees of the Board of Directors
Our Board of Directors currently has four standing committees: an Audit Committee; a Compensation Committee; a Nominating
and Corporate Governance Committee and a Strategic Development Committee. Each of the Audit Committee, Compensation Committee
These charters are available on our website at:
and Nominating and Corporate Governance Committee has a charter.
http://www.Network-1.com/sec/sec.htm. Each member of each committee is an "independent" director under the standards of the NYSE
American LLC Company Guide. Three of our current five directors, Emanuel Pearlman, Allison Hoffman and Niv Harizman, are
considered independent directors under Rule 803A(2) of the NYSE American LLC Company Guide.
Audit Committee
Our Board of Directors has a separately standing audit committee in accordance with Section 10A-3 of the Securities Exchange Act
of 1934, as amended, and Section 803B of the NYSE American Company LLC Guide consisting of Emanuel Pearlman (Chairman) and
Allison Hoffman. Emanuel Pearlman and Allison Hoffman each qualify as an audit committee financial expert under applicable SEC
rules. Mr. Pearlman and Ms. Hoffman also qualify as "independent" as independence for audit committee members is defined under 10A-
3 under the Securities Exchange Act of 1934, as amended, and Section 803B(2) of the NYSE American LLC Company Guide.
- 50 -
The Audit Committee is appointed by our Board of Directors to provide assistance to the Board in fulfilling its oversight
responsibility with respect to, among other things, (i) the integrity of our financial statements, (ii) our compliance with legal and
regulatory requirements, (iii) selecting and evaluating the qualifications and independence of our independent registered public
accounting firm, (iv) evaluating the performance of our internal audit function and independent registered public accounting firm, and (v)
our internal controls and procedures.
Compensation Committee
The Compensation Committee consists of Allison Hoffman (Chairperson) and Niv Harizman. The Compensation Committee is
appointed by our Board of Directors to assist the Board in carrying out the Board's responsibilities relating to compensation of our
executive officers and directors. The Committee has overall responsibility for evaluating and approving the officer and director
compensation plans, policies and our programs.
Nominating and Corporate Governance Committee
Our Board has a Nominating and Corporate Governance Committee consisting of Niv Harizman (Chairman) and Emanuel
Pearlman. The Nominating and Corporate Governance Committee is responsible for, among other things, developing and recommending
to the Board a set of corporate governance policies for the Company, establishing criteria for selecting new directors, and identifying,
screening and recruiting new directors. The Committee also recommends to the Board nominees for directors and recommends directors
for committee membership to the Board.
Strategic Development Committee
We also have a Strategic Development Committee to assist our Chairman and Chief Executive Officer in strategic development and
planning of our business relating to identifying potential strategic partners, the acquisition of new IP and other acquisition opportunities.
The Committee also assists in capital markets related activities. Niv Harizman is the sole member of the Strategic Development
Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more
than ten percent (10%) of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC.
To our knowledge we believe that all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent
(10%) stockholders were complied with during 2017.
- 51 -
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes compensation for the years ended December 31, 2017 and December 31, 2016, awarded to, earned
by or paid to our Chief Executive Officer ("CEO") and to each of our executive officers who received total compensation in excess of
$100,000 for the year ended December 31, 2017 for services rendered in all capacities to us (collectively, the "Named Executive
Officers").
Summary Compensation Table
Name and
Principal Position
Corey M. Horowitz
Chairman and Chief
Executive Officer
Year
2017
2016
Salary ($) Bonus ($)
$
$
998,000 (2) $
482,000 $
440,000 $ 4,902,000 (2) $
Stock
Awards($)(3)
$
—
1,696,000 (3) $
All Other
Compensation($)(1)
David C. Kahn
Chief Financial Officer
Jonathan Greene
Executive Vice President
2017
2016
2017
2016
$
$
$
$
175,000 $
166,000 $
30,000
75,000
200,000 $
200,000 $
40,000
125,000
$
$
$
$
—
124,000
—
124,000
$
$
$
$
Total($)
36,000 (4) $ 1,516,000
35,000 (4) $ 7,073,000
36,000 (5) $
33,375 (5) $
241,000
398,315
36,000 (6) $
33,375 (6) $
276,000
482,375
(1) We have concluded that the aggregate amount of perquisites and other personal benefits paid in 2017 and 2016 to either Mr.
Horowitz, Mr. Kahn or Mr. Greene did not exceed $10,000.
(2) Mr. Horowitz received the following cash incentive bonus payments for 2017: (i) an annual discretionary bonus of $175,000 and
(ii) incentive bonus compensation of $823,000 pursuant to his employment agreement (see "Employment Agreements-
Termination of Employment and Change In-Control Arrangements" below). Mr. Horowitz received the following cash incentive
bonus payments for 2016: (i) an annual discretionary bonus of $650,000 and (ii) incentive bonus compensation of $4,252,000
pursuant to his employment agreement.
(3) The amounts in this column represent the aggregate grant date fair value of restricted stock units awards granted to the Named
Executive Officers computed in accordance with FASB ASC Topic 718. In accordance with SEC rules, the grant date fair value
of an award that is subject to a performance condition is based on the probable outcome of the performance condition. See Note
F[1] to our consolidated financial statements included in this Annual Report for a discussion of the assumptions made by the
Company in determining the grant date fair value.
(4)
Includes 401K matching funds contributions by the Company and profit sharing under the Company's 401k Plan for the benefit of
Mr. Horowitz of $36,000 for 2017 and $35,000 for 2016, respectively.
(5)
Includes 401K matching funds contributions by the Company and profit sharing under the Company's 401k Plan for the benefit of
Mr. Kahn of $36,000 for 2017 and $33,375 for 2016.
(6) Represents 401K matching funds contributions by the Company and profit sharing under the Company's 401k Plan for the benefit
of Mr. Greene of $36,000 for 2017 and $33,375 for 2016.
Narrative Disclosure to Summary Compensation Table
Employment Agreements, Termination of Employment and Change-In-Control Arrangements
On July 14, 2016, we entered into a new employment agreement ("Agreement") with Corey M. Horowitz, our Chairman and Chief
Executive Officer, pursuant to which he continues to serve as Chairman and Chief Executive Officer for a five year term, at an annual
base salary of $475,000 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. During the year ended
December 31, 2017 and December 31, 2016, our Chairman and
- 52 -
Chief Executive Officer received annual discretionary cash bonuses of $175,000 and $650,000 respectively. In addition, pursuant to the
Agreement, we granted to the Chairman and Chief Executive Officer, under our 2013 Plan, 750,000 restricted stock units (the "RSUs",
each RSU awarded by us represents a contingent right to receive one share of our common stock) which vest in three tranches, as follows:
(i) 250,000 RSUs shall vest on July 14, 2018, subject to Mr. Horowitz's continued employment by us through the vesting date (the
"Employment Condition"); (ii) 250,000 RSUs shall vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual
installments for the remaining term of employment, subject to (1) the Employment Condition being satisfied through each such annual
vesting date and (2) our common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $3.25 per share
(subject to adjustment for stock splits) at any time during the term of employment; and (iii) 250,000 RSUs vest at any time beginning July
14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment subject to (1) the Employment
Condition being satisfied through each such annual vesting date and (2) our common stock achieving a closing price (for 20 consecutive
trading days) of a minimum of $4.25 per share (subject to adjustment for stock splits) at any time during the term of employment. The
aforementioned stock price vesting conditions of $3.25 per share and $4.25 per share have been satisfied. Notwithstanding the
aforementioned, in the event of a Change of Control (as defined), a Termination Other Than for Cause (as defined), or a termination of
employment for Good Reason (as defined), all of the 750,000 RSUs shall accelerate and become immediately fully vested. All RSUs
granted by us to our officers, directors or consultants have dividend equivalent rights.
Under the terms of the Agreement, so long as Mr. Horowitz continues to serve as an executive officer of the Company, whether
pursuant to the Agreement or otherwise, Mr. Horowitz shall also receive incentive compensation in an amount equal to 5% of our gross
royalties or other payments from Licensing Activities (as defined) (without deduction of legal fees or any other expenses) with respect to
our Remote Power Patent and a 10% net interest (gross royalties and other payments after deduction of all legal fees and litigation
expenses related to licensing, enforcement and sale activities, but in no event shall he receive less than 6.25% of the gross recovery) of our
royalties and other payments relating to Licensing Activities with respect to patents other than the Remote Power Patent (including our
Mirror Worlds Patent Portfolio, Cox Patent Portfolio and M2M/IoT Patent Portfolio) (collectively, the "Incentive Compensation").
During the year ended December 31, 2017 and December 31, 2016, Mr. Horowitz earned Incentive Compensation of $823,000 and
$4,252,000, respectively. The Incentive Compensation shall continue to be paid to Mr. Horowitz for the life of each of our patents with
respect to licenses entered into with third parties during the term of his employment or at anytime thereafter, whether he is employed by
us or not; provided, that, the employment of Mr. Horowitz has not been terminated by us "For Cause" (as defined) or terminated by him
without "Good Reason" (as defined). In the event of a merger or sale of substantially all of our assets, we have the option to extinguish
the right of Mr. Horowitz to receive future Incentive Compensation by payment to him of a lump sum payment, in an amount equal to the
fair market value of such future interest as determined by an independent third party expert if the parties do not reach agreement as to
such value. In the event that Mr. Horowitz's employment is terminated by us "Other Than For Cause" (as defined) or by him for "Good
Reason" (as defined), Mr. Horowitz shall also be entitled to (i) a lump sum severance payment of 12 months base salary, (ii) a pro-rated
portion of the $175,000 target bonus provided bonus criteria have been satisfied on a pro-rated basis through the calendar quarter in
which the termination occurs and (iii) accelerated vesting of all unvested options, RSUs or other awards.
- 53 -
In connection with the Agreement, Mr. Horowitz has also agreed not to compete with us as follows: (i) during the term of the
Agreement and for a period of 12 months thereafter if his employment is terminated "Other Than For Cause" (as defined) provided he is
paid his 12 month base salary severance amount and (ii) for a period of two years from the termination date, if terminated "For Cause" by
us or "Without Good Reason" by Mr. Horowitz.
David Kahn serves as our Chief Financial Officer on an at-will basis pursuant to an offer letter, dated April 9, 2014, at an annual
base salary of $175,000 (increased in June 2016 from $157,000). Mr. Kahn received an annual bonus of $30,000 for the year ended
December 31, 2017 and an annual bonus of $75,000 for December 31, 2016. In connection with the offer letter, Mr. Kahn was issued,
under our 2013 Plan, a 5-year stock option to purchase 50,000 shares of the common stock, at an exercise price of $1.65 per share, which
option vested in two equal amounts (25,000 shares each) on each of December 31, 2014 and December 31, 2015. On June 9, 2016, Mr.
Kahn was granted 50,000 restricted stock units (RSUs) under our 2013 Plan (each RSU represents a contingent right to receive one share
of our common stock). 50% of such RSUs vested on the one year anniversary of the grant (June 9, 2017) and 50% will vest on the two
year anniversary of grant (June 9, 2018). In addition, in the event Mr. Kahn's employment is terminated without "Good Cause" (as
defined), he shall receive (i) (a) 6 months base salary or (b) 12 months base salary in the event of a termination without "Good Cause"
within 6 months following a "Change of Control" of the Company (as defined) and (ii) accelerated vesting of all remaining unvested
shares underlying his options, RSUs or any other awards he may receive in the future.
Jonathan Greene serves as our Executive Vice President on an at-will basis at an annual base salary of $200,000. Mr. Greene
received an annual bonus of $40,000 for the year ended December 31, 2017 and an annual bonus of $125,000 for the year ended
December 31, 2016. On June 9, 2016, Mr. Greene was granted 50,000 restricted stock units (RSUs) under our 2013 Plan (each RSU
represents a contingent right to receive one share of our common stock). 50% of the RSUs vested on the one year anniversary of grant
(June 9, 2017) and 50% will vest on the two year anniversary of grant (June 9, 2018).
During the year ended December 31, 2017, David Kahn, our Chief Financial Officer, exercised a stock option to purchase 15,000
shares of common stock at an exercise price of $1.40 per share.
Profit Sharing 401(k) Plan
We offer all employees who have completed a year of service (as defined) participation in a 401(k) retirement savings plan . 401(k)
plans provide a tax-advantaged method of saving for retirement. We expensed matching contributions and profit sharing of $108,000 and
$101,750 under the 401(k) plan for the years ended December 31, 2017 and December 31, 2016, respectively.
- 54 -
Director Compensation
In 2017, we compensated each non-management director of our company by granting to each such outside director 13,500
restricted stock units (each RSU represents a contingent right to receive one share of our common stock). The RSUs vested in equal
amounts of 3,375 RSUs on each of March 10, 2017, June 15, 2017, September 15, 2017 and December 15, 2017. In addition, we pay our
non-management directors cash director fees of $40,000 per annum ($10,000 per quarter). Non-management directors also receive
additional cash compensation on an annual basis for serving on the following Board committees: Audit Committee Chairperson receives
($7,500) and members receives $5,000 and the Chairperson and members of each of the Compensation Committee and Nominating and
Corporate Governance Committee receive annual fees of $3,750 and $2,500, respectively.
In consideration for serving as the sole member of our Strategic Development Committee, in June 2013 we issued to Niv Harizman
a 5-year option to purchase 300,000 shares of our common stock, at an exercise price of $1.88 per share, which option vested 100,000
shares on the date of grant, 100,000 shares on the first anniversary of the date of grant and vested 100,000 shares on the second
anniversary from the grant date.
The following table sets forth the compensation awarded to, earned by or paid to all persons who served as members of our board
of directors (other than our Named Executive Officers) during the year ended December 31, 2017. No director who is also a Named
Executive Officer received any compensation for services as a director in 2017.
Name
Emanuel Pearlman
Niv Harizman
Allison Hoffman
___________________________
Fees earned or paid
in cash ($)(1)
Stock Awards(2) (3)
($)
All other
compensation ($)
Total
($)
$
$
$
50,000
46,250
48,750
$
$
$
51,300
51,300
51,300
—
—
—
$
$
$
101,300
97,550
100,050
(1)
(2)
Represents director's fees payable in cash to each non-management director of $10,000 per quarter ($40,000 per annum) for 2017
plus additional cash fees for serving on Board committees as disclosed in the text above.
The amounts included in this column represent the grant date fair value of restricted stock unit awards granted to directors,
computed in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions see Note F[1] to our consolidated
financial statements included in this Annual Report. The 13,500 restricted stock units (RSUs) granted to each non-management
director vested on a quarterly basis beginning March 15, 2017. Each restricted stock unit represents the contingent right to
receive one share of common stock.
(3)
As of December 31, 2017, the above listed directors also held outstanding stock options to purchase shares of our common stock
as follows: Mr. Pearlman – options to purchase 95,000 shares; Mr. Harizman – options to purchase 395,000 shares; and Ms.
Hoffman - options to purchase 95,000 shares.
- 55 -
Outstanding Equity Awards at December 31, 2017
The following table sets forth information relating to unexercised options and unvested restricted stock units for each Named
Executive Officer as of December 31, 2017:
Option Awards
Stock Awards
Number of Securities
Underlying Unexercised
Options
Name
Exercisable Unexercisable
Corey M. Horowitz
Chairman and CEO
David Kahn
Chief Financial Officer
Jonathan Greene
Executive Vice President
500,000
750,000
50,000
50,000
_________________________________
—
—
—
—
Equity
incentive plan
awards:
Number of
unearned
shares, units or
other rights
that have not
vested ($)
750,000(2)
Equity
incentive plan
awards:
Market value
of unearned
shares, units or
other rights
that have not
vested
(1) ($)
$1,800,000
Option
Exercise Price
($)
$ 1.19
$ 0.83
Option
Expiration
Date
11/01/22
6/08/19
$ 1.65
4/09/19
25,000(3)
$ 60,000
$ 1.65
4/09/19
25,000(4)
$ 60,000
(1)
(2)
(3)
(4)
In accordance with SEC rules, market value is based on $2.40 per share representing the closing price of our common stock on
the last trading day of the year.
Represents (i) 250,000 based restricted stock units that vest on July 14, 2018, subject to Mr. Horowitz's continued employment
by us; and (2) an aggregate of 500,000 performance based restricted stock units that vest at anytime beginning July 14, 2018
through July 14, 2021, subject to Mr. Horowitz's continued employment by us and our stock price achieving closing prices of
$3.25 (250,000 restricted stock units shall vest) and $4.25 (250,000 additional restricted stock units shall vest), which stock
price vesting conditions have been satisfied, all of which is described in detail under Executive Compensation – Narrative
Disclosure to Summary Compensation Table on pages 52-54 of this Annual Report.
Represents 25,000 restricted stock units which vest on June 9, 2018, subject to Mr. Kahn's continued employment by us. Such
restricted stock units were part of a grant of 50,000 RSUs on June 9, 2016.
Represents 25,000 restricted stock units which vest on June 9, 2018, subject to Mr. Greene's continued employment by us. All
such restricted stock units were part of a grant to Mr. Greene of 50,000 RSUs on June 9, 2016.
- 56 -
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of our common stock as of March 15, 2018 for (i)
each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each of our
directors, (iii) each of our executive officers, and (iv) all of our executive officers and directors as a group.
NAME AND ADDRESS
OF BENEFICIAL OWNER
Corey M. Horowitz(3)
CMH Capital Management Corp(4)
Steven D. Heinemann (5)
Goose Hill Capital LLC (6)
John Herzog(7)
Niv Harizman(8)
Allison Hoffman(9)
Emanuel Pearlman(10)
David C. Kahn(11)
Jonathan E. Greene(12)
All officers and directors as a group
(6 Persons)
_____________________________________
* Less than 1%.
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP(1)(2)
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED(2)
7,118,769
2,291,372
3,027,815
2,442,582
1,200,130
454,360
177,250
138,590
101,264
76,512
28.5%
9.7%
12.8%
10.2%
5.1%
1.9%
*
*
*
*
8,066,745
31.5%
(1) Unless otherwise indicated, we believe that all persons named in the above table have sole voting and investment power with
respect to all shares of our common stock beneficially owned by them. Unless otherwise indicated the address for each listed
beneficial owner is c/o Network-1 Technologies, Inc., 445 Park Avenue, Suite 912, New York, New York 10022.
(2) A person is deemed to be the beneficial owner of shares of common stock that can be acquired by such person within 60 days from
March 15, 2018 upon the exercise of options or restricted stock units that vest within such 60 day period. Each beneficial owner's
percentage ownership is determined by assuming that all options and restricted stock units held by such person (but not those held
by any other person) and which are exercisable or vested within 60 days from March 15, 2017 have been exercised and vested.
Assumes a base of 23,741,812 shares of our common stock outstanding.
- 57 -
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes (i) 3,124,385 shares of common stock held by Mr. Horowitz, (ii) 1,250,000 shares of common stock subject to currently
exercisable stock options held by Mr. Horowitz, (iii) 2,165,472 shares of common stock held by CMH Capital Management Corp.,
an entity solely owned by Mr. Horowitz, (iv) 125,900 shares of common stock owned by the CMH Capital Management Corp.
Profit Sharing Plan, of which Mr. Horowitz is the trustee, (v) 67,471 shares of common stock owned by Donna Slavitt, the wife of
Mr. Horowitz, (vi) an aggregate of 383,250 shares of common stock held by two trusts and a custodian account for the benefit of
Mr. Horowitz's three children, and (vii) 2,291 shares of common stock held by Horowitz Partners, a general partnership of which
Mr. Horowitz is a partner. Does not include 750,000 shares of common stock from restricted stock units that will not vest within
60 days of March 15, 2018.
Includes 2,165,472 shares of common stock owned by CMH Capital Management Corp. and 125,900 shares of common stock
owned by CMH Capital Management Corp. Profit Sharing Plan. Corey M. Horowitz, by virtue of being the sole officer, director
and shareholder of CMH Capital Management Corp. and the trustee of the CMH Capital Management Corp. Profit Sharing Plan,
has the sole power to vote and dispose of the shares of common stock owned by CMH Capital Management Corp. and the CMH
Capital Management Corp. Profit Sharing Plan.
Includes 585,233 shares of common stock owned by Mr. Heinemann and 2,442,582 shares of common stock owned by Goose Hill
Capital LLC. Goose Hill Capital LLC is an entity in which Mr. Heinemann is the sole member. Mr. Heinemann, by virtue of
being the sole member of Goose Hill Capital LLC, has the sole power to vote and dispose of the shares of common stock owned
by Goose Hill Capital LLC. The aforementioned beneficial ownership is based upon a Form 4 filed by Mr. Heinemann with the
SEC on December 1, 2017. The address for Mr. Heinemann is c/o Goose Hill Capital, LLC, 12378 Indian Road, North Palm
Beach, Florida 33408.
Includes 2,442,582 shares of common stock. Steven D. Heinemann, by virtue of being the sole member of Goose Hill Capital
LLC, has the sole power to vote and dispose of the shares of common stock owned by Goose Hill Capital LLC. The
aforementioned beneficial ownership is based upon a Form 4 filed by Mr. Heinemann with the SEC on December 1, 2017. The
address for Goose Hill Capital LLC is 12378 Indian Road, North Palm Beach, Florida 33408.
Includes 1,200,130 shares of common stock. The aforementioned beneficial ownership is based upon a Schedule 13G filed by
Mr. Herzog with the SEC on February 10, 2016. The address of Mr. Herzog is 824 Harbor Road, Southport, Connecticut 06890-
1410.
Includes (i) 84,360 shares of common stock and (ii) 370,000 shares of common stock subject to currently exercisable options
owned by Mr. Harizman. Does not include 11,250 shares of common stock from restricted stock units that do not vest within 60
days from March 15, 2018.
Includes (i) 107,250 shares of common stock and (ii) 70,000 shares of common stock subject to currently exercisable options
owned by Ms. Hoffman. Does not include 11,250 shares of common stock from restricted stock units that do not vest within 60
days from March 15, 2018.
- 58 -
(10) Includes (i) 68,590 shares of common stock and (ii) 70,000 shares of common stock subject to currently exercisable stock options
owned by Mr. Pearlman. Does not include 11,250 shares of common stock from restricted stock units that do not vest within 60
days from March 15, 2018.
(11) Includes (i) 51,264 shares of common stock and (ii) 50,000 shares of common stock subject to currently exercisable stock options
owned by Mr. Kahn. Does not include (i) 25,000 shares of common stock from restricted stock units that do not vest within 60
days from March 15, 2018 and (ii) 132,800 shares of common stock owned by Mr. Kahn's children.
(12) Includes (i) 26,512 shares of common stock and (ii) 50,000 shares of common stock subject to currently exercisable options owned
by Mr. Greene. Does not include 25,000 shares of common stock from restricted stock units that do not vest within 60 days from
March 15, 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Since the last two fiscal years there were no transactions with related persons requiring disclosure under Item 404 of Regulation S-
K under the Securities Act.
Review, Approval or Ratification of Transactions with Related Persons
The Audit Committee has responsibility for reviewing and approving related-persons transactions in accordance with its charter. A
related person is any executive officer, director, nominee for director or more than 5% stockholder of the Company, including immediate
family members, and any entity owned or controlled by such persons. In addition, pursuant to our Codes of Ethics, all of our officers,
directors and employees are to avoid conflicts of interest and to refrain from taking part or exercising influence in any transaction in which
such party's personal interest may conflict with the best interest of the Company. Except for provisions of the Audit Committee Charter,
there are no written procedures governing review of related-persons transactions.
Director Independence
Three of our five directors, Emanuel Pearlman, Niv Harizman and Allison Hoffman, are considered independent directors in
compliance with the standard of independence in Section 803A(2) of the NYSE American LLC Company Guide.
- 59 -
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Friedman LLP, our independent registered public accounting firm, billed us aggregate fees of $105,000 and $100,000, respectively,
for the years ended December 31, 2017 and December 31, 2016 for the audit of our annual financial statements, review of our financial
statements included in our Form 10-Qs and for other services in connection with statutory or regulatory filings.
Audit Related Fees, Tax Fees and All Other Fees
Friedman LLP provided various tax compliance services for which it billed us $20,000 and $10,900, respectively, for the years
ended December 31, 2017 and December 31, 2016. Friedman LLP did not render any other professional services other than those
discussed above for the years ended December 31, 2017 and December 31, 2016.
Audit Committee Pre-Approval Policies and Procedures
Our audit committee charter provides that our audit committee must comply with SEC rules to maintain auditor independence as set
forth in Rule 2-01(c)(7)(i) of Regulation S-X. The Audit Committee has a policy to pre-approve all audit and permissible non-audit
services to be provided by our independent registered public accounting firm. All the services above were approved in advance by our
Board of Directors.
- 60 -
NETWORK-1 TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Report of independent registered public accounting firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Network-1 Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Network-1 Technologies, Inc. ("the Company") as of December 31,
2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash
flows for each of the years ended December 31, 2017 and 2016, and the related notes and schedules (collectively referred to as the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
years ended December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company's auditor since 2014.
New York, New York
April 2, 2018
F-1
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents
Marketable securities, available for sale
Royalty receivables, net
Prepaid taxes
Other current assets
Total Current Assets
OTHER ASSETS:
Deferred tax assets
Patents, net of accumulated amortization
Security deposits
Total Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable
Accrued contingency fees and related costs
Accrued payroll
Other accrued expenses
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
$
$
$
$
December 31,
2017
2016
$
53,101,000
1,054,000
575,000
125,000
83,000
50,918,000
1,065,000
2,879,000
1,195,000
83,000
54,938,000
56,140,000
168,000
2,169,000
19,000
207,000
1,231,000
19,000
2,356,000
1,457,000
57,294,000
$
57,597,000
$
244,000
1,780,000
709,000
149,000
171,000
2,681,000
1,748,000
125,000
2,882,000
4,725,000
Preferred stock, $0.01 par value; authorized 10,000,000 shares;
none issued and outstanding at December 31, 2017 and December 31, 2016
—
—
Common stock, $0.01 par value; authorized 50,000,000 shares;
23,843,915 and 23,744,829 issued and outstanding at December 31, 2017
and December 31, 2016, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
238,000
238,000
64,435,000
(10,219,000)
(42,000)
62,367,000
(9,702,000)
(31,000)
TOTAL STOCKHOLDERS' EQUITY
54,412,000
52,872,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
57,294,000
$
57,597,000
The accompanying notes are an integral part of the consolidated financial statements
F-2
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
REVENUE
$
16,451,000
$
65,088,000
Years Ended
December 31,
2017
2016
OPERATING EXPENSES:
Costs of revenue
Professional fees and related costs
General and administrative
Amortization of patents
Stock-based compensation
Contingent patent cost
TOTAL OPERATING EXPENSES
OPERATING INCOME
OTHER INCOME:
Interest income, net
INCOME BEFORE INCOME TAXES
INCOME TAXES:
Current
Deferred taxes, net
Total income taxes
NET INCOME
Net Income Per Share
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Cash dividends declared per share
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gain (loss) on securities available-for-sale
arising during the year
Total other comprehensive income (loss)
4,970,000
2,057,000
2,255,000
206,000
949,000
―
25,794,000
2,590,000
2,782,000
813,000
509,000
500,000
10,437,000
32,988,000
6,014,000
32,100,000
215,000
61,000
6,229,000
32,161,000
2,057,000
39,000
2,096,000
4,187,000
4,751,000
8,938,000
4,133,000
$
23,223,000
0.17
0.16
$
$
1.00
0.93
24,147,908
26,396,160
23,320,065
24,885,282
0.10
―
4,133,000
$
23,223,000
(11,000)
(11,000)
4,000
4,000
$
$
$
$
$
COMPREHENSIVE INCOME
$
4,122,000
$
23,227,000
The accompanying notes are an integral part of the consolidated financial statements
F-3
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
(loss)
Total
Stockholders'
Equity
Balance – January 1,
2016
Stock-based
compensation
Vesting of restricted
stock units
Proceeds from exercise
of options
Cashless exercise of
options
Value of shares
delivered to fund
option exercise
Value of shares
delivered to pay
withholding taxes
Proceeds from exercise
of warrants
Treasury stock
purchased and retired
Unrealized gain on
securities available-
for-sale
Net income
Balance – December
31, 2016
Dividends and
dividend equivalents
declared
Stock-based
compensation
Vesting of restricted
stock units
Value of shares
delivered to pay
withholding taxes
Proceeds from exercise
of options
Cashless exercise of
options
Value of shares
delivered to fund
23,211,149 $
232,000 $ 61,249,000 $ (32,756,000) $
(35,000) $ 28,690,000
―
―
509,000
45,000
*
―
59,749
1,000
88,000
470,251
5,000
―
―
―
―
―
―
509,000
―
―
―
89,000
―
5,000
(351,541)
(4,000)
―
―
―
(4,000)
(21,379)
*
―
(49,000)
―
(49,000)
375,000
4,000
521,000
―
―
525,000
(43,400)
*
―
(120,000)
―
(120,000)
―
―
―
―
―
―
4,000
4,000
―
23,223,000
―
23,223,000
23,744,829 $
238,000 $ 62,367,000 $
(9,702,000) $
(31,000) $ 52,872,000
―
―
―
―
(2,505,000)
―
(2,505,000)
―
949,000
110,500
1,000
―
―
―
―
949,000
―
1,000
(13,599)
*
―
(56,000)
―
(56,000)
250,000
2,000
335,000
―
―
337,000
50,000
*
―
―
―
―
option exercise
(23,266)
*
―
375,000
4,000
784,000
―
―
―
―
―
788,000
Proceeds from exercise
of warrants
Treasury stock
purchased and retired
Unrealized loss on
securities available-
for-sale
Net income
Balance – December
31, 2017
__________________
* Less than $1,000
(649,549)
(7,000)
―
(2,089,000)
―
(2,096,000)
―
―
―
―
―
―
―
(11,000)
(11,000)
4,133,000
―
4,133,000
23,843,915
238,000 $
64,435,000 $ (10,219,000) $
(42,000) $ 54,412,000
The accompanying notes are an integral part of the consolidated financial statements
F-4
NETWORK-1 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of patents
Stock-based compensation
Deferred tax provision
Changes in operating assets and liabilities:
Royalty receivables
Prepaid taxes
Other current assets
Accounts payable
Accrued expenses
Years Ended
December 31,
2017
2016
$
4,133,000
$
23,223,000
206,000
949,000
39,000
813,000
509,000
4,751,000
2,304,000
1,070,000
―
73,000
(2,000,000)
(1,342,000)
(1,195,000)
113,000
32,000
3,002,000
NET CASH PROVIDED BY OPERATING ACTIVITIES
6,774,000
29,906,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of patents
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid
Value of shares delivered to fund withholding taxes
on vesting of restricted stock units
Repurchases of common stock, net of commissions
Proceeds from exercises of options and warrants
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
(1,144,000)
(42,000)
(2,420,000)
(56,000)
(2,096,000)
1,125,000
(3,447,000)
―
(49,000)
(120,000)
615,000
446,000
NET INCREASE IN CASH AND CASH EQUIVALENTS
2,183,000
30,310,000
CASH AND CASH EQUIVALENTS, beginning of year
50,918,000
20,608,000
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest
Income taxes
NON-CASH FINANCING ACTIVITY
Accrued dividend rights on restricted stock units
$
$
$
$
53,101,000
$
50,918,000
―
1,290,000
$
$
―
5,265,000
84,000
―
The accompanying notes are an integral part of the consolidated financial statements
F-5
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE A – Business
Network-1 Technologies, Inc. (the "Company") is engaged in the development, licensing and protection of its intellectual property
assets. The Company presently owns fifty-one (51) patents including (i) 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; (ii) 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; (iii) the Cox patent portfolio (the "Cox Patent Portfolio) relating to enabling technology for identifying media content on the
Internet and taking further action to be performed based on such identification; (iv) M2M/IoT patent portfolio (the "M2M/IoT Patent
Portfolio") relating to, among other things, enabling technology for authenticating and using embedded sim cards in next generation
IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; and (v) QoS patents (the "QoS
Patents") relating to systems and methods for the transmission of audio, video and data over computer and telephony networks in
order to achieve high quality of service (QoS). The Company has been actively engaged in licensing its Remote Power Patent (U.S.
Patent No. 6,218,930) covering the control of power delivery over Ethernet cables. The Company has entered into twenty-seven
(27) license agreements with respect to its Remote Power Patent. The Company has also entered into two license agreements with
respect to its Mirror Worlds Patent Portfolio. The Company's current strategy includes continuing to pursue licensing opportunities
for its intellectual property assets. In addition, the Company continually reviews opportunities to acquire or license additional
intellectual property as well as other strategic alternatives. The Company's acquisition 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.
On November 13, 2017, a jury empaneled in the United States District Court for the Eastern District of Texas, Tyler Division, found
that certain claims of the Company's Remote Power Patent were invalid and not infringed by Hewlett-Packard (the "HP Jury
Verdict"). The Company has depended upon its Remote Power Patent for a significant portion of its revenue. As a result of the HP
Jury Verdict several of the Company's largest licensees, including Cisco Systems, Inc. its largest licensee, have notified the
Company that they will no longer make ongoing royalty payments to the Company pursuant to their license agreements. If the
District Court enters an order confirming the HP Jury Verdict and finding certain claims of the Remote Power Patent obvious
(invalid) and either (i) the Company is unable to reverse the District Court order on appeal, or (ii) there is an arbitration ruling that
the District Court order relieves the obligation of certain of the Company's licensees, including Cisco Systems, Inc., to continue to
pay the Company royalties and the District Court order is not subsequently reversed on appeal, the Company's business, results of
operations and cash-flow will be materially adversely effected (see Note I[1] and I[2] hereof).
Consistent with the Company's revenue recognition policy (see Note B[7] hereof), the Company did not record revenue in the fourth
quarter of 2017 from certain licensees, including Cisco, Dell and Netgear, who advised the Company they would not pay the
Company ongoing royalties as a result of the HP Jury Verdict. The Company disagrees with the position taken by such licensees
and intends to pursue arbitration if it does not achieve a satisfactory resolution (see Note I[1] hereof).
Principles of consolidation
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP"). The accompanying financial statements include the accounts of the Company and its
wholly-owned subsidiary, Mirror Worlds Technologies, LLC. All intercompany transactions and balances are eliminated in
consolidation.
F-6
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies
[1] Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. The
significant estimates and assumptions made in the preparation of the Company's consolidated financial statements include revenue
recognition, stock-based compensation, income taxes and valuation of patents. Actual results could be materially different from
those estimates, upon which the carrying values were based.
[2] Cash and Cash Equivalents
The Company places cash investments in high quality financial institutions insured by the Federal Deposit Insurance Corporation
("FDIC"). At December 31, 2017, the Company maintained a cash balance of $42,066,000 in excess of FDIC limits.
The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be
cash equivalents.
Cash and cash equivalents as of December 31, 2017 and December 31, 2016 are composed of:
December 31, 2017
December 31, 2016
Cash and cash equivalents
Money market funds
Total
$
$
9,764,000
43,337,000
53,101,000
$
$
9,452,000
41,466,000
50,918,000
[3] Marketable Securities
Marketable securities are classified as available-for-sale and are recorded at fair market value. Unrealized gains and losses are
reported as other comprehensive income or loss. Realized gains and losses are reclassified from other comprehensive income or loss
to net income or loss in the period they are realized. At December 31, 2017 and December 31, 2016, the Company's marketable
securities consisted of two corporate bonds (face value $1,000,000) with a 3.9% and 4.5% coupon and maturities greater than three
months when purchased. The Company's marketable securities mature in 2021 and it is not the intention of the Company to hold
such securities until maturity.
[4]
Patents
The Company owns patents that relate to various technologies. The Company capitalizes the costs associated with acquisition,
registration and maintenance of its acquired patents and amortizes these assets over their remaining useful lives on a straight-line
basis. Any further payments made to maintain or develop the patents would be capitalized and amortized over the balance of the
useful life for the patents.
[5]
Impairment of long-lived assets
Intangible assets with finite lives are tested for impairment whenever events or circumstances indicate that the carrying amount may
not be recoverable. Accordingly, the Company records impairment losses on long-lived assets used in operations or expected to be
disposed of when indicators of impairment exist and the undiscounted cash flows expected to be derived from those assets are less
than carrying amounts of these assets. At December 31, 2017 and December 31, 2016, there was no impairment to the Company's
patents.
F-7
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies (continued)
[6] Allowance for Doubtful Accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts
receivable to their expected net realizable value. There was no allowance for doubtful accounts at December 31, 2017 and 2016.
[7] Revenue Recognition
The Company recognizes revenue received from the licensing of its intellectual property and other related intellectual property
activities. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed
pursuant to the terms of the applicable license agreement, (iii) amounts are fixed or determinable, and (iv) collectability of amounts
is reasonably assured. In connection with recurring revenue from royalty bearing licenses, 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 and enforcement business is generated from negotiated license agreements. Generally,
in the event of settlement of litigation related to the Company's assertion of patent infringement involving its intellectual property,
defendants will either pay (i) a non-refundable lump sum payment for a non-exclusive fully-paid license (a "Fully-Paid License"), or
(ii) a non-refundable lump sum payment (license initiation fee) together with an ongoing obligation to pay quarterly or monthly
royalties to the Company for the life of the licensed patent (a "Royalty Bearing License").
The Company's license agreements, both Fully-Paid Licenses and Royalty Bearing Licenses, typically include some combination of
the following: (i) the grant of a non-exclusive license to manufacture and/or sell products covered by its patented technologies; (ii)
the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights
granted pursuant to these licenses typically extend until the expiration of the related patents. Pursuant to the terms of these
agreements, the Company typically has no further obligations with respect to the grant of the non-exclusive licenses. Generally, the
license agreements provide for the grant of the licenses, releases, and other significant deliverables following execution of the
agreement and the receipt of the up-front lump sum payment for a Fully-Paid License or a license initiation fee for a Royalty Bearing
License.
Ongoing Royalty Payments: Certain of the Company's revenue from Royalty Bearing Licenses results from the calculation of
royalties based on a licensee's actual quarterly sales (one licensee pays monthly royalties) or actual per unit activity, applied to a
contractual royalty rate. Licensees that pay royalties on a quarterly basis generally report actual quarterly sales and related quarterly
royalties due within 45 days after the end of the quarter in which such sales activity takes place. Licensees with Royalty Bearing
Licenses are obligated to provide the Company with quarterly (or monthly) royalty reports that summarize their sales of licensed
products and their related royalty obligations to the Company. The Company receives these royalty reports subsequent to the period
in which its licensees underlying sales occurred. The amount of royalties due under Royalty Bearing Licenses, each quarter, cannot
be reasonably estimated by management. Consequently, the Company recognizes revenue for the period in which the royalty report
is received in arrears and other revenue recognition criteria are met.
Non-Refundable Up-Front Fees: Fully-Paid Licenses provide for a non-refundable up-front payment, for which the Company has no
future obligations or performance requirements, revenue is generally recognized when the Company has obtained the signed license
agreement, all obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably
assured. Revenue from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized
from each licensee depends upon a number of factors including the specific terms of each agreement and the nature of the
deliverables and obligations.
F-8
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies (continued)
[8] Costs of Revenue
The Company includes in costs of revenue for the year ended December 31, 2017 and 2016 contingent legal fees payable to patent
litigation counsel (see Note G[1] hereof), other contractual payments 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).
[9]
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 740, "Income Taxes" (ASC 740), which requires the Company to use the assets and liability method of
accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences
of temporary (timing) differences by applying enacted statutory tax rates applicable to future years to differences between financial
statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under
this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred
tax asset will not be realized.
ASC 740-10, "Accounting for Uncertainty in Income Taxes," defines uncertainty in income taxes and the evaluation of a tax position
as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon
examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second
step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in
the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of
being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. The Company had no uncertain tax positions as of December 31, 2017 and December 31, 2016.
United States federal, state and local income tax returns prior to 2014 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.
On December 22, 2017, the 2017 Tax Cuts and Job Act was enacted into law and the new legislation contains key tax provisions that
affect the Company. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as
determining the transition tax, remeasuring its U.S. deferred tax assets and liabilities as well as reassessing the net realizability of
deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax
Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the Company to record provisional amounts during a
measurement period not extended beyond one year of the enactment date.
[10] Stock-Based Compensation
The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic
718, Compensation - Stock Compensation ("ASC 718"). ASC 718 requires all stock-based compensation to employees, including
grants of employee stock options and restricted stock units, to be recognized in the consolidated statements of income and
comprehensive income based on their grant date fair values. Compensation expense related to awards to employees is recognized on
a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting
term. Share based payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity
instruments vest and are recognized as expense over the related service period and are expensed using an accelerated attribution
model. The Company uses the Black-Scholes
F-9
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies (continued)
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 granted 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 (see Note F for further discussion of the Company's stock – based compensation).
[11] Earnings Per Share
The Company reports earnings per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or
other contracts, such as warrants and options to purchase common stock were exercised and shares were issued pursuant to
outstanding restricted stock units. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from
the calculation of diluted earnings per share (see Note D).
[12] Financial Instruments
U.S. GAAP regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-
level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
The three levels of inputs are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable.
The carrying value of cash, marketable securities, royalty receivable, other assets, accounts payable, and accrued expenses
approximates fair value because of the short period of time between the origination of such instruments and their expected
realization and their current market rates of interest.
Marketable securities available for sale are measured at fair value on a recurring basis based on Level 1 inputs (see Note B[3]). The
Company also measures the fair value of certain assets on a non-recurring basis, when events or circumstances indicate the carrying
amount of the assets may be impaired.
F-10
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies (continued)
[13] Dividend Policy
Dividends are recorded when declared by the Company's Board of Directors. Common stock dividends are charged against retained
earnings when declared or paid (See Note M hereof).
[14] Recently Issued Accounting Standards
In August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15, Classification of Certain Cash Receipts and
Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows
presentation of certain transactions where diversity in practice exists. The guidance is effective for interim and annual periods
beginning after December 15, 2017, and early adoption is permitted. The adoption of this ASU will not have a material impact on
our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 provides
for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance. The new revenue standard allows for either full retrospective or modified retrospective
application. The Company is required to adopt the amendments in ASU No. 2014-09 using one of the two acceptable methods. In
August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, which deferred the effective date of ASU No. 2014-09 to annual periods beginning after December 2017, along with an option
to permit early adoption as of the original effective date. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends the guidance in 2014-09 related to
identifying performance obligations and accounting for licenses of intellectual property. The ASU does not change the core
principle of the guidance in Topic 606. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients, related to disclosures of remaining performance obligations, as
well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes
collected from customers. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842), which provides additional implementation
guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In November 2017, the
FASB issued ASU 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605),
and Revenue from Contracts with Customers (Topic 606), which provides additional implementation guidance on the previously
issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date and transition requirements for the
ASUs are the same as the effective date and transition requirements in Topic 606. The ASUs apply for annual reporting periods
beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity).
Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting
periods within that reporting period. The Company will adopt ASU 2014-09 on January 1, 2018 using the modified retrospective
approach. The Company does not anticipate a modified retrospective adjustment to be recorded upon adoption as it relates to the
amount and timing of revenue recognized from its existing license agreements for its intellectual property. The Company will
continue to evaluate any new license agreements entered into in the future relating to the new revenue recognition policy which will
be adopted on January 1, 2018.
In May 2017, FASB issued ASU No. 2017-09 Compensation – Stock Compensation (Topic 718) which provides guidance on
determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification
accounting in Topic 718. The new standard is effective beginning after December 15, 2017 with early adoption permitted. This
standard, adopted on a prospective basis, will not have a material impact on its consolidated financial statements.
F-11
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE B – Summary of Significant Accounting Policies (continued)
Accounting Standards Adopted in 2017
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Prior to this
amendment, excess tax benefits resulting from the difference between the deduction for tax purposes and the compensation costs
recognized for financial reporting were not recognized until the deduction reduced taxes payable. The Company has evaluated this
on a modified retrospective basis and determined that no adjustment was necessary. Under the new method the Company recognizes
excess tax benefits in the current accounting period. Additionally, ASU 2016-09 requires that the Company present excess tax
benefits on the Statement of Cash Flows as an operating activity. ASU 2016-09 is effective for fiscal years beginning after December
15, 2016. The Company adopted ASU 2016-09 in the first quarter of 2017 and elected to apply this adoption prospectively as a result
prior periods have not been adjusted. The effective tax rate for the year ended December 31, 2017 was not materially different from
the federal statutory rate.
NOTE C - PATENTS
The Company's intangible assets at December 31, 2017 include patents with estimated remaining economic useful lives ranging from
2.5 to 16 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 December 31, 2017 and 2016 are as follows:
Gross carrying amount
Accumulated amortization
Patents, net
2017
2016
$
$
7,571,000
(5,402,000)
2,169,000
$
$
6,427,000
(5,196,000)
1,231,000
Amortization expense for the years ended December 31, 2017 and 2016 was $206,000 and $813,000, respectively. Future
amortization of current intangible assets, net is as follows:
For the year ended December 31,
2018
2019
2020
2021
2022 and thereafter
Total
$
$
$
$
$
$
278,000
272,000
272,000
266,000
1,081,000
2,169,000
The Company's Remote Power Patent expires in March 2020. The expiration dates of the patents within the Company's Mirror
Worlds Patent Portfolio range from April 2018 to February 2020 (eight of the patents in the Mirror Worlds Patent Portfolio expired
as of December 31, 2017). The expiration dates of the patents within the Cox Patent Portfolio range from September 2021 to
November 2023. The expiration dates of patents within the Company's M2M/IoT Patent Portfolio range from January 2034 to May
2034 and the expiration date of patents within the Company's QoS patents is June 2019.
F-12
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE D - EARNINGS PER SHARE
Basic Earnings per share is calculated by dividing the net income by the weighted average number of outstanding common shares
during the period. Diluted per share data included the dilutive effects of options, warrants and restricted stock units. Potential shares
of 2,830,000 and 3,575,000 at December 31, 2017 and 2016, respectively, consisted of options, restricted stock units and warrants.
Computations of basic and diluted weighted average common shares outstanding are as follows:
2017
2016
Weighted-average common shares outstanding - basic
24,147,908
23,320,065
Dilutive effect of options, warrants and restricted stock units
2,248,252
1,565,217
Weighted-average common shares outstanding - diluted
26,396,160
24,885,282
Options, restricted stock units and warrants excluded from the computation of
diluted income per share because the effect of inclusion would have been anti-
dilutive
―
230,978
NOTE E – INCOME TAXES
Significant components of the income taxes were as follows for the years ended December 31, 2017 and December 31, 2016.
Current
State and local
Federal
Total Current Tax Expense
Deferred
State and local
Federal
Total Deferred Tax Expense
Total Income Taxes
2017
2016
$
$
45,000
2,012,000
$
170,000
4,017,000
2,057,000
$
4,187,000
1,000
38,000
39,000
163,000
4,588,000
4,751,000
$
2,096,000
$
8,938,000
Significant components of deferred tax assets as of December 31, 2017 and December 31, 2016 consist of the following:
Deferred tax assets:
Options, warrants and restricted stock units
2017
2016
$
168,000
168,000
$
207,000
207,000
F-13
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE E – INCOME TAXES (continued)
The Company utilized its remaining federal, state and local net operating loss carry-forwards of approximately $20.7 million in
2016.
The reconciliation between the taxes as shown and the amount that would be computed by applying the statutory federal income tax
rate to the net income before income taxes is as follows:
Income tax - statutory rate
State and local, net
Other – Net
Change in Valuation allowance on deferred tax assets
Year Ended
December 31,
2017
34.0%
0.73%
(1.08%)
—
33.65%
2016
34.0%
1.03%
0.3%
(7.3)%
28.03%
While only the tax returns for the three years ended prior to December 31, 2017 are open for examination for taxes payable for those
years, tax authorities could challenge returns (only under certain circumstances) for earlier years to the extent that they generated
loss carry-forwards that are available for those future years.
The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the
future, which is generally 21%. However, the Company is still examining certain aspects of the 2017 Tax Cuts and Job Act and
refining calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax
amounts.
The personal holding company ("PHC") rules under the Internal Revenue Code impose a 20% tax on a PHC's undistributed personal
holding company income ("PHC Income"), which means, in general, taxable income subject to certain adjustments. For a
corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares must be
owned directly or indirectly by 5 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"). In the second half of 2017 (as well as the second half of prior years), the
Company did not meet the Ownership Test. Due to the significant number of shares held by the Company's largest shareholders, the
Company continually assesses its share ownership to determine whether it meets the Ownership Test. If the Ownership Test were
met and the income generated by the Company were determined to constitute "royalties" within the meaning of the Income Test, the
Company would constitute a PHC and the Company would be subject to a 20% tax on the amount of any PHC Income that it does
not distribute to its shareholders.
NOTE F – Stockholders' Equity
The 2013 Stock Incentive Plan ("2013 Plan") provides for the grant of any or all of the following types of awards: (a) stock options,
(b) restricted stock, (c) deferred stock, (d) stock appreciation rights, and (e) other stock-based awards including restricted stock units.
Awards under the 2013 Plan may be granted singly, in combination, or in tandem. Subject to standard anti-dilution adjustments as
provided, the 2013 Plan provides for an aggregate of 2,600,000 shares of the Company's common stock to be available for
distribution. The Company's Compensation Committee generally has the authority to administer the 2013 Plan, determine
participants who will be granted awards, the size and types of awards, the terms and conditions of awards and the form and content
of the award agreements representing awards. Awards under the 2013 Plan may be granted to employees, directors and consultants
of the Company and its subsidiaries. As of December 31, 2017, there are 1,253,099 shares of common stock available for issuance
under the 2013 Plan.
F-14
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE F – Stockholders' Equity (continued)
[1] Restricted Stock Units
During the year ended December 31, 2017, the Company granted 13,500 restricted stock units ("RSUs") under the 2013 Plan to each
of its three non-management directors as an annual grant for 2017 for service on the Company's Board of Directors. Each RSU
represented a contingent right to receive one share of the Company's common stock. The RSUs vested in four equal quarterly
installments of 3,375 shares of common stock on March 15, 2017, June 15, 2017, September 15, 2017 and December 15, 2017,
subject to continued service on the Board of Directors.
During the year ended December 31, 2016, the Company granted 15,000 RSUs under the 2013 Plan to each of its three non-
management directors. The RSUs vested 7,500 shares of common stock on March 9, 2016 (the date of grant) and 3,750 shares on
September 9, 2016 and December 9, 2016, subject to continued service on the Board of Directors.
On June 9, 2016, the Company also granted 50,000 RSUs under the 2013 Plan to each of its Chief Financial Officer and Executive
Vice President, and 40,000 RSUs to a consultant to the Company. Each such RSUs vested 50% on the one year anniversary of grant
(June 9, 2017) and will vest 50% on the two year anniversary of grant (June 9, 2018), subject to continue service to the Company.
In July 2016, the Company granted to the Chairman and Chief Executive Officer, under its 2013 Plan, 750,000 RSUs (each RSU
awarded by the Company represents a contingent right to receive one share of the Company's common stock) which vest in three
tranches, as follows: (i) 250,000 RSUs shall vest on July 14, 2018, subject to the Chairman and Chief Executive's continued
employment by the Company through the vesting date (the "Employment Condition"); (ii) 250,000 RSUs shall vest at any time
beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term of employment, subject to (1) the
Employment Condition being satisfied through each such annual vesting date and (2) the Company's common stock achieving a
closing price (for 20 consecutive trading days) of a minimum of $3.25 per share (subject to adjustment for stock splits) at any time
during the term of employment; and (iii) 250,000 RSUs vest at any time beginning July 14, 2018 through July 14, 2021 in equal
annual installments for the remaining term of employment subject to (1) the Employment Condition being satisfied through each
such annual vesting date and (2) the Company's common stock achieving a closing price (for 20 consecutive trading days) of a
minimum of $4.25 per share (subject to adjustment for stock splits) at any time during the term of employment. The aforementioned
stock price vesting conditions of $3.25 per share and $4.25 per share have been satisfied. Notwithstanding the aforementioned, in
the event of a Change of Control (as defined), a Termination Other Than for Cause (as defined), or a termination of employment for
Good Reason (as defined), all of the 750,000 RSUs shall accelerate and become immediately fully vested. All RSUs granted by the
Company to its officers, directors or consultants have dividend equivalent rights.
The effect of a market condition is reflected in the estimate of the grant-date fair value of the restricted stock units utilizing a Monte
Carlo valuation technique. The service period for restricted stock units with a market-based vesting condition is inferred from the
application of the Monte Carlo valuation technique. Assumptions utilized in connection with the Monte Carlo valuation technique
included estimated risk-free interest rate ranging from 0.67% to 1.10%; expected volatility of 38.8% and the expected dividend yield
was based on expectations regarding dividend payments at the time of grant.
All of the Company's issued and RSUs have dividend equivalent rights. As of December 31, 2017, there was $84,000 accrued for
dividend equivalent rights.
F-15
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE F – Stockholders' Equity (continued)
A summary of restricted stock units granted during the year ended December 31, 2017 is as follows (each restricted stock unit
represents the contingent right to receive one share of the Company's common stock):
Balance of restricted stock units outstanding at December 31, 2016
Grants of restricted stock units
Vested restricted stock units
Balance of unvested restricted stock units at December 31, 2017
Number of Shares
890,000
40,500
(110,500)
820,000
Weighted-Average
Grant Date Fair
Value
$
$
2.29
3.80
2.96
2.28
Restricted stock unit compensation expense was $949,000 for the year ended December 31, 2017 and $497,000 for the year ended
December 31, 2016.
The Company has an aggregate of $860,000 of unrecognized restricted stock unit compensation expense as of December 31, 2017 to
be expensed over a weighted average period of 1.58 years.
[2]
Stock Options
At December 31, 2017, stock options to purchase an aggregate of 385,000 shares of common stock were outstanding under the 2013
Plan and options to purchase 1,625,000 shares of common stock were outstanding representing option grants outside of the 2013 Plan
(issued prior to the establishment of the 2013 Plan). There were no grants of stock options during the years ended December 31,
2017 and December 31, 2016.
The following table summarizes stock option activity for the years ended December 31:
2017
2016
Weighted
Average
Exercise
Price
Options
Outstanding
Weighted
Average
Exercise
Price
Options
Outstanding
Options outstanding
at beginning of year
Granted
Expired
Exercised
2,310,000
$
―
—
(300,000)
$
$
$
1.29
―
—
1.31
1.28
1.28
2,855,000
―
(15,000)
(530,000)
2,310,000
2,310,000
$
$
$
$
$
1.33
―
1.31
1.53
1.29
1.29
Options outstanding at end of year
2,010,000
Options exercisable at end of year
2,010,000
During the year ended December 31, 2017 and December 31, 2016, the Company did not grant any stock options. During the year
ended December 31, 2017, the Company did not recognize any stock-based compensation related to the vesting of prior issued stock
options to employees and directors. During the year ended December 31, 2016, the Company recognized stock-based compensation
of $12,000 related to the issuance of stock options and vesting of prior issued options. The Company at December 31, 2017 and
2016 has no remaining unrecognized expenses related to unvested stock options to employees and directors. The aggregate intrinsic
value of all stock options exercisable at December 31, 2017 was $2,245,550.
F-16
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE F - Stockholders' Equity (continued)
During the year ended December 31, 2017, stock options to purchase an aggregate of 300,000 shares of the Company's common
stock were exercised (50,000 shares of which were exercised on a net exercise (cashless) basis), by a former director of the Company
(125,000 shares), the Company's Chief Financial Officer and his three children (an aggregate of 75,000 shares), and two directors of
the Company (each 50,000 shares) at exercise prices ranging from $1.14 to $1.40 per share. With respect to the aforementioned
stock option to purchase 50,000 shares exercised on a net exercise (cashless) basis by a director of the Company, net shares of
26,734 were delivered to the director.
During the year ended December 31, 2016, stock options to purchase an aggregate of 530,000 shares of common stock were
exercised (470,251 of which were exercised on a net exercise (cashless) basis), by the Company's Chief Financial Officer (100,000
shares), Executive Vice President (240,000 shares), a director (75,000 shares), a consultant (90,000 shares) and a former director
(25,000 shares), at prices ranging from $1.21 to $1.60 per share. With respect to the aforementioned stock option exercises on a net
exercise (cashless) basis, aggregate net shares of 132,080 were delivered to the Chief Financial Officer (43,580 shares), Executive
Vice President (23,944 shares), director (47,283) and a consultant (17,273 shares).
The following table presents information relating to all stock options outstanding and exercisable at December 31, 2017:
Range of
Exercise
Price
Options
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life in
Years
Options
Exercisable
$0.83 - $2.34
2,010,000
$1.28
2.10
2,010,000
[3] Warrants:
As of December 31, 2017, there were no outstanding warrants to purchase shares of the Company's common stock. As of December
31, 2016, the following are the outstanding warrants to purchase shares of the Company's common stock:
2016
Number of Warrants
Exercise Price
Expiration Date
250,000
125,000
375,000
$2.10
$2.10
May 21, 2018
July 26, 2018
The outstanding warrants to purchase an aggregate of 375,000 shares of common stock at December 31, 2016 pertain to 5-year
warrants issued to Recognition Interface, LLC in connection with the Company's (through Mirror Worlds Technologies, LLC, its
wholly-owned subsidiary) purchase of the Mirror Worlds Patent Portfolio in May 2013 (See Note G[2]).
F-17
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE F - Stockholders' Equity (continued)
During the year ended December 31, 2016, Recognition Interface, LLC exercised warrants to purchase an aggregate of 375,000
shares of the Company's common stock at an exercise price of $1.40 per share resulting in gross proceeds to the Company of
$525,000. In January 2017, Recognition Interface, LLC exercised warrants to purchase an additional 375,000 shares of the
Company's common stock at an exercise price of $2.10 per share, resulting in additional gross proceeds to the Company of $787,500.
NOTE G - Commitments and Contingencies
[1]
Legal fees:
Russ, August & Kabat provides legal services to the Company with respect to its pending patent litigation filed in May 2017 against
Facebook, Inc. in the United States District Court for the Southern District of New York relating to several patents within the
Company's Mirror Worlds Patent Portfolio (see Note [I[5]] to the Company's consolidated financial statements included in this
Annual Report). 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 of the
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 United States District Court for the Southern District of New
York relating to certain patents within the Cox Patent Portfolio acquired by the Company from Dr. Cox (see Note I[3] hereof). The
terms of the Company's agreement with Russ, August & Kabat provide for legal fees on a full contingency basis ranging from 15%
to 30% of the net recovery (after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or
judgment) is achieved. The Company is responsible for all of the expenses incurred with respect to this litigation.
Dovel & Luner, LLP provides legal services to the Company with respect to the Company's pending patent litigation filed in
September 2011 against sixteen (16) data networking equipment manufacturers in the United States District Court for the Eastern
District of Texas, (Tyler Division) (see Note I[1]). The terms of the Company's agreement with Dovel & Luner LLP essentially
provide for legal fees on a full contingency basis ranging from 12.5% to 35% (with certain exceptions) of the net recovery (after
deduction for expenses) depending on the stage of the preceding in which a result (settlement or judgment) is achieved. For the year
ended December 31, 2017 and December 31, 2016, the Company incurred contingent legal fees and expenses to Dovel & Luner of
$2,954,000 and $4,626,000, respectively, with respect to the litigation.
Dovel & Luner, LLP provided legal services to the Company with respect to the Company's patent litigation settled in July 2010
against several major data networking equipment manufacturers (see Note I[2]). The terms of the Company's agreement with Dovel
& Luner, LLP provided for legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of up to 24%
(based on the settlement being achieved at the trial stage) including legal fees of local counsel in Texas. With respect to royalty
payments payable quarterly by Cisco to the Company in accordance with the Company's settlement and license agreement with Cisco,
the Company has an obligation to pay Dovel & Luner 24% of such royalties received after expenses. During the years ended
December 31, 2017 and December 31, 2016, total contingency fees incurred to Dovel & Luner, LLP were $1,801,000 and
$2,117,000, respectively.
[2]
Patent Acquisitions:
On February 28, 2013, the Company completed the acquisition of the Cox Patent Portfolio consisting of four patents (as well as a
pending patent application) from Dr. Ingemar Cox, a technology leader in digital watermarking content identification, digital rights
management and related technologies, for a purchase price of $1,000,000 in cash and 403,226 shares of the Company's common
stock. In addition, the Company is obligated to pay Dr. Cox
F-18
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE G - Commitments and Contingencies (continued)
12.5% of the net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the
patents. Since the acquisition of the patent portfolio from Dr. Cox, the Company has been issued eighteen (18) additional related
patents by the USPTO resulting in an aggregate of twenty-three (23) patents within the Cox Patent Portfolio. Professional fees and
filing fees of $169,000 were capitalized as patent cost.
On May 21, 2013, the Company's wholly-owned subsidiary, Mirror Worlds Technologies, LLC, acquired the Mirror Worlds Patents
consisting of all of the patents previously owned by Mirror Worlds, LLC (which subsequently changed its name to Looking Glass
LLC), including nine issued United States patents and five pending applications (one of which was issued in November 2013)
covering foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer
system. As consideration for the patent acquisition, the Company paid Mirror Worlds, LLC $3,000,000 in cash and issued 5-year
warrants to purchase an aggregate of 1,750,000 shares of the Company's common stock (875,000 shares of common stock at an
exercise price of $1.40 per share and 875,000 shares of common stock at an exercise price of $2.10 per share) (the "Looking Glass
Warrants"). On June 3, 2014, the Company repurchased the Looking Glass Warrants from Looking Glass LLC at a cost of
$505,000. As part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with
Recognition Interface, LLC ("Recognition"), an entity that financed the commercialization of the patent portfolio prior to its sale to
Mirror Worlds, LLC and also retained an interest in the licensing proceeds of the patent portfolio held by Mirror Worlds, LLC.
Pursuant to the terms of the Company's agreement with Recognition, Recognition received (i) 5-year warrants to purchase 250,000
shares of the Company's common stock at $1.40 per share, and (ii) 5-year warrants to purchase 250,000 shares of common
stock at $2.10 per share. Recognition also 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. During the year ended December 31,
2017 and December 31, 2016, the Company paid Recognition $-0- and $2,909,000, respectively, for its net interest in proceeds from
the monetization of the Mirror Worlds Patent Portfolio. During the year ended December 31, 2016 and in January 2017, Recognition
exercised warrants to purchase an aggregate of 750,000 shares of the Company's common stock, resulting in gross proceeds to the
Company of $1,312,500 (see Note F[3] hereof). As part of the acquisition of the Mirror Worlds Patent Portfolio, professional fees
and filing fees of $409,000 were capitalized as patent cost.
On December 29, 2017, the Company acquired from M2M and IoT Technologies, LLC ("M2M") the M2M/IoT Patent Portfolio
consisting of twelve (12) issued United States patents relating to, among other things, the enabling technology for authenticating and
using embedded SIM cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets
and computers as well as automobiles and drones. The Company paid $1,000,000 to acquire the M2M/IoT Patent Portfolio from
M2M and has an obligation to pay M2M 14% of the first $100 million of net proceeds (after deduction of expenses) and 5% of net
proceeds greater than $100 million from Monetization Activities (as defined) related to 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. As part of the acquisition of M2M/IoT Patent Portfolio, professional fees and filing fees of $88,000 were capitalized
as patent cost.
F-19
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE G - Commitments and Contingencies (continued)
[3] Operating leases:
The Company leases its principal office space in New York City at a monthly base rent of approximately $3,700 which lease expires
on May 31, 2018.
The Company leases office space in New Canaan, Connecticut expiring on September 30, 2019 at a base rent of $7,200 per month
(increasing $100 per month each year), which is subject to annual adjustments to reflect increases in real estate taxes and operating
expenses.
Mirror Worlds Technologies, LLC, the Company's wholly-owned subsidiary, entered into a one year lease, at a base rent of $620 per
month, to rent office space in Tyler, Texas (expiring April 30, 2018).
Rental expense for the years ended December 31, 2017 and 2016 aggregated $156,000 and $148,000, respectively.
[4]
Savings and investment plan:
The Company has a Savings and Investment Plan which allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code of 1986. The Company also may make discretionary annual matching contributions
and profit sharing in amounts determined by the Board of Directors, subject to statutory limits. The 401(k) Plan expense for the
years ended December 31, 2017 and 2016 was $108,000 and $102,000, respectively.
NOTE H - Employment Arrangements and Other Agreements
[1] On July 14, 2016, the Company entered into a new employment agreement ("Agreement") with its Chairman and Chief Executive
Officer, pursuant to which he continues to serve as Chairman and Chief Executive Officer for a five year term, at an annual base
salary of $475,000 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. During the years ended
December 31, 2017 and December 31, 2016, the Company's Chairman and Chief Executive Officer received an annual
discretionary bonus of $175,000 and $650,000, respectively. In addition, the Company granted to the Chairman and Chief
Executive Officer, under its 2013 Plan, 750,000 restricted stock units (the "RSUs", each RSU awarded by the Company represents
a contingent right to receive one share of the Company's common stock) which vest in three tranches, as follows: (i) 250,000 RSUs
shall vest on July 14, 2018, subject to the Chairman and Chief Executive's continued employment by the Company through the
vesting date (the "Employment Condition"); (ii) 250,000 RSUs shall vest at any time beginning July 14, 2018 through July 14,
2021 in equal annual installments for the remaining term of employment, subject to (1) the Employment Condition being satisfied
through each such annual vesting date and (2) the Company's common stock achieving a closing price (for 20 consecutive trading
days) of a minimum of $3.25 per share (subject to adjustment for stock splits) at any time during the term of employment; and (iii)
250,000 RSUs vest at any time beginning July 14, 2018 through July 14, 2021 in equal annual installments for the remaining term
of employment subject to (1) the Employment Condition being satisfied through each such annual vesting date and (2) the
Company's common stock achieving a closing price (for 20 consecutive trading days) of a minimum of $4.25 per share (subject to
adjustment for stock splits) at any time during the term of employment. The aforementioned stock price vesting conditions of
$3.25 per share and $4.25 per share have been satisfied. Notwithstanding the aforementioned, in the event of a Change of Control
(as defined), a Termination Other Than for Cause (as defined), or a termination of employment for Good Reason (as defined), all
of the 750,000 RSUs shall accelerate and become immediately fully vested. All RSUs granted by the Company to its officers,
directors or consultants have dividend equivalent rights.
F-20
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE H - Employment Arrangements and Other Agreements (continued)
Under the terms of the Agreement, so long as the Company's Chairman and Chief Executive Officer continues to serve as an
executive officer of the Company, whether pursuant to the Agreement or otherwise, he 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 the Company's Mirror Worlds Patent Portfolio, Cox Patent
Portfolio and M2M/IoT Patent Portfolio) (collectively, the "Incentive Compensation"). During the year ended December 31, 2017
and December 31, 2016, the Company's Chairman and Chief Executive Officer earned Incentive Compensation of $823,000 and
$4,252,000, respectively. As of December 31,2017 and 2016, the amount of accrued compensation for the Company's Chairman and
Chief Executive Officer was $346,000 and $748,000, 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 anytime thereafter,
whether he is employed by the Company 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 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.
In connection with the Agreement, the Company's 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.
Prior to entering into the new employment agreement in July 2016 as referenced above, the Company's Chairman and Chief
Executive Officer received a base salary of $415,000, an annual discretionary target bonus of $150,000, the same Incentive
Compensation, non-compete and other similar provisions as set forth in his new employment agreement.
[2]
The Company's Chief Financial Officer serves on an at-will basis pursuant to an offer letter, dated April 9, 2014, at an annual base
salary of $175,000 (increased in June 2016 from $157,000). The Company's Chief Financial Officer received an annual bonus of
$30,000 for the year ended December 31, 2017 and $75,000 for the year ended December 31, 2016. In connection with the offer
letter, the Chief Financial Officer was issued, under the 2013 Plan, a 5-year stock option to purchase 50,000 shares of the
Company's common stock, at an exercise price of $1.65 per share, which option vested in two equal amounts (25,000 shares each)
on each of December 31, 2014 and December 31, 2015. On June 9, 2016, the Company's Chief Financial Officer was granted
50,000 restricted stock units. Each restricted stock unit vested 50% on the one year anniversary of the grant (June 9, 2017) and
50% will vest on the two year anniversary of grant (June 9, 2018). In addition, in the event the Chief Financial Officer's
employment is terminated without "Good Cause" (as defined), he shall receive (i) (a) 6 months base salary or (b) 12 months base
salary in the event of a termination
F-21
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE H - Employment Arrangements and Other Agreements (continued)
without "Good Cause" within 6 months following a "Change of Control" of the Company (as defined) and (ii) accelerated vesting of
all remaining unvested shares underlying his options, restricted stock units or any other awards he may receive in the future.
[3]
The Company's Executive Vice President serves on an at-will basis at an annual base salary of $200,000. The Executive Vice
President received an annual bonus of $40,000 for the year ended December 31, 2017 and $125,000 for the year ended December
31, 2016. On June 9, 2016, the Executive Vice President was granted 50,000 restricted stock units. The restricted stock units
vested 50% on the one year anniversary of grant (June 9, 2017) and 50% will vest on the two year anniversary of grant (June 9,
2018).
NOTE I – Legal Proceedings
[1]
In September 2011, the Company initiated patent litigation against sixteen (16) data networking equipment manufacturers (and
affiliated entities) in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of its
Remote Power Patent. Named as defendants in the lawsuit, excluding related parties, were Alcatel-Lucent USA, Inc., Allied
Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei
Technologies USA, Juniper Networks, Inx., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co.,
Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transitions Networks, Inc. The Company seeks monetary damages based upon
reasonable royalties. As of December 31, 2017, the Company had reached settlements with fourteen (14) of the sixteen (16)
defendants.
In June 2016, the Company reached a settlement with Sony Corporation and affiliated entities ("Sony"). With respect to the
settlement, Sony received a non-exclusive fully-paid license for the Remote Power Patent for its remaining life. In July 2016, the
Company reached a settlement with Dell, Inc. Under the terms of the settlement, Dell received a non-exclusive license for the
Remote Power Patent for its full term, Dell paid a license initiation fee of $6,000,000 and agreed to pay quarterly royalties based on
its sales of PoE products. In July 2016, the Company also reached settlement agreements with Alcatel-Lucent USA, Inc. and
Alcatel-Lucent Holdings Inc. (collectively, "Alcatel") and ALE, USA ("ALE"). Under the terms of the settlement agreements,
Alcatel and ALE, USA received a non-exclusive fully-paid license for the Remote Power Patent for its remaining life. The
aggregate consideration received by the Company from Alcatel and ALE for the fully-paid license was $4,200,000 of which
$1,900,000 was paid following signing of the settlement agreements and the balance of $2,300,000 was paid in three equal quarterly
payments of $766,666 beginning on July 1, 2017. In August 2017, the Company entered into a settlement agreement with Axis
Communications, Inc. and affiliated entities ("Axis"). With respect to the settlement, Axis received a fully-paid license for the
Remote Power Patent.
In October 2016, the Company entered a settlement agreement with Polycom, Inc. ("Polycom"). Under the terms of the settlement,
Polycom entered into a non-exclusive license for the Company's Remote Power Patent for its full term and is obligated, subject to
certain conditions, to pay a license initiation fee of $5,000,000 for past sales of its Power over Ethernet ("PoE") products and ongoing
royalties based on its sales of PoE products. $2,000,000 of the license initiation fee was paid within 30 days and the balance will be
paid in three annual installments of $1,000,000 beginning in October 2017. Payments due in October 2018 and October 2019 need
not be paid by Polycom if all asserted claims of the Remote Power Patent have been found invalid. If the District Court in our trial
with Hewlett Packard (see below) enters an order finding certain claims of the Remote Power Patent obvious (invalid) and the
Company is unable to overturn such order on appeal to the United States Court of Appeals for the Federal Circuit, Polycom will not
be obligated to make the aforementioned remaining aggregate payments of $2,000,000.
In October 2017, the U.S. Bankruptcy Court of the Southern District of New York approved the Company's settlement with
defendant Avaya, Inc. ("Avaya"). As part of the settlement, Avaya, which on January 19, 2017 had filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code, entered into a non-exclusive license agreement for the full term of the
Company's Remote Power Patent. Under the
F-22
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE I – Legal Proceedings (continued)
terms of the license, Avaya paid the Company a lump sum amount for sales of certain designated Power over Ethernet ("PoE")
products, and agreed to pay ongoing royalty for other designated PoE products. In addition, Avaya agreed that the Company shall
have an allowed general unsecured claim ("Allowed Claim") in the amount of $37,500,000, as amended, relating to all acts occurring
on or before January 19, 2017. Under the Debtors' (Avaya and certain of its affiliates) Second Amended Joint Chapter 11 Plan of
Reorganization of Avaya Inc. and its Debtor Affiliates, which was approved by the Bankruptcy Court on November 28, 2017 and
became effective on December 15, 2017, the Debtors estimated that the total amount of general unsecured claims that will ultimately
be allowed will total approximately $305,000,000 which, based on the treatment of general unsecured creditors therein, would result
in estimated recoveries for the holders of general unsecured claims of approximately 18.9% of their Allowed Claim. The Debtors
acknowledged in the Plan that depending on its ability to successfully prosecute or otherwise reduce the remaining outstanding
claims, the total amount of the general unsecured claims could be substantially higher which would decrease the percentage
recoveries to the holders of general unsecured claims, including the Company's unsecured claim. In such an event, the amount
recovered by the Company under its Allowed Claim may be substantially lower than 18.9%.
On November 1, 2017, defendant Juniper Systems, Inc. ("Juniper") agreed to settle its litigation with the Company for $13,250,000
for a fully- paid license for the Remote Power Patent. On December 8, 2017, the Company was advised by Juniper that it would not
make the settlement payment to the Company as a result of the HP Jury Verdict and there was no binding agreement with the
Company. In January 2018, the Company revised and closed its settlement with Juniper (see Note N - "Subsequent Events").
On November 13, 2017, a jury empaneled in the United States District Court for the Eastern District of Texas, Tyler Division, found
that certain claims of the Company's Remote Power Patent were invalid and not infringed by Hewlett-Packard (the "HP Jury
Verdict"). As a result of the HP Jury Verdict, several of the largest licensees of the Company's Remote Power Patent, including
Cisco, Dell, and Netgear, have advised the Company that they will no longer pay the Company ongoing royalties pursuant to their
license agreements. The Company disagrees with the position taken by such licensees because, among other reasons, the jury
verdict is not an order of the District Court and may be thrown out as a result of motion practice in the District Court. If the
Company does not satisfactorily resolve the issue with such licensees, it intends to pursue arbitration. However, the Company's
position may not prevail in arbitration. On February 2, 2018, the Company moved to throw out the jury verdict and have the Court
determine that certain claims of the Company's Remote Power Patent are not obvious (invalid) as a matter of law by filing a motion
for judgment as a matter of law on validity and motions for a new trial on validity and infringement. A hearing on the Company's
motions is scheduled for May 14, 2018. If the District Court enters an order confirming the HP Jury Verdict and finding certain
claims of the Company's Remote Power Patent obvious (invalid) and either (i) the Company is unable to reverse the District Court
order on appeal, or (ii) there is an arbitration ruling that the District Court order relieves the obligation of certain of the Company's
licensees including Cisco Systems, Inc., the Company's largest licensee, to continue to pay the Company royalties and the District
Court order is not subsequently reversed on appeal, the Company's business, results of operations and cash-flow will be materially
adversely effected.
If the Company is successful in its efforts (i) to throw out the HP Jury Verdict in the District Court, (ii) to overturn the jury verdict on
appeal if the District Court confirms the jury verdict and finding certain claims of the Company's Remote Power Patent obvious
(invalid), or (iii) there is an arbitration ruling that the District Court order does not affect the obligations of certain of the Company's
licensees (including Cisco) to continue to pay the Company royalties and the order is not overturned on appeal, licensees will be
obligated to pay the Company ongoing royalties and all prior royalties that were not previously paid following the HP Jury Verdict in
November 2017.
F-23
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE I – Legal Proceedings (continued)
[2]
In July 2010, the Company settled its patent litigation pending in the United States District Court for the Eastern District of Texas,
Tyler Division, against Adtran, Inc, Cisco Systems, Inc. and Cisco-Linksys, LLC, (collectively, "Cisco"), Enterasys Networks,
Inc., Extreme Networks, Inc., Foundry Networks, Inc., and 3Com Corporation, Inc. As part of the settlement, Adtran, Cisco,
Enterasys, Extreme Networks and Foundry Networks each entered into a settlement agreement with the Company and entered into
non-exclusive licenses for the Company's Remote Power Patent (the "Licensed Defendants"). Under the terms of the licenses, the
Licensed Defendants paid the Company upon settlement approximately $32 million and also agreed to license the Remote Power
Patent for its full term, which expires in March 2020. In accordance with the Settlement and License Agreement, dated May 25,
2011 (the "Agreement"), Cisco is obliged to pay the Company royalties (which began in the first quarter of 2011) based on its
sales of PoE products up to maximum royalty payments per year of $9 million beginning in 2016 ($8 million through 2015) for
the remaining term of the patent. The actual royalty payments received by the Company may be less than the caps stated above.
Under the terms of the Agreement, if the Company grants other licenses with lower royalty rates to third parties (as defined in the
Agreement), Cisco shall be entitled to the benefit of the lower royalty rates provided it agrees to the material terms of such other
license.
The royalty payments from Cisco are subject to certain conditions including that there is no "Adverse Ruling" as defined in the
Agreement related to the Company's Remote Power Patent. Cisco notified the Company in January 2018 that in its view that no
further royalty payments are due the Company under the Agreement because the jury verdict in the Company's Hewlett-Packard trial
finding that certain claims of the Remote Power Patent are invalid and not infringed by Hewlett-Packard constituted an "Adverse
Ruling" under the Agreement. The Company disagrees with Cisco that the HP jury verdict by itself relieves Cisco of its royalty
obligations to the Company for, among other reasons, that the jury verdict has not been subject to an order of the District Court and is
subject to motion practice. However, the Company cannot be certain its position will prevail.
On February 2, 2018, the Company brought motions in the District Court to throw out the HP Jury Verdict and have the Court
determine that certain claims of our Remote Power Patent are not obvious (invalid) by filing motions for judgment as a matter of law
and a new trial on validity and infringement. A hearing on the Company's motions is scheduled for May 14, 2018. If the District
Court enters an order confirming the HP Jury Verdict, the District Court confirms certain claims of our Remote Power Patent are
obvious (invalid), and these decisions are upheld on appeal to the United States Court of Appeals for the Federal Circuit, Cisco will
likely continue not to pay the Company royalties unless there is an arbitration ruling that the District Court order does not affect the
obligation of Cisco to pay the Company royalties under its license agreement. The loss of Cisco as a licensee would have a material
adverse effect on our business, results of operations and cash-flow.
[3]
On April 4, 2014 and December 3, 2014, the Company initiated litigation against Google Inc. ("Google") and YouTube, LLC
(YouTube") in the United States District Court for the Southern District of New York for infringement of several of its patents
within the Cox Patent Portfolio acquired from Dr. Cox (see Note G[2] hereof) which relate to the identification of media content
on the Internet. The lawsuits allege 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 above referenced litigations that the Company commenced in the United States District Court for the Southern District of New
York in April 2014 and December 2014 against Google and YouTube are currently subject to a court ordered stay which has been in
effect since July 2015 as a result of proceedings at the Patent Trial and Appeal Board (PTAB) and the appeals to the United States
District Court of Appeals for the Federal Circuit, as described below.
In December 2014, Google Inc. filed four petitions to institute Inter Partes Review ("IPRs") at the United States Patent and
Trademark Office ("USPTO") pertaining to patents within the Company's Cox Patent Portfolio asserted in the litigation filed in April
2014 as described above. Google in each of the IPRs sought to invalidate certain claims of patents at issue within the Cox Patent
Portfolio. On June 23, 2015, the Patent Trial and Appeal Board ("PTAB") of the USPTO issued an order instituting for oral hearing
each of the four IPRs. The
F-24
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE I – Legal Proceedings (continued)
consolidated trial at the PTAB was held on March 9, 2016. On June 20, 2016, the PTAB issued its Final Written Decisions in the
Company's favor in the four pending IPRs. On August 18, 2016, Google filed Notices of Appeal with respect to the PTAB's Final
Written Decision to the United States Court of Appeals for the Federal Circuit. On March 26, 2018, the United States Court of
Appeals for the Federal Circuit vacated certain rulings of the PTAB's Final Written Decisions in favor of the Company determining
that the PTAB erred in its claim construction of a certain claim term and remanded the four cases to the PTAB for further
proceedings to address the claims that contained the term that was erroneously construed. The Federal Circuit left undisturbed the
PTAB's findings that the remaining claims of the patents (that did not include this claim term) are not invalid.
On April 13, 2015, Google filed a Petition for Covered Business Method Review (CBM) at the PTAB seeking to invalidate claims
pertaining to the Company's U.S. Patent No. 8,904,464, the patent asserted in the Company's litigation against Google and YouTube
filed on December 3, 2014 as referenced above. On October 19, 2015, the PTAB issued an order instituting for oral hearing the
Covered Business Method Review on certain grounds. The oral hearing was held on May 11, 2016. On October 18, 2016, the
PTAB issued its Final Written Decision in the Company's favor. On December 20, 2016, Google filed a Notice of Appeal to appeal
the PTAB's Final Written Decision to the United States Court of Appeals for the Federal Circuit. On January 23, 2018, the United
States Court of Appeals for the Federal Circuit affirmed the final written decision of the PTAB in favor of the Company relating to
the CBM.
[4] On May 23, 2013, the Company's wholly-owned subsidiary, Mirror Worlds Technologies, LLC, initiated patent litigation in the
United States District Court for the Eastern District of Texas, Tyler Division, against Apple, Inc., Microsoft, Inc., Hewlett-Packard
Company, Lenovo Group Ltd., Lenovo (United States), Inc., Dell, Inc., Best Buy Co., Inc., Samsung Electronics America, Inc.
and Samsung Telecommunications America L.L.C., for infringement of the Company's '227 patent (the "227 Patent") (one of the
patents the Company acquired as part of the acquisition of the Mirror Worlds Patent Portfolio). The lawsuit alleged that the
defendants have infringed and continue to infringe the claims of the Company's '227 Patent by making, selling, offering to sell and
using infringing products including Mac OS and Windows operating systems and personal computers and tablets that include
versions of those operating systems, and by encouraging others to make, sell, and use these products. In December 2013, the
litigation was severed into two consolidated actions, Mirror Worlds v. Apple, et. al. and Mirror Worlds v. Microsoft, et. al.
On July 8, 2016, Mirror Worlds Technologies, LLC, the Company's wholly-owned subsidiary, entered into a settlement agreement
with Apple Inc. in connection with litigation in the United States District Court for the Eastern District of Texas, for infringement of
the Company's '227 Patent. Under the terms of the settlement agreement, Apple received a fully paid non-exclusive license to the
'227 Patent for its full term (which expired in June 2016), along with certain rights to other patents in the Company's patent portfolio.
The Company received $25,000,000 from Apple for the settlement and fully paid non-exclusive license.
[5] On May 9, 2017, Mirror Worlds Technologies, LLC, the Company's wholly-owned subsidiary, initiated litigation against
Facebook, Inc. ("Facebook") in the United States District Court for the Southern District of New York, for infringement of certain
patents within the Company's Mirror Worlds Patent Portfolio. The lawsuit alleges that the asserted patents are infringed by
Facebook's core technologies that enable Facebook's Newsfeed and Timeline features. The lawsuit further alleges that Facebook's
unauthorized use of the stream based solutions of the asserted patents has helped Facebook become the most popular social
networking site in the world. The Company seeks, among other things, monetary damages based upon reasonable royalties. On
July 5, 2017, Facebook filed its Answer denying the Company's claims and asserting various affirmative defenses.
F-25
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE J – REVENUE FROM PROFESSIONAL LIABILITY SETTLEMENT
On April 22, 2016, Mirror Worlds Technologies, LLC ("MWT"), the Company's wholly-owned subsidiary, entered into an
agreement pursuant to which it received $17,500,000 in connection with the settlement of a professional liability claim relating to
services rendered in 2008-2010. The Company, through MWT, acquired the claim in May 2013 as part of its acquisition of the
Mirror Worlds Patent Portfolio.
NOTE K – CONCENTRATIONS
Revenue from three licensees constituted approximately 67% of the Company's revenue for the year ended December 31, 2017.
Revenue from three licensees constituted approximately 83% of the Company's revenue for the year ended December 31, 2016
(exclusive of non-licensing revenue from the Company's professional liability settlement—see Note J above. At December 31, 2017,
royalty receivables from three licensees constituted approximately 79% of the Company's royalty receivables. At December 31,
2016, royalty receivables from three licensees constituted approximately 85% of the Company's royalty receivables.
NOTE L – STOCK REPURCHASE PROGRAM
On August 22, 2011, the Company announced that its Board of Directors approved a share repurchase program to repurchase up to
$2,000,000 of shares of its common stock over the next 12 months ("Share Repurchase Program"). On June 14, 2017, the
Company's Board of Directors authorized an extension and increase of the Share Repurchase Program to repurchase up to $5,000,000
of the Company's common stock over the subsequent 24 month period. The common stock may be repurchased from time to time in
open market transactions or privately negotiated transactions in the Company's discretion. The timing and amount of the shares
repurchased are determined by management based on its evaluation of market conditions and other factors. The repurchase program
may be increased, suspended or discontinued at any time.
During the year ended December 31, 2017, the Company repurchased an aggregate of 649,549 shares of its common stock pursuant
to the Share Repurchase Program at a cost of $2,081,135 (exclusive of commissions) or an average price per share of $3.20 per share.
Since inception of the Share Repurchase Program (August 2011) through December 31, 2017, the Company has repurchased an
aggregate of 7,575,553 shares of its common stock at a cost of $13,545,008 (exclusive of commissions) or an average per share price
of $1.79 per share.
NOTE M – DIVIDEND POLICY
On December 7, 2016, the Board of Directors of the Company approved the initiation of a dividend policy providing for the
payment of a semi-annual dividend of $0.05 per common share ($0.10 per common share annually) commencing in 2017. The
Company anticipates paying the semi-annual dividends in March and September of each year. It is anticipated that the semi-annual
dividend will continue to be paid through March 2020 (the expiration of the Company's Remote Power Patent) provided that the
Company continues to receive royalties from licensees of its Remote Power Patent. On February 2, 2017, the Board of Directors of
the Company declared an initial semi-annual cash dividend of $0.05 per common share with a payment date of March 24, 2017 to all
common stockholders of record as of March 3, 2017. On July 25, 2017, the Board of Directors declared a semi-annual cash dividend
of $0.05 per share with a payment date of September 20, 2017 to all common stockholders of record as of September 1, 2017.
However, if the Company is unable to overturn the jury verdict in its litigation with Hewlett-Packard (see Note I[1] hereof), or there
is not an arbitration ruling that the HP Jury Verdict finding of non-infringement does not apply to certain licensees of the Remote
Power Patent, the Board of Directors may decide to modify or discontinue annual cash dividends of an aggregate of $0.10 per
common share.
F-26
NETWORK-1 TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE N – SUBSEQUENT EVENTS
[1]
[2]
[3]
[4]
On January 9, 2018, the Company sold its allowed general unsecured claim of $37,500,000 against Avaya, Inc. (see Note I[1]
hereof) for $6,320,000 to an unaffiliated third party.
On January 16, 2018, the Company revised and closed its settlement with defendant Juniper Networks, Inc. ("Juniper") with
respect to patent litigation in the United States District Court for the Eastern District of Texas (See Note I[1] hereof). The
Company agreed to revise the settlement to avoid the possibility of protracted litigation regarding enforcing the settlement.
Under the terms of the revised settlement, Juniper paid the Company $12,700,000 and received a fully-paid license to the
Company's Remote Power Patent (and certain other patents owned by the Company) for its full term, which will apply to its sales
of PoE products.
On February 9, 2018, the Board of Directors of the Company, pursuant to its dividend policy (see Note M above), declared a
semi-annual cash dividend of $0.05 per common share which is payable on March 24, 2018 to all common stockholders of record
as of March 3, 2018.
On March 8, 2018, the Company issued 15,000 restricted stock units to each of its three non-management directors as a grant for
the year 2018. Each restricted stock unit represents a contingent right to receive one share of the Company's common stock. The
restricted stock units vest in four equal quarterly amounts of 3,750 shares of common stock on March 15, 2018, June 15, 2018,
September 15, 2018 and December 15, 2018, subject to continued service on the Board of Directors.
F-27
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
PART IV
The following are included under Item 8 "Financial Statements and Supplementary Data:"
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets as of December 31, 2017 and 2016
Consolidated statements of income and comprehensive income for the years ended December 31, 2017 and 2016
Consolidated statements of changes in stockholders' equity for the years ended December 31, 2017 and 2016
Consolidated statements of cash flows for the years ended December 31, 2017 and 2016
Notes to consolidated financial statements
(a)(2) Financial Statements Schedules:
Financial statement schedules are omitted because the information is not applicable.
(a)(3) Exhibits
3(i)(a)
3(i)(b)
Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-59617), declared effective by the SEC on November 12, 1998 (the "1998
Registration Statement"), and incorporated herein by reference.
Certificate of Amendment to the Certificate of Incorporation dated November 27, 2001. Previously filed as Exhibit
3.1.1 to the Company's Registration Statement on Form S-3 (Registration No. 333-81344) declared effective by the
SEC on February 12, 2002, and incorporated herein by reference (the "February 2002 Form S-3")
3(i)(c)
Certificate of Amendment to the Certificate of Incorporation dated October 9, 2013. Previously filed as Exhibit 3.1
to the Company's Current Report on Form 8-K filed on October 10, 2013, and incorporated herein by reference.
3(ii)
4.1
10.1+
10.2
10.3
10.4
10.5
10.6
Second Amended and Restated By-laws. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016 and incorporated herein by
reference.
Form of Common Stock certificate. Previously filed as Exhibit 4.1 to the 1998 Registration Statement and
incorporated herein by reference.
2013 Stock Incentive Plan. Previously filed as Appendix B to the Company's Schedule 14A (Proxy Statement) filed
on August 20, 2013 and incorporated herein by reference.
Patents Purchase, Assignment and License Agreement, dated November 18, 2003, between the Company and Merlot
Communications, Inc. Previously filed as Exhibit 10.10 to the Company's Current Report on Form 8-K filed
December 3, 2003 and incorporated herein by reference.
Amendment to Patents Purchase, Assignment and License Agreement, dated January 18, 2005, between the
Company and Merlot Communications, Inc. Previously filed January 24, 2005 as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on January 18, 2005 and incorporated herein by reference.
Form of stock option agreement, previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-
8, filed on October 14, 2009 and incorporated herein by reference.
Settlement Agreement between the Company and Cisco Systems, Inc. and Cisco-Linksys, LLC. Portions of the
Exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to an order
granting confidential treatment request under Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.
Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 20, 2010 and incorporated
herein by reference.
Settlement and License Agreement, dated May 25, 2011, among the Company, Corey M. Horowitz, CMH Capital
Management Corp. and Cisco Systems, Inc. and Cisco Consumer Products, LLC. Portions have been omitted
pursuant to an order granting confidentiality treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934
as amended. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2011
and incorporated herein by reference.
- 61 -
10.7+
10.8
10.9
Employment Agreement, dated July 14, 2016, between the Company and Corey M. Horowitz, Chairman and Chief
Executive Officer. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 19,
2016 and incorporated herein by reference.
Patent Purchase Agreement, dated February 28, 2013, between the Company and Dr. Ingemar Cox. Previously filed
as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 5, 2013 and incorporated herein by
reference.
Asset Purchase Agreement, dated as of May 21, 2013, between the Company and Mirror Worlds, LLC. Portions of
this Exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Previously
filed as Exhibit 10.1 to the Company's Form 8-K filed on May 29, 2013 and incorporated herein by reference.
14
Code of Ethics. Previously filed as Exhibit 14 to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004 filed on April 14, 2004 and incorporated herein by reference.
21.1*
List of Subsidiaries of Registrant
23.1*
Consent of Friedman, LLP, Independent Registered Public Accounting Firm
31.1*
Section 302 Certification of Chief Executive Officer.
31.2*
Section 302 Certification of Chief Financial Officer.
32.1*
Section 906 Certification of Chief Executive Officer.
32.2*
Section 906 Certification of Chief Financial Officer.
101*
Interactive data files: *
101.INS
XBRL Instance Document
101.SCH
XBRL Scheme Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
_________________________
* Filed herewith
+ Management contract or compensatory plan or arrangement
- 62 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 2nd
day of April 2018.
SIGNATURES
NETWORK-1 TECHNOLOGIES, INC.
By: /s/ Corey M. Horowitz
Corey M. Horowitz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated:
NAME
TITLE
DATE
/s/ Corey M. Horowitz
Corey M. Horowitz
/s/ David Kahn
David Kahn
/s/ Emanuel Pearlman
Emanuel Pearlman
/s/ Niv Harizman
Niv Harizman
/s/ Allison Hoffman
Allison Hoffman
Chairman and Chief Executive Officer, Chairman of
the Board of Directors (principal executive officer)
April 2, 2018
Chief Financial Officer, Secretary and a Director
(principal financial officer and principal accounting
officer)
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
Director
Director
Director
- 63 -
EXHIBIT 21.1
List of Subsidiaries of Network-1 Technologies, Inc.
Name
Mirror Worlds Technologies, LLC
Jurisdiction
Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Network-1 Technologies, Inc.
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 Nos. 333-140622, 333-162460, 333-
186612, 333-192811 and 333-193704 and on Form S-3 No. 33-190719 of our report dated April 2, 2018, with respect to the consolidated
financial statements of Network-1 Technologies, Inc. and subsidiary included in this Annual Report (Form 10-K) of Network-1
Technologies, Inc. and subsidiary for the year ended December 31, 2017.
/s/ FRIEDMAN LLP
New York, New York
April 2, 2018
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)
EXHIBIT 31.1
I, Corey M. Horowitz, Chairman and Chief Executive Officer of Network-1 Technologies, Inc. (the "Registrant"), certify that:
1. I have reviewed this report on Form 10-K of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in
this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's
most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: April 2, 2018
By: /s/ Corey M. Horowitz
Corey M. Horowitz
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)
I, David C. Kahn, Chief Financial Officer of Network-1 Technologies, Inc. (the "Registrant"), certify that:
1. I have reviewed this report on Form 10-K of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's
most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: April 2, 2018
By: /s/ David C. Kahn
David C. Kahn
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. §1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Corey M.
Horowitz, Chief Executive Officer and Chairman of Network-1 Technologies, Inc., a Delaware corporation (the "Company"), does
hereby certify that:
The Annual Report of Form 10-K for the year ended December 31, 2017 of the Company (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Corey Horowitz
Chief Executive Officer and Chairman
April 2, 2018
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. §1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, David C. Kahn,
Chief Financial Officer of Network-1 Technologies, Inc., a Delaware corporation (the "Company"), does hereby certify that:
The Annual Report of Form 10-K for the year ended December 31, 2017 of the Company (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
/s/ David C. Kahn
Chief Financial Officer
April 2, 2018