Note
B – Summary
of Significant Accounting Policies
|
[1]
|
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.
|
[2]
|
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,
contingent legal fees and related costs, income taxes, valuation of patents and equity method investments, including evaluation
of the Company’s basis difference. Actual results could be materially different from those estimates, upon which the carrying
values were based.
|
[3]
|
Cash
and Cash Equivalents
|
The
Company maintains cash deposits in high quality financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC").
Accounts at each institution are insured by the FDIC up to $250,000. At December 31, 2020 and 2019, the Company had $5,477,000
and $9,120,000, respectively, in excess of the FDIC insured limit.
The
Company considers all highly liquid short-term investments, including certificates of deposit and money market funds, that are
purchased with an original maturity of three months or less to be cash equivalents.
|
[4]
|
Marketable
Securities
|
The
Company’s marketable securities are comprised of certificates of deposit with original maturity greater than three months
from date of purchase, fixed income mutual funds, and corporate bonds and notes (see Note G). At December 31, 2020 and December
31, 2019, included in marketable securities, the Company had aggregate certificates of deposit of $3,500,000 and $8,921,000, respectively,
at financial institutions that were within the FDIC limit. The Company’s marketable securities are measured at fair value
and are accounted for in accordance with ASU 2016-01. Unrealized holding gains and losses on certificates of deposit and fixed
income mutual funds are recorded in net realized and unrealized gain (loss) from investments on the consolidated statements of
operations and comprehensive income (loss). Unrealized holding gains and losses, net of the related tax effect, on corporate bonds
and notes are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Dividend
and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific
identification method for determining the cost of the marketable securities.
Under
ASC 606, revenue is recognized when the Company completes the licensing of its intellectual property to its licensees, in an amount
that reflects the consideration the Company expects to be entitled to in exchange for licensing its intellectual property.
The
Company determines revenue recognition through the follow steps:
|
•
|
identification
of the license agreement;
|
|
•
|
identification
of the performance obligations in the license agreement;
|
|
•
|
determination
of the consideration for the license;
|
|
•
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
•
|
recognition
of revenue when the Company satisfies its performance obligations.
|
NETWORK-1
TECHNOLOGIES, INC.
Note
B – Summary
of Significant Accounting Policies (continued)
Revenue
disaggregated by source is as follows:
|
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Fully-Paid Licenses
|
|
$
|
―
|
|
|
$
|
130,000
|
(1)
|
Royalty Bearing Licenses
|
|
|
4,403,000
|
(2)
|
|
|
2,907,000
|
|
Total Revenue
|
|
$
|
4,403,000
|
|
|
$
|
3,037,000
|
|
__________________________
|
(1)
|
Includes
conversion of an existing royalty bearing license to a fully-paid license.
|
|
(2)
|
Includes
revenue of $4,150,000 from a litigation settlement with Dell, Inc. (see Note K[2] hereof).
|
The
Company relies on royalty reports received from third party licensees to record its revenue. From time to time, the Company may
audit or otherwise dispute royalties reported from licensees. Any adjusted royalty revenue as a result of such audits or dispute
is recorded by the Company in the period in which such adjustment is agreed to by the Company and the licensee or otherwise determined.
Revenue
from the Company’s patent licensing business is generated from negotiated license agreements. The timing and amount of revenue
recognized from each licensee depends upon a variety of factors, including the terms of each agreement and the nature of the obligations
of the parties. These agreements may include, but not be limited to, elements related to past infringement liabilities, non-refundable
upfront license fees, and ongoing royalties on licensed products sold by the licensee. Generally, in the event of 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 performance 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 obligations 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) of licensed products, applied to a contractual
royalty rate. Licensees that pay royalties on a quarterly basis generally report to the Company 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.
NETWORK-1
TECHNOLOGIES, INC.
Note
B – Summary
of Significant Accounting Policies (continued)
The
Company recognizes revenue from their Royalty Bearing Licenses in a manner consistent with the legal form of the arrangement,
and in accordance with the royalty recognition constraint that applies to licenses of IP for which some or all of the consideration
is in the form of sales or usage based royalty. Consequently, the Company recognizes revenue at the later of when (1) the subsequent
sale occurs or (2) the performance obligation to which some or all of the sales based royalty has been satisfied.
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 performance
obligations have been substantially performed, amounts are fixed and determinable, and collectability is reasonably assured. Revenue
from Fully-Paid Licenses may consist of one or more installments. The timing and amount of revenue recognized from each licensee
depends upon a number of factors including the specific terms of each agreement and the nature of the deliverables and obligations.
|
[6]
|
Equity
Method Investments
|
Equity
method investments are equity securities in entities the Company does not control but over which it has the ability to exercise
significant influence. These investments are accounted for under the equity method of accounting in accordance with ASC 323, Investments
— Equity Method and Joint Ventures (see Note H hereof). Equity method investments are measured at cost minus impairment,
if any, plus or minus the Company’s share of an investee’s income or loss. The Company’s proportionate share
of the income or loss from equity method investments is recognized on a one-quarter lag. When the Company’s carrying value
in an equity method investment is reduced to zero, no further losses are recorded in the Company’s financial statements
unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company
subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses
not previously recognized. Upon sale of equity method investments, the difference between sales proceeds and the carrying amount
of the equity investment is recognized in profit or loss.
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.
|
[8]
|
Costs
of Revenue and Related Costs
|
The
Company includes in costs of revenue for the year ended December 31, 2020 and 2019 contingent legal fees payable to patent litigation
counsel, any other contractual payments related to net proceeds from settlements (see Note I[2] hereof) and incentive bonus compensation
payable to its Chairman and Chief Executive Officer.
During
the year ended December 31, 2020, the Company had a change in estimate related to accrued contingency fees and related costs.
The change was the result of the Company receiving new information reflecting additional legal costs in connection with certain
contingent litigation. The effect of this change in estimate for the year ended December 31, 2020, was an increase in professional
fees and related costs of $886,000 and a corresponding increase in our operating loss and net loss of $886,000, and a decrease
in basic and diluted earnings per share of $0.04 per share.
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.
NETWORK-1
TECHNOLOGIES, INC.
Note
B – Summary
of Significant Accounting Policies (continued)
As of December
31, 2019, the Company recorded a full valuation allowance against its deferred tax assets due to uncertainty concerning its ability
to generate future net income. As of December 31, 2020, the Company relieved the valuation allowance against its deferred tax
assets as a result of Cisco’s agreement to pay the Company $18,691,890 to resolve a dispute (see Note O[5] hereof).
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, 2020 and
2019.
U.S.
federal, state and local income tax returns prior to 2017 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.
|
[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. The Company uses the Black-Scholes option pricing model to determine
the grant date fair value of options granted. The fair value of restricted stock units is determined based on the number of shares
underlying the grant and either the quoted market price of the Company’s common stock on the date of grant for time-based
and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model for market-based awards.
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.
|
[12]
|
Fair
Value Measurements
|
ASC
Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which
requires classification based on observable and unobservable inputs when measuring fair value.
NETWORK-1
TECHNOLOGIES, INC.
Note
B – Summary
of Significant Accounting Policies (continued)
There
are three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that are supported by little or no market activity; therefore, the inputs are developed by the Company
using estimates and assumptions that the Company expects a market participant would use, including pricing models, discounted
cash flow methodologies, or similar techniques.
The
carrying value of the Company’s financial instruments, including cash and cash equivalents, royalty receivable, other assets,
accounts payable, and accrued expenses approximates fair value because of the short-term nature of these financial instruments.
The
Company’s marketable securities are classified within Level 1 because they are valued using quoted market prices in an active
market.
|
[13]
|
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
|
An
impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds
its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based
on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured
as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. If an impairment loss is
recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset,
the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously
recognized impairment loss is prohibited. At December 31, 2020 and 2019, there was no impairment to the Company’s patents
and equity investment.
The
Company’s equity investment in ILiAD Biotechnologies, LLC (“ILiAD”), a privately held development stage biotechnology
company is evaluated on a non-recurring basis for impairment and when and if a triggering event occurs, and is classified within
Level 3 as it is valued using significant unobservable inputs or data in an inactive market, and the valuation requires management
judgment due to the absence of market price and inherent lack of liquidity.
Cash
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 N hereof).
NETWORK-1
TECHNOLOGIES, INC.
Note
B – Summary
of Significant Accounting Policies (continued)
The
Company has reclassified certain amounts in prior period consolidated financial statements to conform to the current period’s
presentation. These reclassifications had no impact on the previously reported net income.
|
[16]
|
New
Accounting Standards
|
Income
Taxes
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The
ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also
simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based
tax, requiring reflection of enacted changes in tax laws in the interim period and making improvements for income taxes related
to employee stock ownership plans. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements
have not been issued. The Company does not expect that the adoption of this standard will have a material effect on its consolidated
financial statements.
Equity
Securities
In
January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method
and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The ASU amends and clarifies certain interactions
between the guidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability
of the accounting for these interactions. The amendments in the ASU should be applied on a prospective basis. The ASU is effective
for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted,
including early adoption in an interim period for which financial statements have not yet been issued. The Company does not expect
that the adoption of this standard will have a material effect on its consolidated financial statements.
Fair
Value Measurements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“ASC 820”), Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness
of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. The Company does not expect the adoption of this standard to have a material impact on its
consolidated financial statements.
Codification
Improvements
In
October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in Section B of this Update improve
the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section. Section C of this
Update contains Codification improvements that vary in nature. The amendments in this Update should be applied retrospectively.
This Update is effective for annual periods beginning after December 15, 2020. Early application of the amendments in this Update
is permitted for any annual or interim period for which financial statements have not been issued. The Company is currently
evaluating the impact the standard will have on its consolidated financial statements.
NETWORK-1
TECHNOLOGIES, INC.
Note
C – Patents
The
Company’s intangible assets at December 31, 2020 include patents with estimated remaining economic useful lives ranging
from 0.75 to 12.75 years. For all periods presented, all the Company’s patents were subject to amortization. The gross carrying
amounts and accumulated amortization related to acquired intangible assets as of December 31, 2020 and 2019 were as follows:
|
|
2020
|
|
|
2019
|
|
Gross carrying amount
|
|
$
|
7,848,000
|
|
|
$
|
7,797,000
|
|
Accumulated
amortization
|
|
|
(6,270,000
|
)
|
|
|
(5,978,000
|
)
|
Patents,
net
|
|
$
|
1,578,000
|
|
|
$
|
1,819,000
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense for the years ended December 31, 2020 and 2019 was $292,000 and $285,000, respectively. Future amortization of current
intangible assets, net is as follows:
For
the years ended December 31,
|
|
|
|
|
|
2021
|
|
|
$
|
294,000
|
|
|
2022
|
|
|
|
294,000
|
|
|
2023
|
|
|
|
230,000
|
|
|
2024
|
|
|
|
83,000
|
|
|
2025
and thereafter
|
|
|
|
677,000
|
|
|
Total
|
|
|
$
|
1,578,000
|
|
|
|
|
|
|
|
|
The
Company’s Remote Power Patent expired on March 7, 2020. All patents within our Mirror Worlds Patent Portfolio and QoS Patents
have also expired. 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 September 2033 to May 2034.
Note
D – Loss Per Share
Basic
Loss per share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period.
Diluted per share data included the dilutive effects of stock options and restricted stock units. Potential shares of 662,500
and 945,000 at December 31, 2020 and 2019, respectively, consist of options and restricted stock units. Computations of basic
and diluted weighted average common shares outstanding are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding – basic
|
|
|
24,011,354
|
|
|
|
23,978,774
|
|
Dilutive
effect of stock options and restricted stock units
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding – diluted
|
|
|
24,011,354
|
|
|
|
23,978,774
|
|
|
|
|
|
|
|
|
|
|
Stock
option and restricted stock units excluded from the computation of diluted income per share because the effect of inclusion
would have been anti-dilutive
|
|
|
662,500
|
|
|
|
945,000
|
|
NETWORK-1
TECHNOLOGIES, INC.
Note
E – Income Taxes
Significant
components of the income taxes were as follows for the years ended December 31, 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
Current
|
|
|
|
|
|
|
|
|
State
and local
|
|
$
|
(34,000
|
)
|
|
$
|
50,000
|
|
Federal
|
|
|
(430,000
|
)
|
|
|
(197,000
|
)
|
Total
Current Tax Expense
|
|
$
|
(464,000
|
)
|
|
$
|
(147,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
State and local
|
|
|
(32,000
|
)
|
|
|
―
|
|
Federal
|
|
|
(458,000
|
)
|
|
|
168,000
|
|
Total
Deferred Tax Expense (Benefit)
|
|
|
(490,000
|
)
|
|
|
168,000
|
|
|
|
|
|
|
|
|
|
|
Total
Income Taxes
|
|
$
|
(954,000
|
)
|
|
$
|
21,000
|
|
Significant
components of deferred tax assets as of December 31, 2020 and 2019 consisted of the following:
|
|
2020
|
|
|
2019
|
|
Deferred
tax assets:
Net operating loss carry forwards
|
|
$
|
1,665,000
|
|
|
$
|
490,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax
Liability
|
|
|
(711,000
|
)
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
―
|
|
|
|
(490,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
$
|
954,000
|
|
|
$
|
―
|
|
At
December 31, 2020, the Company had net operating loss carryforwards (NOLs) totaling approximately $7,761,000 that under the
Tax Act do not expire. As of December 31, 2019, the Company recorded a full valuation allowance against its deferred tax
assets due to uncertainty concerning its ability to generate future net income. As of December 31, 2020, the Company relieved
the valuation allowance against its deferred tax assets as a result of Cisco’s agreement to pay the Company $18,691,890
to resolve a dispute (see Note O[5] hereof). Utilization of NOL credit carryforwards can be subject to a substantial annual
limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the Internal
Revenue Code of 1986, as amended, as well as similar state provisions.
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:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Income tax - statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Permanent difference
|
|
|
(5.05
|
)%
|
|
|
―
|
|
State and other
|
|
|
1.48
|
%
|
|
|
(2.82
|
)%
|
Adjustment of tax liability
|
|
|
―
|
|
|
|
8.27
|
%
|
Valuation allowance on deferred tax assets
|
|
|
18.4
|
%
|
|
|
(27.63
|
)%
|
Total
|
|
|
35.83
|
%
|
|
|
(1.18
|
)%
|
NETWORK-1
TECHNOLOGIES, INC.
Note
E – Income Taxes (continued)
While
only the tax returns for the three years ended prior to December 31, 2020 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. In July 2018, the Internal Revenue Service notified the Company
that it was examining its 2016 federal tax return. In March 2020, the Company was advised by Internal Revenue Service that the
examination was concluded with no change to the Company’s 2016 federal tax return.
The
Company re-evaluated certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in
the future, which is generally 21%, and determined that such items had no material impact on the Company’s financial statements.
The
personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed
personal holding company income (“UPHCI”), which means, in general, taxable income subject to certain adjustments.
For a corporation to be classified as a PHC, it must satisfy two tests: (i) that more than 50% in value of its outstanding shares
must be owned directly or indirectly by five or fewer individuals at any time during the second half of the year (after applying
constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family members
and other related parties) (the “Ownership Test”) and (ii) at least 60% of its adjusted ordinary gross income for
a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). Beginning
in July 2020, based upon available shareholder information and certain assumptions as to the attribution of stock ownership, the
Company may have satisfied the Ownership Test. In addition, the Company may have satisfied the Income Test. In any event, the
Company did not have UPHCI for 2020 because the Company did not have taxable income as adjusted for purposes of computing UPHCI
for 2020. If the Company satisfies both the Ownership Test and Income Test and has UPHCI for the year ending December 31, 2021
(or for any subsequent year in which such tests are also satisfied), the Company would be subject to a 20% tax on the amount of
UPHCI 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, 2020, there are 1,877,308 shares of common stock available
for issuance under the 2013 Plan.
|
[1]
|
Restricted
Stock Units
|
A
summary of restricted stock units granted during the year ended December 31, 2020 is as follows (each restricted stock unit represents
the contingent right to receive one share of the Company’s common stock):
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
Balance
of restricted stock units outstanding at December 31, 2019
|
|
|
340,000
|
|
|
$
|
2.15
|
|
Grants of restricted
stock units
|
|
|
70,000
|
|
|
|
2.68
|
|
Vested
restricted stock units
|
|
|
(247,500
|
)
|
|
|
(2.23
|
)
|
Balance
of unvested restricted stock units at December 31, 2020
|
|
|
162,500
|
|
|
$
|
2.25
|
|
NETWORK-1
TECHNOLOGIES, INC.
Note
F – Stockholders’ Equity (continued)
Restricted
stock unit compensation expense was $302,000 for the year ended December 31, 2020 and $567,000 for the year ended December 31,
2019.
The
Company has an aggregate of $105,000 of unrecognized restricted stock unit compensation expense as of December 31, 2020 to be
expensed over a weighted average period of 1.75 years.
The
fair value of restricted stock units is determined based on the number of shares granted and the quoted market price of the Company’s
common stock on the date of grant for time-based and performance-based awards.
All
of the Company’s issued restricted stock units have divided equivalent rights. As of December 31, 2020 and 2019, there was
$53,000 and $90,000 accrued for dividend equivalent rights which were included in other accrued expenses.
At
December 31, 2020, one stock option to purchase 500,000 shares of common stock were outstanding representing an option grant
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, 2020 and 2019.
The
following table summarizes stock option activity for the years ended December 31:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
at
beginning of year
|
|
|
605,000
|
|
|
$
|
1.39
|
|
|
|
1,635,000
|
|
|
$
|
1.18
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
―
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(105,000
|
)
|
|
$
|
2.34
|
|
|
|
(1,030,000
|
)
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at end of year
|
|
|
500,000
|
|
|
$
|
1.19
|
|
|
|
605,000
|
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of year
|
|
|
500,000
|
|
|
$
|
1.19
|
|
|
|
605,000
|
|
|
$
|
1.39
|
|
During
the year ended December 31, 2020 and 2019, the Company did not recognize any stock-based compensation related to the vesting of
prior issued stock options to employees and directors. The Company at December 31, 2020 and 2019 had 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, 2020 and 2019 was $1,250,000 and $495,000, respectively.
During
the year ended December 31, 2020, stock options to purchase an aggregate of 105,000 shares of the Company’s Common Stock
at an exercise price of $2.34 per share were exercised on net exercise (cashless basis) by each of the Company’s three outside
directors. With respect to the net exercise (cashless) of these stock options, 4,707 aggregate net shares were delivered to the
outside directors.
NETWORK-1
TECHNOLOGIES, INC.
Note
F – Stockholders’ Equity (continued)
During
the year ended December 31, 2019, stock options to purchase an aggregate of 1,030,000 shares of the Company’s common stock
were exercised (964,849 shares of which were exercised on a net exercise (cashless basis)) by the Chairman and Chief Executive
Officer of the Company (750,000 shares), Chief Financial Officer and Executive Vice President (50,000 shares each), the Company’s
three outside directors (35,000 shares each) and a consultant (75,000 shares) at exercise prices ranging from $0.83 to $1.65 per
share. With respect to the options to purchase 964,849 shares on a net exercise (cashless) basis, aggregate net shares of 405,381
were delivered to the holders.
The
following table presents information relating to all stock options outstanding and exercisable at December 31, 2020:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
|
Exercise
|
Option
|
Exercise
|
Life
in
|
Option
|
Price
|
Outstanding
|
Price
|
Years
|
Exercisable
|
|
|
|
|
|
$1.19
|
500,000
|
$1.19
|
1.84
|
500,000
|
Note
G – Marketable Securities
Marketable
securities as of December 31, 2020 and 2019 were composed of:
|
|
December
31, 2020
|
|
|
|
Cost
Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
3,534,000
|
|
|
$
|
7,000
|
|
|
$
|
—
|
|
|
$
|
3,541,000
|
|
Fixed income mutual funds
|
|
|
11,255,000
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
11,335,000
|
|
Corporate
bonds and notes
|
|
|
4,500,000
|
|
|
|
18,000
|
|
|
|
(28,000
|
)
|
|
|
4,490,000
|
|
Total
marketable securities
|
|
$
|
19,289,000
|
|
|
$
|
105,000
|
|
|
$
|
(28,000
|
)
|
|
$
|
19,366,000
|
|
|
|
December
31, 2019
|
|
|
|
Cost
Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
8,953,000
|
|
|
$
|
6,000
|
|
|
$
|
—
|
|
|
$
|
8,959,000
|
|
Fixed income mutual funds
|
|
|
7,878,000
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
7,879,000
|
|
Corporate
bonds and notes
|
|
|
8,813,000
|
|
|
|
112,000
|
|
|
|
(33,000
|
)
|
|
|
8,892,000
|
|
Total
marketable securities
|
|
$
|
25,644,000
|
|
|
$
|
119,000
|
|
|
$
|
(33,000
|
)
|
|
$
|
25,730,000
|
|
NETWORK-1
TECHNOLOGIES, INC.
Note
H – Equity Investment
During
the period December 2018 – August 2019, the Company made an aggregate investment of $5,000,000 in ILiAD Biotechnologies,
LLC (“ILiAD), a privately held clinical stage biotechnology company dedicated to the prevention of human disease caused
by Bordetella pertussis with a current focus on its proprietary intranasal vaccine BPZE1, for the prevention of pertussis (whooping
cough). On December 31, 2020, the Company owned approximately 9.5% of the outstanding units of ILiAD on a non-fully diluted basis
and 7.9% of the outstanding units on a fully diluted basis (after giving effect to the exercise of all outstanding options and
warrants). In connection with its investment, the Company’s Chairman and Chief Executive Officer became a member of ILiAD’s
Board of Managers and receives the same compensation for service on the Board of Managers as other non-management Board members.
The Company incurred approximately $41,000 of advisory and legal expenses in conjunction with its equity investment in ILiAD which
have been capitalized as a component of the equity investment carrying value.
On
September 29, 2020, ILiAD presented positive topline Phase 2b trial results of its lead pertussis (whooping cough) vaccine
candidate BPZE1 at the virtual World Vaccine Congress. BPZE1 met both primary endpoints of overall safety and induction of mucosal
immunity. Specifically, a single vaccination with BPZE1 prevented 90% of colonization by revaccination/challenge three months
later (only 10% colonization observed). BPZE1 was differentiated in its ability to demonstrate induction of broad mucosal immunity
against whole cell extract (WCE) and pertussis-specific protein antibodies. In addition, BPZE1 induced both IgG and IgA systemic
immunity using WCE and pertussis specific protein assays, with durability of response measured to end of study (nine months).
The
Company’s investment in ILiAD is accounted for as an equity method investment in accordance with ASC 323, Investments
— Equity Method and Joint Ventures as the Company has the ability to exercise significant influence, but not control,
over ILiAD. The Company’s investment in ILiAD is measured at cost minus impairment, if any, plus or minus the Company’s
share of ILiAD’s income or loss. The Company’s proportionate share of the income or loss from its investment in ILiAD
is recognized on a one-quarter lag. At September 30, 2020, the Company owned approximately 9.5% of the outstanding units of ILiAD
(on a non-fully diluted basis). For the year ended December 31, 2020, the Company recorded a net (loss) from its equity method
investment in ILiAD of $(787,000).
The
difference between the Company’s share of equity in ILiAD’s net assets and the equity investment carrying value reported
on the Company’s consolidated balance sheet at December 31, 2020 is due to an excess amount paid over the book value of
the investment totaling approximately $5,000,000 which are accounted for as equity method goodwill.
Note
I – Commitments and Contingencies
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 U.S. District Court for the Southern District of New York relating to several patents within the Company’s
Mirror Worlds Patent Portfolio (see Note K[5] hereof). The terms of the Company’s agreement with Russ, August & Kabat
provide for cash payments on a monthly basis subject to a cap plus a contingency fee ranging between 15% and 24% of the net recovery
(after deduction of expenses) depending on the stage of the proceeding in which the result (settlement or judgment) is achieved.
The Company is responsible for all expenses incurred with respect to this litigation.
Russ,
August & Kabat also provides legal services to the Company with respect to its pending patent litigations filed in April 2014
and December 2014 against Google Inc. and YouTube, LLC in the U.S. District Court for the Southern District of New York relating
to certain patents within the Cox Patent Portfolio acquired by the Company from Dr. Cox (see Note K[4] 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 expenses incurred with respect to this litigation.
NETWORK-1
TECHNOLOGIES, INC.
Note
I – Commitments and Contingencies (continued)
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 U.S. District Court for the Eastern District
of Texas, (Tyler Division) (see Note K[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. The Company
is responsible for a portion of the expenses incurred with respect to this litigation. For the year ended December 31, 2020
and 2019, the Company incurred contingent legal fees to Dovel & Luner of $1,428,000 and $696,000, respectively, with respect
to the litigation. As of December 31, 2020, the Company accrued expenses of $886,000 to Dovel & Luner with
respect to the litigation (see Note B[8] hereof).
Dovel
& Luner, LLP also 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 including Cisco (see Note K[3]). 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 any royalty payments payable by Cisco relating to royalties for the period prior to the expiration of the Remote Power
Patent (March 7, 2020), the Company has an obligation to pay Dovel & Luner contingency fees of 24% (see Note O[5] hereof).
During the years ended December 31, 2020 and 2019, there was no expense incurred for contingency fees due Dovel & Luner.
In addition, as of December 31, 2020 and 2019, there were no outstanding contingency fees due Dovel & Luner with respect to
this litigation.
In
connection with the Company’s acquisition of its Cox Patent Portfolio, the Company is obligated to pay Dr. Cox 12.5% of
the net proceeds (after deduction of expenses) generated by the Company from licensing, sale or enforcement of the patent portfolio.
As
part of the acquisition of the Mirror Worlds Patent Portfolio, the Company also entered into an agreement with Recognition Interface,
LLC (“Recognition”) pursuant to which Recognition received from the Company an interest in the net proceeds realized
from the monetization of the Mirror Worlds Patent Portfolio, as follows: (i) 10% of the first $125 million of net proceeds; (ii)
15% of the next $125 million of net proceeds; and (iii) 20% of any portion of the net proceeds in excess of $250 million. Since
entering into the agreement with Recognition in May 2013, the Company has paid Recognition an aggregate of $3,127,000 with respect
to such net proceeds interest related to the Mirror Worlds Patent Portfolio. No such payments were made by the Company to Recognition
during the year ended December 31, 2020 and 2019.
In
connection with the Company’s acquisition of its M2M/IoT Patent Portfolio, the Company is obligated to pay M2M 14% of the
first $100 million of net proceeds (after deduction of expenses) and 5% of net proceeds greater than $100 million from Monetization
Activities (as defined) related to the patent portfolio. In addition, M2M will be entitled to receive from the Company $250,000
of additional consideration upon the occurrence of certain future events related to the patent portfolio.
The
Company leases its principal office space in New York City at a monthly base rent of approximately $3,900 which lease expired
on March 31, 2020 and is occupied on a month-to-month basis. The Company also leases office space in New Canaan, Connecticut,
at a base rent of approximately $7,300 per month and is occupied on a month-to-month basis.
Under
ASC 842, operating lease expense is generally recognized evenly over the term of the lease. Leases with an initial term of twelve
months or less are not recorded on the balance sheet.
As
of December 31, 2020, there were no future lease payments included in the measurement of operating lease liabilities on the consolidated
balance sheet as all of the Company’s leases were on a month-to-month basis. In accordance with ASC 842 and the Company’s
policy, the Company does not recognize an operating lease right-of-use asset and associated lease obligation for leases with an
initial term of less than 12 months.
NETWORK-1
TECHNOLOGIES, INC.
Note
I – Commitments and Contingencies (continued)
|
[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, 2020 and 2019 was $105,450 and $102,000, respectively.
Note
J - 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 each of the years
ended December 31, 2020 and 2019, the Company’s Chairman and Chief Executive Officer received an annual discretionary bonus
of $125,000 and $100,000, respectively. In addition, in accordance with the Agreement, 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). The Agreement provided for the
750,000 RSUs to 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 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.
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, 2020 and 2019, the Company’s Chairman and Chief Executive Officer earned Incentive Compensation
of $220,000 and $152,000, respectively. As of December 31, 2020, and 2019, the amount of accrued compensation for the Company’s
Chairman and Chief Executive Officer was $2,000 and $92,000, respectively.
On
July 14, 2018, 375,000 RSUs owned by the Company’s Chairman and Chief Executive Officer vested in accordance with the above
referenced terms of the Agreement. With respect to such vesting of RSUs, the Company’s Chairman and Chief Executive Officer
delivered 172,313 shares of common stock to satisfy withholding taxes and received 202,687 net shares of common stock. In addition,
in accordance with the above referenced RSU vesting provisions, at December 31, 2018, Mr. Horowitz owned 375,000 unvested RSUs
which vest in equal annual installments of 125,000 shares of our common stock on each of July 14, 2019, July 14, 2020 and July
14, 2021, subject to the Chairman and Chief Executive Officer’s continued employment. With respect
NETWORK-1
TECHNOLOGIES, INC.
Note
J - Employment Arrangements and Other Agreements (continued)
to
the vesting of RSUs for 125,000 shares of our common stock on July 14, 2019, the Chairman and Chief Executive Officer delivered
56,813 shares of common stock to satisfy withholding taxes and received 68,187 net shares of common stock. On July 14, 2020, 125,000
additional RSUs owned by the Chairman and Chief Executive Officer vested in accordance with the Agreement and the Chairman and
Chief Executive Officer delivered 50,563 shares of common stock to satisfy withholding taxes resulting in 74,437 net shares issued.
The
Incentive Compensation shall continue to be paid to the Chairman and Chief Executive Officer for the life of each of the Company’s
patents with respect to licenses entered into with third parties during the term of his employment or at any time thereafter,
whether he is employed by 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 Chairman and Chief Executive Officer also agreed not to compete with the Company
as follows: (i) during the term of the Agreement and for a period of 12 months thereafter if his employment is terminated “Other
Than For Cause” (as defined) provided he is paid his 12 month base salary severance amount and (ii) for a period of two
years from the termination date, if terminated “For Cause” by the Company or “Without Good Reason” by
the Chairman and Chief Executive Officer.
[2]
The Company’s Chief Financial Officer serves on an at-will basis at an annual base salary of $175,000. The Company’s
Chief Financial Officer received a discretionary annual bonus of $15,000 for each of the years ended December 31, 2020 and 2019.
On December 20, 2019, the Company’s Chief Financial Officer was granted 7,500 RSUs under the 2013 Plan, 50% of such RSUs
vested on the one year anniversary of the grant (December 20, 2020) and 50% of such RSUs will vest on the two year anniversary
of the grants (December 20, 2021), subject to the Chief Financial Officer’s continued service to the Company. On December
29, 2020, the Chief Financial Officer was granted 7,500 RSUs under the 2013 Plan. 50% of such RSUs vest on the one year anniversary
of the grant (December 29, 2021) and 50% of such RSUs vest on the two year anniversary of the grant (December 29, 2022), subject
to the Chief Financial Officer’s continued service to the Company. 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 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.
[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 a discretionary annual bonus of $25,000 and $22,500 for the year ended December 31, 2020 and 2019, respectively.
On December 20, 2019, the Company’s Executive Vice President was granted 10,000 RSUs under the 2013 Plan, 50% of such RSUs
vested on the one-year anniversary of the date of grant (December 20, 2020) and 50% of such RSUs vest on the two year anniversary
of the grant (December 20, 2021), subject to his continued employment. On December 29, 2020, the Company’s Executive Vice
President was granted 10,000 RSUs under the 2013 Plan, 50% of such RSUs vest on the one year anniversary of the date of grant
(December 29, 2021) and 50% of such RSUs vest on the two year anniversary of the grant (December 29, 2022), subject to the Executive
Vice President’s continued service to the Company.
NETWORK-1
TECHNOLOGIES, INC.
Note
K – Legal Proceedings
[1]
In September 2011, the Company initiated patent litigation against sixteen (16) data networking equipment manufacturers
(and affiliated entities) in the U.S. District Court for the Eastern District of Texas, Tyler Division, for infringement of its
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., GarrettCom, 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. As of January 2018, the Company reached settlements with fifteen (15) of the sixteen (16)
defendants with Hewlett-Packard Company (“HP”) being the sole remaining defendant.
On
November 13, 2017, a jury empaneled in the U.S. 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 HP. On February 2, 2018, the Company moved
to throw out the jury verdict and have the Court determine that certain claims of the 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.
On August 29, 2018, the District Court issued an order granting the Company’s motion for judgment as a matter of law that
the Remote Power Patent is valid, thereby overturning the jury verdict of invalidity and denied the Company’s motion for
a new trial on infringement. On August 30, 2018, the Company appealed the District Court’s denial of its motion for a new
trial on infringement to the U.S. Court of Appeals for the Federal Circuit. On September 13, 2018, HP filed a cross-appeal of
the District Court’s order that the Remote Power Patent is valid as a matter of law. On September 24, 2020, the U.S. Court
of Appeals for the Federal Circuit ruled in the Company’s favor on the appeal by overturning the judgment of non-infringement
of the U.S. District Court of the Eastern District of Texas in the Company’s litigation with Hewlett-Packard involving the
Remote Power Patent. The Federal Circuit also vacated the District Court judgment of validity of the Remote Power Patent. The
Federal Circuit has remanded the case to the District Court for a new trial on infringement against Hewlett-Packard and further
proceedings on validity.
[2]
On November 13, 2018, the Company filed a lawsuit against Dell, Inc. in the District Court, 241st Judicial District,
Smith County, Texas, for breach of a settlement and license agreement, dated August 15, 2016, with the Company as a result of
Dell’s failure to make royalty payments, and provide corresponding royalty reports, to the Company based on sales of Dell’s
PoE products. On December 19, 2019, the Company filed a motion for summary judgment on its breach of contract claim. On March
25, 2020, the Court granted summary judgment in the Company’s favor and denied Dell’s motion for summary judgment.
On July 28, 2020, the Company reached a settlement with Dell. On August 7, 2020, under the terms of the settlement, Dell paid
the Company $4,150,000 in full settlement of the litigation.
[3]
In accordance with the Settlement and License Agreement, dated May 25, 2011, between the Company and Cisco (the “Agreement”),
Cisco became obligated 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 for the remaining term of the patent. The royalty payments
from Cisco are subject to certain conditions including the continued validity of certain claims of the Remote Power Patent or
a finding that a third party’s PoE products are found not to infringe the Remote Power Patent and such finding applies to
the applicable licensee’s licensed products. As a result of the HP jury verdict, Cisco, its largest licensee, and Netgear
notified the Company in late November 2017 and January 2018 that they will no longer make ongoing royalty payments to the
Company pursuant to their license agreements. As a result of the decision on September 24, 2020 of the U.S. Court of Appeals for
the Federal Circuit to overturn the District Court’s judgment of non-infringement in our trial with Hewlett-Packard involving
the Remote Power Patent, the Company believed that Cisco was obligated to pay the Company royalties that accrued but were not
paid beginning in the fourth quarter of 2017 through the expiration of the Remote Power Patent. The Company has resolved its dispute
with Cisco (see Note O[5] hereof). The Company has commenced litigation against Netgear (see Note K[6] hereof).
NETWORK-1
TECHNOLOGIES, INC.
Note
K – Legal Proceedings (continued)
[4]
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 its Cox Patent Portfolio acquired from Dr. Cox which relate to the identification of media content
on the Internet. The lawsuit alleges that Google and YouTube have infringed and continue to infringe certain of the Company’s
patents by making, using, selling and offering to sell unlicensed systems and related products and services, which include YouTube’s
Content ID system. In May 2014, the defendants filed an answer to the complaint and asserted defenses of non-infringement and
invalidity.
The
above referenced litigations that the Company commenced in the U.S. District Court for the Southern District of New York in April
2014 and December 2014 against Google and YouTube were subject to court ordered stays which were in effect from July 2, 2015 until
January 2, 2019 as a result of proceedings at the Patent Trial and Appeal Board (PTAB) and the appeals of PTAB Final Written Decisions
to the U.S. Court of Appeals for the Federal Circuit. Pursuant to a joint stipulation and order entered on January 2, 2019, the
parties agreed, among other things, that the stays with respect to the litigations were lifted. In addition, the Company agreed
not to assert certain patent claims which were asserted in the litigation commenced in April 2014 (and which were the subject
of the PTAB proceedings). The Company was permitted to substitute new claims. Google also agreed to terminate the pending IPR
proceedings that were subject to remand by the U.S. Court of Appeals for the Federal Circuit. In January 2019, the two litigations
against Google and YouTube were consolidated. A Markman hearing (claim construction) was held on November 21, 2019 and a ruling
has not yet been rendered. Discovery is complete and a pre-trial order is pending which would include a trial date.
[5]
On May 9, 2017, Mirror Worlds Technologies, LLC, the Company’s wholly-owned subsidiary, initiated litigation against
Facebook, Inc. (“Facebook”) in the U.S. District Court for the Southern District of New York, for infringement of
U.S. Patent No. 6,006,227, U.S. Patent No. 7,865,538 and U.S. Patent No. 8,255,439 (among the patents within the Company’s
Mirror Worlds Patent Portfolio). The lawsuit alleged that the asserted patents are infringed by Facebook’s core technologies
that enable Facebook’s Newsfeed and Timeline features. The lawsuit further alleged that Facebook’s unauthorized use
of the stream-based solutions of the Company’s asserted patents has helped Facebook become the most popular social networking
site in the world. The Company sought, among other things, monetary damages based upon reasonable royalties. On May 7, 2018, Facebook
filed a motion for summary judgment on non-infringement.
On
August 11, 2018, the Court issued an order granting Facebook’s motion for summary judgment of non-infringement and dismissed
the case. On August 17, 2018, the Company filed a Notice of Appeal to appeal the summary judgment decision to the U.S. Court of
Appeals for the Federal Circuit. On January 23, 2020, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment
finding of the District Court and remanded the litigation to the Southern District of New York for further proceedings.
[6]
On December 15, 2020, the Company filed a lawsuit against Netgear in the Supreme Court of the State of New York, County of
New York, for breach of a Settlement and License Agreement, dated May 22, 2009, with the Company for failure to make royalty payments,
and provide corresponding royalty reports, to the Company based on sales of Netgear’s PoE products.
Note
L - Concentrations
Revenue
from the Company’s Remote Power Patent constituted 100% of the Company’s revenue for the year ended December 31, 2020
and 2019. Revenue from one licensee constituted an aggregate of 94% of the Company’s revenue for the year ended December
31, 2020. Revenue from two licensees constituted approximately 69% of the Company’s revenue for the year ended December
31, 2019. At December 31, 2020, there were no royalty receivables from licensees. At December 31, 2019, royalty receivables
from four licensees constituted approximately 90% of the Company’s royalty receivables.
NETWORK-1
TECHNOLOGIES, INC.
Note
M – Stock Repurchase Program
On
August 22, 2011, the Company established a share repurchase program (“Share Repurchase Program”). On June 11, 2019,
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, 2020, the Company repurchased an aggregate of 115,889 shares of its common stock pursuant to the Share
Repurchase Program at a cost of approximately $249,158 (exclusive of commissions) or an average price per share of $2.15 per share.
Since
inception of the Share Repurchase Program (August 2011) through December 31, 2020, the Company has repurchased an aggregate of
8,605,659 shares of its common stock at a cost of approximately $16,156,005 (exclusive of commissions) or an average per share
price of $1.88 per share.
Note
N – Dividend Policy
On
June 9, 2020, the Company’s Board of Directors approved the continuation of the Company’s dividend policy which consists
of a semi-annual cash dividend 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. On February 19, 2020, the Board of Directors declared a semi-annual cash dividend of $0.05
per share with a payment date of March 31, 2020 to all common shareholders of record as of March 16, 2020. On August 18, 2020,
the Board of Directors declared a semi-annual dividend of $0.05 per share with a payment date of September 30, 2020 to all common
shareholders of record as of September 14, 2020. The Company’s dividend policy undergoes a periodic review by the Board
of Directors and is subject to change at any time depending upon the Company’s earnings, financial requirements and other
factors.
Note
O – Subsequent Events
[1]
On January 7, 2021, the Company filed a lawsuit against Plantronics, Inc., the successor entity to Polycom, Inc., in the Supreme
Court of the State of California, County of Santa Clara, for breach of a Settlement and License Agreement, dated September 29,
2016, with the Company for the failure of Plantronics and Polycom to make royalty payments, and provide corresponding royalty
reports, to the Company based on sales of PoE products.
[2]
On February 23, 2021, the Company’s Board of Directors declared a semi-annual cash dividend of $0.05 per share with
a payment date of March 31, 2021 to all common shareholders of record as of March 16, 2021.
[3]
On February 23, 2021, the Company’s Board of Directors approved the grant of 15,000 RSUs to each of the Company’s
three non-management directors. The RSUs vest over a one year period in equal quarterly installments of 3,750 shares of common
stock on each of March 15, 2021, June 15, 2021, September 15, 2021 and December 15, 2021.
[4]
On March 12, 2021, the Company invested an additional $1,000,000 in ILiAD Biotechnologies, LLC (see Note H hereof) as part
of a private offering of up to $23,500,000 of convertible debt. The Notes have a maturity of three years with interest accruing
at 6% per annum. The Notes are required to be converted into a Qualified Financing (minimum financing of $15 million) at the lesser
of (i) 80% of the price paid per unit in such offering or (ii) a price based on an enterprise value of $176,000,000. In addition,
the Notes shall convert in the event of a merger at the lower of an enterprise value of $176,000,000 or the stated valuation of
ILiAD in the merger transaction. In the event of a change-in-control, noteholders will also have the option to have the Notes
repaid except in a Qualified Offering or a stock-for-stock merger.
[5]
On March 30, 2021, the Company entered into an amendment (the “Amendment”) to the Settlement and License Agreement,
dated May 25, 2011, between the Company and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco agreed to pay
$18,691,890 to the Company to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement
to the Company for the period beginning in the fourth quarter of 2017 through March 7, 2020 (when the Remote Power Patent expired)
with respect to licensing the Remote Power Patent.