[1] BASIS OF PRESENTATION

 

The accompanying condensed consolidated financial statements are unaudited, but, in the opinion of the management of Network-1 Technologies, Inc. (the “Company”), contain all adjustments consisting only of normal recurring items which the Company considers necessary for the fair presentation of the Company’s financial position as of September 30, 2020, and the results of its operations and comprehensive income (loss) for the three and nine month periods ended September 30, 2020 and September 30, 2019, changes in stockholders’ equity for the three and nine month periods ended September 30, 2020 and September 30, 2019, and its cash flows for the nine month periods ended September 30, 2020 and September 30, 2019. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP may have been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2020. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the full year.

 

The accompanying unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, Mirror Worlds Technologies, LLC.

 

[2] BUSINESS

 

The Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns eighty-four (84) patents including (i) the remote power patent (the “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) 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 actions to be performed based on such identification; (iv) the M2M/IoT patent portfolio (the “M2M/IoT Patent Portfolio”) relating to, among other things, enabling technology for authenticating, provisioning and using embedded sim cards in next generation IoT, Machine-to-Machine, and other mobile devices, including smartphones, tablets and computers; and (v) the QoS patents (the “QoS Patents”) covering 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 had been actively engaged in licensing its Remote Power Patent (U.S. Patent No. 6,218,930) which expired on March 7, 2020. As of the expiration date, the Company had entered into twenty-seven (27) license agreements with respect to its Remote Power Patent. The Company no longer receives licensing revenue for its Remote Power Patent that accrues for any period subsequent to the expiration date (March 7, 2020). Notwithstanding the expiration of the Remote Power Patent, the Company believes that Cisco and certain other licensees are obligated to pay the Company significant royalties related to its Remote Power Patent for periods prior to March 7, 2020 as a result of the decision of the U.S. Court of Appeals for the Federal Circuit to overturn the District Court’s order of non-infringement of the Remote Power Patent in its trial with Hewlett-Packard. In addition, the Company has an opportunity to receive revenue from Hewlett-Packard related to its Remote Power Patent depending upon the outcome of a new trial with Hewlett-Packard as a result of the decision of the Federal Circuit (see below and Note I[1] and Note I[2] hereof). In addition, the Company has 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 patent 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 enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.

 

On September 24, 2020, the U.S. Court of Appeals for the Federal Circuit overturned 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 its 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. As a result of the Federal Circuit’s decision to overturn the District Court judgment of non-infringement, the Company believes that Cisco and certain other licensees of the Company’s Remote Power Patent are obligated to pay the Company significant royalties that accrued but were not paid beginning the fourth quarter of 2017 through March 7, 2020 (the expiration of the Remote Power Patent) (see Note I[1] and Note I[2] hereof). There is, however, no certainty that the Company will receive such royalties from Cisco and certain other licensees. 

  

Consistent with the Company’s revenue recognition policy (see Note B[4] hereof), the Company did not record revenue for 2018, 2019 and for the three and nine months ended September 30, 2020 from certain licensees, including Cisco, who notified the Company they would not pay the Company ongoing royalties as a result of the Hewlett-Packard jury verdict. The Company disagrees with the position taken by such licensees and may pursue legal proceedings if it does not achieve a satisfactory resolution (see Notes I[1] and I[2] hereof).