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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
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Jun. 30, 2014
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| Nature Of Business And Summary Of Significant Accounting Policies Policies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation |
The accompanying condensed financial statements as of June 30, 2014 and for the three and six month periods ended June 30, 2014 and June 30, 2013 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 June 30, 2014, and the results of its operations and comprehensive income and its cash flows for the three and six month periods ended June 30, 2014 and June 30, 2013. The condensed financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations to be expected for the full year. |
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| Business |
(a) The Company is engaged in the development, licensing and protection of its intellectual property assets. The Company presently owns twenty-two (22) patents that relate to various technologies including patents covering (i) 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) foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii) enabling technology for identifying media content on the Internet and taking further action to be performed based on such identification including, among others, the insertion of advertising and the facilitation of the purchase of goods and services related to such content; and (iv) 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 “Remote Power Patent”). The Company has entered into sixteen (16) license agreements with respect to its Remote Power Patent. The Company’s current strategy includes continuing to pursue licensing opportunities for its Remote Power Patent and its efforts to monetize two patent portfolios (the Cox and Mirror Worlds patent portfolios) acquired by the Company in 2013 (see Note B[2] hereof). 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. The Company’s Remote Power Patent has generated licensing revenue in excess of $65,000,000 from May 2007 through June 30, 2014. The Company continually reviews opportunities to acquire or license additional intellectual property. In addition, the Company may enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiary, Mirror Worlds Technologies, LLC (a single member LLC).
(b) As reflected in the accompanying financial statements, the Company had revenue of $5,166,000 and $1,907,000 for the three month period ended June 30, 2014 and June 30, 2013, respectively, and revenue of $9,657,000 and $5,971,000 for the six month period ended June 30, 2014 and June 30, 2013, respectively. Revenue for the three and six month periods ended June 30, 2014 includes $3,281,000 of revenue as a result of the Cisco audit (see Note F hereof). The Company has been dependent upon royalty revenue from license of its Remote Power Patent to fund its operations. The Company had cash and cash equivalents of $16,579,000 as of June 30, 2014. |
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| Stock-based compensation |
On April 9, 2014, the Company issued 5-year stock options to (i) each of its Chief Financial Officer and Executive Vice President to purchase 50,000 shares of common stock, at an exercise price of $1.65 per share, which options vest 25,000 shares on December 31, 2014 and 25,000 shares on December 31, 2015 and (ii) a consultant to the Company to purchase 75,000 shares of common stock at an exercise price of $1.65 per share, which option vests 37,500 shares on December 31, 2014 and 37,500 shares on December 31, 2015.
On April 9, 2014, the Company issued stock options to each of its then three non-management directors to purchase 35,000 shares of common stock at an exercise price of $1.65 per share. Such options vested 8,750 on the date of grant and 8,750 in three equal quarterly amounts beginning on June 30, 2014, subject to continued service on the Board. The Company recorded $33,000 in non-cash compensation expense in connection with the vested portion of these options for the six month period ended June 30, 2014.
During the six month period ended June 30, 2014 and June 30, 2013, the Company recorded non-cash compensation expense of $54,000 for the vested portion of options to purchase 500,000 shares issued to the Company’s Chairman and Chief Executive Officer in November 2012. In addition, during the six month period ended June 30, 2014 and June 30, 2013, the Company recorded non-cash compensation expense of $75,000 and $101,000, respectively, for the vested portion of options granted to its Chief Financial Officer, directors and consultants in prior years.
During the three month period ended June 30, 2014, the Company’s Chairman and Chief Executive Officer exercised options to purchase an aggregate of 1,517,500 shares of common stock at exercise prices of $0.25 per share (1,100,000 shares) and $0.68 per share (417,500 shares). All such shares were exercised on a cashless (net exercise) basis by delivery of an aggregate of 292,618 shares of common stock. In addition, the Chairman and Chief Executive Officer delivered an aggregate of 516,288 shares of common stock with an aggregate value of $986,110 to fund payroll withholding taxes with respect to such option exercises. As a result of the aforementioned stock option exercises, the Chairman and Chief Executive Officer received 708,594 net shares of the Company’s common stock.
During the six month period ended June 30, 2014, the Company’s Executive Vice President exercised a stock option to purchase 75,000 shares of the Company’s common stock at an exercise price of $0.68 per share. The option was exercised on a cashless basis by delivery of 31,098 shares of common stock. In addition, 16,968 shares were delivered with an aggregate value of $27,828 to fund payroll withholding taxes on exercise, resulting in net shares of 26,934 issued to the Company’s Executive Vice President with respect to such option exercise.
On June 19, 2013, the Company issued to a director a 5-year option to purchase 300,000 shares of its common stock, at an exercise price of $1.88 per share, for service as the sole member of the Company’s Strategic Development Committee. The shares underlying such option vested 100,000 shares on the date of grant, 100,000 shares on June 19, 2014 and 100,000 shares will vest on June 19, 2015. The Company recorded $75,000 in non-cash compensation in connection with the vested portion of the option for the six month period ended June 30, 2014 and June 30, 2013.
During the six month period ended June 30, 2013, the Company issued stock options to each of its four (4) non-management directors to purchase 25,000 shares of common stock at an exercise price of $1.19 per share. Such options vest over a one year period in equal quarterly amounts, subject to continued service on the Board. The Company recorded $24,000 in non-cash compensation in connection with the vested portion of these options for the six month period ended June 30, 2013.
During the three month period ended June 30, 2013, the Company’s Chairman and Chief Executive Officer and an employee (who subsequently became Executive Vice President) exercised options to purchase an aggregate of 1,125,000 and 52,500 shares, respectively, of the Company’s common stock at an exercise price of $0.68 per share. All such options were exercised on a cashless basis by delivery of an aggregate of 396,373 and 18,497 shares of common stock, respectively. In addition, 241,540 and 10,201 shares of common stock were delivered with an aggregate value of $466,617 and $19,688 to fund payroll withholding taxes with respect to such option exercises. As result of the aforementioned stock option exercises, the Chairman and Chief Executive Officer and the employee received net shares of 487,087 and 23,802, respectively.
The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:
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| Revenue recognition |
The Company recognizes revenue received from the licensing of its intellectual property in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB No. 104") and related authoritative pronouncements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the terms of the license agreement, (iii) amounts are fixed or determinable, and (iv) collectibility of amounts is reasonably assured. One licensee (Cisco Systems) constituted approximately 92% and 84% of the Company’s revenue, respectively, for the six month periods ended June 30, 2014 and June 30, 2013. |
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| Income taxes |
At June 30, 2014, the Company had net operating loss carryforwards (NOLs) totaling approximately $22,855,000 expiring through 2029, with a future tax benefit of approximately $7,771,000. At June 30, 2014 and June 30, 2013, $4,093,000 and $5,878,000, respectively, were recorded as a deferred tax asset on the Company's balance sheet. During the six month period ended June 30, 2014 as a result of income (before taxes) for the period of $4,665,000, $1,668,000 was recorded as income tax expense and the deferred tax asset was reduced by $1,566,000 to $4,093,000. To the extent that the Company earns income in the future, it will report income tax expense and such expense attributable to federal income taxes will reduce the recorded income tax benefit asset reflected on the balance sheet. Management will continue to evaluate the recoverability of the NOL and adjust the deferred tax asset appropriately. 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. |
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| Earnings (Loss) Per Share |
Basic Earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of outstanding common shares during the period. Diluted per share data includes the dilutive effects of options, warrants and convertible securities. Potential shares of 3,720,000 and 7,587,000 at June 30, 2014 and 2013, respectively, consisted of options and warrants. Computations of basic and diluted weighted average common shares outstanding are as follows:
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| Cash equivalents |
The Company places cash investments in high quality financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). At June 30, 2014, the Company maintained cash balance of $16,329,000 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 June 30, 2014 and December 31, 2013 are composed of:
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| Marketable securities |
Marketable securities are classified as available-for-sale and are recorded as fair market value. Unrealized gain and losses are reported as other comprehensive income. Realized gains and losses are included in income in the period they are realized. The Company's marketable securities consist of a corporate bond (face value $500,000) with a 5% coupon and a maturity date of June 2015. |
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| Investment In Lifestreams |
In May 2013, as part of the acquisition of the Mirror Worlds portfolio (see Note B[2] hereof), the Company acquired from Mirror Worlds, LLC 250,000 shares of common stock of Lifestreams Technologies Corporation (“Lifestreams”), a company engaged in the development of next generation applications and methodologies designed to organize and display digital data. In addition, in July 2013 the Company made an additional investment of $50,000 in Lifestreams as part of a financing and received 123,456 shares of Series A preferred stock and, as part of an amended license agreement between the Company’s subsidiary and Lifestreams, the Company received a warrant to purchase 7.5% of the then outstanding shares of common stock of Lifestreams on a fully diluted basis (post-financing). The warrant is valued at $70,000 based on the Black-Scholes option model and recorded as non-cash royalty income. In March 2014, the Company made an additional investment of $95,000 in Lifestreams in the form of a convertible note as part of the first tranche of an aggregate investment of $380,200 of convertible notes. In May 2014, the Company made an additional investment of $95,000 as part of the second tranche. The convertible notes are due March 31, 2015 and shall automatically convert into shares of preferred stock upon a Lifestreams “qualified” equity financing (at least $3.0 million). Since the investment in Lifestreams does not have a readily determinable fair value and is less than 20% equity ownership at June 30, 2014, such investment was recorded utilizing the cost-method. At June 30, 2014, the Company’s investment in Lifestream consists of the following:
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