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Nature Of Business Summary Of Significant Accounting Policies (Policies)
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6 Months Ended | |||||||||||||||||||||||||||||||||||
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Jun. 30, 2012
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| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||
| [1] BASIS OF PRESENTATION: |
[1] BASIS OF PRESENTATION:
The accompanying condensed financial statements as of June 30, 2012 and for the three and six month periods ended June 30, 2012 and June 30, 2011 are unaudited, but, in the opinion of the management of Network-1 Security Solutions, 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, 2012, and the results of its operations for the three and six month periods ended June 30, 2012 and June 30, 2011 and its cash flows for the six month periods then ended. 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, 2011 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, 2012 are not necessarily indicative of the results of operations to be expected for the full year. |
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| [2] BUSINESS: |
[2] BUSINESS:
(a) The principal business of the Company is the acquisition, development, licensing and protection of its intellectual property. The Company presently owns six patents covering various telecommunications and data networking technologies including, among others, patents 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, over Ethernet networks and systems and methods of transmission of audio, video and data over computer and telephony networks. In addition, the Company continually reviews opportunities to acquire or license additional intellectual property. The Company’s strategy is to pursue licensing and strategic business alliances with companies in the industries that manufacture and sell products that make use of the technologies underlying its patents as well as with other users of the technology who benefit directly from the technology including corporate, educational and governmental entities. To date, the Company’s efforts with respect to its intellectual property have focused on licensing its patent (U.S. Patent No. 6,218,930) covering the control of power delivery over Ethernet cables (the “Remote Power Patent”). As of June 30, 2012, the Company had entered into thirteen (13) license agreements with respect to its Remote Power Patent which include, among others, license agreements with Cisco Systems, Inc. and Cisco-Linksys, Microsemi Corporation, Motorola Solutions, Inc., Extreme Networks, Inc., Netgear, Inc. and several other major data networking equipment manufacturers (See Note D). The Company’s current strategy includes continuing to pursue licensing opportunities for the Remote Power Patent from vendors of PoE equipment in order to resolve possible infringement of the Remote Patent by such vendors. In addition, the Company may acquire additional intellectual property assets in the future to develop, commercialize, license or otherwise monetize such intellectual property. The Company may also enter into strategic relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property. The form of such relationships may vary depending upon the opportunity and may include, among other things, a strategic investment in such third party or the formation of a joint venture for the purpose of monetizing such third party’s intellectual property assets.
(b) As reflected in the accompanying financial statements, the Company had revenue of $1,966,000 and $1,814,000 for the three month period ended June 30, 2012 and June 30, 2011, respectively, and revenue of $6,391,000 and $5,390,000 for the six month period ended June 30, 2012 and June 30, 2011, respectively. 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 $21,279,000 as of June 30, 2012. |
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| [3] STOCK-BASED COMPENSATION: |
[3] STOCK-BASED COMPENSATION:
On April 11, 2012, the Company issued a five year option to purchase 125,000 shares of its common stock to one of its directors, at an exercise price of $1.40 per share, in consideration of serving on a special committee of the Board of Directors, and such option vests over a one year period in equal quarterly amounts of 31,250 shares. On April 12, 2012, the Company issued to its Chief Financial Officer, in consideration of extension of his consulting agreement with the Company (See Note D[2]), a five year option to purchase 75,000 shares of its common stock, at an exercise price of $1.40 per share. Such option vests over a one year period in equal installments of 18,750 shares. On January 27, 2012, the Company issued a 5 year option to purchase 50,000 shares of its common stock, at an exercise price of $1.21 per share, to a director for joining the Board of Directors, which option vests in equal quarterly installments over a one year period. On January 31, 2012 and February 24, 2012, the Company issued five year options to purchase an aggregate of 25,000 shares to each of its three non-management directors, at exercise prices of $1.21 and $1.35 per share. These options vest over a one year period in equal quarterly installments. During each of the six month periods ended June 30, 2012 and June 30, 2011 the Company recorded non-cash compensation expense of $37,000 and $74,000, respectively, for the vested portion of options to purchase 750,000 shares issued to the Company’s Chairman and Chief Executive Officer in June 2009 (See Note C). In addition, during the six month periods ended June 30, 2012 and June 30, 2011 the Company recorded non-cash compensation expense of $128,000 and $76,000, respectively, for the vested portion of options granted to its Chief Financial Officer, directors and consultants in current and prior years.
During the six month period ended June 30, 2012, the Company's Chairman and Chief Executive Officer and an affiliate exercised options and warrants to purchase an aggregate of 2,623,070 shares 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 1,306,979 shares of common stock and 350,160 shares of common stock were delivered with an aggregate value of $486,951 to fund payroll withholding taxes on exercise, resulting in aggregate net shares of 965,933 issued to the Chairman and Chief Executive Officer with respect to such option and warrant exercises. On February 2, 2011, the Company extended for three years the expiration dates of certain outstanding options issued to a consultant to purchase an aggregate of 75,000 shares of common stock at $0.68 per share. The Company incurred non-cash compensation charges of $5,000 with respect to this option extension. During the three month periods ended June 30, 2012 and June 30, 2011, the Company recorded non-cash compensation expense of $74,000 and $22,000, respectively, for the vested portion of options issued to its Chief Financial Officer, directors and consultants. On May 20, 2011, the Company extended the expiration dates for three years of options and warrants (expiring in 2011) to purchase an aggregate of 1,095,218 shares of common stock held by officers, directors and a third party. The extensions of the expiration dates for an aggregate of 690,218 shares underlying such options were subsequently cancelled in December 2011 and the Company recorded non-cash compensation of $35,000 with respect to the option extensions which were not cancelled. The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing utilizing the following weighted average assumptions:
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| [4] REVENUE RECOGNITION: |
[4] 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 81% and 93% of the Company’s revenue, respectively, for the six month periods ended June 30, 2012 and June 30, 2011. |
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| [5] INCOME TAXES: |
[5] INCOME TAXES:
At June 30, 2012, the Company had net operating loss carryforwards (NOLs) totaling approximately $25,300,000 expiring 2031, with a future tax benefit of approximately $8,880,000. During the second quarter of 2011, as a result of the Company's financial results and projected future operating results, management determined that a portion of the NOL was more likely than not to be utilized resulting in the recording of a one-time, non-cash income tax benefit of $7,000,000 (income) or $0.29 per share (basic) for the three and six month periods ended June 30, 2011. At June 30, 2012, $6,335,000 has been recorded as a deferred tax benefit on the Company's balance sheet. During the six month period ended June 30, 2012 as a result of income (before taxes) for the period of $3,261,000, $601,000 was recorded as income tax expense and the deferred tax asset was reduced by $568,000 to $6,335,000. 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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| [6] EARNINGS (LOSS) PER SHARE: |
[6] 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 5,460,000 and 10,899,915 at June 30, 2012 and 2011, respectively, consisted of options and warrants. Computations of basic and diluted weighted average common shares outstanding are as follows:
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| [7] CASH EQUIVALENTS: |
[7] CASH EQUIVALENTS: The Company places cash investments in high quality financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). At June 30, 2012, the Company maintained cash balance of $21,029,000 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, 2012 and December 31, 2011 are composed of:
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| [8] MARKETABLE SECURITIES |
[8] 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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