The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our
intellectual property assets. We presently own ninety-six (96) patents
including: (i) our Cox Patent Portfolio relating to enabling technology for
identifying media content on the Internet and taking further action to be
performed after such identification; (ii) our M2M/IoT Patent Portfolio relating
to, among other things, enabling technology for authenticating, provisioning and
using embedded sim technology in next generation IoT, Machine-to-Machine, and
other mobile devices, including smartphones, tablets and computers; (iii) our
HFT Patent Portfolio covering certain advanced technologies relating to high
frequency trading, which inventions specifically address technological problems
associated with speed and latency and provide critical latency gains in trading
systems where the difference between success and failure may be measured in
nanoseconds; (iv) our Mirror Worlds Patent Portfolio relating to foundational
technologies that enable unified search and indexing, displaying and archiving
of documents in a computer system; and (v) our 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. In addition, we continually review opportunities to acquire or
license additional intellectual property as well as other strategic
alternatives.
At September 30, 2022, our principal sources of liquidity consisted of cash and
cash equivalents and marketable securities of $48,923,000 and working capital of
$48,555,000. Based on our cash position, we continually review opportunities to
acquire additional intellectual property as well as evaluate other strategic
opportunities.
During the period December 2018 through August 2022, we made an aggregate
investment of $7,000,000 in ILiAD Biotechnologies, LLC ("ILiAD"), a clinical
stage biotechnology company with an exclusive license to sixty-two (62) patents
(see Note J to our unaudited condensed consolidated financial statements
included herein). Our investment in ILiAD involves significant risk.
During the three and nine months ended September 30, 2022, we recorded a gain on
our investment in ILiAD of $3,727,000 due to an observable transaction price and
dilution to the Company's ownership of ILiAD with respect to an ILiAD private
offering as well as a gain on conversion of our convertible note from ILiAD of
$271,000 as a result of the conversion of the convertible note in the private
offering, (see Note J and Note B[5] to our unaudited condensed consolidated
financial statements included herein).
We have been dependent upon our Remote Power Patent for a significant portion of
our revenue. Our Remote Power Patent generated licensing revenue in excess of
$187,000,000 from May 2007 through September 30, 2022. We no longer receive
licensing revenue for our Remote Power Patent for any period subsequent March 7,
2020 (the expiration date of the patent). We recently commenced litigations
against nine defendants involving our Remoter Power Patent for patent
infringement for the period prior to March 7, 2020 (see Notes O[1], O[3], O[4]
and O[5] to our unaudited condensed consolidated financial statements).
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Our current strategy includes continuing our licensing efforts with respect to
our intellectual property assets and the monetization of our patent
portfolios. In addition, we continue to seek to acquire additional intellectual
property assets to develop, commercialize, license or otherwise monetize. Our
strategy includes working with inventors and patent owners to assist in the
development and monetization of their patented technologies. We may also enter
into strategic relationships with third parties to develop, commercialize,
license or otherwise monetize their intellectual property. Our patent
acquisition and development strategy is to focus on acquiring high quality
patents which management believes have the potential to generate significant
licensing opportunities as we have achieved with respect to our Remote Power
Patent and Mirror Worlds Patent Portfolio.
On March 25, 2022, we completed the acquisition of a new patent portfolio (the
HFT Patent Portfolio) consisting of six U.S. patents and two pending U.S.
patents (see Note G[2] to our unaudited condensed consolidated financial
statements included in this Quarterly Report). On May 10, 2022, we received an
additional patent issuance from the U.S. Patent and Trademark Office related to
the HFT Patent Portfolio.
We had no revenue for the three and nine months ended September 30, 2022. Our
revenue of $35,692,000 for the nine months ended September 30, 2021 resulted
from the resolution of our contractual dispute with Cisco in which we received
$18,692,000 and revenue of $17,000,000 from our litigation settlement with
Hewlett-Packard (see Notes I[1] and I[2] to our unaudited condensed consolidated
financial statements included herein). While we have pending litigation
involving certain patents within our Cox Patent Portfolio and our Remote Power
Patent and have appealed the judgment of the District Court dismissing our
litigation against Facebook on the grounds of non-infringement involving certain
patents within our Mirror Worlds Portfolio, we may not achieve successful
outcomes of such litigation or the appeal. Accordingly, our future revenue is
uncertain.
The significant components of expenses impacting our net income include income
tax expense as a result of transactions with our equity method investment. Other
significant components of expenses impacting our net income when revenue is
recorded relate to contingent legal fees and expenses related to our patent
litigation (see Note B[7] to our unaudited condensed consolidated financial
statements included herein) and incentive compensation payable to our Chairman
and Chief Executive Officer pursuant to his employment agreement (see Note H[1]
to our unaudited condensed consolidated financial statements included herein),
both such components of expenses are based on a percentage of the licensing
revenue received by us as a result of litigation or otherwise.
Our quarterly and annual operating and financial results may fluctuate
significantly from period to period as a result of a variety of factors that are
outside our control, including the timing and our ability to achieve successful
outcomes of patent litigation, our ability and timing of consummating future
license agreements for our intellectual property, and whether we will achieve a
return on our investment in ILiAD Biotechnologies, LLC ("ILiAD") and the timing
of any such return.
Our future operating results may also be materially impacted by our ability to
acquire high quality patents which management believes have the potential to
generate significant licensing opportunities. In the future, we may not be able
to identify or consummate such patent acquisitions or achieve significant
licensing revenue with respect to such patent acquisitions.
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In 2022 and future years we could be classified as a Personal Holding Company.
If this is the case, we would be subject to a 20% tax on the amount of any
undistributed personal holding company income (as defined) for such year that we
do not distribute to our shareholders (see Note B[8] to our unaudited condensed
consolidated financial statements included in this Quarterly Report).
On June 9, 2021, our Board of Directors approved the continuation of our
dividend policy consisting of semi-annual cash dividends of $0.05 per share
($0.10 per share annually) which are anticipated to be paid in March and
September of each year. In 2021 and 2022, we paid semi-annual cash dividends in
accordance with our dividend policy. Our dividend policy undergoes a periodic
review by our Board of Directors and is subject to change at any time depending
upon our financial requirements, earnings and other factors existing at the time
(see Note M to our unaudited condensed consolidated financial statements
included herein).
RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 Compared to Three Months Ended September
30, 2021
Revenue. We had no revenue for the three months ended September 30, 2022 as
compared to revenue of $17,000,000 for three months ended September 30, 2021
from our litigation settlement with Hewlett-Packard (see Note I[2] to our
unaudited condensed consolidated financial statements included herein).
Operating Expenses. Operating expenses for the three months ended September 30,
2022 were $838,000 as compared to $7,963,000 for the three months ended
September 30, 2021. We had costs of revenue of $-0- and $6,610,000 for the three
months ended September 30, 2022 and 2021, respectively. Included in the costs of
revenue for the three months ended September 30, 2021 were contingent legal fees
of $5,760,000 and $850,000 of incentive bonus compensation payable to our
Chairman and Chief Executive Officer pursuant to his employment agreement (see
Note H[1] to our unaudited condensed consolidated financial statements included
herein).
General and administrative expenses were $639,000 for the three months ended
September 30, 2022 as compared to $558,000 for the three months ended September
30, 2021. The increase in general and administrative expenses of $81,000 was
primarily due to stock-based compensation expense related to the issuance of
restricted stock units, which was $174,000 for the three months ended September
30, 2022 as compared to $65,000 for the three months ended September 30, 2021.
The increase in stock-based compensation expense was due to the issuance of
additional restricted stock units in March 2022 to our Chairman and Chief
Executive Officer in accordance with his new employment agreement (see Note H[1]
to our unaudited condensed consolidated financial statements included herein).
Professional fees and related costs were $117,000 for the three months ended
September 30, 2022 as compared to $721,000 for the three months ended September
30, 2021 as a result of decreased expenses related to patent litigation.
Operating (Loss) Income. We had an operating loss of $838,000 for the three
months ended September 30, 2022 compared with operating income of $9,037,000 for
the three months ended September 30, 2021. The operating loss of $838,000 for
the three months ended September 30, 2022 was primarily due to no revenue for
the period as compared to revenue of $17,000,000 from our litigation settlement
with Hewlett-Packard for the three months ended September 30, 2021.
Additionally, since we incurred no revenue for the three months ended September
30, 2022, we did not incur any cost of revenue as of September 30, 2022 compared
to incurring $6,610,000 of cost of revenue as of September 30, 2021.
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Interest and Dividend Income. Interest and dividend income, for the three months
ended September 30, 2022 was $321,000 as compared to $67,000 for the three
months ended September 30, 2021 primarily as a result of a change in the mix of
our short term fixed income investments and cash equivalents.
Gain on Conversion of Note. For the three months ended September 30, 2022, we
recorded a gain on conversion of our ILiAD convertible note of $271,000 as
compared to $-0- for the three months ended September 30, 2021 as a result of
conversion of the note and accrued interest into equity of ILiAD (see Note J to
our unaudited condensed consolidated financial statements included herein).
Gain on Equity Method Investment. For the three months ended September 30, 2022,
we recorded a gain on our equity method investment of $3,727,000 as compared to
$-0- for the three months ended September 30, 2021 as a result of adjustment to
our equity method investment based on the fair value of an observable price
transaction relating to ILiAD's private offering in August 2022 (see Note J to
our unaudited condensed consolidated financial statements included herein).
Realized and Unrealized Loss on Marketable Securities. For the three months
ended September 30, 2022, we recorded a realized and unrealized loss on
marketable securities of $268,000 as compared to $40,000 for the three months
ended September 30, 2021. The change of $228,000 is due to unfavorable market
conditions for the three months ended September 30, 2022 resulting in additional
realized and unrealized losses.
Income Taxes. For the three months ended September 30, 2022, we had a current
tax benefit for federal, state and local income taxes of $274,000 and a deferred
tax expense of $976,000. For the three months ended September 30, 2021, we had a
current tax expense for federal, state and local income taxes of $2,326,000 and
a deferred tax benefit of $37,000. The net decrease of income tax expense of
$1,587,000 was primarily due to decreased taxable income of $5,851,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of
$285,000 during the three month period ended September 30, 2022 related to our
equity share in ILiAD as compared to a net loss of $186,000 for the three months
ended September 30, 2021 (see Note J to our unaudited condensed consolidated
financial statements included herein).
Net Income (Loss). As a result of the foregoing, we realized a net income of
$2,226,000 or $0.09 per share basic and diluted for the three months ended
September 30, 2022 compared with net income of $6,589,000 or $0.28 per share
basic and $0.27 per share diluted for the three months ended September
30, 2021. The decrease in net income for the three months ended September 30,
2022 was primarily due to no revenue for the period as compared to revenue of
$17,000,000 from our litigation settlement with Hewlett-Packard for the three
months ended September 30, 2021. This was partially offset by a $3,727,000 gain
related to the Company's equity method investment for the three months ended
September 30, 2022.
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September
30, 2021
Revenue. We had no revenue for the nine months ended September 30, 2022 as
compared to revenue of $35,692,000 for the nine months ended September 30, 2021.
Revenue for the nine months ended September 30, 2021 resulted from our
resolution of a contractual dispute with Cisco concerning licensing of our
Remote Power Patent and our litigation settlement with Hewlett-Packard (see Note
I[1] and I[2] to our unaudited condensed consolidated financial statements
included herein).
Operating Expenses. Operating expenses for the nine months ended September 30,
2022 were $2,569,000 as compared to $15,285,000 for the nine months ended
September 30, 2021. We had costs of revenue of $-0- and $12,030,000 for the nine
months ended September 30, 2022 and 2021, respectively. Included in the costs of
revenue for the nine months ended September 30, 2021 were contingent legal fees
of $10,245,000 and $1,785,000 of incentive bonus compensation payable to our
Chairman and Chief Executive Officer pursuant to his employment agreement (see
Note H[1] to our unaudited condensed consolidated financial statements included
herein).
General and administrative expenses were $1,812,000 for the nine months ended
September 30, 2022 as compared to $1,650,000 for the nine months ended September
30, 2021. The increase in general and administrative expenses of $162,000 was
primarily due to stock-based compensation expense related to the issuance of
restricted stock units, which was $407,000 for the nine months ended September
30, 2022 as compared to $183,000 for the nine months ended September 30, 2021.
The increase in stock-based compensation expense was due to the issuance of
additional restricted stock units to our Chairman and Chief Executive Officer
pursuant to his employment agreement (see Note H[1] to our unaudited condensed
consolidated financial statement included herein). Professional fees and related
costs were $524,000 for the nine months ended September 30, 2022 as compared to
$1,384,000 for the nine months ended September 30, 2021 as a result of decreased
expenses related to patent litigation.
Operating (Loss) Income. We had an operating loss of $2,569,000 for the nine
months ended September 30, 2022 compared with operating income of $20,407,000
for the nine months ended September 30, 2021. The operating loss for the nine
months ended September 30, 2022 was due to no revenue for the period as compared
to revenue of $35,692,000 for the nine months ended September 30, 2021.
Interest and Dividend Income. Interest and dividend income for the nine months
ended September 30, 2022 was $532,000 as compared to $185,000 for the nine
months ended September 30, 2021 primarily as a result of a change in the mix of
our short term fixed income investments and cash equivalents.
Gain on Conversion of Note. For the nine months ended September 30, 2022, we
recorded a gain on conversion of our ILiAD convertible note of $271,000 as
compared to $-0- for the nine months ended September 30, 2021 as a result of the
conversion of the note and accrued interest into equity of ILiAD (see Note J to
our unaudited condensed consolidated financial statements included herein).
Gain on Equity Method Investment. For the nine months ended September 30, 2022,
we recorded a gain on our equity method investment of $3,727,000 as compared to
$-0- for the nine months ended September 30, 2021 as a result of an adjustment
to our equity method investment based on the fair value of an observable price
transaction of ILiAD relating to its private offering in August 2022 (see Note J
to our unaudited condensed consolidated financial statements included herein).
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Realized and Unrealized Loss on Marketable Securities. For the nine months ended
September 30, 2022, we recorded a realized and unrealized loss on marketable
securities of $1,358,000 as compared to $32,000 for the nine months ended
September 30, 2021. The change of $1,326,000 is due to unfavorable market
conditions for the nine months ended September 30, 2022 resulting in additional
realized and unrealized losses.
Income Taxes. For the nine months ended September 30, 2022, we had a current tax
benefit of $274,000 for federal, state and local income taxes and a deferred tax
expense of $422,000. For the nine months ended September 30, 2021, we had a
current tax expense for federal, state and local income taxes of $3,036,000 and
a deferred tax expense of $1,635,000. The net decrease of income tax expense of
$4,523,000 was primarily due to decreased taxable income of $19,957,000.
Share of Net Losses of Equity Method Investee. We incurred a net loss of
$1,073,000 during the nine month period ended September 30, 2022 related to our
equity share in ILiAD as compared to a net loss of $632,000 for the nine months
ended September 30, 2021 (see Note J to our unaudited condensed consolidated
financial statements included herein).
Net Income (Loss). As a result of the foregoing, we realized a net loss of
$618,000 or $0.03 loss per share basic and diluted for the nine months ended
September 30, 2022 compared with net income of $15,257,000 or $0.63 per share
basic and $0.62 per share diluted for the nine months ended September
30, 2021. The net loss for the nine months ended September 30, 2022 was due to
no revenue for such period as compared to $35,692,000 of revenue for the nine
months ended September 30, 2021 from the resolution of our contractual dispute
with Cisco and our litigation settlement with Hewlett-Packard (see Notes I[1]
and I[2] to our unaudited condensed consolidated financial statements included
herein).
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our
patents. At September 30, 2022, our principal sources of liquidity consisted of
cash and cash equivalents and marketable securities of $48,923,000 and working
capital of $48,555,000. Based on our current cash position, we believe that we
will have sufficient cash to fund our operations for the next twelve months and
the foreseeable future.
Working capital decreased by $7,110,000 at September 30, 2022 to $48,555,000 as
compared to working capital of $55,665,000 at December 31, 2021. The decrease in
working capital of $7,110,000 for the nine months ended September 30, 2022 was
primarily due to our operating loss of $2,569,000, cash dividends paid of
$2,381,000, and an additional investment of $1,000,000 in ILiAD.
Net cash (used in) provided by operating activities for the nine months ended
September 30, 2022 decreased by $24,781,000 from $19,601,000 provided by
operating activities for the nine months ended September 30, 2021 to $5,180,000
used in operating activities for the nine months ended September 30, 2022,
primarily due to revenue of $35,692,000 from resolution of our contractual
dispute with Cisco and our litigation settlement with Hewlett-Packard during the
nine months ended September 30, 2021.
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Net cash (used in) provided by investing activities during the nine months ended
September 30, 2022 was $(15,238,000) as compared to $608,000 for the nine months
ended September 30, 2021 primarily as a result of the differential of purchases
and sales of marketable securities.
Net cash used in financing activities for the nine months ended September 30,
2022 and 2021 was $2,915,000 and $2,541,000, respectively. The change of
$374,000 primarily resulted from repurchases of common stock of $422,000 for the
nine months ended September 30, 2022 compared to $131,000 of repurchases for the
nine months ended September 30, 2021 and the value of shares delivered to fund
withholding taxes of $112,000.
We maintain our cash in money market funds, government securities, certificates
of deposit, and short-term fixed income securities. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, purchase
obligations or other long-term liabilities except for our lease obligations for
our principal office space (see Note G[3] to our unaudited condensed
consolidated financial statement included herein).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in
accordance with GAAP. The preparation of our financial statements included in
this Quarterly Report on Form 10-Q requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates and assumptions made in the
preparation of our unaudited condensed consolidated financial statements include
revenue recognition, contingent legal fees and related expenses, income taxes,
valuation of patents and equity method investments, including the evaluation of
the Company's basis difference. Actual results could be materially different
from those estimates, upon which the carrying values were based. See also Note B
to our unaudited condensed consolidated financial statements included in this
quarterly report.
We believe our most critical accounting policies and estimates to be the
following:
Equity Method Investments
Equity method investments are equity securities in entities that we do not
control but over which we have 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 J 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, and adjustments based on the investees observable price transactions, if
any. Our proportionate share of the income or loss from equity method
investments is recognized on a one-quarter lag. When our carrying value in an
equity method investment is reduced to zero, no further losses are recorded in
our financial statements unless we guaranteed obligations of the investee
company or have committed additional funding. When the investee company
subsequently reports income, we will not record our share of such income until
it equals the amount of our share of losses not previously
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recognized. In the event the equity method investee enters into an observable
price transaction, the Company will increase or decrease the carrying value in
its equity method investment based on the fair value indicated by such
transaction. 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. In determining whether an equity method investment is impaired,
we take into consideration a variety of factors including the operating and
financial performance of the investee, the investee's future business plans and
projections, discussions with the investee's management, and our intent and
ability to hold the investment until it recovers in value. Accordingly, we make
assumptions and estimates in assessing whether an impairment has occurred and
if, in the future, our assumptions and estimates made in assessing the fair
value of these investments change, this could result in a material decrease in
the carrying value of the investment. This would cause us to write-down the
carrying value of the investment and could have a material adverse effect on our
results of operations in the period the impairment charge is taken.
Income Taxes
We account for income taxes in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes
(ASC 740), which requires us 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. In
evaluating the need for a valuation allowance, we estimate future taxable income
based on management business plans. This process involves significant management
judgment about assumptions that are subject to change from period to period.
Because the recognition of deferred tax assets requires management to make
significant judgments about future earnings, the periods in which items will
impact taxable income and the application of inherently complex tax laws, we
have identified the assessment of deferred tax assets and the need for any
related valuation allowance as a critical accounting estimate.
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