10-K
1
network1_10k-123120.htm
FORM 10-K FOR YEAR ENDED DECEMBER 31, 2020
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________
FORM
10-K
_________________
or
Commission File Number: 1-15288
_____________________
NETWORK-1
TECHNOLOGIES, INC.
(Exact Name of Registrant
as Specified in Its Charter)
_____________________
(Address of Principal Executive Offices)
Registrant's
telephone number, including area code: (212) 829-5770
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common Stock $.01 par value NTIP NYSE American
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock,
$.01 par value
(Title
of Class)
_________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller Reporting Company ☒
Emerging growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market
value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock
was last sold as of June 30, 2020 was $30,716,475.90. Shares of voting stock held by each officer and director and by
each person, who as of June 30, 2020, may be deemed to have beneficially owned more than 10% of the voting stock have been excluded.
This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
The number of shares outstanding of Registrant's common stock as
of March 25, 2021 was 24,117,129.
NETWORK-1
TECHNOLOGIES, INC.
2020
FORM 10-K
TABLE
OF CONTENTS
Page
No.
PART I
Item 1. Business 2
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 22
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 25
PART II
Item 6. Selected Financial Data 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9A. Controls and Procedures 33
Item 9B. Other Information 35
PART IIII
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 40
Item 14. Principal Accountant Fees and Services 47
PART IV
Item 15. Exhibits and Financial Statement Schedules 48
Signatures 50
PART
I
Forward-looking
statements:
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND EXPECTATIONS WHICH ARE “FORWARD-LOOKING STATEMENTS”.
ANY STATEMENT IN THIS 10-K THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING STATEMENT. FORWARD-LOOKING
STATEMENTS PROVIDE CURRENT EXPECTATIONS OF FUTURE EVENTS BASED ON CERTAIN ASSUMPTIONS AND INCLUDE ANY STATEMENT THAT DOES NOT
DIRECTLY RELATE TO ANY HISTORICAL OR CURRENT FACT. STATEMENTS CONTAINING SUCH WORDS AS “MAY,” “WILL,”
“EXPECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “COULD,” “ESTIMATE,”
“CONTINUE” OR “PLAN” AND SIMILAR EXPRESSIONS OR VARIATIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO VARIOUS FACTORS IN THIS REPORT AND IN OTHER
FILINGS MADE BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE
RISKS OR UNCERTAINTIES MATERIALIZE, INCLUDING THOSE DISCUSSED AS “RISK FACTORS” IN ITEM 1A AND ELSEWHERE IN THIS REPORT,
OR SHOULD ANY OF OUR UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED IN THIS REPORT.
WE UNDERTAKE NO OBLIGATION TO UPDATE, AND WE DO NOT HAVE A POLICY OF UPDATING OR REVISING THESE FORWARD-LOOKING STATEMENTS. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT WAS MADE.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS “NETWORK-1,” “COMPANY,” “WE,” “OUR,”
“US” MEAN NETWORK-1 TECHNOLOGIES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, MIRROR WORLDS TECHNOLOGIES, LLC.
ITEM
1. BUSINESS
Overview
Our
principal business is the development, licensing and protection of our intellectual property assets. We presently own
eighty-four (84) patents including (i) our remote power patent (“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) our 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) our 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 after such identification; and (iv) our
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. In addition, we continually review opportunities to acquire or license
additional intellectual property.
Until
March 7, 2020, when the Remote Power Patent expired, we had been actively engaged in the licensing of our Remote Power Patent
(U.S. Patent No. 6,218,930) which generated licensing revenue in excess of $151,000,000 from May 2007 through December 31,
2020. As of March 7, 2020 (the expiration of our Remote Power Patent), we had twenty-seven (27) license agreements with
respect to our Remote Power Patent which, among others, included license agreements with Cisco Systems, Inc.
(“Cisco”), Dell Inc., Extreme Networks, Inc., NETGEAR, Inc. (“Netgear”), Microsemi Corporation,
Motorola Solutions, Inc., NEC Corporation, Samsung Electronics Co., Ltd, Huawei Technologies Co., Ltd., ShoreTel, Inc.,
Juniper Networks, Inc., Polycom, Inc. and Avaya, Inc. As a result of the expiration of our Remote Power Patent, we no longer
receive licensing revenue for our Remote Power Patent for any period subsequent to the expiration date (March 7, 2020). 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 that resulted from our trial with Hewlett-Packard involving our Remote Power
Patent, we believed that Cisco, the largest licensee of our Remote Power Patent, was obligated to pay us significant
royalties that accrued but were not paid beginning in the fourth quarter of 2017 through the expiration of our Remote Power
Patent. On March 30, 2021, we entered into an amendment (the “Amendment”) to the Settlement and License
Agreement, dated March 25, 2011, between us and Cisco (the “Agreement”). Pursuant to the Amendment, Cisco agreed
to pay $18,691,890 to us to resolve a dispute relating to Cisco’s contractual obligation to pay us royalties under the
Agreement 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 (see Note O[5] to our consolidated financial statements included in this
Annual Report). We also believe that Netgear, another licensee of our Remote Power Patent, is obligated to pay us
royalties that accrued but were not paid during the same period. We have commenced litigation against Netgear (see
Note K[6] to our consolidated financial statements included in this Annual Report). In addition, we may receive additional
revenue related to our Remote Power Patent depending upon the outcome of our new trial with Hewlett-Packard as a result of
the Federal Circuit decision in September 2020 (see Note K[1] and Note K[3] to our consolidated financial statements included
in this Annual Report).
Consistent
with our revenue recognition policy (see Note B[5] of the consolidated financial statements included herein), we did not record
revenue beginning in the fourth quarter of 2017 through March 7, 2020 (the expiration of the Remote Power Patent) from Cisco and
Netgear, who had notified us they would not pay us ongoing royalties as a result of the jury verdict of non-infringement in our
trial with Hewlett-Packard.
We
have also entered into license agreements with Apple Inc. and Microsoft Corporation with respect to our Mirror Worlds Patent Portfolio
(see “Business–Licensing–Mirror Worlds Patent Portfolio”). Since acquisition of Mirror Worlds Patent Portfolio
in May 2013, we have received licensing and other revenue from the Mirror Worlds Patent Portfolio of $47,150,000 through December
31, 2020.
Our
current strategy includes continuing our efforts to monetize our intellectual property. 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.
The form of such relationships may differ depending upon the opportunity and may include, among other things, a strategic investment
in such third party, the provision of financing to such third party or the formation of a joint venture with such third party
or others for the purpose of monetizing their intellectual property assets.
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.
In
addition to litigation involving our Remote Power Patent, we also have pending litigation involving our assertion of infringement
claims concerning certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see “Legal Proceedings”
at pages 23-25 of this Annual Report).
At
December 31, 2020, we had cash and cash equivalents and marketable securities of $44,871,000 and working capital of $42,959,000.
Based on our current cash position, we believe that we will have sufficient cash to fund our operations for the foreseeable future.
Based on our cash position, we continually review opportunities to acquire additional intellectual property as well as evaluate
other strategic alternatives.
To
date, we have invested $6,000,000 in ILiAD Biotechnologies, LLC, a clinical stage biotechnology company with an exclusive license
to fifty-one (51) patents (see “Investment in ILiAD Biotechnologies” at page 12 of this Annual Report).
Our
Patents
Our
intellectual property currently consists of eighty-four (84) patents as follows:
Remote
Power Patent
Our
Remote Power Patent (U.S. Patent No. 6,218,930) covers the delivery of power over Ethernet cables for the purpose of remotely
powering network devices such as wireless access ports, IP phones and network based cameras. Our Remote Power Patent expired on
March 7, 2020. We had twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others, include
license agreements
with
Cisco, Dell Inc., Extreme Networks, Inc., Netgear, Inc., Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation, Samsung
Electronics Co., Ltd, Huawei Technologies Co., Ltd, ShoreTel, Inc., Juniper Networks, Inc., Polycom, Inc. and Avaya, Inc. As a
result of the Federal Circuit’s decision on September 24, 2020 to overturn the District Court’s judgment of non-infringement
involving our Remote Power Patent, we will have a new trial and further proceedings with Hewlett-Packard (see “Legal Proceedings
at pages 23-25 hereof).
Cox
Patent Portfolio
Our
Cox Patent Portfolio relates to identification of media content on the Internet and taking further action to be performed after
such identification. The expiration dates of our thirty-nine (39) issued patents currently within the Cox Patent Portfolio range
from September 2021 to November 2023. During the year ended December 31, 2020, we were issued six new patents for this portfolio.
We have pending litigation against Google Inc. and YouTube, LLC involving assertion of certain patents within our Cox Patent Portfolio
(see “Legal Proceedings” at pages 23-25 hereof).
Mirror
Worlds Patent Portfolio
Our
Mirror Worlds Patent Portfolio acquired in May 2013 covers foundational technologies that enable unified search and indexing,
displaying and archiving of documents in a computer system. All of our patents within our Mirror Worlds Patent Portfolio expired
including U.S. Patent No. 6,006,227 (the “'227 Patent”) and U.S. Patent No. 8,255,439 which are currently being asserted
in our litigation against Facebook, Inc. (see “Legal Proceedings” at pages 23-25 hereof). Our '227 Patent was previously
asserted in litigations against Apple Inc. and Microsoft Corporation which were settled (see “Business-Licensing-Mirror
Worlds Patent Portfolio” at page 10 hereof.)
M2M/IoT
Patent Portfolio
Our
M2M/IoT Patent Portfolio acquired in December 2017 relates 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. The expiration dates of the twenty-nine (29) issued patents currently within our M2M/IoT Patent Portfolio range
from September 2033 to May 2036. In addition, we have five pending U.S. patent applications and seven pending foreign patent applications
relating to this portfolio. During the year ended December 31, 2020, we were issued six new patents for this portfolio.
Our
future success is largely dependent upon our ability to protect our intellectual property assets, including (i) achieving success
in our new trial and further proceedings with Hewlett-Packard relating to our Remote Power Patent and (ii) monetization of our
other patent portfolios including our Cox, Mirror Worlds and M2M/IoT patent portfolios as well as our ability to acquire additional
intellectual property assets or enter into strategic relationships with third parties to develop, license or otherwise monetize
their intellectual property. The complexity of patent law and the inherent risk and uncertainty of litigation create risks that
our efforts to protect our intellectual property assets, or those of our
strategic
partners, may not be successful. We may not be able to uphold our intellectual property assets or that third parties will not
invalidate our other intellectual property assets. In addition, we may not be able to (i) acquire additional intellectual property
assets or successfully license such assets or (ii) successfully enter into strategic relationships with third parties to license
or otherwise monetize their intellectual property. Furthermore, our investment in ILiAD Biotechnologies, a development stage company,
involves significant risk (see “Risk Factors” at pages 13-22 of this Annual Report).
Overview
of Our Patents
Remote
Power Patent
Our
Remote Power Patent (U.S. Patent No. 6,218,930) relates to several technologies which describe a methodology for controlling the
delivery of power to certain devices over an Ethernet network.
The
Institute of Electrical and Electronic Engineers (IEEE) is a non-profit, technical professional association. The Standards Association
of the IEEE is responsible for the creation of global industry standards for a broad range of technology industries. In 2000,
at the urging of several industry vendors, the IEEE formed a task force to facilitate the adoption of a standardized methodology
for the delivery of remote power over Ethernet networks which would ensure interoperability among vendors of switches and terminal
devices. On June 13, 2003, the IEEE Standards Association approved the 802.3af Power over Ethernet standard (the “Standard”),
which covers technologies deployed in delivering power over Ethernet networks. The Standard provides for the Power Sourcing Equipment
(PSE) to be deployed in switches or as standalone midspan hubs to provide power to remote devices such as wireless access points,
IP phones and network-based cameras. The technology is commonly referred to as Power over Ethernet (“PoE”). In 2009,
the IEEE Standards Association approved 802.3at, a new PoE standard which, among other things, increased the available power for
delivery over Ethernet networks. We believe that our Remote Power Patent covers several of the key technologies covered by both
the 802.3af and 802.3at standards.
Ethernet
is the leading local area networking technology in use today. PoE technology allows for the delivery of PoE cables rather than
by separate power cords. As a result, a variety of network devices, including IP telephones, wireless LAN Access Points, web-based
network security cameras, data collection terminals and other network devices, are able to receive power over existing data cables
without the need to modify the existing infrastructure to facilitate the provision of power for such devices through traditional
AC outlets. Advantages such as lower installation costs, remote management capabilities, lower maintenance costs, centralized
power backup, and flexibility of device location as well as the advent of worldwide power compatibility, led to PoE becoming widely
adopted in networks throughout the world.
Cox
Patent Portfolio - Patents Related to Identification of Media Content on the Internet
On
February 28, 2013, we acquired four patents (as well as a pending patent application) from Dr. Ingemar Cox pertaining to enabling
technology for identifying media content on the Internet (the “Cox Patent Portfolio”). We are obligated to pay Dr.
Cox 12.5% of the net proceeds generated by us from licensing, sale or enforcement of the Cox Patent Portfolio. Dr. Cox provides
consulting services to us with respect to the Cox Patent Portfolio and assists our efforts to develop the patent portfolio.
The
Cox Patent Portfolio currently consists of thirty-nine (39) patents, relating to enabling technology for identifying media content
on the Internet, such as audio and video, and taking further actions to be performed based on such identification. The patents
within our Cox Patent Portfolio are based on a patent application filed in 2000 and have patent terms extending into 2023. Since
the acquisition of the Cox Patent Portfolio in February 2013, we have been issued thirty-four (34) additional patents relating
to this portfolio. The claims in these thirty-four (34) additional patents are generally directed towards systems of content identification
and performing actions following therefrom.
Dr.
Cox is currently a Professor at the University of Copenhagen and University College London where he is head of its Media Futures
Group. Dr. Cox was formerly a member of the Technical Staff at AT&T Bell Labs and a Fellow at NEC Research Institute. He is
a Fellow of the ACM, IEEE, the IET (formerly lEE), and the British Computer Society and is a member of the UK Computing Research
Committee. In 2019, Dr. Cox was the recipient of the Tony Kent Strix Award in recognition of his contribution to the field of
information retrieval. He was founding co-editor in chief of the lEE Proc. on Information Security and was an associate editor
of the IEEE Trans. on Information Forensics and Security. He is co-author of a book entitled “Digital Watermarking”
and its second edition “Digital Watermarking and Steganography”. He is an inventor or co-inventor of over seventy
(70) U.S. Patents.
Mirror
Worlds Patent Portfolio - Patents Covering Document Stream Operating Systems
On
May 21, 2013, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, acquired all of the patents previously owned by Mirror
Worlds, LLC (which subsequently changed its name to Looking Glass LLC), consisting of nine issued U.S. patents and five pending
applications (one of which was issued in November 2013) covering foundational technologies that enable unified search and indexing,
displaying and archiving of documents in a computer system.
The
inventions relating to document stream operating systems covered by the Mirror Worlds Patent Portfolio resulted from the work
done by Yale University computer scientist, Professor David Gelernter, and his then graduate student, Dr. Eric Freeman, in the
mid-1990s. Certain aspects of the technologies developed by David Gelernter were commercialized in their company's product offering
called “Scopeware.” Technologies
embodied in Scopeware are now common in various computer and web-based operating systems. Professor Gelernter and Dr. Freeman
each entered into consulting agreements with us as part of our acquisition of the Mirror Worlds Patent Portfolio.
As
part of the acquisition of the Mirror Worlds Patent Portfolio, we also entered into an agreement with Recognition Interface, LLC
(“Recognition”), an entity that financed the commercialization of the Mirror Worlds patent portfolio prior to its
sale to Mirror Worlds, LLC and also retained an interest in the licensing proceeds of the Mirror Worlds patent portfolio. Pursuant
to the terms of the agreement with us, Recognition received from us an interest in the net proceeds realized from our 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, we have paid Recognition an aggregate of $3,127,000 with respect to such net proceeds interest in
the Mirror Worlds Patent Portfolio (no such payments were paid for the years ended December 31, 2020 and December 31, 2019). In
addition to the net proceeds interest, we also issued to Recognition (and its affiliate) warrants to purchase an aggregate of
1,250,000 shares of our common stock at exercise prices ranging from $1.40 to $2.10 per share, which warrants were exercised in
full.
M2M/IoT
Patent Portfolio – Patents Related to Internet of Things and Machine-to-Machine Industries
On
December 29, 2017, we acquired from M2M and IoT Technologies, LLC (“M2M”) twelve (12) issued U.S. patents, seven pending
U.S. patent applications and nine pending international patents, all relating to, among other things, the 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 as well as automobiles and drones (the “M2M/IoT Patent Portfolio”). We
have an obligation 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 our M2M/IoT Patent Portfolio. In addition, M2M
will be entitled to receive from us $250,000 of additional consideration upon the occurrence of certain future events related
to the patent portfolio.
During
the year ended December 31, 2020, we were issued five new U.S. patents for the M2M/IoT Portfolio. The M2M/IoT Patent Portfolio
currently consists of twenty-nine (29) issued U.S. patents, five pending U.S. patent applications and seven additional pending
non-U.S. patent applications. We anticipate further issuances of additional claims for this portfolio.
John
Nix, the Managing Member of M2M, provides consulting services to us with respect to our M2M/IoT Patent Portfolio. Mr. Nix is an
entrepreneur and inventor, and founder and Chief Executive Officer of Vobal Technologies, LLC. In 2016, Mr. Nix was recognized
as “Creator of the Year” by the Intellectual Property Law Association of Chicago for his intellectual property related
to embedded SIM technology.
Patent
Acquisitions or Strategic Relationships
We
seek to acquire additional intellectual property assets in order to develop, commercialize, license or otherwise monetize such
intellectual property. We review opportunities to acquire or license additional intellectual property assets from individual inventors,
technology companies and others for the purpose of pursuing licensing opportunities related to our existing intellectual property
portfolio or otherwise. In addition, we may enter into strategic relationships with such 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, the provision of financing to such third party or
the formation of a joint venture for the purpose of monetizing such third party's intellectual property assets.
Network-1
Strategy
Our
strategy is to capitalize on our intellectual property assets by entering into licensing arrangements with third parties including
manufacturers and users that utilize our intellectual property's proprietary technologies as well as any additional proprietary
technologies covered by patents which may be acquired by us in the future. Our current 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 has been the case with our Remote Power Patent and Mirror Worlds Patent Portfolio. Our Remote Power Patent has generated licensing
revenue in excess of $151,000,000 from May 2007 through December 31, 2020. Since acquisition of our Mirror Worlds Patent Portfolio
in May 2013, we have received licensing and other revenue of $47,150,000 through December 31, 2020. In addition, we may enter
into third party strategic relationships with inventors and patent owners to assist in the development and monetization of their
patent technologies. Based on our cash position, we continually review opportunities to acquire additional intellectual property
as well as evaluate other strategic alternatives.
In
connection with our activities relating to the protection of our intellectual property assets, or the intellectual property assets
of third parties with whom we have strategic relationships in the future, it may be necessary to assert patent infringement claims
against third parties whom we believe are infringing our patents or those of our strategic partners. We are currently involved
in several litigations to protect our patents including our Remote Power Patent, certain patents within our Cox Patent Portfolio
and Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 23-25 hereof). We have previously successfully
asserted litigation with respect to our Remote Power Patent and our Mirror Worlds Patent Portfolio and have also been successful
in defending proceedings at the USPTO challenging the validity of our Remote Power Patent and certain patents within our Cox Patent
Portfolio (see “Legal Proceedings” at pages 23-25 of this Annual Report).
Licensing
– Remote Power Patent
We
had been actively engaged in licensing our Remote Power Patent which expired on March 7, 2020. As of the expiration date, we had
entered into twenty-seven (27) license agreements with respect to our Remote Power Patent which, among others included license
agreements with Cisco, Dell Inc., Extreme Networks, Inc. Netgear, Microsemi Corporation, Motorola Solutions, Inc., NEC Corporation,
Samsung Electronics Co., Ltd., Huawei Technologies Co., Ltd., ShoreTel, Inc., Juniper Networks, Inc., Polycom, Inc. and Avaya,
Inc. As a result of the expiration of our Remote Power Patent, we no longer receive licensing revenue for our Remote Power Patent
for any period subsequent to the March 7, 2020 expiration date.
Licensing
– Mirror Worlds Patent Portfolio
We
have entered into fully paid non-exclusive license agreements with respect to our Mirror Worlds Patent Portfolio with Apple Inc.
and Microsoft Corporation pursuant to which we have received aggregate licensing revenue of $29,650,000 since the acquisition
of the Mirror Worlds Patent Portfolio in May 2013.
On
July 8, 2016, Mirror Worlds Technologies, LLC, our wholly-owned subsidiary, entered into a settlement agreement with Apple Inc.
in connection with litigation in the U.S. District Court for the Eastern District of Texas for infringement of one of our patents
(U.S. Patent No. 6,006,227 (the “'227 Patent”) included within our Mirror Worlds Patent Portfolio. Under the terms
of the settlement agreement, Apple received a fully-paid non-exclusive license to our '227 Patent for its full term (which expired
in June 2016), along with certain rights to other patents in our patent portfolio. We received $25,000,000 from Apple for the
fully-paid non-exclusive license.
On
November 6, 2015, we entered into a settlement with Microsoft with respect to litigation pending in the U.S. District Court for
the Eastern District of Texas for infringement of our '227 Patent. Under the terms of the settlement, Microsoft (including its
customers) received a fully-paid non-exclusive license to our Mirror Worlds Patent Portfolio for the remaining life of its patents
in consideration for a lump sum payment of $4,650,000.
Significant
Licensees
For
the year ended December 31, 2020, one licensee constituted 94% of our revenue. For the year ended December 31, 2019, two licensees
constituted any aggregate of 69% of our revenue. It is anticipated that one or a few of our licensees or other third parties will
continue to constitute a significant portion of our revenue for the foreseeable future.
Competition
With
respect to our ability to acquire additional intellectual property assets or enter into strategic relationships with third
parties to monetize their intellectual property assets, we face considerable competition from other companies, many of which
have significantly greater financial and other resources than we have. The patent licensing and enforcement industry has
grown and there has been a material increase in the number of companies seeking to acquire intellectual property assets from
third parties or to provide financing to third parties seeking to monetize their intellectual
property. Entities including, among others, Acacia Research Corporation (NASDAQ:ACTG), Intellectual Ventures, WI-LAN
Inc., a subsidiary of Quarterhill Inc. (NASDAQ:QTRH), VirnetX Holdings Corp. (NYSE MKT:VHC), and RPX Corporation, seek
to acquire intellectual property or partner with third parties to license or enforce intellectual property rights. In
addition, we also compete with strategic corporate buyers with respect to the acquisition of intellectual property assets. It
is expected that others will enter this market as well. Many of these competitors have significantly greater financial and
human resources than us.
We
may also compete with litigation funding firms such as Burford Capital Limited, Validity Finance, LLC, Fortress Investment Group,
LLC, Parabellum Capital LLC and Bentham Capital LLC, venture capital firms and hedge funds for intellectual property acquisitions
and licensing opportunities. Many of these competitors also have greater financial resources and human resources than us.
The
industries and markets covered by our intellectual property are characterized by intense competition and rapidly changing business
conditions, customer requirements and technologies. Other companies may develop competing technologies that offer better or less
expensive alternatives to the technologies covered by our intellectual property assets. Such competing technologies may adversely
impact our licensing revenue. Moreover, technological advances or entirely different approaches developed by one or more of our
competitors or adopted by various standards groups could render our intellectual property assets obsolete, less marketable or
unenforceable.
Regulatory
Environment
If
new legislation, regulations or rules are implemented either by Congress, the USPTO or the courts that impact the patent application
process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our business, financial
condition and results of operations. Certain legislation, regulations, and rulings by the courts and actions by the USPTO have
materially increased the risk and cost of enforcement of patents. U.S. patent laws were amended by the Leahy-Smith America Invents
Act, referred to as the “America Invents Act”, which became effective on March 16, 2013. The America Invents Act includes
a number of significant changes to U.S. patent law. In general, it attempts to address issues surrounding the enforceability of
patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation and new
administrative post-grant review procedures to challenge the patentability of issued patents outside of litigation, including
Inter Partes Review (IPR) and Covered Business Method Review (CBM) proceedings which provide
third
parties a timely, cost effective alternative to district court litigation to challenge the validity of an issued patent. The America
Invents Act and its implementation has increased the uncertainties and costs surrounding the enforcement of patent rights which
could have a material adverse effect on our business, financial condition and results of operations.
In
addition, future changes in patent law could adversely impact our business. Such changes may not be advantageous to us and may
make it more difficult to obtain adequate patent protection to enforce our patents. Increased focus on the growing number of patent
lawsuits, particularly by non-practicing entities (NPEs), may result in legislative changes which increase the risk and costs
of asserting patent litigation.
Investment
in ILiAD Biotechnologies
During
the period December 2018 – March 2021, we made an aggregate investment of $6,000,000 in ILiAD Biotechnologies, LLC (“ILiAD”),
a privately held clinical stage biotechnology company dedicated to the prevention and treatment of human disease caused by Bordetella
pertussis. ILiAD is developing key technologies and working with leading scientists to investigate the impact of Bordetella
pertussis in a range of human disease and is currently focused on validating its proprietary intranasal vaccine, BPZE1, in
human clinical trials for the prevention of Pertussis (whooping cough). Pertussis is a life-threatening disease caused by the
highly contagious respiratory bacterium Bordetella pertussis. According to the U.S. Centers for Disease Control and Prevention,
each year pertussis affects approximately 16 million people globally, accounting for nearly 200,000 deaths. ILiAD has the exclusive
license to fifty-one (51) issued patents and has thirty-five (35) pending patent applications.
ILiAD’s
BPZE1 is an advanced next generation pertussis vaccine, designed to overcome deficiencies of current vaccines, including inadequate
efficacy and duration of immunity, and failure to prevent nasal-passage based Bordetella pertussis infections that lead
to transmission to vulnerable infants. Current vaccines have been found to be inadequate in curbing recent epidemics, highlighting
the need for an improved vaccine against Bordetella pertussis. On December 31, 2020, we 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 our investment, Corey Horowitz, our Chairman
and Chief Executive Officer, became a member of ILiAD’s Board of Managers.
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).
Corporate
Information
We
were incorporated under the laws of the State of Delaware in July 1990. Our principal offices are located at 445 Park Avenue,
Suite 912, New York, New York 10022 and our telephone number is (212) 829-5770.
Available
Information
We
file or furnish various reports, such as registration statements, quarterly and current reports, proxy statements and other materials
with the SEC. Our Internet website address is www.network-1.com. You may obtain, free of charge on our Internet
website, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information we post
on our website is intended for reference purposes only; none of the information posted on our website is part of this Annual Report
or incorporated by reference herein.
In
addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information
statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of the SEC's
Internet site is http://www.sec.gov.
Employees
and Consultants
As
of March 15, 2021, we had three employees and two consultants providing monthly services to us.
ITEM
1A. RISK FACTORS
Our
operations and financial results are subject to various material risks and uncertainties, including those described below, which
could adversely affect our business, financial condition, results of operations, cash flow, and the trading price of our common
stock. You should carefully consider the material risks and uncertainties described below in addition to the other information
set forth in this Annual Report on Form 10-K, including, but not limited to, the section titled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” The material risks described below are not the only risks
we face. Additional risks that we do not know of or that we currently believe are immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial condition, results of operations and cash flow could be
materially adversely affected, and the trading price of our common stock could decline significantly.
Risks
Related to Our Business
Our
revenue is uncertain.
We
have been dependent on licensing revenue from our Remote Power Patent for a significant portion of our revenue. Our Remote Power
Patent expired on March 7, 2020 and licensees are no longer obligated to pay us royalties for any period after the expiration
date. Notwithstanding the expiration of our Remote Power Patent, Cisco has agreed to pay us $18,691,890 in licensing royalties
for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note O[5] to our consolidated financial statements
included herein). In addition, we believe that Netgear, another licensee of our Remote Power Patent, is obligated to pay us royalties
that were not paid during the same period. We have commenced litigation against Netgear (see Note K[6] to our consolidated financial
statements included herein). Without licensing revenue from our Remote Power Patent, our revenue will be dependent upon litigation
outcomes involving our Cox Patent Portfolio and Mirror Worlds Patent Portfolio, our ability to monetize our M2M/IoT Patent Portfolio
or new patents to be acquired in the future. We currently have pending litigation against Google and YouTube involving patents
within our Cox Patent Portfolio and litigation against Facebook involving certain patents within our Mirror Worlds Patent Portfolio
(see “Legal Proceedings” at pages 23-25 hereof). Patent litigation is inherently risky and the outcome is uncertain.
Accordingly, our future revenue is uncertain.
We
have been dependent upon our Remote Power Patent for a significant portion of our revenue and the patent expired on March 7, 2020.
Our
Remote Power Patent has generated licensing revenue in excess of $151,000,000 from May 2007 through December 31, 2020. Revenue
for the years ended December 31, 2020, 2019 and 2018 from license agreements for our Remote Power Patent constituted $4,403,000
(100% of our revenue), $3,037,000 (100% of our revenue) and $15,785,000 (71% of our revenue), respectively. As a result of the
expiration of our Remote Power Patent on March 7, 2020, we no longer receive licensing revenue for our Remote Power Patent for
any period subsequent to the expiration date. However, Cisco has agreed to pay us $18,691,890 in licensing royalties for the period
beginning in the fourth quarter of 2017 through March 7, 2020 (see Note O[5] to our consolidated financial statements included
herein). In addition, we believe that Netgear, another licensee of our Remote Power Patent, is obligated to pay us royalties that
were not paid during the same period. We have commenced litigation against Netgear (see Note K[6] to our consolidated financial
statements included herein). Furthermore, we may receive additional revenue related to our Remote Power Patent if we are successful
in our new trial against Hewlett-Packard as a result of our successful appeal of the District Court’s judgment of non-infringement
to the Federal Circuit (see Note K[1] to our consolidated financial statements included herein and “Legal Proceedings”
at pages 23-25 hereof). Except for the above related to our Remote Power Patent, our future revenue will be entirely dependent
on our ability to monetize our Mirror Worlds, Cox and M2M/IoT patent portfolios or patents acquired in the future.
Our
success is dependent upon our ability to protect our patents.
Our
success is substantially dependent upon our proprietary technologies and our ability to protect our intellectual property rights.
We currently own eighty-four (84) patents that relate to various technologies including our Remote Power Patent, Cox Patent Portfolio,
Mirror Worlds Patent Portfolio, and our M2M/IoT Patent Portfolio. Our Remote Power Patent is subject to challenge at our new trial
with Hewlett-Packard as a result of our successful appeal to the U.S. Court of Appeals for the Federal Circuit (see “Legal
Proceedings at page 23 hereof). In addition, certain patents within our Mirror Worlds Patent Portfolio and Cox Patent Portfolio
are currently being challenged in patent infringement litigation pending in the courts (see “Legal Proceedings” at
pages 24-25 of this Annual Report). The uncertainty of the outcome of litigation creates risks that our efforts to protect our
intellectual property assets may not be successful. If we are not successful in protecting our patents, such an event will have
a material adverse effect on our business, results of operations and cash-flow.
We
may not be able to capitalize in the future on our strategy to acquire high quality patents with significant licensing opportunities
or enter into strategic relationships with third parties to license or otherwise monetize their intellectual property.
Based
upon the success we achieved from licensing our Remote Power Patent (twenty-seven (27) license agreements which generated in excess
of $151,000,000 of revenue), the revenue we generated from our Mirror Worlds Patent Portfolio ($47,150,000)
and establishing a patent portfolio currently consisting of eighty-four (84) patents, we believe we have the expertise and sufficient
capital to compete in the intellectual property monetization market and to enter strategic
relationships with third parties to develop, commercialize,
license or otherwise monetize their intellectual property. However, we may
not be able to acquire additional intellectual property or, if acquired, we may not
achieve material revenue or profit from such intellectual property. Acquisitions
of patent assets are competitive, time consuming, complex and costly to consummate. Our strategy is to focus on acquiring high
quality patent assets which management believes have the potential for significant licensing opportunities.
These high quality patent opportunities are difficult to find and are often very competitive to acquire. In addition, such acquisitions
present material risks. Even if we acquire additional patent assets,
we may not be able to achieve significant licensing revenue or even generate sufficient revenue related to such patent assets
to offset the acquisition costs and the legal fees and expenses which may be incurred
to enforce, license or otherwise monetize such patents. In addition, we may not be
able to enter into strategic relationships with third parties to license or otherwise monetize their intellectual
property and, even if we consummate such strategic relationships, we may not
achieve material revenue or profit from such relationships.
We
may not be successful in our new trial with Hewlett-Packard involving our Remote Power Patent.
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 our litigation with Hewlett-Packard involving our Remote Power Patent. The
Federal Circuit also vacated the District Court judgment of validity of our Remote Power Patent. The Federal Circuit remanded
the case to the District Court for a new trial against Hewlett-Packard. If we are not successful in our new trial with Hewlett-Packard,
it will have an adverse effect on our business, results of operations and cash-flow.
We
may not be successful in enforcing or defending our Cox Patent Portfolio, generating additional revenue from our Mirror Worlds
Patent Portfolio or generating revenue from our M2M/IoT Patent Portfolio.
We
acquired our Cox Patent Portfolio in 2013, which currently consists of thirty-nine (39) patents. We have not yet achieved any
revenue from our Cox Patent Portfolio. We are currently enforcing patents within our Cox Patent Portfolio against Google and YouTube,
who are challenging these patents (see “Legal Proceedings” at page 25 hereof). With respect to our efforts to enforce
our Mirror Worlds Patent Portfolio against Facebook, on May 7, 2018, the U.S. District Court for the Southern District of New
York granted defendants motion for summary judgment on non-infringement. On January 23, 2020, the U.S. Court of Appeals for the