Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Mine Safety Disclosures 22
PART II
Item 6. (Reserved) 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9A. Controls and Procedures 32
Item 9B. Other Information 34
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 34
PART IIII
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 39
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 WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED, OR SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 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
ARE BASED ON THE BELIEFS AND ASSUMPTIONS OF OUR MANAGEMENT BASED ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO VARIOUS FACTORS SET FORTH 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 SUBSIDIARIES, MIRROR WORLDS TECHNOLOGIES, LLC AND HFT SOLUTIONS, LLC.
ITEM
1. BUSINESS
Overview
Our
principal business is the development, licensing and protection of our intellectual property assets. We presently own ninety-five (95)
patents including (i) 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; (ii) 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; (iii) our HFT patent portfolio (the “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 (the “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 (“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.
To
date, we have invested $6,000,000 in ILiAD Biotechnologies, LLC, a clinical stage biotechnology company with an exclusive license to
fifty-eight (58) patents (see “Investment in ILiAD Biotechnologies” at page 10 of this Annual Report).
Until
March 7, 2020, when our 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 $187,000,000 since May 2007. We achieved twenty-eight (28) license agreements
with respect to our Remote Power Patent which, among others, included license agreements with Cisco Systems, Inc. (“Cisco”),
Dell Inc., Hewlett-Packard Enterprise Company and Hewlett Packard Company (collectively, “Hewlett-Packard”), 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 such patent for any period subsequent
to the expiration date (March 7,2020). However, subsequent to the expiration date of our Remote Power Patent, we received licensing revenue from certain licensees for periods prior to March 7, 2020. On March 30, 2021, we entered into
an amendment to our Settlement and License Agreement, dated May 25, 2011, with Cisco (the “Agreement”) pursuant to which
Cisco paid $18,692,000 to us to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement
pertaining to the Remote Power Patent for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note K[2] to
our consolidated financial statements included in this Annual Report). In addition, on July 26, 2021, we entered into a settlement
agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid us $17,000,000 in full settlement of a patent litigation involving
our Remote Power Patent (see Note K[1] to our consolidated financial statements included in this Annual Report). We believe that
NETGEAR, Inc. (“Netgear”), another licensee of our Remote Power Patent, is obligated to pay us royalties that accrued but
were not paid since the fourth quarter of 2017 through March 7, 2020. We have pending litigation against Netgear to recover
such royalties (see Note K[5] to our consolidated financial statements included in this Annual Report).
Since
acquisition of our 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, 2021 including license agreements with Apple and Microsoft.
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. 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, we may also enter into strategic
relationships with third parties to develop, commercialize, license or otherwise monetize their intellectual property.
We
have pending litigation involving our assertion of infringement claims concerning certain patents within our Cox Patent Portfolio and
intend to appeal to the U.S. Court of Appeals for the Federal Circuit the District Court judgment of non-infringement dismissing our
case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 of this
Annual Report).
At
December 31, 2021, we had cash and cash equivalents and marketable securities of $59,623,000 and working capital of $55,665,000. 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.
Overview
of Our Patents
Cox
Patent Portfolio
Our
Cox Patent Portfolio, acquired from Dr. Ingemar Cox in February 2013, 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. All of the patents within our Cox patent portfolio expired in September 2021 except for two
patents which expire in July 2023 and November 2023. 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 21-22 hereof). The
patents within our Cox Patent Portfolio are based on a patent application filed in 2000. 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.
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.
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 IEE), 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 IEE 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.
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
as well as automobiles and drones. The M2M/IoT Patent Portfolio currently consists of thirty (30) issued U.S. patents, five pending U.S.
patent applications and seven additional pending non-U.S. patent applications. Since we acquired the M2M/IoT Patent Portfolio in December
2017 we have been issued eighteen (18) additional U.S. patents. We anticipate further issuances of additional claims for this portfolio.
The expiration dates of the thirty (30) issued U.S. patents currently within our M2M/IoT Patent Portfolio range from September 2033 to
May 2034. During the year ended December 31, 2021, we were issued one new U.S. patent and three non-U.S. patents for the M2M/IoT 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.
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.
HFT
Patent Portfolio
On
March 25, 2022, we acquired the HFT Patent Portfolio from Nima Badizadegan. The newly acquired portfolio covers 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. The HFT Patent Portfolio currently includes six issued U.S.
patents and two pending U.S. patents.
In
addition to the purchase price of that we paid to the seller at closing, we have an obligation to pay the seller an additional
cash payment of $500,000 and $375,000 of our common stock contingent upon achieving certain milestones with respect to the patent portfolio.
We also have an obligation to pay the seller 15% of the first $50 million of net proceeds (after deduction of expenses) generated from
the patent portfolio and 17.5% of net proceeds greater than $50 million.
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. The Mirror
Worlds Patent Portfolio includes 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 21-22 hereof). Our 227 Patent
was previously asserted in litigations against Apple Inc. and Microsoft Corporation which were settled resulting in aggregate payments
to us of $29,650,000.
The
inventions relating to document stream operating systems covered by our 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 our acquisition of the Mirror Worlds Patent Portfolio in 2013, 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, we are obligated to pay Recognition 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 our Mirror Worlds Patent Portfolio (no such payments were made during the years 2021
and 2020). 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.
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.
Notwithstanding the expiration of the Remote Power Patent in March 2020, we received in 2021 aggregate licensing revenue of $36,029,000
relating to periods prior to expiration of the patent.
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.
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
$187,000,000 from May 2007 through December 31, 2021. 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, 2021. 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 certain patents within our Cox Patent Portfolio and Mirror Worlds Patent Portfolio (see “Legal
Proceedings” at pages 21-22 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.
Significant
Licensees
Revenue
from our Remote Power Patent constituted 100% of our revenue for the years ended December 31, 2021 and December 31, 2020. For the year
ended December 31, 2021, two licensees constituted 99% of our revenue. For the year ended December 31, 2020, one licensee constituted
an aggregate of 94% 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 Corporation
(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 included a number
of significant changes to U.S. patent law. In general, it addressed 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. The aggregate investment of $6,000,000 by the Company includes a $5,000,000 equity investment
and $1,0000,000 investment in convertible notes (see below). On December 31, 2021, we owned approximately 9.5% of the outstanding units
of ILiAD on a non-fully diluted basis and 7.2% of the outstanding units on a fully diluted basis (after giving effect to the exercise
of all outstanding options, warrants and convertible notes). In connection with our investment, Corey Horowitz, our Chairman and Chief
Executive Officer, became a member of ILiAD’s Board of Managers. 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, 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-eight (58) issued patents and has thirty-three (33) pending patent applications.
BPZE1
was developed in the laboratory of Camille Locht, PhD, at the Institut Pasteur de Lille (IPL) and French National Institute of Health
and Medical research. BPZE1 is a live-attenuated intranasal vaccine designed to overcome deficiencies of current pertussis vaccines,
including poor durability of protection and failure to prevent nasopharyngeal Bordetella pertussis infections that lead to escape
mutants and transmission to vulnerable infants. Four clinical trials studying BPZE1 in healthy adults have been completed by ILiAD to
date, including positive topline results from a 300-participant adult Phase 2b trial demonstrating that BPZE1 induced durable mucosal
immunity and reduced nasal colonization — two key factors necessary for the prevention of transmission and reduction of epidemic
pertussis cycles.
On
March 12, 2021, we invested $1,000,000 in ILiAD as part of its private offering of up to $23,500,000 of convertible notes (the “Notes”). The
Notes have a maturity of three years with interest accruing at 6% per annum. The Notes are required to be converted into a Qualified
Financing (minimum financing of $15 million) at the lesser of (i) 80% of the price paid per unit in such offering or (ii) a price based
on an enterprise value of $176,000,000. In addition, the Notes shall convert in the event of a merger at the lower of an enterprise value
of $176,000,000 or the stated valuation of ILiAD in the merger transaction. In the event of a change-in-control, noteholders will also
have the option to have the Notes repaid except in a Qualified Financing or a stock-for-stock merger.
In
December 2021, ILiAD announced the initiation and enrollment of the first participants in a BPZE1 study involving school age children.
On January 3, 2022, ILiAD announced that the U.S. Food and Drug Administration (FDA) granted Fast Track designation for BPZE1.
Corporate
Information
We
were incorporated under the laws of the State of Delaware in July 1990. Our principal offices are located at 65 Locust Avenue, New Canaan,
Connecticut 06840 and our telephone number is (203) 920-1055.
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
On
March 28, 2022, 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.
Since
March 2020 (the expiration of our Remote Power Patent), we no longer receive ongoing licensing revenue on a quarterly basis from licensees.
Accordingly, except for our pending litigation against Netgear involving our Remote Power Patent (see Note K[5] to our consolidated financial
statements included in this Annual Report), our revenue will be dependent upon litigation outcomes involving our Cox Patent Portfolio
and Mirror Worlds Patent Portfolio, our ability to monetize our other patent portfolios or new patents to be
acquired in the future. We currently have pending litigation against Google and YouTube involving certain patents within our Cox Patent
Portfolio and we intend to appeal the District Court judgment granting Facebook summary judgment of non-infringement and dismissing
our case involving certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 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 has expired.
Our
Remote Power Patent has generated licensing revenue for us in excess of $187,000,000 from May 2007 through December 31, 2021. Revenue
for the years ended December 31, 2021 ($36,029,000), 2020 ($4,403,000) and 2019 ($3,037,000) from license agreements for our Remote
Power Patent constituted 100% of our revenue. 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, in April 2021, Cisco
paid us $18,691,890 in licensing royalties for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note K[2]
to our consolidated financial statements included in this Annual Report). In addition, in July 2021, we entered into a settlement agreement
with Hewlett-Packard pursuant to which we were paid $17,000,000 in settlement of patent infringement litigation. Furthermore, we have
pending litigation against Netgear, another licensee of our Remote Power Patent, for unpaid royalties for a period prior to March 2020
(see Note K[5] to our consolidated financial statements included in this Annual Report). Except for our pending litigation
against Netgear involving our Remote Power Patent, our future revenue will be entirely dependent on our ability to monetize our patent portfolios or patents we acquire in the future.
Our
success is substantially 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 ninety-five (95) patents that relate to various technologies including our Remote Power Patent, Cox Patent Portfolio, Mirror
Worlds Patent Portfolio, M2M/IoT Patent Portfolio and HFT Patent Portfolio. 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 21-22 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, our business would be negatively impacted.
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-eight (28) license agreements which generated in excess of
$187,000,000 of revenue), the revenue we generated from our Mirror Worlds Patent Portfolio ($47,150,000)
and establishing a patent portfolio currently consisting of ninety-five (95) patents as well as our cash position, 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 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 and HFT 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 certain patents within our Cox Patent Portfolio against Google
and YouTube, who are challenging these patents (see “Legal Proceedings” at page 22 hereof). We also intend to appeal the
District Court decision granting Facebook summary judgment of non-infringement and dismissing our case involving certain patents
within our Mirror Worlds Patent Portfolio (see “Legal Proceedings at pages 21-22 hereof). In addition, our M2M/IoT Patent Portfolio,
currently consisting of thirty (30) patents, is not currently being asserted and thus it is not anticipated that this portfolio will
generate revenue for at least the next twelve months. We also recently acquired our HFT Patent Portfolio, consisting of six patents and
two pending patents. We may not have future success in enforcing or defending our Cox Patent Portfolio, Mirror Worlds Patent Portfolio,
M2M/IoT Patent Portfolio and HFT Patent Portfolio, which would have a negative impact on our business.
Our
quarterly and annual operating and financial results and our revenue are difficult to predict and are likely to fluctuate significantly
in future periods.
Our
quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to period.
We had revenue of $36,029,000 and net income of $14,281,000 for the year ended December 31, 2021. We had revenue of $4,403,000
and incurred a net loss of $1,709,000 for the year ended December 31, 2020 as compared to revenue of $3,037,000 and a net loss
of $1,792,000 for the year ended December 31, 2019. Our revenue and net income was $22,106,000 and $7,706,000, respectively,
for the year ended December 31, 2018 and $16,451,000 and $4,133,000 for the year ended December 31, 2017. Accordingly, our revenue, net
income and results of operations may widely fluctuate as a result of a variety of factors that are outside our control including our
ability and timing in consummating future license agreements for our intellectual property assets, the timing and extent of payments
received by us from licensees, the timing and our ability to achieve successful outcomes from current and future patent litigation, whether
we will achieve a return on our investment in ILiAD Biotechnologies and the timing of any such gains, and the timing and our ability
to achieve revenue from future strategic relationships.
The
patent monetization cycle is long, costly and unpredictable.
There
is generally a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During this
time lag, significant costs are likely to be incurred which may have a negative impact on our results of operations, cash flow and financial
position. Furthermore, the outcome of our efforts to monetize our patents is uncertain and we may not be successful.
In
the future we could be classified as a Personal Holding Company resulting in a 20% tax on our PHC Income that we do not distribute to
our shareholders.
The
personal holding company (“PHC”) rules under the Internal Revenue Code impose a 20% tax on a PHC’s undistributed personal
holding company income (“UPHCI”), which means, in general, taxable income subject to certain adjustments and reduced by certain
distributions to shareholders. For a corporation to be classified as a PHC, it must satisfy two tests: (1) that more than 50% in value
of its outstanding shares must be owned directly or indirectly by five or fewer individuals at any time during the second half of the
year (after applying constructive ownership rules to attribute stock owned by entities to their beneficial owners and among certain family
members and other related parties) (the “Ownership Test”) and (2) at least 60% of its adjusted ordinary gross income for
a taxable year consists of dividends, interest, royalties, annuities and rents (the “Income Test”). During the second
half of 2021, based on available information concerning our shareholder ownership, we did not satisfy the Ownership Test and thus we
were not a PHC for 2021. However, we may be determined to be a PHC in the future. If we were determined to be a PHC in any
future year, we would be subject to an additional 20% tax on our UPHCI. In such event, we may issue a special cash dividend to our shareholders
in an amount equal to the UPHCI rather than incur the 20% tax.
We
are dependent upon our CEO and Chairman.
Our
success is largely dependent upon the personal efforts of Corey M. Horowitz, our Chairman, Chief Executive Officer and Chairman of our
Board of Directors. On March 22, 2022, we entered into a new four year employment agreement with M. Horowitz pursuant to which he continues
to serve as our Chairman and Chief Executive Officer. The loss of the services of Mr. Horowitz would have a material adverse effect on
our business and prospects. We do not maintain key-man life insurance on the life of Mr. Horowitz.
Our
investment in ILiAD Biotechnologies involves a high degree of risk and we may lose our entire investment.
We
have invested $6,000,000 in ILiAD Biotechnologies, LLC, a privately held clinical stage biotechnology company, dedicated to the prevention
and treatment of human disease caused by Bordetella pertussis with a current focus on its proprietary intranasal vaccine, BPZE1,
for the prevention of pertussis (whooping cough). As a clinical
stage biotechnology investment, our investment involves a high degree of risk including the potential loss of our entire investment.
Cash
dividends may not be continued to be paid.
Our
dividend policy consists 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. We have paid such semi-annual dividends since our dividend policy was enacted in December 2016. Our
dividend policy undergoes a periodic review by our Board of Directors and is subject to change at any time depending upon our earnings,
financial requirements and other factors existing at the time. We may not be in a position to continue to pay dividends in
the future.
The
global COVID-19 pandemic could have an adverse impact on our business.
The
COVID-19 pandemic has and continues to impact economic activities and the financial markets around the world. As to the impact on our
Company, COVID-19 has and continues to cause some delays in the courts including the scheduling of trial dates, which could adversely
affect the timing of outcomes of our litigations. COVID-19 has not presented other direct material risks to our business. Our
cash is held at major financial institutions in money-market funds, certificates of deposit, or in short-term fixed income securities. With
only three employees, our employees are able to work remotely. However, the ongoing pandemic may present risks that we have not currently
considered material or risks that may evolve quickly that could have a material adverse effect on our business, financial condition,
operating results and prospects.
Legislation,
regulations, court rulings and actions by the USPTO have materially increased the risk and cost of enforcement of patents and may continue
to do so in the future.
Legislation,
regulations, court rulings and actions by the USPTO have materially increased the risk and cost of enforcing 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 included a number of significant changes to U.S. patent law. In general, it addressed issues
surrounding the enforceability of patents and the increase in patent litigation by, among other things, established 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. In
addition, the America Invents Act changed the way that parties may be joined in patent infringement actions, increased the
likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual
actions or activities. The America Invents Act and its implementation also 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.
Changes
in patent law could adversely impact our business.
Patent
laws may continue to change and may alter the protections afforded to owners of patent rights. 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 further legislative changes which increase the risk
and costs of asserting patent litigation.
Our
pending patent infringementlitigations are time consuming and costly.
We
have pending litigation against Google and YouTube involving certain patents within our Cox Patent Portfolio and intend to appeal the
decision of District Court granting Facebook’s motion for summary judgment of non-infringement and dismissing our case involving
certain patents within our Mirror Worlds Patent Portfolio (see “Legal Proceedings” at pages 21-22 of this Annual Report).
While we have contingent legal fee arrangements, or a contingency plus a fixed cash amount arrangement, with our patent litigation counsel
in each litigation, we are responsible for all or a portion of the expenses which are anticipated to be material. In addition, the time
and effort required of our management to effectively pursue these litigations is likely to be significant and it may adversely affect
other business opportunities.
We
face intense competition to acquire intellectual property and enter into strategic relationships.
With
respect to our ability to acquire additional intellectual property or enter into strategic relationships with third parties to monetize
their intellectual property, 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 business has grown significantly over the past years and there
has been an increase in the number of companies seeking to acquire intellectual property rights from third parties. It is expected that others will enter this market as well. Many of these competitors have
significantly more financial and human resources than us.
We
may also compete with strategic corporate buyers, litigation funding firms, venture capital firms and hedge
funds for intellectual property acquisitions and licensing opportunities.
Many of these competitors have greater financial resources and human resources than us.
Our
markets are subject to rapid technological change and our technologies face potential technology
obsolescence.
The
markets covered by our intellectual property are characterized by rapid technological changes, changing customer requirements, frequent
new product introductions and enhancements, and evolving industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards may render our technologies obsolete or less marketable.
In
addition, other companies may develop competing technologies that offer better or less expensive alternatives to the technologies covered
by our intellectual property. Moreover, technological advances or entirely different approaches developed by other companies or adopted
by various standards groups could render our patents obsolete, less marketable or unenforceable.
The
burdens of being a public company may adversely affect us including our ability to pursue litigation.
As
a public company, our management must devote substantial time,
attention and financial resources to comply with U.S. securities laws. This may have
a material adverse effect on management's ability to effectively and efficiently pursue its business. In addition, our disclosure obligations
under U.S. securities laws require us to disclose information publicly that will be available to litigation opponents. We may, from time
to time, be required to disclose information that may have a material adverse effect on our litigation strategies. This information may
enable our litigation opponents to develop effective litigation strategies that are contrary to our interests.
Risks
Related to Our Common Stock
Investors
may have limited influence on stockholder decisions because ownership of our common stock is concentrated.
As
of March 15, 2022, our executive officers
and directors beneficially owned 31.6% of our outstanding common stock. As a result,
these stockholders may be able to exercise substantial control
over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions,
such as a merger or other sale of our company or its assets. This concentration of ownership will limit other stockholders' ability to
influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Our
common stock may be delisted from the NYSE American Exchange if we fail to comply with continued listing standards.
Our
common stock is currently traded on the NYSE American Exchange under the symbol “NTIP”.
If we fail to meet any of the continued listing standards of the NYSE American Exchange,
our common stock could be delisted. Such delisting could adversely affect the price and trading (including liquidity) of our common
stock.
Provisions
in our corporate charter, by-laws and in Delaware law could make it more difficult for a third party to acquire us, discourage a takeover
and adversely affect existing stockholders.
Our
certificate of incorporation authorizes the board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock
may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors, without
further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation,
conversion and redemption rights, and sinking fund provisions, any of which could adversely affect holders of our common stock.
Although there are currently no shares of preferred stock outstanding, future holders of preferred stock may have rights superior to
our common stock and such rights could also be used to restrict our ability to merge with, or sell our assets to third parties.
We
are also subject to the “anti takeover” provisions of Section 203 of the Delaware General Corporation Law, which could prevent
us from engaging in a “business combination” with a 15% or greater stockholder for a period of three years from the date
such person acquired that status unless appropriate board or stockholder approvals are obtained.
In
addition, our By-laws contain advance notice requirements for director nominations and for new business to be brought up at stockholder
meetings. Stockholders wishing to submit director nominations or raise matters to a vote of stockholders must provide notice to us within
specified date windows and in very specific forms in order to have that matter voted on at a stockholders meeting.
The
aforementioned provisions could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions
in which stockholders might otherwise receive a premium for their shares over the then current market price.
These provisions may also limit the ability of stockholders to delay, deter or prevent a change of control, or approve transactions that
they may deem to be in their best interests.
Our
stock price may be volatile.
The
market price of our common stock may be highly volatile and could fluctuate widely in price in response to various factors, many of which
are beyond our control, including the following: