The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our principal business is the development, licensing and protection of our
intellectual property assets. We presently own ninety-six (96) patents
including: (i) our Cox Patent Portfolio relating to enabling technology for
identifying media content on the Internet and taking further action to be
performed after such identification; (ii) our M2M/IoT Patent Portfolio relating
to, among other things, enabling technology for authenticating, provisioning and
using embedded sim technology in next generation IoT, Machine-to-Machine, and
other mobile devices, including smartphones, tablets and computers; (iii) our
HFT Patent Portfolio covering certain advanced technologies relating to high
frequency trading, which inventions specifically address technological problems
associated with speed and latency and provide critical latency gains in trading
systems where the difference between success and failure may be measured in
nanoseconds; (iv) our Mirror Worlds Patent Portfolio relating to foundational
technologies that enable unified search and indexing, displaying and archiving
of documents in a computer system; and (v) our Remote Power Patent covering the
delivery of power over Ethernet (PoE) cables for the purpose of remotely
powering network devices, such as wireless access ports, IP phones and network
based cameras. In addition, we continually review opportunities to acquire or
license additional intellectual property as well as other strategic
alternatives.
At June 30, 2022, our principal sources of liquidity consisted of cash and cash
equivalents and marketable securities of $52,125,000 and working capital of
$51,291,000. Based on our cash position, we continually review opportunities to
acquire additional intellectual property as well as evaluate other strategic
opportunities.
During the period December 2018 through March 2021, we made an aggregate
investment of $6,000,000 in ILiAD, a clinical stage biotechnology company with
an exclusive license to sixty-one (61) patents (see Note J to our unaudited
condensed consolidated financial statements included herein). Our investment in
ILiAD involves significant risk.
We have been dependent upon our Remote Power Patent for a significant portion of
our revenue. Our Remote Power Patent generated licensing revenue in excess of
$187,000,000 from May 2007 through June 30, 2022. We no longer receive licensing
revenue for our Remote Power Patent for any period subsequent March 7, 2020 (the
expiration date of the patent). Except for our pending legal proceeding against
NETGEAR, Inc. involving our Remote Power Patent, our future revenue is entirely
dependent on our ability to monetize our other patent assets.
Our current strategy includes continuing our licensing efforts with respect to
our intellectual property assets and the monetization of our patent
portfolios. In addition, we continue to seek to acquire additional intellectual
property assets to develop, commercialize, license or otherwise monetize. Our
strategy includes working with inventors and patent owners to assist in the
development and monetization of their patented technologies. We may also enter
into strategic relationships with third parties to develop, commercialize,
license or otherwise monetize their intellectual property. Our patent
acquisition and development strategy is to focus on acquiring high quality
patents which management believes have the potential to generate significant
licensing opportunities as we have achieved with respect to our Remote Power
Patent and Mirror Worlds Patent Portfolio.
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On March 25, 2022, we completed the acquisition of a new patent portfolio (the
HFT Patent Portfolio) consisting of six U.S. patents and two pending U.S.
patents (see Note G[2] to our consolidated financial statements included in this
Quarterly Report). On May 10, 2022, we received an additional patent issuance
from the U.S. Patent and Trademark Office related to the HFT Patent Portfolio.
We had no revenue for the three and six months ended June 30, 2022. All of our
revenue for the six months ended June 30, 2021 resulted from the resolution of
our contractual dispute with Cisco in which we received $18,692,000 (see Note
I[1] to our unaudited condensed consolidated financial statements included
herein). While we have pending litigation involving certain patents within our
Cox Patent Portfolio against Google and YouTube and have appealed the judgment
of the District Court dismissing our litigation against Facebook on the grounds
of non-infringement involving certain patents within our Mirror Worlds
Portfolio, we may not achieve successful outcomes of the litigation or the
appeal. Accordingly, our future revenue is uncertain.
The significant components of expenses impacting our net income include
contingent legal fees and expenses related to our patent litigation (see Note
B[7] to our unaudited condensed consolidated financial statements included
herein) and incentive compensation payable to our Chairman and Chief Executive
Officer pursuant to his employment agreement (see Note H[1] to our unaudited
condensed consolidated financial statements included herein), both such
components of expenses are based on a percentage of the licensing revenue
received by us as a result of litigation or otherwise.
Our quarterly and annual operating and financial results may fluctuate
significantly from period to period as a result of a variety of factors that are
outside our control, including the timing and our ability to achieve successful
outcomes of patent litigation, our ability and timing of consummating future
license agreements for our intellectual property, and whether we will achieve a
return on our investment in ILiAD Biotechnologies, LLC ("ILiAD") and the timing
of any such returns.
Our future operating results may also be materially impacted by our ability to
acquire high quality patents which management believes have the potential to
generate significant licensing opportunities. In the future, we may not be able
to identify or consummate such patent acquisitions or achieve significant
licensing revenue with respect to such patent acquisitions.
In 2022 and future years we could be classified as a Personal Holding Company.
If this is the case, we would be subject to a 20% tax on the amount of any PHC
Income (as defined) for such year that we do not distribute to our shareholders
(see Note B[8] to our unaudited condensed consolidated financial statements
included in this Quarterly Report).
As to the impact of the global COVID-19 pandemic on us, 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 our consummation of future
license agreements.
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On June 9, 2021, our Board of Directors approved the continuation of our
dividend policy consisting of semi-annual cash dividends of $0.05 per share
($0.10 per share annually) which are anticipated to be paid in March and
September of each year. In 2021 and the first quarter of 2022, we paid
semi-annual cash dividends in accordance with our dividend policy. Our dividend
policy undergoes a periodic review by our Board of Directors and is subject to
change at any time depending upon our financial requirements, earnings and other
factors existing at the time (see Note M to our unaudited condensed consolidated
financial statements included herein).
RESULTS OF OPERATIONS
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenue. We had no revenue for the three months ended June 30, 2022 and June 30,
2021.
Operating Expenses. Operating expenses for the three months ended June 30, 2022
were $834,000 as compared to $901,000 for the three months ended June 30, 2021.
The decrease in operating expenses for the three months ended June 30, 2022 was
primarily due to a decrease in professional fees and related costs of $151,000.
General and administrative expenses were $423,000 for the three months ended
June 30, 2022 as compared to $461,000 for the three months ended June 30, 2021.
Stock-based compensation expense related to the issuance of restricted stock
units was $178,000 for the three months ended June 30, 2022 as compared to
$59,000 for the three months ended June 30, 2021 as a result of increased
expense due to the issuance of additional restricted stock units in March 2022
to our Chairman and Chief Executive Officer in accordance with his new
employment agreement (see Note H[1] to our unaudited condensed consolidated
financial statements included herein). Professional fees and related costs were
$157,000 for the three months ended June 30, 2022 as compared to $308,000 for
the three months ended June 30, 2021 as a result of decreased expenses related
to patent litigation.
Operating Loss. We had an operating loss of $834,000 for the three months ended
June 30, 2022 compared with an operating loss of $901,000 for the three months
ended June 30, 2021. The decreased operating loss of $67,000 for the three
months ended June 30, 2022 was primarily due to decreases in professional fees
and related costs of $151,000 and general and administrative expenses of
$38,000, offset by increased stock based compensation of $119,000 as a result of
the additional grant of restricted stock units.
Interest and Dividend Income. Interest and dividend income for the three months
ended June 30, 2022 was $131,000 as compared to $68,000 for the three months
ended June 30, 2021 primarily as a result of a change in the mix of our short
term fixed income investments and cash equivalents.
Income Taxes. For the three months ended June 30, 2022, we had a current tax
expense for federal, state and local income taxes of $-0- and a deferred tax
benefit of $102,000. For the three months ended June 30, 2021, we had a current
tax benefit for federal, state and local income taxes of $180,000 and a deferred
tax benefit of $52,000. The decrease in income tax benefit of $130,000 was
primarily due to the decrease in current tax benefit for the three months ended
June 30, 2021.
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Share of Net Losses of Equity Method Investee. We incurred a net loss of
$355,000 during the three month period ended June 30, 2022 related to our equity
share in ILiAD Biotechnologies, LLC a clinical stage biotechnology company, as
compared to a net loss of $231,000 for the three months ended June 30, 2021 (see
Note J to our unaudited condensed consolidated financial statements included
herein).
Net Loss. As a result of the foregoing, we realized a net loss of $1,532,000 or
$0.06 per share basic and diluted for the three months ended June 30, 2022
compared with net loss of $783,000 or $0.03 per share basic and diluted for the
three months ended June 30, 2021. The increase in our net loss was primarily due
to our net realized and unrealized loss from investments of $576,000.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Revenue. We had no revenue for the six months ended June 30, 2022 as compared to
revenue of $18,692,000 for the six months ended June 30, 2021. Revenue for the
six months ended June 30, 2021 entirely resulted from our resolution of a
contractual dispute with Cisco concerning licensing of our Remote Power Patent
(see Note I[1] to our unaudited condensed consolidated financial statements
included herein).
Operating Expenses. Operating expenses for the six months ended June 30, 2022
were $1,731,000 as compared to $7,322,000 for the six months ended June 30,
2021. We had costs of revenue of $-0- and $5,420,000 for the six months ended
June 30, 2022 and 2021, respectively. Included in the costs of revenue for the
six months ended June 30, 2021 were contingent legal fees of $4,485,000 and
$935,000 of incentive bonus compensation payable to our Chairman and Chief
Executive Officer pursuant to his employment agreement (see Note H[1] to our
unaudited condensed consolidated financial statements included herein).
General and administrative expenses were $940,000 for the six months ended June
30, 2022 as compared to $974,000 for the six months ended June 30, 2021.
Stock-based compensation expense related to the issuance of restricted stock
units was $233,000 for the six months ended June 30, 2022 as compared to
$118,000 for the six months ended June 30, 2021. Professional fees and related
costs were $407,000 for the six months ended June 30, 2022 as compared to
$663,000 for the six months ended June 30, 2021 as a result of decreased
expenses related to patent litigation.
Operating (Loss) Income. We had an operating loss of $1,731,000 for the six
months ended June 30, 2022 compared with operating income of $11,370,000 for the
six months ended June 30, 2021. The operating loss for the six months ended June
30, 2022 was due to no revenue for the period and the operating income for six
months ended June 30, 2021 was due to revenue of $18,692,000 from resolution of
a contractual dispute with Cisco.
Interest and Dividend Income. Interest and dividend income for the six months
ended June 30, 2022 was $211,000 as compared to $118,000 for the six months
ended June 30, 2021 primarily as a result of a change in the mix of our short
term fixed income investments and cash equivalents.
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Income Taxes. For the six months ended June 30, 2022, we had a current tax
expense for federal, state and local income taxes of $-0- and a deferred tax
benefit of $554,000. For the six months ended June 30, 2021, we had a current
tax expense for federal, state and local income taxes of $710,000 and a deferred
tax expense of $1,672,000. The decrease in income tax expense of $2,936,000 was
due to our net income for the six months ended June 30, 2021.
Share of Net Losses of Equity Method Investee. We incurred a net loss of
$788,000 during the six month period ended June 30, 2022 related to our equity
share in ILiAD Biotechnologies, a clinical stage biotechnology company, as
compared to a net loss of $446,000 for the six months ended June 30, 2021 (see
Note J to our unaudited condensed consolidated financial statements included
herein).
Net (Loss) Income. As a result of the foregoing, we realized a net loss of
$2,844,000 or $(0.12) per share basic and diluted for the six months ended June
30, 2022 compared with net income of $8,668,000 or $0.36 per share basic and
$0.35 per share diluted for the six months ended June 30, 2021. The net loss for
the six months ended June 30, 2022 was due to no revenue for such period as
compared to $18,692,000 of revenue for the six months ended June 30, 2021 from
the resolution of our contractual dispute with Cisco (see Note I[1] to our
unaudited condensed consolidated financial statements included herein.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our
patents. At June 30, 2022, our principal sources of liquidity consisted of cash
and cash equivalents and marketable securities of $52,125,000 and working
capital of $51,291,000. Based on our current cash position, we believe that we
will have sufficient cash to fund our operations for the next twelve months and
the foreseeable future.
Working capital decreased by $4,374,000 at June 30, 2022 to $51,291,000 as
compared to working capital of $55,665,000 at December 31, 2021. The decrease in
working capital of $4,374,000 for the six months ended June 30, 2022 was
primarily due to our net loss of $2,844,000, cash dividends of $1,195,000 and
patent acquisition costs of $524,000 during the period.
Net cash (used in) provided by operating activities for the six months ended
June 30, 2022 decreased by $15,878,000 from $11,270,000 provided by operating
activities for the six months ended June 30, 2021 to $(4,608,000) used in
operating activities for the six months ended June 30, 2022, primarily due to
revenue of $18,692,000 from resolution of our contractual dispute with Cisco
during the six months ended June 30, 2021.
Net cash (used in) provided by investing activities during the six months ended
June 30, 2022 was $(12,803,000) as compared to $3,612,000 for the three months
ended June 30, 2021 primarily as a result of the differential of purchases and
sales of marketable securities and partially offset by our $1,000,000
convertible note investment in ILiAD Biotechnologies (see Note J to our
unaudited condensed consolidated financial statements included herein).
Net cash used in financing activities for the six months ended June 30, 2022 and
2021 was $1,554,000 and $1,337,000, respectively. The change of $217,000
primarily resulted from repurchases of common stock of $247,000, the value of
shares delivered to fund withholding taxes of $112,000, partially offset by cash
dividends paid of $1,195,000.
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We maintain our cash in money market funds, government securities, certificate
of deposit, and short-term fixed income securities. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, purchase
obligations or other long-term liabilities except for our lease obligations for
our principal office space (see Note G[3] to our unaudited condensed
consolidated financial statement included herein).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated financial statements are prepared in accordance with
GAAP. The preparation of our financial statements included in this Quarterly
Report on Form 10-Q requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods. The
significant estimates and assumptions made in the preparation of our unaudited
condensed consolidated financial statements include revenue recognition,
contingent legal fees and related expenses, income taxes, valuation of patents
and equity method investments, including the evaluation of the Company's basis
difference. Actual results could be materially different from those estimates,
upon which the carrying values were based. See also Note B to our unaudited
condensed consolidated financial statements included in this quarterly report.
We believe our most critical accounting policies and estimates to be the
following:
Equity Method Investments
Equity method investments are equity securities in entities that we do not
control but over which we have the ability to exercise significant influence.
These investments are accounted for under the equity method of accounting in
accordance with ASC 323, Investments - Equity Method and Joint Ventures
(see Note J hereof). Equity method investments are measured at cost minus
impairment, if any, plus or minus the Company's share of an investee's income or
loss. Our proportionate share of the income or loss from equity method
investments is recognized on a one-quarter lag. When our carrying value in an
equity method investment is reduced to zero, no further losses are recorded in
our financial statements unless we guaranteed obligations of the investee
company or have committed additional funding. When the investee company
subsequently reports income, we will not record our share of such income until
it equals the amount of our share of losses not previously recognized. Upon sale
of equity method investments, the difference between sales proceeds and the
carrying amount of the equity investment is recognized in profit or loss. In
determining whether an equity method investment is impaired, we take into
consideration a variety of factors including the operating and financial
performance of the investee, the investee's future business plans and
projections, discussions with the investee's management, and our intent and
ability to hold the investment until it recovers in value. Accordingly, we make
assumptions and estimates in assessing whether an impairment has occurred and
if, in the future, our assumptions and estimates made in assessing the fair
value of these investments change, this could result in a material decrease in
the carrying value of the investment. This would cause us to write-down the
carrying value of the investment and could have a material adverse effect on our
results of operations in the period the impairment charge is taken.
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Income Taxes
We account for income taxes in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes
(ASC 740), which requires us to use the assets and liability method of
accounting for income taxes. Under the assets and liability method, deferred
income taxes are recognized for the tax consequences of temporary (timing)
differences by applying enacted statutory tax rates applicable to future years
to differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities and operating loss and tax credit carry
forwards. Under this accounting standard, the effect on deferred income taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than
not that some portion, or all, of a deferred tax asset will not be realized. In
evaluating the need for a valuation allowance, we estimate future taxable income
based on management business plans. This process involves significant management
judgment about assumptions that are subject to change from period to period.
Because the recognition of deferred tax assets requires management to make
significant judgments about future earnings, the periods in which items will
impact taxable income and the application of inherently complex tax laws, we
have identified the assessment of deferred tax assets and the need for any
related valuation allowance as a critical accounting estimate.
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