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 Annual Report on Form 10-K. The
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Annual Report on Form 10-K, particularly in the "Risk Factors" Section on
pages 10-18 hereof.
OVERVIEW
Our principal business is the development, licensing and protection of our
intellectual property assets. We presently own ninety-seven (97) U.S. patents
and [eight] foreign patents relating to: (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 (Subscriber Identification
Module) 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.
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At December 31, 2022, our principal sources of liquidity consisted of cash and
cash equivalents and marketable securities of $48,439,000 and working capital of
$47,359,000. Based on our cash position, we continually review opportunities to
acquire additional intellectual property as well as evaluate other strategic
opportunities.
To date we have invested $7,000,000 in ILiAD, a clinical stage biotechnology
company with an exclusive license to sixty-four patents. Although in 2022 we
recorded gains on our investment in ILiAD as referenced below, our investment
continues to involve significant risk and the outcome is uncertain.
We had no revenue for the year ended December 31, 2022. During the year ended
December 31, 2022, we recorded a gain on our equity investment in ILiAD of
$3,883,000 in accordance with ASC 323 due to an observable transaction price and
dilution to our ownership of ILiAD as a result of an ILiAD private offering as
well as a gain on conversion of our convertible note from ILiAD of $271,000 in
the private offering (see Note B[6] and Note H to our consolidated financial
statements included herein).
We have been dependent upon our Remote Power Patent for a significant portion of
our revenue. Our Remote Power Patent generated licensing revenue in excess of
$187,000,000 from May 2007 through December 31, 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). During the fourth quarter of 2022, we
commenced separate litigation against ten defendants involving our Remote Power
Patent for patent infringement for the period prior to March 7, 2020 (see "Legal
Proceedings" on page 20 hereof).
In addition, we have pending litigation involving certain patents within our Cox
Patent Portfolio and have appealed the judgment of the District Court dismissing
our litigation against Meta (Facebook) on the grounds of non-infringement
involving certain patents within our Mirror Worlds Portfolio. We also intend to
commence efforts to monetize certain patents within our M2M/IoT Patent Portfolio
and HFT Patent Portfolio. We may not achieve successful outcomes of such
litigation, the appeal, or future litigation involving our 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) currently consisting of nine U.S. patents and two pending
U.S. patents (see Note I[2] to our consolidated financial statements included in
this Annual Report).
The significant components of expenses impacting our net income include income
tax expense as a result of transactions with our equity method investment in
ILiAD. Other significant components of expenses impacting our net income when
revenue is recorded relate to contingent legal fees and expenses related to our
patent litigation (see Note I[1] to our consolidated financial statements
included herein) and incentive compensation payable to our Chairman and Chief
Executive Officer pursuant to his employment agreement (see Note J to our
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 annual and quarterly 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 our 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 and the timing of any such return.
Our future operating results may also be materially impacted by our ability to
acquire high quality patents which management believes have the potential to
generate significant licensing opportunities. In the future, we may not be able
to identify or consummate such patent acquisitions or, if consummated, achieve
significant licensing revenue with respect to such acquisitions.
In 2023 and future years we could be classified as a Personal Holding Company.
If this is the case, we would be subject to a 20% tax on the amount of any
undistributed personal holding company income (as defined) for such year that we
do not distribute to our shareholders (see Note E to our consolidated financial
statements included in this Annual Report).
On June 9, 2021, our Board of Directors approved the continuation of our
dividend policy consisting of semi-annual cash dividends of $0.05 per share
($0.10 per share annually) which have been paid in March and September of each
year. In 2022 and 2021, we paid semi-annual cash dividends in accordance with
our dividend policy. At this time we anticipate continuing to pay dividends
consistent with our policy. However, 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 O to our consolidated financial statements included herein).
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RESULTS OF OPERATIONS
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenue. We had no revenue for the year ended December 31, 2022 ("2022") as
compared to revenue of $36,029,000 for the year ended December 31, 2021
("2021"). Revenue for 2021 resulted from our resolution of a contractual dispute
with Cisco concerning licensing of our Remote Power Patent and our litigation
settlement with Hewlett-Packard.
Operating Expenses. Operating expenses for 2022 were $3,903,000 as compared to
$16,443,000 for 2021.
We had costs of revenue of $-0- and $12,147,000 for 2022 and 2021, respectively.
Included in the costs of revenue for 2021 were contingent legal fees of
$10,346,000 and incentive bonus compensation of $1,801,000 payable to our
Chairman and Chief Executive Officer pursuant to his employment agreement (see
Note J[1] to our consolidated financial statements included herein).
Professional fees and related costs were $809,000 for 2022 as compared to
$1,500,000 for 2021 as a result of decreased expenses related to patent
litigation.
Stock-based compensation was $585,000 for 2022 as compared to $238,000 for 2021.
The increase in stock-based compensation expense was due to the issuance of
restricted stock units to our Chairman and Chief Executive Officer pursuant to
his employment agreement (see Note J[1] to our consolidated financial statements
included herein).
Operating (Loss) Income. We had an operating loss of $3,903,000 for 2022
compared with operating income of $19,586,000 for 2021. The operating loss for
2022 was due to no revenue for the period as compared to revenue of $36,029,000
for 2021.
Interest and Dividend Income. Interest and dividend income for 2022 was
$1,020,000 as compared to $327,000 for 2021 primarily as a result of a change in
the mix of our short term fixed income investments and cash equivalents to
higher yielding investments as interest rates were rising in 2022.
Gain on Conversion of Note. For 2022, we recorded a gain on conversion of our
ILiAD convertible note of $271,000 as compared to $-0- for 2021 as a result of
the conversion of the ILiAD convertible note and accrued interest into equity of
ILiAD (see Note H to our consolidated financial statements included herein).
Gain on Equity Method Investment. For 2022, we recorded a gain on our equity
method investment in ILiAD of $3,883,000 as compared to $-0- for 2021, as a
result of an unrealized gain in connection with ILiAD's August 2022 private
offering, which was accounted for as an observable price transaction (see Note
B[6] and Note H to our consolidated financial statements included herein).
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Realized and Unrealized Loss on Marketable Securities. For 2022, we recorded
realized and unrealized losses on marketable securities of $1,351,000 as
compared to $173,000 for 2021. The increased loss of $1,178,000 was due to
unfavorable market conditions in the fixed income mutual funds market in 2022
compared to 2021.
Income Taxes. For 2022, we had $-0- current income tax for federal, state and
local income taxes and a deferred tax expense of $607,000. For 2021, we had a
current tax expense for federal, state and local income taxes of $2,952,000 and
a deferred tax expense of $1,508,000. The net decrease of income tax expense of
$3,853,000 was primarily due to no revenue in 2022.
Share of Net Losses of Equity Method Investee. We incurred net losses of
$1,639,000 and $999,000 during 2022 and 2021, respectively, related to our
equity method investment in ILiAD. The increase of $640,000 in the net losses of
ILiAD includes an additional loss of $398,000 as a result of new information
received from ILiAD in the fourth quarter of 2022 (see Note B[6] and Note H to
our consolidated financial statements included herein).
Net (Loss) Income. As a result of the foregoing, we incurred a net loss of
$2,326,000 or $0.10 per share basic and diluted for 2022 compared with net
income of $14,281,000 or $0.59 per share basic and $0.58 per share diluted for
2021. Our net loss for 2022 was due to having no revenue and our continuing
operating expenses supporting our patent portfolios, offset by our gain on
equity method investment of $3,883,000 and interest and dividend income of
$1,020,000. In comparison, we had revenue of $36,029,000 for 2021 from the
resolution of our contractual dispute with Cisco and our litigation settlement
with Hewlett-Packard.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from revenue from licensing our
patents. At December 31, 2022, our principal sources of liquidity consisted of
cash and cash equivalents and marketable securities of $48,439,000 and working
capital of $47,359,000. 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. Material increases in our liquidity and capital
resources are primarily dependent upon litigation outcomes and licensing of our
intellectual property as well as whether we will be able to achieve returns on
our investment in ILiAD.
Working capital decreased by $8,306,000 at December 31, 2022 to $47,359,000 as
compared to working capital of $55,665,000 at December 31, 2021. The decrease in
working capital was primarily due to our operating loss of $3,903,000, payment
of income taxes of $3,004,000, cash dividends paid of $2,455,000, and an
additional investment of $1,000,000 in ILiAD.
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Net cash (used in) provided by operating activities for 2022 decreased by
$24,935,000 from $19,499,000 provided by operating activities for 2021 to
$5,436,000 used in operating activities for 2022, primarily due to no revenue in
2022 as compared to revenue of $36,029,000 for 2021. In addition, in 2022 we
paid $3,004,000 in income taxes related to 2021 taxable income.
Net cash (used in) provided by investing activities during 2022 was
$(22,271,000) as compared to $2,994,000 for 2021, primarily as a result of the
differential of increased purchases and decreased sales of marketable
securities.
Net cash used in financing activities for 2022 and 2021 was $3,342,000 and
$3,501,000, respectively. The reduction of $159,000 primarily resulted from
repurchases of our common stock of $534,000 for 2022 compared to $1,077,000 of
repurchases for 2021 and offset by an increase of $341,000 in the value of
shares delivered to fund withholding taxes for 2022.
We maintain our cash in money market funds, government securities, certificates
of deposit, and short-term fixed income securities. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
We do not have any long-term debt, capital lease obligations, purchase
obligations or other long-term liabilities except for our lease obligations for
our principal office space (see Note I[4] to our consolidated financial
statement included herein).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition, results of operations
and cash flows are based on our audited consolidated financial statements which
have been prepared in accordance with GAAP. The preparation of our financial
statements included in this Annual Report on Form 10-K 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 consolidated financial statements include revenue
recognition, contingent legal fees and related expenses, income taxes, valuation
of patents and equity method investments. Actual results could be materially
different from those estimates, upon which the carrying values were based. See
also Note B to our consolidated financial statements included in this Annual
Report for full disclosure of our accounting policies.
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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 B[6] hereof). Equity method investments are measured at cost minus
impairment, if any, plus or minus our share of an investee's income or loss, and
adjustments based on the investees observable price transactions, if any. Our
proportionate share of the income or loss from equity method investments is
recognized on a one-quarter lag. When our carrying value in an equity method
investment is reduced to zero, no further losses are recorded in our financial
statements unless we guaranteed obligations of the investee company or have
committed additional funding. When the investee company subsequently reports
income, we will not record our share of such income until it equals the amount
of our share of losses not previously recognized. In the event the equity method
investee enters into an observable price transaction, the Company will increase
or decrease the carrying value in its equity method investment based on the
transaction price. Upon sale of equity method investments, the difference
between sales proceeds and the carrying amount of the equity investment is
recognized in profit or loss. In determining whether an equity method
investment is impaired, we take into consideration a variety of factors
including the operating and financial performance of the investee, the
investee's future business plans and projections, discussions with the
investee's management, and our intent and ability to hold the investment until
it recovers in value. Accordingly, we make assumptions and estimates in
assessing whether an impairment has occurred and if, in the future, our
assumptions and estimates made in assessing the fair value of these investments
change, this could result in a material decrease in the carrying value of the
investment. This would cause us to write-down the carrying value of the
investment and could have a material adverse effect on our results of operations
in the period the impairment charge is taken.
Income Taxes
We account for income taxes in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes
(ASC 740), which requires us to use the assets and liability method of
accounting for income taxes. Under the assets and liability method, deferred
income taxes are recognized for the tax consequences of temporary (timing)
differences by applying enacted statutory tax rates applicable to future years
to differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities and operating loss and tax credit carry
forwards. Under this accounting standard, the effect on deferred income taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than
not that some portion, or all, of a deferred tax asset will not be realized. In
evaluating the need for a valuation allowance, we estimate future taxable income
based on management business plans. This process involves significant management
judgment about assumptions that are subject to change from period to period.
Because the recognition of deferred tax assets requires management to make
significant judgments about future earnings, the periods in which items will
impact taxable income and the application of inherently complex tax laws, we
have identified the assessment of deferred tax assets and the need for any
related valuation allowance as a critical accounting estimate.
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