Network-1 Technologies: Free Call Options In A Cash-Rich Public Company (NYSEMKT:NTIP)

Network-1 Technologies (NYSEMKT:NTIP) is an established value creator in the patent space. It is run by an aligned CEO who has made several solid investments while at the company. Below is a description of the business directly from the 10-Q:

“The Company is engaged in the development, licensing, and protection of its intellectual property assets. The Company presently owns seventy-two (72) patents including (i) the remote power patent (the “Remote Power Patent”) covering the delivery of power over Ethernet (PoE) cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones and network based cameras; (ii) the Mirror Worlds patent portfolio (the “Mirror Worlds Patent Portfolio”) relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system; (iii) the 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 based on such identification; (iv) 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; and (v) QoS patents (the “QoS Patents”) covering systems and methods for the transmission of audio, video and data over computer and telephony networks in order to achieve high quality of service (QoS) (the “QoS Patents”). The Company has been actively engaged in licensing its Remote Power Patent (U.S. Patent No. 6,218,930) covering the control of power delivery over Ethernet cables. The Company has entered into twenty-seven (27) license agreements with respect to its Remote Power Patent. The Company has also entered into two license agreements with respect to its Mirror Worlds Patent Portfolio.”

The focus of our bullish view on the company is that investors can own the whole portfolio of patents for next to nothing. There are multiple events happening in the next 6-12 months that could drive a significant increase in the value of the equity. At $2.60 a share and with 25mm shares outstanding, the company trades for $65mm, which equals to the sum of their “current assets” as I define them.

The components are $45mm of cash and investments (no debt), $5mm investment in ILiAD, which I explain more about below, but should be worth more today than when they invested, $2mm net received after the last quarter from a $4 settlement with Dell (NYSE:DELL) and $12mm net owed by Cisco (NASDAQ:CSCO) after a recent appeals court ruling that I will also explain more about below. Total market cap at last sale of $65mm versus $64mm of value currently on the balance sheet or owed to NTIP.

You are paying nothing for 1) a case against HP (NYSE:HPQ) that could be worth $1-2 a share, 2) a case against Google (NASDAQ:GOOG) (NASDAQ:GOOGL) that could also be worth $1-2 a share, 3) a case against Facebook (NASDAQ:FB) that could be worth 50 cents to $1 a share, 4) a slew of additional patents related to the Internet of Things and virtual sim-card “e-sim” technology and 5) any appreciation in ILiAD from partnerships or up rounds of financing after their positive Phase 2b results.

So why does the opportunity exist? The Remote Power Patent mentioned above has been the company’s most profitable asset. Litigation and settlements have been ongoing since 2010 and the patents have been thoroughly vetted and fought over by the likes of Cisco, Dell, Polycom, Motorola, and 12 others that all decided the patents were valid and their products infringed on the patents. Those companies settled with NTIP and have paid over $140mm in licensing fees for use of the patents.

Hewlett-Packard Company held out and decided to go to trial. Given the strength of the patents and the fact that so many deep-pocketed companies had decided to settle, investors were excited to see just how much NTIP would win at trial. Investors bid up the stock from $2 in early 2016 to over $4.50 for much of 2017 in anticipation of the verdict. In November of 2017, the verdict came back and it was not favorable for NTIP. The jury ruled the patents invalid and that HP did not infringe on them. NTIP lost. The stock quickly settled back down to $2.50 and has been range-bound between $2 and $3 since then.

The idea that the patents were not valid is idiotic given they define the standard every company uses for Power Over Ethernet and have been vetted by the PTO and very competent legal teams over the last 10 years. The judge agreed and nullified the validity decision by the jury. However, he let the non-infringement decision stand. Being a standards-based patent and knowing that Cisco, Lucent, Juniper, Motorola and Dell plus others were all paying royalties, it defies logic that HP somehow did not infringe. They all used the same standard – that’s why it is a standard. NTIP appealed and on Sept. 24th 2020 they won the appeal and are headed back to trial with HP.

HP will either go back to a new trial or finally settle like everyone else in the industry. Damages could be anywhere between $50mm and $100mm. I assume 50% of that makes it to the balance sheet after costs and taxes. That could generate $1-$2 a share in cash. Damage estimates are based on court documents and Cisco’s current royalty being about $9mm a year, it seems like a reasonable range. Getting a new trial date on the calendar should drive renewed settlement talks. This should be a catalyst in the coming months.

I mentioned $12mm from Cisco in my “current asset” definition and want to explain that a bit further. Many of the royalty agreements have clauses that allow the licensee to stop paying royalties if the patents are deemed invalid or there is an “adverse ruling” against the patents. After the HP loss, a few of the licensees stopped paying their royalties. Now that the case has been vacated, they must pay their accrued royalty obligations. Cisco is the largest licensee that is not paying. They publicly disclosed roughly $9mm in annual payments leading up to when they stopped paying. So they are $23mm or so in arrears based on two and a half years of missed payments. NTIP would net about $12mm or just under 50 cents a share when they pay. The reversal of the HP decision obligates them to pay the unpaid royalties.

Another catalyst is a bit of a departure from the intellectual property licenses mentioned above. However, it does involve intellectual property and hopefully a licensing deal. In 2019, NTIP invested in a company called ILiAD. NTIP owns about 10% of the company. The main reason for investing was to fund a Phase 2b Clinical trial on their pertussis (whooping cough) vaccine. There is an epidemic happening and the current vaccines are not very good (here, here, here). At first, I was alarmed at the departure in capital allocation but after further diligence determined it is an incredible opportunity and the underlying science is quite compelling.

Below is some additional information about ILiAD and the whooping cough market, but a simple Google search will give you an idea of what is going on. The old way to vaccinate for whooping cough was with a live virus but it had too many complications, so they went to using another approach. Unfortunately, the new approach is less effective. ILiAD’s approach uses live vaccine again but splices out the genes that were causing the complications. NTIP invested $5mm into ILiAD to fund the Phase 2b study and on Sept. 24th ILiAD announced that the results were positive.

Given the results, we would expect the company to look for a strategic partner or additional financing at a better valuation. We like that NTIP has structured the investment in a way that requires distributions to shareholders when large payments are received, lowering the risk that the capital is burned in subsequent promising ventures. Also, the CEO of NTIP took a seat on the ILiAD board. The video here will give you a good summary of why the new vaccine is needed and ILiAD’s approach.

It is interesting to see people like this joining little ILiAD from big established companies. It should be noted that ILiAD thinks their process is applicable to numerous other conditions and has applications in cancer and Alzheimer’s treatments. Maybe so, but we are not paying for that currently. Multicomponent Pertussis vaccines generate more than $4.8bln annually. Capturing just half the market with a new and improved vaccine would result in ILiAD being worth 5-10x its current value.

In 2014, NTIP entered into litigation with Google and YouTube based on the company’s belief that they infringe on several of its patents in the “Cox portfolio” which is described above but essentially relates to tracking content on the internet. It has been a long process of review by the Patent Trial and Appeal Board but last year the process was completed, and the case resumed in earnest as many of NTIP’s most important patents remained intact. They are currently in litigation and awaiting some initial rulings from the judge.

The patents cover ad serving and intellectual property tracking for internet video – the heart of what YouTube does so the damages are massive, and it is probably best to think of the outcome in the context of a settlement and do some probability analysis. Jury verdicts can be huge but are often contested and reduced by judges, a look at settlements over time provides a reasonable framework to guestimate an outcome. In cases of similar importance, we have seen $20-$100mm settlements.

So, we use five equally-weighted outcomes of $0, $25, $50, $75 and $100mm to get to an average of $50mm for the settlement. If we keep the same 50% convention for simplicity, the Google case could add another $1/share in value. The Google trial date should be concluded in 2021. Settlement discussions often happen as trials near their end. There is no way to know if the company will win at trial or settle the case or what any proceeds might be. However, the track record is good and we’re paying nothing for the optionality.

On top of all that, there is a patent suit against Facebook on the Mirror Worlds portfolio. The company has already settled with Apple (NASDAQ:AAPL) for $25mm on the Mirror Worlds patents. There is also a large and growing Internet of Things (IoT) patent portfolio which will take time to develop and is hard to value but likely worth more than the $0 we are paying for it.

The company mainly uses contingency lawyers to keep cash burn low and reduce risk. That approach does cut into profits when awards are reached. The CEO has been a good steward of investor capital and seems to be a thoughtful investor. Overhead is relatively low and they pay a 5-cent dividend semi-annually. The CEO’s pay package is controversial and resembles a hedge fund in that he receives a salary and % of the proceeds from the various IP portfolio monetization.

He gets paid when shareholders do but you must get used to the unconventional structure. He owns over 26% of the company so he is very aligned at the equity level too. One of the biggest questions is what he will do with all the cash he has in low-risk bonds right now. The company has a stock repurchase plan in place and has bought back over 8mm shares for an average price of $1.87 since Aug. 2011. With the optionality available in the stock, hopefully, he buys back more aggressively before any of the potential positives are priced in.

The 10-Qs are a good summary of what is going on and at under 50 pages, they tend to be one of the most digestible of any NYSE-listed company.

The equity should reflect some of the optionality mentioned above and trade closer to $3.00 or more today. Future price movements are dependent on developments in the key areas mentioned above but $4.50 to $5.50 does not seem like a stretch if some or all of the catalysts go their way.

Disclosure: I am/we are long NTIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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