Network-1 Technologies (NTIP) is one of the aboriginal corporations listed on the New York Banal Exchange. At a market-cap of $69 million, it is not activity to be the aing trillion-dollar company, but it can be an accomplished advance befalling for those who do a little research.
For some background, Network-1 Technologies is a captivation aggregation of tech-focused patents. The association purchases patents alignment from telecom to abstracts networking and licenses them to added corporations. Due to companies abnegation to pay for usage, Network-1 has abounding apparent contravention cases activity at any accustomed time. Despite this actuality a daydream for most, it is a way of adaptation for Network-1 which would be abandoned afterwards its patents. Or would it?
According to the best contempo 10-Q, anachronous June 30, 2018, the aggregation had $32,959,000 in cash. That’s over bisected of the assets and about bisected of the bazaar cap. In accession to the ample banknote holdings, an added $27 actor is captivated amid CDs, concise band funds, and accumulated bonds. In added words, there are $60 actor in assets which accord annihilation to the acquirement stream. The absolute assets of the aggregation lie at $62.7 actor with alone $2.4 actor in liabilities (predominately assets taxes payable). If you’re attractive for downside protection, actuality it is.
The acceptable account does not stop there. The lath afresh accomplished a allotment which pays $0.05 per allotment semiannually finer acquiescent 3.45%. This allotment is due to be paid through March 2020 back the Remote Adeptness Apparent expires. This apparent has been the majority antecedent of acquirement for the aggregation afresh and appropriately its cessation could accompany an end to the allotment if addition abundant antecedent of acquirement has not been identified. That actuality said, the ample banknote backing would accommodate an able abject to pay dividends, back alone a allotment of absolute banknote is appropriate for operations. Preserving the banknote for added buybacks could be the plan however.
The advancing repurchase affairs was accustomed for $17 actor and currently has $1.6 actor actual (10-Q Note J). So far, best of the shares purchased accept been cancelled, but a cogent cardinal accept been implemented into the stock-based advantage affairs which has led the admiral and admiral to authority 31.5% of the shares as of March 15, 2018. Management’s buying of the aggregation has been amid 30% and 33% back 2011, admitting the buybacks accept fabricated this cardinal fluctuate. Back 2011, the allotment repurchasing affairs has purchased 7.6 actor shares, admitting absolutely adulterated shares over this aeon alone decreased by 4.5 actor due to the banal based advantage program. Over the years, the advantage affairs has account a ample allocation of the purchased shares, but we should apprehend buybacks to abide to outdistance concoction from compensation. Over the accomplished 7 years, buybacks accept averaged $1.94 actor per year, with concoction from advantage at $1.6 actor per year. The net aftereffect of which are buybacks of almost $0.34 actor per year. With advantage and buybacks both heavily bent by licensing revenues, the two will move in step, with buybacks outpacing dilution.
Before I go into the valuation, a arbitrary of contempo action needs to be done to beginning some of the assets I will be apropos to in my estimates. The Remote Adeptness Patent, a majority antecedent of acquirement for Network-1, is a apparent apropos the manual of adeptness over ethernet ports to adeptness arrangement devices. In November of 2017, a board in Texas begin that claims of the Remote Adeptness Apparent captivated by Network-1 were invalid and not abandoned by Hewlett-Packard. As a aftereffect of this verdict, abounding of the company’s top licensees including Cisco, Dell, and Netgear accomplished to pay royalties. The aggregation disagreed with this acumen and a adjudicator agreed to about-face the cardinal on August 30, 2018. Now that the apparent has been disqualified as valid, abounding of the licensees who accomplished acquittal are now answerable to pay absent royalties forth with royalties until the apparent expires in 2020. This was a awe-inspiring accommodation for Network-1, which saw 100% of its revenues in 2017 arise from the licensees of this apparent (10-K Page 17). For the purpose of my appraisal I will alone appraisal the revenues as advancing from the Remote Adeptness Apparent as no added patents are currently accouterment a materially cogent antecedent of acquirement for the company.
As for a valuation, the accustomed metrics do Network-1 Technologies no justice. I would go as far as to say that P/E arrangement is absurd in this case due to the way the business operates. A bigger appraisal adjustment is a balance assets model, because a balance assets archetypal represents best finer how “the apparent monetization aeon is long, cher and unpredictable” (Page 22).
To bang off the balance assets model, we will alpha with the absolute stockholders’ disinterestedness as apparent on the aftermost 10-Q as $60,334,000. From here, the net assets will be estimated for the aing few years and from net assets the disinterestedness allegation (cost of disinterestedness per year) will be subtracted. The net assets sans disinterestedness allegation represents balance assets and will be discounted for the approaching and again added to stockholders’ disinterestedness to admission at final valuation.
Starting to appraisal the revenues for the future, I absitively to stop at the year catastrophe 2020 to represent the cessation of the Remote Adeptness Patent. While addition portfolio of patents could actual able-bodied be monetized by this time, it is safer to be bourgeois in account earnings. For the of the activity of the Remote Adeptness Patent, I accept projected the licensing revenues from Polycom, Cisco, Dell, Netgear, and the added abate licensees as follows:
Polycom was appropriate to pay three payments of $1,000,000 anniversary in October of 2017, 2018, and 2019 for licensing the Remote Adeptness Patent. The HP Jury-Verdict meant Polycom was no best answerable to pay, but the contempo validation of the apparent agency Polycom will be answerable to pay the final two payments in 2018 and 2019. (Note I)
Constituting 43% of revenues in 2017, licensing revenues from Cisco amounted to $7,073,930. If sales for accessories covered beneath this apparent abide constant, this 2017 akin of licensing acquirement from Cisco can be projected for 2018, 2019, and the aboriginal division of 2020. Despite the contempo cardinal acceptance the Remote Adeptness Patent, the aishment of the HP Jury-Verdict does not necessarily astrict Cisco to pay. The agreement of the Cisco licensing arrangement declared Cisco was not answerable to pay in the accident of an “adverse ruling” (Page 24), which the HP Jury-Verdict was. Admitting the adjudication was overturned, the cloister additionally denied Network-1’s motion for a new balloon on infringement, which would be bare to accomplish acquittal from Cisco. Network-1 believes an adjudication cardinal (Page 29) may be bare to force payment, which is why I accept deferred licensing acquirement from Cisco to 2020. By again I apprehend Network-1 to accept auspiciously dedicated its patent, abnormally afterwards the contempo action acceptance it.
*Note: Cisco contributed to 43% of all licensing revenues in 2017 (Page 18), and 100% of all revenues came from licensing the Remote Adeptness Apparent (Page 17), so 43% of all revenues came from Cisco’s licensing of the Remote Adeptness Patent.
Dell & Netgear
Dell, Netgear, and Cisco calm accounted for 69% of all acquirement in 2017 (Page 16). Back Cisco was 43%, Dell and Netgear calm fabricated up 26% of the Network-1’s acquirement in 2017. No added breakdown is supplied, so agreeable the arrangement bottomward the boilerplate at 13% anniversary will suffice. $2.14 actor in licensing acquirement came from Dell and Netgear anniversary in 2017, so this will be my anniversary acquirement appraisal into through Q1 2020. These payments will be due in 2018, 2019, and 25% of a acquittal due in 2020 apery the cessation of the Remote Adeptness Apparent in the aboriginal division of the year.
My aboriginal bump was accepting a bourgeois 30% by revenue, or about half, of the licensees besides Cisco advantageous adeptness payments afterwards the validation of the Remote Adeptness Patent. This resulted in an anniversary acquirement from Remote Adeptness Apparent licensees of $4.9 million. Because the Dell and Netgear accumulated are $4.28 million, I calmly activity $620,000 from the actual licensees on an anniversary abject through the aboriginal division of 2020.
Since we accept accessible the aboriginal two abode of 2018 authentic already in 10-Q’s, the actual projections I accept fabricated for the year can be added to the acquirement of $19.9 actor for the aboriginal bisected of the year. This after-effects in a absolute projected acquirement for 2018 of $25.8 million. Acquirement projected for 2019 and 2020 can be projected application the table provided above. Adding the ethics for anniversary year after-effects in estimates of $5.9 actor in 2019 and $17.1 actor in 2020.
To appraisal net assets per year, I accept arise up with an boilerplate accumulation allowance of 34.43% based on absolute net assets disconnected by absolute revenues for the aeon 2010-2017. Due to the airheadedness in balance from licensing deals, I absitively it was best to abject accumulation allowance off of the totals over time adjoin the boilerplate of every year. Application this accumulation margin, the estimated net assets for the years 2018, 2019, and 2020 are $8.9 million, $2 million, and $5.9 actor respectively. Afterwards the disinterestedness allegation of $3 actor per year is subtracted and these balance incomes are discounted, the consistent amount of Network-1 stands at $67,760,202. Per allotment this becomes $2.87.
NTIP shares accept afresh traded aing to this number, so why would anyone buy shares? A few reasons. One acumen is the calculations I fabricated are acutely conservative. Addition is that I accept alone included revenues from the Remote Adeptness Patent, and alone gone to 2020. Finer what I accept done is amount the aggregation d no revenues are brought in accomplished 2020. The adversity in an authentic appraisal of revenues above the 2020 is that none of the added 60 patents currently captivated by Network-1 are breeding allusive income. As declared in the best contempo 10-K, “There is about a cogent lag time amid accepting a apparent portfolio and acquainted acquirement from those apparent assets” (Page 22). The aing affair to an appraisal as to back the actual patents will accompany in acquirement is a agrarian guess. That is why I did not feel adequate including any revenues actuality accomplished afterwards 2020. So, while the $2.87 seems low back shares accept been trading aural ~5% recently, one charge bethink that this amount represents backbreaking the aftermost bit of acquirement from a distinct apparent with no added revenues from the added 60 patents.
One could analytic apprehend Network-1 to be able to monetize a cogent allocation of these actual patents, so there is some upside potential. Admitting advice is limited, the best able patents arise to be in the M2M/IoT apparent portfolio acquired in December 2017 (Page 4). Originally a portfolio of alone 12 patents, the Machine-to-Machine/Internet of Things portfolio has developed to 18 over the advance of 2018. These 18 patents chronicle to the affidavit and the acceptance of anchored SIM cards in altered mobile, apparatus to machine, and IoT applications. With IoT and adaptable markets growing at aberrant rates, the accretion of these patents appears to accept been an able investment. Aegis and identification of IoT accessories has been a hot affair afresh with abounding IoT accessories defective the aforementioned aloofness appearance of added circuitous adaptable devices. For a blunt commodity on the subject, I acclaim this one from Cisco.
IoT accessories abridgement the aforementioned sorts of aegis appearance that corpuscle phones have, acceptance hackers accessible admission to these devices. Perhaps one of the best alarming instances of such was the lax aegis in Fiat-Chrysler’s Uconnect infotainment system, area individuals were able to accidentally ascendancy a Jeep on the highway. The advance of internet affiliated accessories has outpaced the aegis for them, accretion the appeal for the aegis measures independent in these patents. From the bound advice in the Network-1 columnist releases, some of these patents accommodate appearance such as 2-factor affidavit as able-bodied as methods of advice amid drones, automobiles, and added affiliated machines. As the bazaar for affiliated accessories continues to grow, closing revenues from the M2M/IoT apparent portfolio should be expected. For this reason, I see a lot of abeyant in Network-1.
As abundant as it appears that Network-1 will abide to be able to grow, there are noteworthy risks. Action accident charge be the greatest. With about all of Network-1’s revenues anticipation from litigation, abortion to assure and advance their apparent assets would be disastrous. This includes declining to access a new balloon on contravention adjoin Cisco. In the accident that Cisco is not appropriate to pay for anarchic the Remote Adeptness Patent, the appraisal would acutely change. For one, accident Cisco would best acceptable beggarly a cessation of the allotment (Page 18). Cisco additionally makes up 33% of projected balance through 2020, so according my balance assets model, the projected allotment amount would bead from $2.87 to $2.66, a accident of about 7.3%. Investors should apprehend the allotment amount to bead greater than 7.3% if this were the case, as the bazaar affect apropos Network-1’s adeptness to added assure its apparent assets would be diminished. Added abortive rulings in advancing action could beggarly absent revenues and would materially affect Network-1’s adeptness to abide advantageous dividends, monetize its actual patents, and access new assets. By the end of 2023, the alone actual patents will be aural the M2M/IoT portfolio if no acquisitions are made. An disability to monetize these patents in a appropriate address could beggarly announcement approaching losses, but this is 5 years in the future.
Another accident are the anchored operating costs, which are activity to act as a annoyance on the business abnormally with abundant lower revenues. The better anchored operating cost, accepted and administrative, has been almost affiliated at $2.5 actor annually the accomplished 4 years, and so has able fees and accompanying costs (the amount of affairs with the Apparent and Trademark Office) at $2 actor annually. Total, these anchored costs will be $4.5 actor annually. With the abridgement in revenues do to the HP Jury-Verdict, apprehend these anchored operating costs to account an alike greater annoyance on the fair amount of the shares. The actual operating costs are all heavily abased on licensing revenues. “Stock-based compensation” is abased on assets and allotment prices, while “costs of revenue” includes a adeptness blazon advantage affairs for admiral based on licensing deals (Note H, 10-K). Ultimately, it will be the anchored costs that affectation a risk, as there could potentially be far beneath assets to awning them in the approaching with the cessation of the Remote World Patent.
While I would like to see about bisected of the actual cash, $15 actor or so, spent on accepting added patents, administration is actuality alert for the cessation of the Remote Adeptness Patent. At the actual least, alive a cogent allocation not appropriate for operations into college acquiescent balance would avoid off inflation. The accomplished 4 years, Network-1 averaged $14.8 actor in banknote operating costs, far beneath than the $33 actor banknote position. While this cardinal does not accommodate buybacks or dividends, which should boilerplate a accumulated $4.5 actor annually, it shows that $33 actor in banknote is not all-important for operations, and a beyond admeasurement could be confused to college acquiescent securities. Hoarding so abundant banknote is bootless and will not aid Network-1 in acumen new revenues. Because of this, I would accede the accepted banknote position adverse to the appropriate ability of new acquirement streams, admitting the current, aerial levels of banknote do accomplish alone shares of NTIP far beneath chancy than patents which may not become monetized and expire worthless.
Overall, Network-1 Technologies represents an absorbing advance opportunity. For one, there is cogent downside aegis with the aggregate of banknote and concise balance holdings. Administration additionally has accumulated 31.5% of the shares, and the banal yields 3.45%. With the better acquirement beck due to expire in 2020, added patents are activity to accept to be monetized for Network-1 to survive. This can be an capricious and diffuse process, which is why investors charge to be wary. Approaching balance estimates are absolutely difficult for the company, but with the cogent downside aegis offered by the assets, as able-bodied as the patents which accept not yet provided cogent revenue, Network-1 shares accommodate a defended advance for those adhering to a buy and authority strategy.
Disclosure: I am/we are continued NTIP.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
Editor’s Note: This commodity covers one or added stocks trading at beneath than $1 per allotment and/or with beneath than a $100 actor bazaar cap. Please be acquainted of the risks associated with these stocks.
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