By The Acquirer’s Multiple. Originally published at ValueWalk.
One of the cheapest stocks in our Small & Micro Cap – Stock Screener is Network-1 Technologies Inc (NYSEMKT:NTIP).
With a market cap around $89 million, very few investors have ever heard of this great little company. Network-1 Technologies Inc (Network-1) has a remarkable record of taking on and beating technology behemoths like Apple and Microsoft in court.
Network-1 is engaged in the development, licensing and protection of its intellectual property assets. The company presently owns twenty-eight (28) patents including:
(i) 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 relating to foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system.
(iii) The Cox Patent Portfolio relating to enabling technology for identifying media content on the Internet and taking further action to be performed based on such identification.
(iv) 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.
A quick look at the company’s share price (below) over the past twelve months shows that the price is up 104% to $3.80 from $1.86 in March 2016. That is 10% off its 52 week high of $4.15, but closer inspection shows that the stock remains undervalued.
(Source, Morningstar)
According to the company’s latest Q3 2016 earnings report dated September 30, 2016, Network-1 had the largest quarterly revenues in its history with revenue of $34.3 million for the three months ended September 30, 2016 compared to $3.0 million for the previous corresponding period (pcp). The significant increase was due to additional licensing revenue of $31.0 million from settlement and licensing agreements entered into with Apple Inc. and Dell, Inc. during the quarter.
Total revenue for the nine months ending September 30, 2016 was $60 million compared to $10.4 million for the pcp due to the same settlement and licensing agreements, plus a $17.5 million settlement of a professional liability claim. As a result, the company reported net income of $0.98 per share (basic) and $0.93 per share (diluted) compared to just $0.07 per share (basic and diluted) for the pcp.
Network-1 is a company that spends a great deal of time in court defending its patents and has a great track record of winning.
The Remote Power Patent (U.S. Patent No. 6,218,930)
Network-1’s Remote Power Patent (U.S. Patent No. 6,218,930) has been a power-house for the little company generating licensing revenue in excess of $100 million from May 2007 through September 30, 2016. More that twice that of the company’s Mirror Worlds Patent Portfolio acquired in May 2013, which has generated licensing and other revenue of $47.2 million through September 30, 2016.
A quick look at Network-1’s litigation history shows just how well the company has performed against some of the biggest data network equipment manufacturers in the world.
In September 2011, Network-1 initiated patent litigation against sixteen (16) data networking equipment manufacturers (and affiliated entities) in the United States District Court for the Eastern District of Texas, Tyler Division, for infringement of its Remote Power Patent. Named as defendants in the lawsuit (excluding affiliated parties), were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc., GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inc., Motorola Solutions, Inc., NEC Corporation, Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transition Networks, Inc.
In March 2012, Network-1 reached settlement agreements with defendants Motorola Solutions, Inc. (“Motorola”) and Transition Networks, Inc. (“Transition Networks”).
In October 2012, the company reached a settlement with defendant GarretCom, Inc (“GarretCom”).
In February 2013, Network-1 reached settlement agreements with Allied Telesis, Inc. (“Allied Telesis”) and NEC Corporation (“NEC”). As part of the settlements, Motorola, Transition Networks, GarretCom, Allied Telesis and NEC each entered into a non-exclusive license agreement for Network-1’s Remote Power Patent pursuant to which each defendant agreed to license the Remote Power Patent for its full term (which expires in March 2020) and pay a license initiation fee and quarterly or annual royalties based on their sales of PoE products.
In March 2015 and July 2015, Network-1 reached settlements with defendants Samsung Electronics Co., Ltd. (“Samsung”), Huawei Technologies Co., Ltd. (“Huawei”) and ShoreTel, Inc. (“ShoreTel”). Samsung and Huawei each entered into a non-exclusive fully paid license agreement for the Remote Power Patent for its full term. ShoreTel entered into a non-exclusive license agreement for the Remote Power Patent for its full term and paid a license initiation fee and agreed to pay quarterly royalties based upon its sales of PoE products.
In June 2016, Network-1 reached a settlement with Sony Corporation and affiliated entities (“Sony”). With respect to the settlement, Sony received a non-exclusive fully-paid license for the Remote Power Patent for its remaining life.
In July 2016, Network-1 reached settlement agreements with Alcatel-Lucent USA and Alcatel-Lucent Holdings, Inc. (collectively, “Alcatel”) and ALE, USA. Under the terms of the settlement agreements, Alcatel and ALE, USA received a non-exclusive fully paid license for the Remote Power Patent for its remaining life. The aggregate consideration to be received by Network-1 from Alcatel and ALE for the fully-paid license was $4.3 million of which $2.3 million is payable in three equal quarterly payments contingent upon a ruling to be issued by the U.S. District Court of Texas with respect to a pending motion finding that any asserted claim of the Remote Power Patent is valid.
In July 2016, Network-1 also reached a settlement with Dell, Inc. Under the terms of the settlement, Dell received a non-exclusive license for the Remote Power Patent for its full term, Dell is obligated to pay a license initiation fee of $6 million and royalties based on its sales of PoE products.
In October, 2016, Network-1 reached a settlement with Polycom, Inc. Under the terms of the settlement, Polycom licensed on a non-exclusive basis the Remote Power Patent for its full term (expiring in March 2020), and is obligated to pay a license initiation fee of $5 million for past sales of its Power over Ethernet (“PoE”) products and will also pay ongoing royalties based on its sales of PoE products. $2 Million of the license initiation fee has been paid and the balance will be paid in three annual installments of $1 million beginning in October, 2017. Payments due in October 2018 and October 2019 need not be paid by Polycom if all asserted claims of the Company’s Remote Power Patent have been found invalid.
So that means Network-1 has now reached settlement and license agreements with twelve of the original sixteen defendants for the licensing of its Remote Power Patent. The remaining four defendants are Avaya Inc., AXIS Communications Inc., Hewlett-Packard Company, and Juniper Networks, Inc. The litigation is currently scheduled for trial in 2017.
The Markman Ruling
Back in November Network-1 received more good news regarding the remaining four defendants.
In a recent Markman Ruling – the court hearing a patent infringement case interprets and rules on the scope and meaning of disputed patent claim language regarding the patent at issue. In the Markman Ruling, the court adopted a number of constructions proposed by Network-1, while also adopting constructions proposed by defendants. As part of the Markman Ruling, the court also considered defendants’ motion for Summary Judgment that all claims of the Remote Power Patent are invalid
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