During the latest bear phase on Wall Street in early 2022, many investors are searching for equity exposure with limited downside. A proven investment strategy over the years to reduce risk is by finding a business with plenty of cash vs. few liabilities. One such name is Network-1 Technologies (NYSE:NTIP). The company is small with a large patent portfolio, reporting $44 million in cash and just $4.6 million in total liabilities as of December 2021. In fact, the stock is trading right at or a little UNDER at its net liquid valuation, when you consider other long-term investments held.
More good news – with limited downside, investors have been picking up their buy interest in NTIP, and an upside breakout could be approaching. My quant sorting formulas have been highlighting Network-1 as a serious turnaround candidate if just one of a handful of potential catalysts appears over the coming months.
Future Value Drivers
Corey M. Horowitz, Chairman and CEO since in December 2003 has done a respectable job of running the patent portfolio business, developing, licensing and protecting intellectual property assets. NTIP works with individual inventors and corporate and academic patent owners to fully develop and license their intellectual property assets in order to maximize the value of the underlying inventions.
Total returns from the stock have largely mimicked long-term gains in the Russell 2000 index since late 2013. Plus, the business model and super-high cash position should support price appreciation and dividend gains in a positive fashion for years to come.
Future upside in the stock will be a function of: (1) its cash stash for investment in new income producing assets, (2) a speculative biotech investment, (3) its large patent portfolio of 28 owned directly to create license/royalty income, and (4) any potential court win/settlement from a single or many of the lawsuits for patent infringement now underway (including another 67 patents that have expired).
Again, the major pull for me to invest in Network-1 is the real and honest backing of value around $2.50 per share with plain vanilla, no-risk cash on the balance sheet. Management has enough cash to invest in income producing patents, or buy corporate bonds returning 3-5% annually, or even dabble in purchasing other equities for yield and price appreciation. Below is a graph since 2013 highlighting the near-record surplus of cash vs. total liabilities today.
Reviewing its business valuation, tangible book value at the end of December (including cash, long-term investments and physical assets) is roughly equal to the equity market worth of $59 million at $2.50 per share. If you are searching for a low-risk upfront valuation, few other companies are positioned like Network-1.
Speculative Biotech Investment
Assuming downside is limited, what is the upside for NTIP investors? Over the last several years, management has invested $6 million in a private biotech concern working on a better vaccine for pertussis, commonly known as whopping cough. With 200,000 deaths and 25 million global cases of pertussis each year, ILiAD is working on a new more effective vaccine for children and adults, with 58 owned patents and late phase clinical trials underway.
I am no expert at valuing biotechs, so here is what contributor No Called Strikes Investing of Seeking Alpha (who writes about NTIP on a regular basis) explained in his latest article,
NTIP has an equity position in ILiAD Biotechnologies, a private trial-phase biotech company that is set to begin Phase 3 trials for their BPZE1 Pertussis vaccine. To date NTIP has invested $6mm into the company, giving them a 9.5% ownership stake (7.2% fully diluted). I dove into greater detail in my previous article, but to summarize I would value this equity stake at about $50mm, based on a BPZE1 addressable market of $1.5 billion, 25% market share, an 85% chance of Phase 3 approval, a moderately conservative price to sales ratio of 1.75, and a 10% discount rate of the future cash flow. If Phase 3 trials fail, NTIP’s equity stake will be worth nothing, but if trials are successful the stake could eclipse NTIP’s current market cap.
Below is a summary of the business taken from the ILiAD website.
Patent Licensing & Lawsuits
On top of the potential new investments of cash generate future income, or the ILiAD ownership stake turns into a big windfall on FDA approval of its pertussis vaccine under development, the existing patent portfolio is also worth something. Some of the patents expired in 2020-21, and this is the main reason NTIP’s stock quote has gone nowhere for many months. However, a number of lawsuits for patent infringement are still ongoing against many of the largest technology businesses in America. These could result in court victories or settlements with payouts in the tens of millions of dollars.
Again, I am not an expert on patents or companies running portfolios of them to generate sales and income. Below is a summary taken from Network-1’s 2021 10-K SEC filing made in March 2022.
As a result of the expiration of our Remote Power Patent, we no longer receive licensing revenue for such patent for any period subsequent to the expiration date (March 7,2020). However, subsequent to the expiration date of our Remote Power Patent, we received licensing revenue from certain licensees for periods prior to March 7, 2020. On March 30, 2021, we entered into an amendment to our Settlement and License Agreement, dated May 25, 2011, with Cisco (the “Agreement”) pursuant to which Cisco paid $18,692,000 to us to resolve a dispute relating to Cisco’s contractual obligation to pay royalties under the Agreement pertaining to the Remote Power Patent for the period beginning in the fourth quarter of 2017 through March 7, 2020 (see Note K to our consolidated financial statements included in this Annual Report). In addition, on July 26, 2021, we entered into a settlement agreement with Hewlett-Packard pursuant to which Hewlett-Packard paid us $17,000,000 in full settlement of a patent litigation involving our Remote Power Patent (see Note K to our consolidated financial statements included in this Annual Report). We believe that NETGEAR, Inc. (“Netgear”), another licensee of our Remote Power Patent, is obligated to pay us royalties that accrued but were not paid since the fourth quarter of 2017 through March 7, 2020. We have pending litigation against Netgear to recover such royalties (see Note K to our consolidated financial statements included in this Annual Report)…
Our Cox Patent Portfolio, acquired from Dr. Ingemar Cox in February 2013, currently consists of thirty-nine (39) patents, relating to enabling technology for identifying media content on the Internet, such as audio and video, and taking further actions to be performed based on such identification. All of the patents within our Cox patent portfolio expired in September 2021 except for two patents which expire in July 2023 and November 2023. We have pending litigation against Google Inc. and YouTube, LLC involving assertion of certain patents within our Cox Patent Portfolio (see “Legal Proceedings” at pages 21-22 hereof). The patents within our Cox Patent Portfolio are based on a patent application filed in 2000. Since the acquisition of the Cox Patent Portfolio in February 2013, we have been issued thirty-four (34) additional patents relating to this portfolio. The claims in these thirty-four (34) additional patents are generally directed towards systems of content identification and performing actions following therefrom…
Our M2M/IoT Patent Portfolio acquired in December 2017 relates 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 as well as automobiles and drones. The M2M/IoT Patent Portfolio currently consists of thirty (30) issued U.S. patents, five pending U.S. patent applications and seven additional pending non-U.S. patent applications. Since we acquired the M2M/IoT Patent Portfolio in December 2017 we have been issued eighteen (18) additional U.S. patents. We anticipate further issuances of additional claims for this portfolio. The expiration dates of the thirty (30) issued U.S. patents currently within our M2M/IoT Patent Portfolio range from September 2033 to May 2034. During the year ended December 31, 2021, we were issued one new U.S. patent and three non-U.S. patents for the M2M/IoT Portfolio…
On March 25, 2022, we acquired the HFT Patent Portfolio from Nima Badizadegan. The newly acquired portfolio covers 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. The HFT Patent Portfolio currently includes six issued U.S. patents and two pending U.S. patents…
Our Mirror Worlds Patent Portfolio acquired in May 2013 covers foundational technologies that enable unified search and indexing, displaying and archiving of documents in a computer system. All of our patents within our Mirror Worlds Patent Portfolio expired. The Mirror Worlds Patent Portfolio includes U.S. Patent No. 6,006,227 (the “227 Patent”) and U.S. Patent No. 8,255,439 which are currently being asserted in our litigation against Facebook, Inc. (see “Legal Proceedings” at pages 21-22 hereof). Our 227 Patent was previously asserted in litigations against Apple Inc. and Microsoft Corporation which were settled resulting in aggregate payments to us of $29,650,000…
Our Remote Power Patent (U.S. Patent No. 6,218,930) covers the delivery of power over Ethernet cables for the purpose of remotely powering network devices such as wireless access ports, IP phones and network-based cameras. Our Remote Power Patent expired on March 7, 2020. Notwithstanding the expiration of the Remote Power Patent in March 2020, we received in 2021 aggregate licensing revenue of $36,029,000 relating to periods prior to expiration of the patent.
Technical Momentum Turnaround
What’s convinced me to purchase shares in April is investor buying interest has improved around its cash liquidation value. During 2022 on a price range between $2.40 and $2.80, there exists no solid rationale to sell your position. Trading volume has been extremely low. On the charts, we are starting to see buyers have a greater affect on price. And, basic momentum indicators are beginning to turn higher.
In fact, the technical setup looks almost identical to the last big run higher in price between September 2020 and February 2021 pictured below. Reviewing daily trading action over the past two years, a decent Negative Volume Index zigzag (circled in red) and rising On Balance Volume in the face of a minor price decline (the blue arrows mark OBV bottoms) can be positive signals.
The most bullish change in early 2022 has been in the 21-day Chaikin Money Flow indicator. Circled in green on the chart, CMF has recorded a spurt of serious buying in February and April, just like happened days before the September 2020 breakout from a prolonged basing pattern.
All told, Network-1 has outlined shareholder gains including dividends at nearly the same rate as the small-cap iShares Russell 2000 ETF (IWM) pictured below. And, the NTIP advance has been achieved with excessive levels of cash and limited risk-taking by management.
Revenues for 2022-23 could be low to nonexistent, according to the 10-K filing. Unfortunately, several million in annual operating costs including ongoing litigation expense are being spent from cash reserves. Wall Street expectations for this year are nonexistent regarding Network-1. Yet, a lack of visibility on its future and timid investor sentiment could change quickly.
Management will likely invest tens of millions in new patents and other assets this year and next, financed with its large cash holdings. The biotech investment alone could end up being worth more than the entire equity market value of the company today. Lawsuits could be won or settled, and new license agreements could be signed on its existing patent portfolio.
This selection is basically a game of patience for investors. As long as management does not enter into some horrible capital investments, the current cash liquidation value should serve as a real backstop (“margin of safety” for Ben Graham followers), preventing major losses for shareholders.
I purchased a very small stake in relation to portfolio size, as my momentum formulas sense some positive news event could be on the horizon. Given the bargain valuation near cash levels, any bullish announcement will likely spike price, similar to September 2020. My conclusion: investors in NTIP are essentially getting the biotech investment and lawsuit upside for free today.
Remember, Network-1 is a microcap with only three employees. It is more speculative and riskier than a regular blue-chip equity investment. As such, NTIP should remain a very minor part of portfolio construction. I suggest keeping dollar position size to less than 1% of your specific financial security portfolio.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.