Network-1 Technologies Inc. (NTIP)

[geodan]

Great article on SeekingAlpha about NTIP today

http://seekingalpha.com/article/4046282-networkminus-1-technologies-catalysts-horizon

Network-1 has a strong balance sheet and a record of consistent profitability.

Despite a recent run-up, the valuation is still compelling.

Possible catalysts are visible on the horizon.



Network-1 CEO and Chairman Corey M. Horowitz

Several event-driven catalysts seem to be emerging on the horizon for Network-1 Technologies Inc. (NYSEMKT:NTIP). This article will describe these possible catalysts and evaluate the merits of an investment in this microcap intellectual property firm. First, let's take a look at the fundamentals.

Despite the lofty valuations of most US stocks these days, Network-1 Technologies is one company that is profitable, growing, debt free and trading at a P/E under 4. Here are some other basic metrics:

Market Cap: 87.5M

Cash and cash equivalents: 57.8M

Price/Book: 1.7

Price/Sales: 1.4

Price/Cash Flow: 2.3

Forward dividend yield: 2.7%

Debt: 0

TTM ROE: 64%

Insider Ownership: 32.8%

Interested?

Network-1 develops, licenses and protects intellectual property assets. Put another way, Network-1 is in the business of acquiring high-quality patents on cutting edge inventions and then monetizing them by selling usage licenses. Since Network-1 owns technology patents, their licensees are often well-known tech companies such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Cisco (NASDAQ:CSCO). The interesting part is that historically, most or all of Network-1's licensees have been unwilling customers.

This is where the "protect" part of the firm's mission statement comes in as a bulk of the operating expenses consist of legal consulting fees. Essentially, Network-1's CEO and Chairman, Corey M. Horowitz, has developed a consistent track record of dragging Fortune 500 tech companies into court and extracting multimillion-dollar licensing deals from them. If this business model sounds unscrupulous at first glance, consider that Network-1 actually is supporting technological innovation, which makes the world a better place, by providing inventors with a credible way to monetize their ideas.

In the fiercely competitive IP industry, Network-1 isn't the biggest in terms of financial resources or staff, but unlike most of its competitors, the firm has reported a solid profit almost every quarter for the past six years. A brief overview of the competition will demonstrate just how tough the IP industry is:

-RPX Corporation (NASDAQ:RPXC). Market cap: 579M. EPS has declined for four years straight mostly due to equity dilution.

-Acacia Research Corporation (NASDAQ:ACTG). Market cap: 295M. About to post its fourth straight year of negative earnings.

-Wi-Lan Inc. (NASDAQ:WILN). Market cap: 206M. Earnings are spotty. ROE hasn't been above 5% since 2011.

-VirnetX Holdings Corp. (NYSEMKT:VHC): Market cap: 130M. Book value per share is in free fall from 1.42 per share in 2011 to .22 per share today.

-Marathon Patent Group, Inc. (NASDAQ:MARA). Market cap: 30M. Negative free cash flow every year since the 2012 IPO.

To be fair, I have not done a deep dive on any of the companies listed above and some of them may be sound investments. However, after a cursory review of their financial statements, I am happy to pass on all of them.

Looking at the weak fundamentals of the competition, one might be inclined to forego investing in the IP industry altogether. On the other hand, Network-1 stands out as an outlier and a consistent performer in this industry.

With that overview out of the way, let's have a look at what's been happening with Network-1 lately. Over the past year, the stock has almost doubled. The 85% capital gain has coincided with two blowout quarters in both Q2 and Q3. In Q3 2016, Network-1 set all-time records in almost every operating metric and year-over-year operating income growth for the quarter was 2251%.



At this point, savvy SA readers will start to wonder whether the recent performance is sustainable. No matter how impressive, past performance is only useful to the extent that it may hold clues to what the future may hold.

Network-1 is a relatively easy company to understand because the firm owns four main assets with revenue generating potential. These intangible assets are portfolios of patents known as (1) Mirror Worlds, (2) Remote Power, (3) Cox, and (4) QoS. A detailed description of each of these assets can be found at Network-1's website. I will discuss each of these four assets and their monetization potential. The chart below provides a quick snapshot of what follows.
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In addition to the 12M-15M in recurring royalty revenues that we can expect from the Remote Power asset through March 2020, litigation related to this patent portfolio is still pending and investors should expect future revenue-generating settlements related to this litigation. Network-1 initiated this legislation with 16 defendant tech firms in September 2011, and as of this writing, only 12 of the 16 have settled with Network-1. Of note, the courts have consistently ruled in Network-1's favor in this litigation, so the writing is probably on the wall for the remaining four holdouts.

So what can we expect from the future settlements with these firms? Perhaps the recent example of Polycom Inc. (NASDAQ:PLCM) can offer some insight. Polycom capitulated in October 2016 and agreed to pay a one-time license initiation fee of 5M for past use in addition to ongoing royalties.