Network-1 Technologies Inc (NTIP) - A micro cap with downside protection and 50+% upside potential

Network-1 Technologies Inc (NTIP) is a micro cap IP licensing company trading on the AMX market of the NYSE. Here's the firm's vital statistics at the time of writing;

 Market cap = $61 Million 

Price per share = $2.56

Enterprise Value = $1.5 Million

D/E = 0

P/FCF = 5.4

P/B = 1.03

Quick Ratio = 25.34

(ttm) Revenue = $25 Million

(ttm) FCF = $12 Million

Before you  get too excited, yes this stock has got some hair on it!

NTIP  basically acquires ownership or distribution rights of intangible assets in the form of intellectual property and then licenses them out to its customers which include Cisco Systems Inc , Juniper Networks Inc  and Dell Inc. Now to the hairy bits!

NTIP's derives the majority of its revenues and earnings from its Remote Power Patent  which has generated licensing revenue in excess of $121,000,000 from May 2007 through December 31, 2017. The company is currently engaged in patent infringment litigation with Hewlett Packard Co. over claims that the latter infringed upon the former's patents. Thus far the legal preceedings are not going in NTIP's favour. Here's what the company has to say in the most recent 10-K;

"On November 13, 2017, a jury empaneled in the United States District Court for the Eastern District of Texas found that certain claims of our Remote Power Patent were invalid and not infringed by Hewlett-Packard (the "HP Jury Verdict"). We have depended on our Remote Power Patent for a significant portion of our revenue. In addition, we have been entirely dependent upon royalty bearing licenses for our Remote Power Patent for our recurring
revenue. If the District Court enters an order confirming the HP Jury Verdict and finding certain claims of our Remote Power Patent obvious (invalid) and either (i) we are unable to reverse the District Court order on appeal, or (ii) there is an arbitration ruling that the
District Court order relieves the obligation of certain of our licensees including Cisco Systems, Inc., our largest licensee, to continue to pay us royalties and the District Court order is not subsequently reversed on appeal, our business, results of operations and cash-flow will be materially adversely effected."

So if NTIP fails in the appeal process it will lose out on the royalty payments expected from Cisco Inc and a number of other licensees who have been withholding royalty payments whilst the legal proceedings are in play. Not only that but the Remote Power  Patent is set to expire in 2020.

Now to the silver lining,

NTIP is currently trading at just above book value and  over 95% of its assets are cash & equivalents. Since the company is carrying no debt the balance sheet offers some downside protection for the share price.

NTIP's history with patent infringement litigation has been pretty successful with favourable outcomes against Sony, Motorola, Samsung and Huawei amongst others. If NTIP can successfully overturn the district court ruling it will be able to legally claim royalties from Cisco, Dell and Netgear.

NTIP also currently has patent infringment litigation proceedings underway against Facebook and has received a recent favourable ruling against Google. It also has a number of other patent portfolios including its "Mirror Worlds Patent Portfolio", "Cox Patent Portfolio" and "M2M/IoT Patent Portfolio" which it has  or  is in the process of monetizing.

Aside from the litigation expenses NTIP runs a low cost operation with a  couple of rented offices and a handful of employees. This translates to a high margin business generating strong free cash flow relative to revenues. Management has some skin the gain with inside ownership of around 26% and the firm is currently paying dividends and buying back shares.

Conclusion

I'm not that excited by NTIP as a long-term investment, patents are not as strong as other intangible assets like brand names given their monetizable lifespan is limited and the risk that they cannot be successfully enforced is always a possibility.

The interest for me is in the short to mid-term prospects for the stock. The absence of debt and the fact that virtually all the assets are cash & equivalents means buying around book value offers a credible floor on the share price. If NTIP gets a favourable outcome with its litigation proceedings or strikes up some substantial licensing agreements with its other patent portfolios theres a decent chance the stock could rally back up to prior levels of around $3.80-4.

Let's see how this plays out.

Thanks for reading,

David

Disclaimer: The author is long NTIP