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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-14896
NETWORK-1 SECURITY SOLUTIONS, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3027591
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
445 Park Avenue, Suite 1028, New York, New York 10022
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
212-829-5770
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(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares of Common Stock, $.01 par value per share, outstanding as
of May 10, 2007 was 23,173,057
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
NETWORK-1 SECURITY SOLUTIONS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 2007 (unaudited)
and December 31, 2006............................................ 3
Condensed Statements of Operations for the three months
ended March 31, 2007 and 2006 (unaudited)........................ 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2007 and 2006 (unaudited)........................ 5
Notes to Condensed Financial Statements.......................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........ 14
Item 3. CONTROLS AND PROCEDURES.......................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 24
Item 3. Defaults Upon Senior Securities.................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
Item 5. Other Information................................................ 24
Item 6. Exhibits......................................................... 24
SIGNATURES................................................................ 25
2
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,086,000 $ 1,797,000
Prepaid Insurance 53,000 74,000
Other current assets 3,000 4,000
------------ ------------
Total current assets 1,142,000 1,875,000
Equipment, net 10,000 11,000
Security Deposits 6,000 6,000
Patents 77,000 79,000
------------ ------------
$ 1,235,000 $ 1,971,000
============ ============
LIABILITIES
-----------
Current liabilities:
Accounts payable $ 332,000 $ 350,000
Accrued expenses and other current liabilities 89,000 219,000
------------ ------------
Total current liabilities 421,000 569,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
--------------------
Common stock - $0.01 par value ; authorized
50,000,000 shares; 19,839,724 shares issued
and outstanding at March 31, 2007 and
19,764,724 at December 31, 2006 198,000 197,000
Additional paid-in capital 47,955,000 47,484,000
Accumulated deficit (47,339,000) (46,279,000)
------------ ------------
814,000 1,402,000
------------ ------------
$ 1,235,000 $ 1,971,000
============ ============
See notes to condensed financial statements
3
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------------ ------------
Operating expenses:
General and administrative $ 614,000 $ 280,000
Non Cash Compensation 461,000 48,000
------------ ------------
LOSS BEFORE INTEREST INCOME (1,075,000) (328,000)
Interest income - net 15,000 12,000
------------ ------------
Net loss $ (1,060,000) $ (316,000)
============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.05) $ (0.02)
============ ============
WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 19,784,724 17,832,787
============ ============
See notes to condensed financial statements
4
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOW
UNAUDITED
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net loss $ (1,060,000) $ (316,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,000 2,000
Non Cash Compensation 461,000 48,000
Changes in:
Prepaid expenses and other current assets 22,000 23,000
Accounts payable, accrued expenses and other
current liabilities (148,000) (147,000)
------------ ------------
Net cash used in operating activities (722,000) (390,000)
------------ ------------
Cash Flows from Investing Activities -- --
------------ ------------
Cash Flows from Financing Activities
Issuance of Common Stock 11,000 1,494,000
------------ ------------
NET INCREASES [DECREASE] IN CASH AND CASH EQUIVALENTS (711,000) 1,104,000
Cash and cash equivalents, beginning of period 1,797,000 938,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,086,000 $ 2,042,000
============ ============
See notes to condensed financial statements
5
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PRESENTATION:
The accompanying condensed financial statements as of March 31, 2007 and for the
three month periods ended March 31, 2007 and March 31, 2006, are unaudited, but,
in the opinion of the management of Network-1 Security Solutions, Inc. (the
"Company"), contain all adjustments consisting only of normal recurring items
which the Company considers necessary for the fair presentation of the Company's
financial position as of March 31, 2007, and the results of its operations and
its cash flows for the three month periods ended March 31, 2007 and March 31,
2006. The condensed financial statements included herein have been prepared in
accordance with the accounting principles generally accepted in the United
States of America for interim financial information and the instructions to Form
10-QSB. Accordingly, certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2006 included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission. The
results of operations for the three months ended March 31, 2007 are not
necessarily indicative of the results of operations to be expected for the full
year.
[2] BUSINESS:
(a) The principal business of the Company is the acquisition, development,
licensing and protection of its intellectual property. The Company presently
owns six patents (the "Patent Portfolio") covering various telecommunications
and data networking technologies including, among others, patents covering the
delivery of power over Ethernet cable for the purpose of remotely powering
network devices, and the transmission of audio, video and data over computer and
telephony networks. The Company's strategy is to pursue licensing and strategic
business alliances with companies in the industries that manufacture and sell
products that make use of the technologies underlying its patents as well as
with other users of the technology who benefit directly from the technology
including corporate, educational and governmental entities.
In February 2004, the Company initiated licensing efforts relating to one of its
patents (U.S. Patent No. 6,218,930) covering the remote delivery of power over
Ethernet cables (the "Remote Power Patent"). To date the Company has not entered
into any license agreements with third parties with respect to its Remote Power
Patent, although as part of its settlement agreement with D-Link in April 2007,
D-Link has agreed to enter into a license agreement pertaining to the Company's
Remote Power Patent (See Note E[2] - Subsequent Events).
6
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
[2] BUSINESS: (CONTINUED)
(b) As reflected in the accompanying financial statements, the Company has
incurred substantial losses and has experienced net cash outflows from
operations for 2006 and the three month period ended March 31, 2007. For the
year ended December 31, 2006 and the three month period ended March 31, 2007,
the Company had no revenue from operations. The Company will continue to have
operating losses for the foreseeable future until it is successful in licensing
its patented technologies. The Company is dependent upon debt and equity
financing until it generates cash flows from operations. During the three month
period ended March 31, 2007, options to purchase 75,000 shares of common stock
were exercised, at exercise prices of $.12, $.14 and $.19 per share, resulting
in aggregate proceeds to the Company of $11,000. On April 16, 2007, the Company
completed a $5 million private placement of its securities (see Note E [1] -
Subsequent Events). The Company had cash and cash equivalents of $5,463,000 as
of April 30, 2007. The Company believes its current cash position will more
likely than not be sufficient to satisfy the Company's operations and capital
requirements until at least December 31, 2008, although there can be no
assurance that such funds will not be expended prior thereto.
[3] STOCK-BASED COMPENSATION:
In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R supersedes APB 25 and requires the
recognition of the cost of employee services received in exchange for stock
options and awards of equity instruments based on the grant-date fair value of
such options and awards, over the period they vest. Under APB 25, no
compensation was recorded in earnings for the Company's stock-based options
granted under the 1996 Stock Incentive Plan (the "Plan"). The pro forma effects
on net income and earnings per share for the awards issued under the Plan were
instead disclosed in a footnote to the financial statements. Under SFAS No.
123R, all share-based compensation is measured at the grant date, based on the
fair value of the award, and is recognized as an expense in earnings over the
requisite service period. On January 1, 2006, the Company adopted the provisions
of SFAS No. 123R, for its share-based compensations plans and began recognizing
the unvested portion of employee compensation from stock options and awards
equal to the unamortized grant-date fair value over the remaining vesting
period. Furthermore, compensation costs will also be recognized for any awards
issued, modified, repurchased, or canceled after January 1, 2006.
7
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
[3] STOCK-BASED COMPENSATION: (continued)
On February 2, 2006, the Company granted options to two directors to purchase
15,000 shares each at an exercise price of $1.31 per share and a consultant to
purchase 75,000 shares at an exercise price of $1.20 per share. The director
options vest over one year period at the rate of 3,750 shares per quarter
beginning May 4, 2006 and the consultant options vest over one year period at
the rate of 18,750 shares per quarter beginning March 31, 2006. The Company
recorded compensation expenses of $15,000 for these options during the quarter
ended March 31, 2006 based on the Black-Scholes option-pricing model. In
addition, during the quarter ended March 31, 2006, the Company also recorded
compensation expense of $15,000 and $18,000 for the vested portion of options
granted to directors and consultants, respectively, prior to January 1, 2006.
On February 28, 2007, the Company granted options to its Chairman and CEO to
purchase 375,000 shares each at an exercise price of $1.46 per share in
accordance with a new employment agreement (See Note D - Employment Arrangements
and Other Agreements). Such options vest in equal quarterly amounts of 93,750
shares beginning March 31, 2007 through December 31, 2007. The Company recorded
compensation expenses of $63,000 for these options during the quarter ended
March 31, 2007 based on the Black-Scholes option-pricing model. In addition,
during the quarter ended March 31, 2007, the Company also recorded compensation
expense of $8,000 and 19,000 for the vested portion of options granted to
directors and consultants, respectively, prior to January 1, 2007.
The fair value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing utilizing the following weighted average
assumptions:
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
------- -------
Risk-free interest rates 4.52% 4.51%
Expected option life in years 5 yrs. 5 yrs.
Expected stock price volatility 45.92% 69.8%
Expected dividend yield -0- -0-
0.00%
8
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
[4] REVENUE RECOGNITION:
The Company plans on recognizing revenue received from the licensing of its
intellectual property portfolio in accordance with Staff Accounting Bulletin No.
104, "Revenue Recognition" ("SAB No. 104") and related authoritative
pronouncements. Revenue is recognized when (i) persuasive evidence of an
arrangement exists, (ii) all obligations have been performed pursuant to the
terms of the license agreement, (iii) amounts are fixed or determinable and (iv)
collectibility of amounts is reasonably assured.
[5] LOSS PER SHARE:
Basic net loss per share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period. Diluted per share
data includes the dilutive effects of options, warrants and convertible
securities. Potential shares of 9,581,481 and 9,826,943 at March 31, 2007 and
2006, respectively, are anti-dilutive, and are not included in the calculation
of diluted loss per share. Such potential common shares reflect options and
warrants.
[6] CASH EQUIVALENTS:
The Company places cash investments in high quality financial institutions
insured by the Federal Deposit Insurance Corporation ("FDIC"). At March 31,
2007, the Company maintained cash balance of approximately $1,061,000 in excess
of FDIC limits.
NOTE B - COMMITMENTS AND CONTINGENCIES
On November 30, 2004, the Company entered into a master services agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
ThinkFire has been granted the exclusive worldwide rights (except for direct
efforts by the Company and related companies) to negotiate license agreements
for the Remote Power Patent with respect to certain potential licensees agreed
to between the parties. Either the Company or ThinkFire can terminate the
Agreement upon 60 days' notice for any reason or upon 30 days' notice in the
event of a material breach. The Company has agreed to pay ThinkFire a fee not to
exceed 20% of the royalty payments received from license agreements consummated
by ThinkFire on its behalf.
On January 18, 2005, the Company and Merlot Communications, Inc. ("Merlot")
amended the Patent Purchase Agreement originally entered into in November 2003
(the "Amendment") pursuant to which the Company paid additional purchase price
of $500,000 to Merlot in consideration for the restructuring of future
contingent payments to Merlot from the licensing or sale of the Patents. The
Amendment provides for future contingent payments by the Company to Merlot of
$1.0 million upon achievement of $25 million of Net Royalties (as defined), an
additional $1.0 million upon achievement of $50 million of Net Royalties and an
additional $500,000 upon achievement of $62.5 million of Net Royalties from
licensing or sale of the patents acquired from Merlot. Certain principal
stockholders of the Company and related parties were also principal stockholders
and directors of Merlot at the time of the original agreement in November 2003
and the Amendment.
9
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In August 2005, the Company entered into an agreement with Blank Rome, LLP
("Blank Rome"), a national law firm, pursuant to which Blank Rome has been
engaged to represent the Company in connection with all litigation involving the
Company's Remote Power Patent. Blank Rome has agreed to represent the Company
with respect to each litigation pertaining to the Remote Power Patent on a full
contingency basis (except for any proceeding before the International Trade
Commission). As compensation for its services on a full contingency basis, Blank
Rome will receive from the Company percentages of Net Consideration (as defined
in the agreement) ranging from 12.5% to 35% received by the Company by way of
settlement or judgment in connection with each litigation matter. The Company
has also agreed to compensate Blank Rome in an amount equal to 10% of the Net
Consideration received by the Company from certain designated parties mutually
agreed upon by the Company and Blank Rome in the event that prior to
commencement of litigation such designated parties enter into license agreements
or similar agreements with the Company.
In March 2006, the Company entered into a one year agreement with Alliance
Advisors, LLC ("Alliance") pursuant to which Alliance provides financial and
public relations services to the Company. In consideration for such services,
the Company pays Alliance a fee of $7,000 per month. In addition, the Company
issued Alliance 80,000 shares of common stock.
NOTE C - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS
On February 28, 2007, the Company entered into a new Employment Agreement with
Corey M. Horowitz pursuant to which Mr. Horowitz continued to serve as Chairman
and Chief Executive Officer for a two year term at an annual base salary of
$288,750 for the first year, increasing by 5% for the second year. In connection
with his employment agreement, Mr. Horowitz was issued a five (5) year option to
purchase 375,000 shares of common stock at an exercise price of $1.46 per share
which vests, on a quarterly basis over a one year period subject to acceleration
upon a change of control. The Company also agreed to issue to Mr. Horowitz on
the one year anniversary date an additional five (5) year option to purchase a
minimum of 375,000 shares of our common stock at an exercise price equal to the
closing price of our common stock on the date of grant, which option will vest
on a quarterly basis over a one year period. In addition to the aforementioned
option grants, the Company agreed to extend for an addition three (3) years the
expiration dates of all options and warrants (an aggregate of 2,620,000 shares)
expiring in calendar year 2007 and 2008 owned by Mr. Horowitz and CMH Capital
Management Corp. ("CMH"), an affiliate. In connection with the extension of the
expiration dates of such options and warrants, the Company recorded compensation
expense of $371,000 during the quarter ended March 31, 2007 based on the
Black-Scholes option pricing model. Under the terms of his Employment Agreement,
Mr. Horowitz shall receive bonus compensation in a amount equal to 5% of Company
royalties or other payments (before deduction of payments to third parties
including, but not limited to, legal fees and expenses and third party license
fees) received from licensing its patents (including patents currently owned and
acquired or licensed on an exclusive basis during the period in which Mr.
Horowitz continues to serve as an executive
10
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS: (CONTINUED)
officer of the Company) (the "Royalty Bonus Compensation"). Mr. Horowitz shall
also receive bonus compensation equal 5% of the gross proceeds from (i) the sale
of any of the Company's patents or (ii) the Company's merger with or into
another corporation or entity. The Royalty Bonus Compensation shall continue to
be paid to Mr. Horowitz for the life of each of the Company's patents with
respect to licenses entered into by us with third parties during Mr. Horowitz's
term of employment or at anytime thereafter, whether Mr. Horowitz is employed by
the Company or not, provided, that, Mr. Horowitz's employment has not been
terminated by the Company "For Cause" (as defined) or terminated by Mr. Horowitz
without "Good Reason" (as defined). In the event that Mr. Horowitz's employment
is terminated by the Company "Other Than For Cause" (as defined) or by Mr.
Horowitz for "Good Reason" (as defined), Mr. Horowitz shall be entitled to a
severance of 12 months base salary.
In accordance with his employment agreement, Mr. Horowitz also has certain
anti-dilution rights which provide that if at any time during the period ended
December 31, 2008, in the event that the Company completes an offering of its
common stock or any securities convertible or exercisable into common stock
(exclusive of securities issued upon exercise of outstanding options, warrants
or other convertible securities), Mr. Horowitz shall receive from the Company,
at the same price as the securities issued in the financing, such number of
additional options to purchase common stock so that he maintains the same
derivative ownership percentage (21.47%) of the Company based upon options and
warrants owned by Mr. Horowitz and CMH (an affiliated entity) and exclusive of
his ownership of shares of common stock as he and CMH owned as of the time of
execution of his employment agreement; provided, that, the aforementioned
anti-dilution protection shall be afforded to Mr. Horowitz up to maximum future
financings of $2.5 million. (See Note E[1].
NOTE D - LITIGATION
POWERDSINE SETTLEMENT
On November 17, 2005, the Company entered into a Settlement Agreement with
PowerDsine, Inc. (NASDAQ: PDSN) and PowerDsine Ltd. (collectively, "PowerDsine")
which dismissed, with prejudice, patent litigation brought by PowerDsine against
the Company in March 2004 in the United States District Court for the Southern
District of New York that sought a declaratory judgment that the Company's
Remote Power Patent (U.S. Patent No. 6,218,930) was invalid and not infringed by
PowerDsine and/or its customers.
Under the terms of the Settlement Agreement, the Company agreed that it will not
initiate litigation against PowerDsine for its sale of Power over Ethernet (PoE)
integrated circuits. In addition, the Company has agreed that it will not seek
damages for infringement from customers that incorporate PowerDsine integrated
circuit products in PoE capable Ethernet switches manufactured on or before
April 30, 2006. PowerDsine has agreed that it will not initiate, assist or
cooperate in any legal action relating to the Remote Power Patent. The Company
has also
11
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - LITIGATION: (CONTINUED)
agreed that it will not initiate litigation against PowerDsine or its customers
for infringement of the Remote Power Patent arising from the manufacture and
sale of PowerDsine Midspan products for three years following the dismissal date
(November 23, 2005). Following such three year period, the Company may seek
damages for infringement of the Remote Power Patent from PowerDsine or its
customers with respect to the purchase and sale of Midspan products beginning 90
days following the dismissal date of the litigation. The benefits afforded to
PowerDsine under the Settlement Agreement will cease in the event PowerDsine
institutes, assists or cooperates in any legal proceeding related to the Remote
Power Patent adverse to the Company (unless otherwise required by law to do so)
and PowerDsine customers will also forfeit benefits under the Settlement
Agreement if they engage in similar action.
No licenses to use the technologies covered by the Remote Power Patent were
granted to PowerDsine or its customers under the terms of the settlement. The
Settlement Agreement further provides that PowerDsine is obligated to provide
each of its customers with written notice of the settlement which notice shall
disclose that no license for the Remote Power Patent has been provided to
PowerDsine's customers and that in order to combine, modify or integrate any
PowerDsine product with or into any other device or software, PowerDsine's
customers may need to receive patent license(s) for such third party patents
which is the customer's responsibility. For the full text of the Company's
Settlement Agreement with PowerDsine, see Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on November
17, 2005.
D-LINK LITIGATION
On August 10, 2005, the Company commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated in the United States District Court
for the Eastern District of Texas, Tyler division (Civil Action No. 6:05W291),
for infringement of the Company's Remote Power Patent. The Company's complaint
sought, among other things, a judgment that its Remote Power Patent is
enforceable and has been infringed by the defendants. The Company also sought a
permanent injunction restraining the defendants from continued infringement, or
active inducement of infringement by others, of the Company's Remote Power
Patent. The litigation was settled in April 2007 (See Note E[2]).
12
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - SUBSEQUENT EVENTS
[1] On April 16, 2007, the Company completed a $5 million private placement of
its securities consisting of 3,333,333 shares of its common stock, at a purchase
price of $1.50 per share and five year warrants to purchase an aggregate of
1,666,667 shares of common stock at an exercise price of $2.00 per share.
Pursuant to the anti-dilution provisions of his employment agreement, Corey M.
Horowitz, Chairman and CEO, was issued a 5 year option to purchase 732,709
shares of common stock, at an exercise price of $1.67 per share, with respect to
the private placement.
[2] On April 25, 2007 the Company agreed to a settlement of its patent
infringement litigation against D-Link Corporation and D-Link Systems,
(collectively "D-Link") in the United States District Court for the Eastern
District of Texas, Tyler Division, for infringement of the Company's Remote
Power Patent (U.S. Patent No. 6,218,930). Under the terms of the settlement,
D-Link has agreed to enter into a license agreement for the Remote Power Patent
the terms of which include monthly royalty payments of 3.25% of the net sales of
D-Link branded Power over Ethernet products, including those products which
comply with the IEEE 802.3af and 802.3at Standards, for the full term of the
Remote Power Patent, which expires in March 2020. The royalty rate is subject to
adjustment beginning after the first quarter of 2008 to a rate consistent with
other similarly situated licensees of the Remote Power Patent based on units of
shipments of licensed products. In addition, D-Link has agreed to pay Network-1
$100,000.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WHICH
ARE FORWARD-LOOKING STATEMENTS THAT INCLUDE INFORMATION BASED UPON BELIEF OF OUR
MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO
MANAGEMENT. STATEMENTS CONTAINING TERMS SUCH AS "BELIEVES", "EXPECTS",
"ANTICIPATES", "INTENDS" OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD
LOOKING STATEMENTS. ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE
PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN
SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT
LIMITED TO, THOSE DISCUSSED BEGINNING ON PAGES 16-22 OF THIS QUARTERLY REPORT ON
10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007.
PLAN OF OPERATION
Our principal business is the acquisition, development, licensing and
protection of our intellectual property. We presently own six patents covering
various telecommunications and data networking technologies (the "Patent
Portfolio") including, among others, patents covering the delivery of power over
Ethernet for the purpose of remotely powering network devices, and the
transmission of audio, video and data over computer and telephony networks. Our
strategy is to pursue licensing and strategic business alliances with companies
in the industries that manufacture and sell products that make use of the
technologies underlying our patents as well as with other users of the
technology who benefit directly from the technology including corporate,
educational and governmental entities.
On November 18, 2003, we acquired the Patent Portfolio from Merlot
Communications, Inc., a broadband communications solutions provider. In February
2004, following its review of applicable markets, the Company initiated
licensing efforts relating to one of its patents (U.S. Patent No. 6,218,930)
covering the remote delivery of power over Ethernet cable (the "Remote Power
Patent"). We have focused, and will continue to focus, our efforts on licensing
its Remote Power Patent. As of the date of this Report, we have not entered into
any license arrangement with respect to the Remote Power Patent although as part
of our settlement agreement with respect to our litigation with D-Link reached
in April 2007, D-Link has agreed to enter into a license agreement pertaining to
our Remote Power Patent (See Note E[2] - Subsequent Events to the Financial
Statements). During the next 12 months, we do not anticipate licensing efforts
for our other patents besides our Remote Power Patent.
To date we have incurred significant losses and at March 31, 2007 had an
accumulated deficit of $(47,339,000). For the year ended December 31, 2006, we
incurred a net loss of $(1,952,000) and incurred a net loss of $(1,060,000) for
the three months ended March 31, 2007. We anticipate that we will continue to
incur losses until we enter into material license agreements with respect to our
patented technologies. We have not achieved any revenue from our technology
licensing business as of March 31, 2007. Our inability to consummate license
14
agreements and achieve revenue from our patented technologies would have a
material adverse effect on our operations and its ability to continue business.
We do not currently have any revenue from operations. Our success and
ability to generate revenue is largely dependent on our ability to consummate
licensing arrangements with third parties. In November 2004, we entered into an
agreement with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
ThinkFire has been granted the exclusive worldwide rights to negotiate license
agreements for the Remote Power Patent with certain agreed-upon potential
licensees. We have agreed to pay ThinkFire a fee not to exceed 20% of the
royalty payments received from license agreements consummated by ThinkFire on
its behalf.
On April 25, 2007 we agreed to a settlement of our patent infringement
litigation against D-Link Corporation and D-Link Systems, (collectively
"D-Link") in the United States District Court for the Eastern District of Texas,
Tyler Division, for infringement of our Remote Power Patent (U.S. Patent No.
6,218,930). Under the terms of the settlement, D-Link has agreed to enter into a
license agreement for the Remote Power Patent the terms of which will include
monthly royalty payments of 3.25% of the net sales of D-Link branded Power over
Ethernet products, including those products which comply with the IEEE 802.3af
and 802.3at Standards, for the full term of the Remote Power Patent, which
expires in March 2020. The royalty rate is subject to adjustment beginning after
the first quarter of 2008 to a rate consistent with other similarly situated
licensees of the Remote Power Patent based on units of shipments of licensed
products. In addition, D-Link has agreed to pay us $100,000.
Our success depends on our ability to protect our intellectual property
rights. In the future, it may be necessary for us to commence patent litigation
against third parties whom we believe require a license to our patents. In
addition, we may be subject to third-party claims seeking to invalidate our
patents. These types of claims, with or without merit, may subject us to costly
litigation and diversion of our focus. In August 2005, we engaged Blank Rome LLP
as litigation counsel with respect to the Remote Power Patent on a contingency
basis pursuant to which Blank Rome is entitled to share in the proceeds of any
successful enforcement of the Remote Power Patent (See Note C Commitments and
Contingencies and Risk Factors - "We are currently relying upon our contingency
fee agreement with Blank Rome"). If third parties making claims against us
seeking to invalidate our Remote Power Patent are successful, they may be able
to obtain injunctive or other equitable relief, which effectively could block
our ability to license or otherwise capitalize on its patent. Successful
litigation against us resulting in a determination that our Remote Power Patent
is invalid would have a material adverse effect on the Company.
We have financed our operations primarily from the sale of equity
securities. On December 21, 2004 and January 13, 2005, we completed a private
offering of equity securities resulting in gross proceeds of $2,685,000. In
addition, during the first quarter of 2006 we received $1,493,726 of cash
proceeds from the exercise of warrants issued in December 1999. In April 2007,
we completed a private offering of equity securities resulting in gross proceeds
of $5,000,000. We anticipate, based on currently proposed plans and assumptions,
relating to our operations, that our cash and cash equivalents of approximately
$5,463,000 as of April 30, 2007 will more likely than not be sufficient to
satisfy our operations and capital requirements until at least December 31,
2008. There can be no assurance, however, that such funds will not be expended
prior thereto. In the event our plans change, or our assumptions change, or
prove to be
15
inaccurate (due to unanticipated expenses, difficulties, delays or otherwise),
we may have insufficient funds to support our operations prior to December 31,
2008. Our inability to consummate licensing arrangements with respect to its
Remote Power Patent and generate revenues therefrom on a timely basis or obtain
additional financing when needed would have a material adverse effect on our
company, requiring us to curtail or cease operations. In addition, any equity
financing may involve substantial dilution to our current stockholders.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond our control. The following discussion
highlights the most material of the risks.
WE HAVE A HISTORY OF LOSSES AND NO REVENUE FROM CURRENT OPERATIONS.
We have incurred substantial operating losses since our inception, which has
resulted in an accumulated deficit of $(47,339,000) as of March 31, 2007. For
the years ended December 31, 2006 and 2005, we incurred net losses of
$(1,958,000) and $(1,332,000), respectively. For the three months ended March
31, 2007, we incurred a net loss of $(1,060,000). We have financed our
operations primarily by sales of equity securities. Since December 2002, when we
discontinued our security software products and following the commencement of
our new technology licensing business in November 2003, we have had no material
revenue from operations for the years ended December 31, 2005 and December 31,
2006 and for the three months ended March 31, 2007. Our ability to achieve
revenue and generate positive cash flow from operations is dependent upon
consummating licensing agreements with respect to our patented technologies. We
may not be successful in achieving licensing agreements with third parties and
our failure to do so would have a material adverse effect on our business,
financial condition and results of operations. We may not be able to achieve
revenue or generate positive cash flow from operations from our licensing
business.
WE COULD BE REQUIRED TO STOP OPERATIONS IF WE ARE UNABLE TO DEVELOP OUR
TECHNOLOGY LICENSING BUSINESS OR RAISE CAPITAL WHEN NEEDED.
We anticipate, based on our currently proposed plans and assumptions relating to
our operations (including the timetable of, costs and expenses associated with
our continued operations), that our cash position of $5,463,000 at April 30,
2007 will more likely than not be sufficient to satisfy our operations and
capital requirements until at least December 31, 2008. However, we may expend
our funds prior thereto. In the event our plans change, or our assumptions
change or prove to be inaccurate (due to unanticipated expenses, difficulties,
delays or otherwise), we could have insufficient funds to support our operations
prior to December 31, 2008. Our inability to obtain additional financing when
needed, absent generating sufficient cash from licensing arrangements, would
have a material adverse effect on our company, requiring us to curtail or
possibly cease our operations. In addition, any additional equity financing may
involve substantial dilution to the interests of our then existing stockholders.
16
OUR LICENSING BUSINESS MAY NOT BE SUCCESSFUL.
In November 2003, we entered the technology licensing business following our
acquisition of six patents relating to various telecommunications and data
networking technologies including, among others, patents covering the delivery
of remote power over Ethernet and the transmission of audio, video and data over
computer and telephony networks. Accordingly, we have a limited history in the
technology licensing business upon which an evaluation of our prospects and
future performance can be made. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in the development,
operation and expansion of a new business based on patented technologies in a
highly specialized and competitive market. We may not be able to achieve revenue
or profitable operations from our new licensing business.
OUR FUTURE SOURCE OF LICENSING REVENUE IS UNCERTAIN.
In February 2004, we initiated our first licensing efforts relating to the
technologies in our remote power patent (U.S. Patent No. 6,218,930) (the "Remote
Power Patent"). To date, we have not entered into any licensing agreements with
third parties with respect to our Remote Power Patent or our other patented
technologies, although D-Link has agreed to enter into a license agreement with
us as part of a settlement agreement regarding pending litigation (See Note E[2]
to the Financial Statements). Our inability to consummate licensing agreements
and achieve revenue from our patented technologies would have a material adverse
effect on our operations and our ability to continue our business. In addition,
in the event we consummate license arrangements with third parties, such
arrangements are not likely to produce a stable or predictable stream of revenue
in the foreseeable future. Furthermore, the success of our licensing efforts
depends upon the strength of our intellectual property rights.
WE ARE CURRENTLY RELYING UPON THE EFFORTS OF THINKFIRE TO CONSUMMATE LICENSING
AGREEMENTS FOR OUR REMOTE POWER PATENT WITH CERTAIN SELECT POTENTIAL LICENSEES.
On November 30, 2004, we entered into a Master Services Agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
we granted ThinkFire the exclusive (except for us and related companies)
worldwide rights to negotiate license agreements for our Remote Power Patent
with respect to certain potential licensees agreed to between the parties.
Either we or ThinkFire can terminate the Agreement upon 60 days notice for any
reason or upon 30 days notice in the event of a material breach. We have agreed
to pay ThinkFire a fee not to exceed 20% of the royalty payments received from
license agreements consummated by ThinkFire on our behalf. ThinkFire may not be
successful in consummating license agreements on our behalf and even if such
agreements are consummated they may not result in significant royalty payments
to us.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGIES.
Our success is substantially dependent upon our proprietary technologies and our
ability to protect our intellectual property rights. We currently hold 6 patents
issued by the U.S. Patent Office that relate to various telecommunications and
data networking technologies and include among other things, patents covering
the transmission of audio, voice and data over computer and telephony networks
and the delivery of remote PoE networks. We rely upon our patents and trade
secret laws, non-disclosure agreements with our employees, consultants and third
parties to
17
protect our intellectual property rights. The complexity of patent and common
law, combined with our limited resources, create risk that our efforts to
protect our proprietary technologies may not be successful. We cannot assure you
that our patents will be upheld or that third parties will not invalidate our
patent rights. In the event our intellectual property rights are not upheld,
such an event would have a material adverse effect on us.
WE ARE CURRENTLY RELYING UPON OUR CONTINGENCY FEE AGREEMENT WITH BLANK ROME.
In August 2005, we entered into an agreement (the "Agreement") with Blank Rome,
LLP ("Blank Rome"), a national law firm, pursuant to which Blank Rome has been
engaged to represent us in connection with all litigation involving our Remote
Power Patent. Blank Rome has agreed to represent us with respect to each
litigation pertaining to the Remote Power Patent on a full contingency basis
(except for any proceeding before the International Trade Commission). As
compensation for its services on a full contingency basis, Blank Rome will
receive from us percentages of Net Consideration (as defined in the Agreement)
ranging from 12.5% to 35% received by us by way of settlement or judgment in
connection with each litigation matter. We have also agreed to compensate Blank
Rome in an amount equal to 10% of the Net Consideration received by us from
certain designated parties mutually agreed upon by us and Blank Rome (the
"Designated Parties") in the event such Designated Parties enter into license
agreements or similar agreements with us during the period of Blank Rome's
engagement.
The Agreement may be terminated by either Blank Rome or us upon 30 days notice.
If we elect to terminate the Agreement, we will compensate Blank Rome in an
amount equal to 5% of the Net Consideration received by us from the Designated
Parties with whom Blank Rome has not commenced litigation on our behalf,
provided that such parties had substantive licensing or settlement discussions
related to our Remote Power Patent during the term of the Agreement and entered
into a license agreement or similar agreement with us providing for Net
Consideration within the 12 month period following termination. In addition, in
the event of termination during the pendency of litigation, Blank Rome will
receive its pro-rata share of Net Consideration based upon its hourly time
charges with respect to parties against whom Blank Rome commenced litigation (or
defended) on our behalf. In the event the Agreement with Blank Rome is
terminated, depending upon our financial resources at the time, we may need to
enter into a contingent fee agreement with a new law firm in order to enforce
and/or defend our Remote Power Patent and our inability to secure such an
arrangement on satisfactory terms and on a timely basis may have a material
adverse effect on us.
18
ANY LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY OR ANY THIRD PARTY CLAIMS TO
INVALIDATE OUR PATENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our success depends on our ability to protect our intellectual property rights.
In August 2005, we commenced patent litigation against D-Link Corporation and
D-Link Systems, Incorporated for infringement of our Remote Power Patent and in
April 2007 we entered into a settlement agreement with the D-Link parties (See
Note E[2] - Subsequent Events to the Financial Statements). In the future, it
may be necessary for us to commence patent litigation against additional third
parties whom we believe require a license to our patents. In addition, we may be
subject to claims seeking to invalidate our patents, as had been asserted by
D-Link as a defense in their litigation with us. These types of claims, with or
without merit, may subject us to costly litigation and diversion of management's
focus. If we are unsuccessful in enforcing and validating our patents and/or if
third parties making claims against us seeking to invalidate our patents are
successful, they may be able to obtain injunctive or other equitable relief,
which effectively could block our ability to license or otherwise capitalize on
our proprietary technologies. Successful litigation against us resulting in a
determination that our patents are invalid would have a material adverse effect
on us.
OUR SETTLEMENT WITH D-LINK DOES NOT NECESSARILY MEAN WE WILL ACHIEVE ADDITIONAL
MATERIAL LICENSE AGREEMENTS PERTAINING TO OUR REMOTE POWER PATENT.
On April 25, 2007 we entered into a settlement agreement with respect to our
patent litigation against D-Link Corporation and D-Link Systems, Incorporated
pending in the United States District Court for the Eastern District of Texas,
Tyler Division, for infringement of our Remote Power Patent. Under the terms of
the settlement, D-Link has agreed to enter into a license agreement for our
Remote Power Patent the terms of which will include monthly royalty payments of
3.25% of the net sales of D-Link branded Power over Ethernet products, including
those products which comply with the IEEE 802.3af and 802.3at Standards, for the
full term of the Remote Power Patent, which expires in March 2020. The royalty
rate is subject to adjustment beginning after the first quarter of 2008 to a
rate consistent with other similarly situated licensees of the Remote Power
Patent based on units of shipments of licensed products. In addition, D-Link has
agreed to pay us $100,000. Notwithstanding our settlement with the D-Link
parties, there is no assurance that we will be able to achieve additional
license agreements with third parties relating to our Remote Power Patent or
that such license arrangements will result in material revenue to us.
MATERIAL LICENSING REVENUES FROM OUR REMOTE POWER PATENT MAY BE DEPENDENT UPON
THE APPLICABILITY OF THE IEEE STANDARD.
The Institute of Electrical and Electronic Engineers (IEEE) is a non-profit,
technical professional association of more than 360,000 individual members in
approximately 175 countries. The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries. In 1999, the IEEE formed a task force to facilitate the
adoption of a standardized methodology for the delivery of remote power over
Ethernet networks which would insure interoperability among vendors of switches
and terminal devices. In June 2003, the IEEE Standards Association approved the
802.3af Power Over Ethernet standard (the "Standard"), which covers technologies
deployed in delivering power over Ethernet cables including whether deployed in
switches or as standalone midspan hubs both of which provide power to remote
devices including wireless access points, IP phones and network based cameras.
19
The technology is commonly referred to as Power Over Ethernet ("PoE"). We
believe our Remote Power Patent covers several of the key technologies covered
by the Standard. However, there is a risk that as a result of litigation a court
may determine otherwise and such a determination would have a material adverse
effect on our ability to enter into license agreements and achieve revenue and
profits from our Remote Power Patent.
WE FACE INTENSE COMPETITION AND WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE.
The telecommunications and data networking market is characterized by intense
competition and rapidly changing business conditions, customer requirements and
technologies. Our current and potential competitors have longer operating
histories, greater name recognition and possess substantially greater financial,
technical, marketing and other competitive resources than us. Although we
believe that we have rights to enforceable patents relating to
telecommunications and data networking, there can be no assurance that third
parties will not invalidate any or all of our patents or that such parties may
not be deemed to infringe any or all of our patents. In addition, the
telecommunications and data networking industries may develop technologies that
may be more effective than our proprietary technologies or that render our
technologies less marketable or obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND OUR TECHNOLOGIES FACE
POTENTIAL TECHNOLOGY OBSOLESCENCE.
The telecommunications and data networking technology market including,
transmission of audio, video and data over computer and telephony networks and
the delivery of remote power over Ethernet markets, are characterized by rapid
technological changes, changing customer requirements, frequent new product
introductions and enhancements, and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards may render our technologies obsolete or less marketable. To
the extent we are able to achieve revenue in the future, such revenue will be
derived from licensing our technologies based on existing and evolving industry
standards.
DEPENDENCE UPON CEO AND CHAIRMAN.
Our success is largely dependent upon the personal efforts of Corey M. Horowitz,
our Chairman and Chief Executive Officer and Chairman of the Board of Directors.
In February 2007, we entered into a new two (2) year employment agreement with
Mr. Horowitz pursuant to which he continues to serve as our Chairman and Chief
Executive Officer (See Note D to the Financial Statements). We do not maintain
key man life insurance on the life of Mr. Horowitz. The loss of the services of
Mr. Horowitz would have a material adverse effect on our business and prospects.
20
RISKS RELATED TO LOW PRICED STOCKS.
Our common stock currently trades on the OTC Bulletin Board under the symbol
NSSI. Since the trading price of our common stock is below $5.00 per share, our
common stock is considered a penny stock. SEC regulations generally define a
penny stock to be an equity security that is not listed on Nasdaq or a national
securities exchange and that has a market value of less than $5.00 per share,
subject to certain exceptions. SEC regulations require broker-dealers to deliver
to a purchaser of our common stock a disclosure schedule explaining the penny
stock market and the risks associated with it. Various sales practice
requirements are also imposed on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors (generally
institutions). Broker-dealers must also provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and monthly account statements disclosing recent price information for the penny
stock held in the customer's account.
THE SIGNIFICANT NUMBER OF OPTIONS AND WARRANTS OUTSTANDING MAY ADVERSELY EFFECT
THE MARKET PRICE FOR OUR COMMON STOCK.
As of April 30, 2007, there are outstanding options and warrants to purchase an
aggregate of 12,340,857 shares of our common stock at exercise prices ranging
from $.12 to $10.00. To the extent that outstanding options and warrants are
exercised, stockholder percentage ownership will be diluted and any sales in the
public market of the common stock underlying such options may adversely affect
prevailing market prices for our common stock.
WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK, WHICH
MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.
Our Board of Directors has the authority, without further action by the
stockholders, to issue 10,000,000 shares of preferred stock on such terms and
with such rights, preferences and designations as our Board of Directors may
determine. Such terms may include restricting dividends on our common stock,
dilution of the voting power of our common stock or impairing the liquidation
rights of the holders of our common stock. Issuance of such preferred stock,
depending on the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control. In addition,
certain "anti-takeover" provisions in Delaware law may restrict the ability of
our stockholders to authorize a merger, business combination or change of
control.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:
o our ability to successfully enforce and/or defend our Remote Power
Patent;
o our ability to enter into favorable license agreements with third
parties with respect to our Remote Power Patent;
o our ability to achieve revenues and profits;
21
o our ability to raise capital when needed;
o sales of our common stock;
o our ability to execute our business plan;
o technology changes;
o legislative, regulatory and competitive developments; and
o economic and other external factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
As of April 1, 2007, we have registered for resale 22,453,987 shares of common
stock, including shares issuable upon exercise of outstanding options and
warrants that are not currently freely tradable. If our stockholders sell
substantial amounts of our common stock in the public market, including shares
issued upon the exercise of outstanding options and warrants, the market price
of our common stock could fall. These sales also may make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem reasonable or appropriate.
ADDITIONAL STOCK OFFERINGS MAY DILUTE CURRENT STOCKHOLDERS.
We may need to issue additional shares of our capital stock or securities
convertible or exercisable for shares of our capital stock, including preferred
stock, options or warrants. The issuance of additional capital stock may dilute
the ownership of our current stockholders.
22
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures of the Company as of the end of the period
covered by this Quarterly Report on Form 10-QSB. Based upon this review, these
officers concluded that, as of the end of the period covered by this Quarterly
Report on Form 10-QSB, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports we file or
submit under Securities Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in applicable rules and forms
and is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect these controls, or in other factors that could significantly affect these
controls during the last fiscal quarter included in this report or from the end
of the reporting period to the date of this Quarterly Report on Form 10-QSB.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On August 10, 2005, we commenced patent litigation against D-Link Corporation
and D-Link Systems, Incorporated in the United States District Court for the
Eastern District of Texas, Tyler division (Civil Action No. 6:05W291), for
infringement of our Remote Power Patent. Our complaint sought, among other
things, a judgment that its Remote Power Patent is enforceable and has been
infringed by the defendants. We also sought a permanent injunction restraining
the defendants from continued infringement, or active inducement of infringement
by others, of the Company's Remote Power Patent. On February 27, 2006, the
D-Link defendants filed answers and asserted counterclaims. In their answers,
the D-Link defendants asserted that they did not infringe any valid claim of the
Remote Power Patent, and further asserted that the asserted patent claims are
invalid and/or unenforceable. In addition to these defenses, the D-Link
defendants also asserted counterclaims for, among other things,
non-infringement, invalidity and unenforceability of the Remote Power Patent.
On April 25, 2007, we agreed to a settlement of our patent infringement
litigation against D-Link Corporation and D-Link Systems, (collectively
"D-Link") in the United States District Court for the Eastern District of Texas,
Tyler Division, for infringement of the Company's Remote Power Patent (U.S.
Patent No. 6,218,930). Under the terms of the settlement, D-Link has agreed to
enter into a license agreement for the Remote Power Patent the terms of which
will include monthly royalty payments of 3.25% of the net sales of D-Link
branded Power over Ethernet products, including those products which comply with
the IEEE 802.3af and 802.3at Standards, for the full term of the Remote Power
Patent, which expires in March 2020. The royalty rate is subject to adjustment
beginning after the first quarter of 2008 to a rate consistent with other
similarly situated licensees of the Remote Power Patent based on units of
shipments of licensed products. In addition, D-Link has agreed to pay us
$100,000.
23
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Controls and Procedure Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Controls and Procedure Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK-1 SECURITY SOLUTIONS, INC.
BY: /S/ COREY M. HOROWITZ
-----------------------------------
COREY M. HOROWITZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY: /S/ DAVID C. KAHN
-----------------------------------
DAVID C. KAHN
CHIEF FINANCIAL OFFICER
DATE: MAY 11, 2007
25