The downtrend of Network-1 Security Solutions, Inc. (OTC:NSSI) has stopped and Friday’s session closed without a change in the share price. The only news for the last two months was the latest financial report which predicted a decline in the revenue. 
The latest session closed again at $1.25, while the trading volume increased to 55,200. Since September this year NSSI is trading in a channel and the rising last week trading volumes are not high enough to suggest that the stock price could start to rise again.
In the middle of the month, Network-1 Security Solutions filed their quarter report for the three and nine months ending September 2011. The company’s assets have increased from $22.9 million at the end of December 2010 to $31.2 million due to a deferred tax asset. Stockholders’ equity is now $29.2 million, while market cap is only slightly higher with $31.7 million.
Such low valuation looks unusual for the industry in which NSSI operated. The company’s main source of revenue are the royalty payments for its patent covering the control of power delivery over Ethernet cables named the “Remote Power Patent”. As of September this year, NSSI has entered into 11 license agreements for this patent with a number of major manufacturers among which Cisco Systems, Inc. and Cisco-Linksys.
In July last year, the company settled a patent litigation against some of the companies with which it subsequently entered into license agreements for the full term of the patent which expires in March 2020. Upon settlement, NSSI received an upfront payment of $32 million, which explains the abnormally high revenue for the quarter ended September 2010. Revenue for the third quarter this year was $1.2 million, which would mean actually an increase quarter-over-quarter if the upfront payment is excluded from the calculation.
The largest part of NSSI royalty revenue comes from its agreement with Cisco who is obligated to pay the company maximum royalty payments of $8 million per year through 2015 and $9 million per year thereafter. The payments from Cisco, however, are based on Cisco product sales and are calculated using declining rates as the volume of Cisco product sales increase. Thus, management expects revenues would decline with each quarter, which could explain the low market value of the company.
