See the accompanying notes to the unaudited condensed
consolidated financial statements.
See the accompanying notes to the unaudited condensed
consolidated financial statements.
See the accompanying notes to the unaudited condensed consolidated
financial statements.
See the accompanying notes to the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
The Company is a Delaware corporation, incorporated
on July 17, 1987 and has been engaged in the intellectual property monetization business since 2008.
As used herein, “we”, “us”,
“our”, the “Company” refer to Quest Patent Research Corporation and its wholly and majority-owned and controlled
operating subsidiaries unless the context indicates otherwise. All intellectual property acquisition, development, licensing and enforcement
activities are conducted by the Company’s wholly and majority-owned and controlled operating subsidiaries.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these interim financial statements do
not include all of the information and notes required by GAAP for complete financial statements. All adjustments (consisting of normal
recurring items) necessary to present fairly the Company’s consolidated financial position have been included. These interim financial
statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our annual report
on Form 10-K for the year ended December 31, 2021. Operating results for the interim periods presented herein are not necessarily
indicative of the results that may be expected for any other interim period or for the entire year. Reclassifications have been made to
conform with the current year presentation.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation and Financial Statement
Presentation
The consolidated financial statements are prepared
in accordance with U.S. generally accepted accounting principles (“US GAAP”) and present the consolidated financial statements
of the Company and its wholly owned and majority owned subsidiaries as of June 30, 2022.
The consolidated financial statements include
the accounts and operations of:
Quest Patent Research Corporation
(“The Company”)
Digital IP Advisors Inc. (“DIPA”)
(wholly owned) (formerly Quest Licensing Corporation (NY))
Quest Licensing Corporation
(DE) (“QLC”) (wholly owned)
Quest Packaging Solutions
Corporation (90% owned)
Quest Nettech Corporation
(“NetTech”) (65% owned)
Semcon IP, Inc. (“Semcon”)
(wholly owned)
Mariner IC, Inc. (“Mariner”)
(wholly owned)
IC Kinetics, Inc. (“IC”)
(wholly owned)
CXT Systems, Inc. (“CXT”)
(wholly owned)
Photonic Imaging Solutions
Inc. (“PIS”) (wholly owned)
M-Red Inc. (“M-Red”)
(wholly owned)
Audio Messaging Inc. (“AMI”)
(wholly owned)
Peregrin Licensing LLC (“PLL”)
(wholly owned)
Taasera Licensing LLC (“TLL”)
(wholly owned)
Soundstreak Texas LLC (“STX”)
(wholly owned)
Multimodal Media LLC (“MML”)
(wholly owned)
LS Cloud Storage Technologies,
LLC (“LSC”) (wholly owned)
Tyche Licensing LLC (“Tyche”)
(wholly owned)
Deepwell IP LLC (“DIP”)
(wholly owned)
In February 2022, the Company changed the name
of Quest Licensing Corporation to Digital IP Advisors Incorporated.
Significant intercompany transaction and balances
have been eliminated in consolidation.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Use of Estimates
In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
Intangible Assets
Intangible assets consist of patents which are
amortized using the straight-line method over their estimated useful lives or statutory lives whichever is shorter and are reviewed for
impairment upon any triggering event that may give rise to the assets ultimate recoverability as prescribed under the guidance related
to impairment of long-lived assets. Costs incurred to acquire patents, including legal costs, are also capitalized as long-lived assets
and amortized on a straight-line basis with the associated patent.
Patents include the cost of patents or patent
rights (hereinafter, collectively “patents”) acquired from third-parties or acquired in connection with business combinations.
Patent acquisition costs are amortized utilizing the straight-line method over their remaining economic useful lives, ranging from one
to ten years. Certain patent application and prosecution costs incurred to secure additional patent claims that, based on management’s
estimates are deemed to be recoverable, are capitalized and amortized over the remaining estimated economic useful life of the related
patent portfolio.
Warrant Liability
The Company reflects a warrant liability with
respect to warrants for which the number of shares underlying the warrants is not fixed until the date of the initial exercise. The amount
of the liability is determined at the end of each fiscal period and the period to period change in the amount of warrant liability is
reflected as a gain or loss in warrant liability and is included under other income (expense) in the accompanying condensed consolidated
statements of operations.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 4 for
information about our warrant liability.
The fair value hierarchy based on the three levels
of inputs that may be used to measure fair value are as follows:
Level 1 – Quoted
prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires
significant judgment or estimation.
The carrying value reflected in the consolidated
balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and short-term borrowings approximate
fair value due to the short-term nature of these items. The carrying value of long-term debt approximates fair value since the related
rates of interest approximate current market rates.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Inventor/Former Owner Royalties and Contingent
Legal/Litigation Finance Expenses
In connection with the investment in certain patents
and patent rights, certain of the Company’s operating subsidiaries may execute related agreements which grant to the inventors and/or
former owners of the respective patents or patent rights, the right to receive a percentage of future net revenues (as defined in the
respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
The Company’s operating subsidiaries may
retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing
and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid a percentage of
any negotiated fees, settlements or judgments awarded.
The Company’s operating subsidiaries may
engage with funding sources that provide financing for patent licensing and enforcement. These litigation finance firms may be engaged
on a non-recourse basis whereby such litigation finance firms are paid a percentage of any negotiated fees, settlements or judgments awarded
in exchange for providing funding for legal fees and out of pocket expenses incurred as a result of the licensing and enforcement activities.
The economic terms of the inventor agreements,
operating agreements, contingent legal fee arrangements and litigation financing agreements associated with the patent portfolios owned
or controlled by the Company’s operating subsidiaries, if any, including royalty rates, contingent fee rates and other terms, vary
across the patent portfolios owned or controlled by such operating subsidiaries and are included in cost of revenues as litigation and
licensing expenses. Inventor/former owner royalties, payments to non-controlling interests, contingent legal fees expenses and litigation
finance expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue
agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues
each period. Inventor/former owner royalties, contingent legal fees expenses and litigation finance expenses will continue to fluctuate
and may continue to vary significantly period to period, based primarily on these factors.
Revenue Recognition
Patent Licensing Fees
The Company recognizes revenue in accordance with
ASC Topic 606, “Revenue from Contracts with Customers”. Revenue is recognized when control of the promised goods or services
is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for
those goods or services. Under Topic 606, revenue is recognized when there is a contract which has commercial substance which is approved
by both parties and identifies the rights of the parties and the payment terms.
For the periods presented, revenue contracts executed
by the Company primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the
grant of certain intellectual property rights for patented technologies owned or controlled by the Company’s operating subsidiaries
as part of the settlement of litigation commenced by the Company’s subsidiaries. Intellectual property rights granted included the
following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered
by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of
any pending litigation. The intellectual property rights granted were perpetual in nature, extending until the legal expiration date of
the related patents. The individual intellectual property rights are not accounted for as separate performance obligations, as (a) the
nature of the promise, within the context of the contract, is to transfer combined items to which the promised intellectual property rights
are inputs and (b) the Company’s promise to transfer each individual intellectual property right described above to the customer
is not separately identifiable from other promises to transfer intellectual property rights in the contract.
Since the promised intellectual property rights
are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is distinct,
and accounted for all of the intellectual property rights promised in the contract as a single performance obligation. The intellectual
property rights granted were “functional IP rights” that have significant standalone functionality. The Company’s subsequent
activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee
has rights. The Company’s subsidiaries have no further obligation with respect to the grant of intellectual property rights, including
no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for
the grant (i.e. transfer of control) of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution
of the contract. Licensees legally obtain control of the intellectual property rights upon execution of the contract. As such, the earnings
process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue
recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 30 to 90 days of execution
of the contract. Contractual payments made by licensees are generally non-refundable. The Company does not have any significant payment
terms, as payment is received shortly after goods are delivered or services are provided, therefore there is no significant financing
component or consideration payable to the customer in these transactions.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Cost of Revenue
Cost of revenues mainly includes expenses incurred
in connection with our patent enforcement activities, such as legal fees, consulting costs, patent maintenance, royalty fees for acquired
patents and other related expenses. Cost of revenue does not include expenses related to product development, patent amortization, integration
or support, as these are included in general and administrative expenses.
Stock-Based Compensation
The Company recognizes stock-based compensation
pursuant to ASC 718, “Compensation — Stock Compensation,” which prescribes accounting and reporting standards for all
stock-based payment transactions in which employee and non-employee services, are acquired. Transactions include incurring liabilities,
or issuing or offering to issue shares, options and other equity instruments such as employee stock ownership plans and stock appreciation
rights. Stock-based payments to employees and non-employees, including grants of employee stock options, are recognized as compensation
expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee or
non-employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
Net Loss Per Share
The Company calculates net losses per share by
dividing losses allocated to the Company’s stockholders by the weighted average number of shares of common stock outstanding for
the period. Diluted weighted average shares is computed using basic weighted average shares plus any potentially dilutive securities outstanding
during the period using the treasury-stock-type method and the if-converted method, except when their effect is anti-dilutive. Because
the Company incurred losses in all periods covered by the financial statements the inclusion of diluted weighted average shares would
be anti-dilutive, the diluted net loss per share is the same as the basic net loss per share. Potentially dilutive securities are excluded
from the computation of dilutive earnings per share for the three and six months ended June 30, 2022 and for the three and six months
ended June 30, 2021 since the effect would be antidilutive. The Company’s potentially dilutive securities include potential common
shares related to 962,463 warrants granted to QFL in connection with the Purchase Agreement, 500,000 stock options granted to Intelligent
Partners in connection with the Restructure Agreement and 500,000 stock options granted to officers and consultants. See Notes 3, 4 and
5.
Recent Accounting Pronouncements
Management does not believe that there are any
recently issued, but not effective, accounting standards which, if currently adopted, would have a material effect on the Company’s
financial statements.
Going Concern
As shown in the accompanying financial statements,
the Company has an accumulated deficit of approximately $25,819,000 and negative working capital of approximately $8,990,000 as of June 30,
2022. Because of the Company’s continuing losses, its working capital deficiency, the uncertainty of future revenue, the Company’s
obligations to Intelligent Partners, QPRC Finance LLC (“QFL”), the Company’s low stock price and the absence of an active
trading market in its common stock, the ability of the Company to raise funds in the equity market or from lenders is severely impaired.
These conditions, together with the effects of the COVID-19 pandemic and the steps taken by the states to slow the spread of the virus
and its effect on its business as well as any adverse consequences which would result from our failure to remain listed on the OTCQB (see
Note 8), raise substantial doubt as to the Company’s ability to continue as a going concern. Although the Company may seek to raise
funds and to obtain third party funding for litigation to enforce its intellectual property rights, the availability of such funds, particularly
in view of the COVID-19 pandemic, is uncertain. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
| 3. | SHORT-TERM DEBT AND LONG-TERM LIABILITIES |
The following table shows the Company’s
short-term and long-term debt at June 30, 2022 and December 31, 2021.
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Short-term debt: | |
| | |
| |
Loans payable | |
$ | 138,000 | | |
$ | 138,000 | |
Funding liability | |
| 4,733,714 | | |
| 3,202,765 | |
Loan payable – related party | |
| 2,801,150 | | |
| 2,805,000 | |
Loan payable – SBA - current portion | |
| 1,609 | | |
| — | |
Net short-term debt | |
$ | 7,674,473 | | |
$ | 6,145,765 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Loans payable - SBA | |
| | | |
| | |
Gross long-term portion | |
$ | 148,391 | | |
$ | 150,000 | |
Net loans payable - SBA | |
| 148,391 | | |
| 150,000 | |
Purchase price of patents | |
| | | |
| | |
Gross long-term portion | |
| 190,000 | | |
| 190,000 | |
Net purchase price of patents – long-term | |
$ | 190,000 | | |
$ | 190,000 | |
Loans Payable
The loans payable represents demand loans made
by former officers and directors, who are unrelated third parties at June 30, 2022 and December 31, 2021, in the amount of $138,000.
The loans are payable on demand plus accrued interest at 10% per annum. These third parties are also stockholders, but their stockholdings
are not significant.
Funding Liability
The funding liability at June 30, 2022 represents
the principal amount of the Company’s obligations to QFL pursuant to a purchase agreement (“Purchase Agreement”) dated
February 22, 2021 between the Company and QFL, as described below. As of June 30, 2022, the Company had made repayments in the amount
of approximately $719,000. The obligation to QFL has no repayment term and has been classified as a current liability as of June 30,
2022.
On February 22, 2021, the Company entered into
a series of agreements, all dated February 19, 2021, with QFL, a non-affiliated party, including the “Purchase Agreement”,
a security agreement (the “Security Agreement”), a subsidiary security agreement (the “Subsidiary Security Agreement”),
a subsidiary guaranty (the “Subsidiary Guaranty”), a warrant issue agreement (the “Warrant Issue Agreement”),
a registration rights agreement (the “Registration Rights Agreement”) and a board observation rights agreement (the “Board
Observation Rights Agreement” together with the Security Agreement, the Subsidiary Guaranty, the Subsidiary Security Agreement,
Warrant Issuance Agreement, Registration Rights Agreement and the Purchase Agreement, the “Investment Documents”) pursuant
to which, at the closing held contemporaneously with the execution of the agreements:
(i) Pursuant to the Purchase Agreement,
QFL agreed to make available to the Company a financing facility of: (a) up to $25,000,000 for the acquisition of mutually agreed patent
rights that the Company intends to monetize, of which $2,303,000 has been advanced as of June 30, 2022; (b) up to $2,000,000 for
operating expenses, of which the Company has requested and received $1,400,000 as of June 30, 2022; and (iii) $1,750,000 to fund
the cash payment portion of the restructure of the Company’s obligations to Intelligent Partners. In return the Company transferred
to QFL a right to receive a portion of net proceeds generated from the monetization of those patents.
(ii) The Company used $1,750,000 of
proceeds from the QFL financing as the cash payment portion of the restructure of the Company’s obligations to Intelligent Partners
pursuant to the Restructure Agreement executed contemporaneously with the closing of the Investment Documents. The payment was made directly
from QFL to Intelligent Partners.
(iii) Pursuant to the Security Agreement,
the Company’s obligations under the Purchase Agreement with QFL are secured by: (a) the proceeds (as defined in the Purchase Agreement);
(b) the patents (as defined in the Purchase Agreement; (c) all general intangibles now or hereafter arising from or related to the foregoing
(a) and (b); and (d) proceeds (including, without limitation, cash proceeds and insurance proceeds) and products of the foregoing (a)-(c).
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
(iv) Pursuant to the Subsidiary Guaranty,
eight of the Company’s subsidiaries – QLC, NetTech, Mariner, Semcon, IC, CXT, M-Red, and AMI, collectively, the “Subsidiary
Guarantors”) guaranteed the Company’s obligations to QFL under the Purchase Agreement.
(v) Pursuant to the Subsidiary Security
Agreement, the Subsidiary Guarantors granted QFL a security interest in the proceeds from the future monetization of their respective
patent portfolios.
(vi) Pursuant to the Warrant Issue
Agreement, the Company granted QFL ten-year warrants to purchase a total of up to 962,463 shares of the Company’s common stock,
at an exercise price of $0.54 per share which may be exercised from the date of grant through February 18, 2031 on a cash or cashless
basis. Exercisability of the warrant is limited if, upon exercise, the holder or any of holder’s affiliates would beneficially own
more than 4.99% (the “Maximum Percentage”) of the Company’s common stock, except that by written notice to the Company,
the holder may change the Maximum Percentage to any other percentage not in excess of 9.99% provided any such change will not be effective
until the 61st day following notice to the Company. The warrant also contains certain minimum ownership percentage antidilution rights
pursuant to which the aggregate number of shares of common stock purchasable upon the initial exercise of the warrant shall not be less
than 10% of the aggregate number of outstanding shares of capital stock of the Company (determined on a fully diluted basis). Because
the facility with QFL has no term the fair value of the warrants was expensed at the grant date. A portion of any gain from sale of the
shares, net of taxes and costs of exercise, realized prior to the completion of all monetization activities shall be credited against
the total return due to QFL pursuant to the Purchase Agreement. See Notes 4 and 5 for information on the warrant issue and associated
liability.
(vii) The Company regained compliance
with the OTCQB Eligibility Requirements on May 7, 2021, at which time the common stock recommenced trading on the OTCQB.
(viii) The Company granted QFL certain
registration rights with respect to the 962,463 shares of common stock issuable upon exercise of the warrant. See Note 5 for information
on the warrant issue.
(ix) Pursuant to the Board Observation
Rights Agreement, until the later of the date on which QFL or its affiliates (i) have received the entirety of their Investment Return
(as defined in Purchase Agreement), and (ii) no longer hold any Securities (the “Observation Period”), the Company granted
QFL the right, exercisable at any time during the Observation Period, to appoint a representative to attend meetings (including, without
limitation, telephonic or other electronic meetings) of the Board or any committee thereof, including executive sessions, in an observer
capacity.
On February 26, 2021, the Company entered into
an agreement with Peter K. Trzyna (“PKT”) pursuant to which PKT assigned to the Company all right, title, and interest in
a portfolio of eight United States patents (the “Peregrin Portfolio”). Under the agreement, the Company paid PKT $350,000
at closing and agreed that upon the realization of gross proceeds, if any, the Company shall make a second installment payment or payments
in the aggregate amount of $93,900 representing reimbursement to PKT, as the prosecuting attorney, for legal fees associated with prosecution
of the portfolio, such reimbursement shall be due and payable to PKT from time to time as gross proceeds are realized, and paid to PKT
along with and in proportion to reimbursement to other third parties of costs incurred in realizing gross proceeds from the Peregrin Portfolio.
Thereafter, PKT is entitled to a percentage of gross proceeds realized, if any, from the Peregrin Portfolio. The Company requested and
received a capital advance from QFL in the amount of $350,000 pursuant to the Purchase Agreement, which was used to make payment to PKT.
On May 20, 2021, TLL, entered into an agreement
with Taasera, Inc. to acquire all right, title, and interest in a portfolio of seven United States patents (the “Taasera Portfolio”)
for $250,000. The Company requested and received a capital advance from QFL in the amount of $250,000 pursuant to the Purchase Agreement,
which was used to make payment to Taasera, Inc.
On October 15, 2021, MML, acquired all right,
title, and interest in a portfolio of nine United States patents (the “MML Portfolio”) for a purchase price of $550,000 pursuant
to an agreement with Aawaaz Inc. (“AI”), pursuant to which MML retains an amount equal to the purchase price plus any fees
incurred out of net proceeds, as defined in the agreement, after which AI is entitled to a percentage of further net proceeds realized,
if any. The Company requested and received a capital advance from QFL in the amount of $550,000 pursuant to the Purchase Agreement, which
was used to make payment to AI.
On January 27, 2022, the Company acquired, via
assignment from Intellectual Ventures Assets 181 LLC and Intellectual Ventures Assets 174 LLC, all right title and interest to fifteen
United States patents and three foreign patents for a purchase price of $1,060,000. The Company requested and received a capital advance
in the amount of the $1,060,000 purchase price from the facility with QFL. Two of the patents were assigned to Tyche and the balance of
the patents were assigned to DIP.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
In June 2022, MML and AI agreed to amend the Purchase
Agreement to add two additional patent families for an additional $93,000. The Company requested and received a capital advance from QFL
in the amount of $93,000, which will be used to make payment to AI pending final documentation of the amendment.
The Company requested and received operating capital
advances in the amount of $200,000 and $400,000 from QFL pursuant to the Purchase Agreement during the three and six months ended June
30, 2022, respectively. The Company requested and received operating capital advances in the amount of $200,000 and $600,000 from QFL
pursuant to the Purchase Agreement during the three and six months ended June 30, 2021, respectively.
Loan Payable Related Party
The loan payable – related party at June 30,
2022 and December 31, 2021 represents the current amount of a non-interest bearing total monetization proceeds obligation (the “TMPO”)
to Intelligent Partners, LLC (“Intelligent Partners”) of $2,801,150, pursuant to a restructure agreement (“Restructure
Agreement”) dated February 22, 2021 whereby the Company and Intelligent Partners, extinguished the Company’s 10% Note to Intelligent
Partners as transferee of the notes issued to United Wireless Holdings, Inc. (“United Wireless”), in the amount of $4,672,810
pursuant to securities purchase agreement dated October 22, 2015 between the Company and United Wireless. The notes became due by their
terms on September 30, 2020, and the Company did not make any payment on account of principal of and interest on the notes. Subsequent
to September 30, 2020, the Company engaged in negotiations with Intelligent Partners in parallel with the Company’s negotiations
with QFL, with a view to restructuring the Company’s obligations under the United Wireless agreements, including the notes, so that
the Company no longer had any obligations under the notes or the SPA. These negotiations resulted in the Restructure Agreement, described
below, which provided for the payment to Intelligent Partners of $1,750,000 from the proceeds from the Company’s agreements with
QFL. As part of the restructure of the Company’s agreements with Intelligent Partners, the Company amended the existing MPAs and
granted Intelligent Partners certain rights in the monetization proceeds from any new intellectual property the Company acquires, as described
below. Under these MPAs, Intelligent Partners participates in the monetization proceeds the Company receives with respect to new patents
after QFL has received its negotiated rate of return.
On or prior to the date of the Restructure Agreement,
Intelligent Partners transferred to Andrew Fitton (“Fitton”) and Michael Carper (“Carper”) $250,000 of the notes
(the “Transferred Note”), thereby reducing the principal amount of the notes held by Intelligent Partners to $4,422,810.
On February 22, 2021, the Company and Intelligent
Partners agreed to extinguish the notes and Transferred Note, and terminate or amend and restate the SPA and Transaction Documents, pursuant
to a series of agreements including: the Restructure Agreement, a Stock Purchase Agreement (the “Stock Purchase Agreement”),
an Option Grant (the “Option Grant”), an Amended and Restated Pledge Agreement (the “Pledge Agreement”), an Amended
and Restated Registration Rights Agreement (the “Registration Rights Agreement”), a Board Observation Agreement (the “Board
Observation Agreement”), a MPA-NA Security Interest Agreement (the “MPA-NA Security Interest Agreement”), an Amended
and Restated Patent Proceeds Security Agreement (the “Patent Proceeds Security Agreement”, an Amended and Restated MPA-CP
(the “MPA-CP”), an Amended and Restated MPA-CXT (the “MPA-CXT”), a MPA-MR (the “MPA-MR”), a MPA-AMI
(the “MPA-AMI,” and together with the MPA-CP, MPA-CXT and MPA-MR, each a Restructure MPA and together the Restructure MPAs)
and a MPA-NA (the “MPA-NA”).
(i) Pursuant to the Restructure Agreement,
the Company paid Intelligent Partners $1,750,000 at closing, which the Company received from QFL and which QFL paid directly to Intelligent
Partners, and recognized the TMPO, which shall, from and after the Restructure Date, be reduced on a dollar for dollar basis by (a) payments
to Intelligent Partners pursuant to the Restructure Agreement, the Restructure MPAs and the MPA-NA and (b) any election by the Intelligent
Partners to pay the Exercise Price of the Restructure Option, in whole or part, by means of a reduction in the then outstanding TMPO.
The TMPO has been classified as a current liability as of June 30, 2022.
(ii) Pursuant to the Stock Purchase
Agreement, the Company issued to Fitton and Carper, as holders of the Transferred Note, a total of 462,963 shares of common stock at a
purchase price of $0.54 per share, which purchase price was paid by the conversion and in full satisfaction of the Transferred Note (the
“Conversion Shares”). For purposes of extinguishment, the issuance of the Conversion Shares in full satisfaction of the Transferred
Note balance of $250,000 is included in the reacquisition price of the debt. The Company recognized a loss on debt conversion of $305,556
which is the difference between the agreed conversion price and the fair value of the Conversion Shares at the date of conversion. See
Note 5 for information on the share issue.
(iii) Pursuant to the Option Grant,
the Company granted Intelligent Partners an option to purchase a total of 500,000 shares of common stock, with an exercise price of $0.54
per share which vests immediately and may be exercised through September 30, 2025. The Company valued the option at approximately $598,000
using the Black-Scholes pricing model. The proceeds were allocated to the repurchase price of the debt extinguishment based on its fair
value. See Note 5 for information on the option grant.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
(iv) Pursuant to the restructured monetization
proceeds agreement, Intelligent Partners has a right to receive 60% of the net monetization proceeds from the patents currently owned
by the Subsidiary Guarantors. The agreement has no termination provisions, so Intelligent Partners will be entitled to its percentage
interest as long as revenue is generated from the intellectual property covered by the agreement.
(v) Pursuant to the MPA-NA, until the
TMPO has been paid in full, Intelligent Partners is entitled to receive 10% of the net proceeds realized from new assets acquired by the
Company. If, in any calendar quarter, net proceeds realized exceed $1,000,000, Intelligent Partners’ entitlement for that quarter
only shall increase to 30% on the portion of net proceeds in excess of $1,000,000 but less than $3,000,000. If in the same calendar quarter,
net proceeds exceed $3,000,000, Intelligent Partners’ entitlement for that quarter only shall increase to 50% on the portion of
net proceeds in excess of $3,000,000. After satisfaction of the TMPO, the MPA-NA and Intelligent Partners’ interest in new asset
proceeds shall terminate.
(vi) The Company granted Intelligent
Partners, Fitton and Carper certain registration rights with respect to (i) the 500,000 shares currently owned by Fitton and Carper; (ii)
the 462,963 Conversion Shares issued to Fitton and Carper, and (iii) the 500,000 shares of common stock issuable upon exercise of the
option. See Note 5
(vii) Pursuant to the Subsidiary Security
Agreement, the Company’s obligations under its agreements with Intelligent Partners, including its obligations under the Restructure
Agreement and the Restructure MPAs are secured by a security interest in the net proceeds realized from the future monetization of the
patents currently owned by the eight subsidiaries named above.
(viii) Pursuant to the MPA-NA-Security
Interest Agreement, our obligations under the MPA-NA are secured by a security interest in net proceeds realized from the future monetization
of new patents acquired until the TMPO is satisfied, provided Intelligent Partners’ secured interest shall be limited to its entitlement
in Net Proceeds under the MPA-NA. After satisfaction of the TMPO the security interest in proceeds from new assets shall terminate.
(ix) Pursuant to the Board Observation
Rights Agreement, until the Total Monetization Proceeds Obligation has been satisfied (the “Observation Period”), the Company
granted Intelligent Partners the option and right, exercisable at any time during the Observation Period, to appoint a representative
to attend meetings of the Board or any committee thereof, including executive sessions, in an observer capacity. Intelligent Partners
has no right to appoint a director to the board.
Events of Default include (i) a Change of Control
of the Company (ii) any uncured default on payment due to Intelligent Partners in an amount totaling in excess of $275,000, which is not
the subject of a Dispute or other formal dispute resolution proceeding initiated in good faith pursuant to this Agreement or other Restructure
Documents (iii) the filing of a voluntary petition for relief under the United States Bankruptcy Code by Company or any of its material
subsidiaries, (iv) the filing of an involuntary petition for relief under the United States Bankruptcy Code against the Company, which
is not stayed or dismissed within sixty (60) days of such filing, except for an involuntary petition for relief filed solely by Intelligent
Partners, or any Affiliate or member of Intelligent Partners, or (v) acceleration of an obligation in excess of $1,000,000 to another
provider of financing following a final determination by arbitration or other judicial proceeding that such obligation is due and owing.
The Company recognized a loss on extinguishment of the note of $730,378
reflected as follows:
Carrying amount as of the restructure date | |
$ | 4,672,810 | |
Less unamortized debt discount and issuance costs | |
| — | |
Net carrying amount | |
| 4,672,810 | |
Reacquisition price | |
| | |
Cash payment via QFL | |
| (1,750,000 | ) |
Conversion of transferred note | |
| (250,000 | ) |
Fair value of option grant | |
| (598,188 | ) |
TMPO undiscounted future cash flows | |
| (2,805,000 | ) |
Loss on debt extinguishment | |
$ | (730,378 | ) |
Because of its ownership percentage, Intelligent Partners is treated
as a related party.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Loan Payable – SBA - Current Portion
The loans payable – SBA - current portion
at June 30, 2022 represents the current portion of installment payments due under:
| ● | A secured Economic Injury Disaster Loan from the U.S. Small Business Association (“SBA”) in
the aggregate amount of $150,000, pursuant to Section 7(b) of the Small Business Act as part of the COVID-19 relief effort. The Company’s
obligations on the loan are set forth in the Company’s note dated May 14, 2020 which matures on May 14, 2050 and bears interest
at a rate of 3.75% per annum, payable monthly commencing on November 14, 2022. The Note may be prepaid by the Company at any time prior
to maturity with no prepayment penalties. Funds from the Loan may be used solely as working capital to alleviate economic injury caused
by disaster occurring in the month of January 31, 2020 and continuing thereafter and to pay Uniform Commercial Code (UCC) lien filing
fees and a third-party UCC handling charge of $100 which were deducted from the loan amount stated above. In addition to the loan, as
part of the COVID-19 relief effort, the Company obtained an Emergency EIDL Grant from the SBA in the amount of $1,000. The Company is
not required to repay the grant. |
Long-Term Liabilities
The purchase price of patents at June 30,
2022 represents:
The non-current portion of our obligations under
the unsecured non-recourse funding agreement with a third-party funder entered into in May 2020 whereby the third-party agreed to provide
acquisition funding in the amount of $95,000 for the Company’s acquisition of the audio messaging portfolio. Under the funding agreement,
the third party funder is entitled to a priority return of funds advanced from net proceeds, as defined, recovered until the funder has
received $190,000. The Company has no other obligation to the third party and has no liability to the funder in the event that the Company
does not generate net proceeds. Pursuant to ASC 470, the company recorded this monetization obligation as debt and the difference between
the purchase price and total obligation as a discount to the debt and fully expensed to interest during the period.
4. WARRANT
LIABILITY
The Company issued warrants to purchase 962,463
shares of common stock to QFL (see Note 3) in connection with its funding agreement. If on the date of initial exercise the aggregate
number of warrant shares purchasable upon exercise of the warrant would yield less than an amount equal to 10% of the aggregate number
of outstanding shares of capital stock of the Company (determined on a fully diluted basis), then the number of warrant shares shall be
increased to an amount equal to 10% of the aggregate number of outstanding shares of capital stock of the Company (determined on a fully
diluted basis), and therefore the number of shares underlying the warrants is not fixed until the date of the initial exercise. As such,
the warrant issued to QFL requires classification as a liability pursuant to ASC Topic 480, Distinguishing Liabilities from Equity and
is valued at its fair value as of the grant date and re-measured at each balance sheet date with the period-to-period change in the fair
market value of the warrant liability reflected as a gain or loss in warrant liability and included under other income (expense).
As of June 30, 2022 and December 31,
2021, the aggregate fair value of the outstanding warrant liability was approximately $770,000 and $1,636,000, respectively.
The Company estimated the fair value of the warrant
liability using the Black-Scholes option pricing model using the following key assumptions as of June 30, 2022 and December 31,
2021:
| |
As of | |
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Volatility | |
| 370 | % | |
| 373 | % |
Exercise price | |
$ | 0.54 | | |
$ | 0.54 | |
Risk-free interest rate | |
| 1.37 | % | |
| 1.37 | % |
Expected dividends | |
| — | % | |
| — | % |
Expected term | |
| 8.7 | | |
| 9.4 | |
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
The following schedule summarizes the valuation
of financial instruments at fair value in the balance sheets as of June 30, 2022 and December 31, 2021:
| |
Fair Value Measurements as of | |
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| |
Warrant liability | |
| — | | |
| — | | |
| 769,970 | | |
| — | | |
| — | | |
| 1,636,187 | |
Total liabilities | |
$ | — | | |
$ | — | | |
$ | 769,970 | | |
$ | — | | |
$ | — | | |
$ | 1,636,187 | |
The following table sets forth a reconciliation
of changes in the fair value of warrant liabilities classified as Level 3 in the fair value hierarchy:
| |
Fair Value | |
Balance at December 31, 2021 | |
$ | 1,636,187 | |
Gain on subsequent measurement | |
| (866,217 | ) |
Balance at June 30, 2022 | |
$ | 769,970 | |
See Notes 3 and 5 for information on the warrant
issuance.
5. STOCKHOLDERS’
EQUITY
Amendment to Amended and Restated Certificate of Incorporation
On July 27, 2022, the Company amended its amended
and restated certificate of incorporation following approval of the amendment by the stockholders at the 2022 annual meeting of stockholders
which was held on July 27, 2022.
The amendment (i) decreased the number of authorized shares of common
stock from 10,000,000,000 shares to 30,000,000 shares and (ii) effects a one-for-100 reverse split whereby each share of common stock,
par value $0.00003 per share, became and was converted into 0.01 of a share of such common stock, with fractional shares being rounded
up to the next higher whole number of shares. The reverse split is not effective in the marketplace until the reverse split has been cleared
with FINRA. The Company filed an Issuer Company Related Action Notification with FINRA with respect to the reverse split and FINRA is
reviewing the notification. Until the Company receives FINRA approval, the market price of the Company’s common stock will not reflect
the reverse split.
All historical share and per share amounts reflected
throughout this report have been adjusted to reflect the reverse stock split described above.
Amendment to the 2017 Equity Incentive Plan
On February 19, 2021, the board of directors amended the 2017 Equity
Incentive Plan (the “Plan”) increasing the shares the Company can issue under the Plan to 5,000,000 shares of common stock
pursuant to non-qualified stock options, restricted stock grants and other equity-based incentives, the amendment to the Plan and the
grants of awards pursuant to the Plan, were effective upon the closing of the agreements with QFL.
Issuance of Common Stock and Options
Issuances to Intelligent Partners
On February 22, 2021, pursuant to the Restructure
Agreement, Intelligent Partners and its controlling members (Fitton and Carper) agreed to extinguish the notes and Transferred Note, and
terminate or amend and restate the SPA and Transaction Documents and the Company: (i) issued to Fitton and Carper, as holders of the Transferred
Note, pursuant to the Stock Purchase Agreement a total of 462,963 shares of common stock at a purchase price of $0.54 per share, which
purchase price was paid by the conversion and in full satisfaction of the Company’s obligation under the Transferred Note and is
included in the calculation of the repurchase price of the debt; and (ii) granted Intelligent Partners, pursuant to the Option Grant,
an option to purchase a total of 500,000 shares of common stock, with an exercise price of $0.54 per share which vested immediately and
may be exercised through September 30, 2025. The Company valued the purchase option at approximately $598,000 using the Black-Scholes
pricing model. Variables used in the valuation include (1) discount rate of 1.37%; (2) option life of 5 years; (3) computed volatility
of 252% and (4) zero expected dividends. The Company granted Intelligent Partners, Fitton and Carper certain registration rights with
respect to (i) the 500,000 shares currently owned by Fitton and Carper; (ii) the 462,963 Conversion Shares issued to Fitton and Carper,
and (iii) the 500,000 shares of common stock issuable upon exercise of the option. Commencing six months from the closing date, if the
shares owned by Fitton, Carper and Intelligent Partners cannot be sold pursuant to a registration statement and cannot be sold pursuant
to Rule 144 without the Company being in compliance with the current public information requirements of Rule 144, if the Company is not
in compliance with the current public information requirements, the Company is required to pay damages to Intelligent Partners.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Consulting Agreements
On February 22, 2021, the Company entered into
advisory service agreement with three consultants pursuant to which they will provide services to the Company in connection with the development
of the Company’s business. The agreements have a term of ten years and may be terminated by the Company for cause or upon the death
or disability of the consultants.
Pursuant to the agreements with two of the consultants,
the compensation payable to each of them consists of a restricted stock grant of 100,000 shares of Common Stock which immediately vests
in full and a ten-year option to purchase a total of 300,000 shares of Common Stock, which become exercisable cumulatively as follows:
| a. | 100,000 shares at an exercise price of $1.00 per share becoming exercisable upon the commencement of trading
of the Common Stock on the OTCQB. The Company regained such compliance on May 7, 2021, at which time the common stock recommenced trading
on the OTCQB. |
| b. | 100,000 shares at an exercise price of $3.00 per share, becoming exercisable on the first day on which
the Company files with the SEC a Form 10-K or Form 10-Q which reports stockholders’ equity of at least $5,000,000, and |
| c. | 100,000 shares at an exercise price of $5.00 per share becoming exercisable on the date on which the Common
Stock is listed for trading on the Nasdaq Stock Market or the New York Stock Exchange. |
The Company recorded professional fees in the
amount of $240,000 as a result the restricted stock grants to these two consultants. The Company determined the fair value of the options
as of the grant date to be approximately $720,000 using the Black-Scholes pricing model. Variables used in the valuation include (1) discount
rate of 1.37%; (2) term of 10 years; (3) computed volatility of 252% and (4) zero expected dividends. The Company determined that the
first performance condition will be met and accrued the option expense of approximately $240,000 over the period from the grant date to
achievement of the performance condition. The Company did not recognize any option expense for the three and six months ended June 30,
2022. The Company recognized option expense of approximately $120,000 and $240,000 for the three and six months ended June 30, 2021, respectively.
Pursuant to the agreement with the third consultant,
the compensation payable to the consultant consists of a restricted stock grant of 100,000 shares of Common Stock which immediately vests
in full and a ten-year option to purchase 300,000 shares of Common Stock, which becomes exercisable cumulatively as follows:
| a. | 100,000 shares at an exercise price of $1.00 per share became exercisable on February 22, 2022, which
was the first anniversary of the date of the agreement; |
| b. | 100,000 shares at an exercise price of $3.00 per share upon the second anniversary of the agreement; and |
| c. | 100,000 shares at an exercise price of $5.00 per share upon the third anniversary of the agreement. |
The Company recorded professional fees in the
amount of $120,000 as a result the restricted stock grant to the third consultant. The Company determined the fair value of the options
as of the grant date to be approximately $360,000 using the Black-Scholes pricing model. Variables used in the valuation include (1) discount
rate of 1.37%; (2) term of 10 years; (3) computed volatility of 252% and (4) zero expected dividends. The Company recognized option expense
of approximately $25,000 and $67,000 for the three and six months ended June 30, 2022, respectively and option expense of approximately
$55,000 and $77,000 for the three and six months ended June 30, 2021, respectively.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Compensatory Arrangements of Officers and Directors
On February 22, 2021, the board of directors:
| (i) | Granted restricted stock grants for services rendered and
vesting in full upon grant, to: |
| a. | Jon C. Scahill – 490,000 shares |
| b. | Timothy J. Scahill – 100,000 shares |
| c. | Dr. William R. Carroll - 100,000 shares |
(ii) Granted Jon Scahill a ten-year
option (the “Option”) to purchase 600,000 shares of Common Stock which become exercisable cumulatively as follows:
| a. | 200,000 shares at an exercise price of $1.00 per share becoming
exercisable upon the commencement of trading of the Common Stock on the OTCQB. |
| b. | 200,000 shares at an exercise price of $3.00 per share, becoming
exercisable on the first day on which the Company files with the SEC a Form 10-K or Form 10-Q which reports stockholders’ equity
of at least $5,000,000, and |
| c. | 200,000 shares at an exercise price of $5.00 per share becoming
exercisable on the date on which the Common Stock is listed for trading on the Nasdaq Stock Market or the New York Stock Exchange |
| (iii) | Appointed Ryan T. Logue to the board of directors and granted
Mr. Logue a restricted stock grant of 500,000 shares of common stock which vests upon his acceptance of his appointment as a director. |
The Company recognized compensation expense of
$888,000 in conjunction with issuance of common stock to officers and directors. The Company determined the fair value of the options
to be approximately $720,000 as of the grant date using the Black-Scholes pricing model. Variables used in the valuation include (1) discount
rate of 1.37%; (2) term of 10 years; (3) computed volatility of 252% and (4) zero expected dividends. The Company did not recognize any
option expense for the three and six months ended June 30, 2022. The Company recognized option expense of approximately $120,000 and $240,000
for the three and six months ended June 30, 2021, respectively.
A summary of the status of the Company’s
stock options and changes is set forth below:
| |
Number of Options (#) | | |
Weighted Average Exercise Price ($) | | |
Weighted Average Remaining Contractual Life (Years) | |
Balance - December 31, 2021 | |
| 2,000,000 | | |
| 2.00 | | |
| 7.80 | |
Granted | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Expired | |
| — | | |
| — | | |
| — | |
Cancelled | |
| — | | |
| — | | |
| — | |
Balance - June 30, 2022 | |
| 2,000,000 | | |
| 2.00 | | |
| 7.30 | |
Options exercisable at end of period | |
| 1,000,000 | | |
| 0.77 | | |
| 5.95 | |
The intrinsic value of the outstanding options
as of June 30, 2022 is approximately $130,000.
As of June 30, 2022, there was approximately
$1,090,000 of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted
average expected term of approximately 8 years.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
Issuance of Warrants
A summary of the status of the Company’s
warrants and changes is set forth below:
| |
Number of Warrants (#) | | |
Weighted Average Exercise Price ($) | | |
Weighted Average Remaining Contractual Life (Years) | |
Balance - December 31, 2021 | |
| 962,463 | | |
| 0.54 | | |
| 9.14 | |
Granted | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Expired | |
| — | | |
| — | | |
| — | |
Cancelled | |
| — | | |
| — | | |
| — | |
Balance - June 30, 2022 | |
| 962,463 | | |
| 0.54 | | |
| 8.64 | |
The intrinsic value of the outstanding warrants
as of June 30, 2022 is approximately $250,000.
6. INTANGIBLE
ASSETS
Intangible assets include patents purchased and
are recorded based at their acquisition cost. Intangible assets consisted of the following:
| |
June 30, 2022 | | |
December 31, 2021 | | |
Weighted Average Amortization Period (Years) | |
Patents | |
$ | 2,315,000 | | |
$ | 5,617,117 | | |
| 11.02 | |
Disposal | |
| — | | |
| (4,362,117 | ) | |
| | |
Subtotal | |
| 2,315,000 | | |
| 1,255,000 | | |
| | |
Less: accumulated amortization | |
| (1,229,092 | ) | |
| (715,519 | ) | |
| | |
Net value of intangible assets | |
$ | 1,085,908 | | |
$ | 539,481 | | |
| 2.66 | |
Intangible assets are comprised of patents with
estimated useful lives. The intangible assets at June 30, 2022 represent:
| ● | patents acquired in October 2015 for a purchase price of $3,000,000, the useful lives of the patents,
at the date of purchase, was 6-10 years; these patents were disposed of as of December 31, 2021 |
| ● | patents acquired in July 2017 pursuant to an obligation to pay 50% of net revenues to IV 34/37 (see Note
3); the useful lives of the patents, at the date of acquisition, was 5-6 years; these patents were disposed of as of December 31, 2021. |
| ● | patents (which were fully amortized at the date of acquisition) acquired in January 2018 pursuant to an
agreement with to Intellectual Ventures Assets 62 LLC and Intellectual Ventures Assets 71 LLC “(IV 62/71”), pursuant to which
CXT has an obligation to distribute 50% of net revenues to IV 62/71; |
| ● | patents (which were fully amortized at the date of acquisition) acquired in January 2018 by Photonic Imaging
Solutions Inc. (“PIS”) from Intellectual Ventures Assets 64 LLC (“IV 64”) pursuant to which PIS is to pay IV 64
(a) 70% of the first $1,500,000 of net revenue, (b) 30% of the next $1,500,000 of net revenue and (c) 50% of net revenue in excess of
$3,000,000; |
| ● | patents acquired in March 2019 pursuant to an obligation to pay 50% of net revenues to IV 113/108 (see
Note 3); the useful lives of the patents, at the date of acquisition, was approximately 9 years, these patents were disposed of as of
December 31, 2021. |
| ● | patents (which were fully amortized at the date of acquisition) acquired in May 2020 for a purchase price
of $95,000 pursuant to an agreement with Texas Technology Ventures 2, LLP (“TTV”), pursuant to which of the Company retains
the first $230,000 of net proceeds, as defined in the agreement, after which the company has an obligation to distribute 50% of net proceeds
to TTV. |
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
| ● | patents (which were fully amortized at the date of acquisition) acquired in February 2021 pursuant to
an agreement with PKT for a purchase price of $350,000, pursuant to which $350,000 was paid at closing, and upon the realization of gross
proceeds, as defined in the agreement, the Company shall make a subsequent or payments in the aggregate amount of $93,900, representing
reimbursement to PKT, as the prosecuting attorney, for legal fees associated with prosecution of the portfolio, such reimbursement shall
be due and payable to PKT from time to time as gross proceeds are realized, if any, and paid to PKT along with and in proportion to reimbursement
to other third parties of costs incurred in realizing gross proceeds. Thereafter, PKT is entitled to a percentage of gross proceeds realized,
if any. |
| ● | patents acquired in January 2022 for a purchase price of $1,060,000, the useful lives of the patents,
at the date of purchase, was approximately 1-2 years. |
The Company amortizes the costs of intangible
assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including legal costs, are also
capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
The Company assesses intangible assets for any
impairment to the carrying values. As of June 30, 2022, management concluded that there was no impairment to the intangible assets.
Amortization expense for patents was approximately
$205,000 and $514,000 for the three and six months ended June 30, 2022, respectively. Amortization expense for patents was approximately
$388,000 and $876,000 for the three and six months ended June 30, 2021, respectively. Amortization expense is included in selling, general,
and administration expenses in the accompanying condensed consolidated statement of operations. Future amortization of intangible assets
is as follows:
Year Ended December 31, | |
| |
Remainder of 2022 | |
$ | 344,650 | |
2023 | |
| 314,150 | |
2024 | |
| 98,291 | |
2025 | |
| 53,267 | |
2026 and thereafter | |
| 275,550 | |
| |
$ | 1,085,908 | |
7. RELATED PARTY TRANSACTIONS
The Company has at various times entered into
transactions with related parties, including officers, directors and major stockholders, wherein these parties have provided services,
advanced or loaned money, or both, to the Company which was needed to support its daily operations. The Company discloses all related
party transactions.
See Notes 3 and 5 in connection with the Restructure
Agreement dated February 22, 2021 with Intelligent Partners. Because of its ownership percentage, Intelligent Partners is treated as a
related party.
See Note 5 with respect to share based compensation
to officers and directors.
See Note 8 with respect to the employment agreement
with the Company’s president and chief executive officer.
During the three and six months ended June 30,
2022 and 2021, the Company contracted with an entity owned by the chief technology officer for the provision of information technology
services to the Company. The cost of such services was approximately $90 and $205 for the three and six months ended June 30, 2022, respectively,
and approximately $90 and $205 for the three and six months ended June 30, 2021, respectively.
During the three and six months ended June 30,
2022 and 2021, the Company contracted with a law firm more than 10 percent owned, but not controlled, by the father-in-law of the chief
executive officer. The firm is engaged on a contingent fee basis and serves as escrow agent in connection with monetization of the Company’s
patents in matters where the firm is serving as counsel to the Company. For the three and six months ended June 30, 2022, the cost of
these services was approximately $0 and $28,000, respectively. For each of the three and six months ended June 30, 2021, the cost of these
services was approximately $0.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2022
8. COMMITMENTS
AND CONTINGENCIES
Employment Agreements
Pursuant to a restated employment agreement, dated
November 30, 2014, with the Company’s president and chief executive officer, the Company agreed to employ him as president and chief
executive officer for a term of three years, commencing January 1, 2014, and continuing on a year-to-year basis unless terminated by either
party on not less than 90 days’ notice prior to the expiration of the initial term or any one-year extension. The agreement provides
for an initial annual salary of $252,000, which may be increased, but not decreased, by the board or the compensation committee. In March
2016, the Company’s board of directors increased the chief executive officer’s annual salary to $300,000, effective January
1, 2016. The chief executive officer is entitled to a bonus if the Company meets or exceeds performance criteria established by the compensation
committee. In August 2016, the Company’s board of directors approved annual bonus compensation equal to 30% of the amount by which
the Company’s consolidated income before income taxes exceeds $500,000, but, if the Company is subject to the limitation on deductibility
of executive compensation pursuant to Section 162(m) of the Internal Revenue Code, the bonus cannot exceed the amount which would be deductible
pursuant to Section 162(m). The chief executive officer is also eligible to participate in any executive incentive plans which the Company
may adopt.
Pension Benefits
Pursuant to the SEP IRA plan adopted by the Company
in March 2020, the Company deposited into a SEP IRA account of each of its participating employees a percentage of the employee’s
compensation, subject to statutory limitations on the amount of the contribution all as set forth in the IRS Form 5305-SEP. For the year
ending December 31, 2022, the percentage is set at 19%. The Company’s president and chief executive officer is the only participant
and $14,500 was deposited into his SEP IRA account during the six months ended June 30, 2022.
Patent Enforcement and Other Litigation
Certain of the Company’s operating subsidiaries
are engaged in litigation to enforce their patents and patent rights. In connection with these patent enforcement actions, it is possible
that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority,
federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions.
In such event, a court may issue monetary sanctions against the Company or its operating subsidiaries or award attorney’s fees and/or
expenses to a defendant(s), which could be material, and if required to be paid by the Company or its operating subsidiaries, could materially
impair the Company’s operating results and financial position and could result in a default under the Company’s obligations
to QFL. Since the operating subsidiaries do not have any assets other than the patents, and the Company does not have any available financial
resources to pay any judgment which a defendant may obtain against a subsidiary, such a judgment may result in the bankruptcy of the subsidiary
and/or the loss of the patents, which are the subsidiaries’ only assets.
Effects of possible delisting of common stock
on OTCQB
On May 23, 2022, the Company received notice from OTC Markets Group,
that, because the bid price for its common stock had closed below $0.01 per share for more than 30 consecutive days, the Company no longer
meets the Standards for Continued Eligibility under the OTC listing standards and, if this deficiency is not met by August 21, 2022, our
common stock will be removed from the OTCQB marketplace, in which event the common stock will be traded on the OTC Pink market. Our registration
rights agreement with QFL provides that, in the event of a failure to comply with certain covenants, which includes the failure of our
common stock to be traded on the OTCQB, in additional to any other remedies available to QFL, we are to pay to QFL an amount in cash equal
to 2.0% of the aggregate value of QFL’s Registrable Securities, as defined in the Registration Rights Agreement, whether or not
included in such registration statement, on each of the following dates: (i) the initial day of a maintenance failure; (ii) on the 30th
day after the date of such a failure and (iii) every 30th day thereafter (prorated for periods totaling less than thirty (30) days) until
such failure is cured. We may not have the funds to make the payment pursuant to the registration rights agreement, and, if QFL seeks
to enforce its rights to the damages, we may seek protection under the Bankruptcy Act. Further, even if QFL does not seek to enforce it
right to damages, it may not make advances to us until and unless our common stock meets the OTCQB trading requirements.
9. SUBSEQUENT EVENTS
In July 2022, the Company’s wholly owned
subsidiary, EDI Licensing LLC (“EDI”), acquired, via assignment from Edward D. Ioli Trust, all right title and interest to
a portfolio of five United States patents relating to a system and method for controlling vehicles and for providing assistance to operated
vehicles (“EDI Portfolio”) for a purchase price consisting of 50% of the net proceeds resulting from monetization of the EDI
Portfolio.
In July 2022, the Company entered into a purchase
agreement with Hewlett Packard Enterprise Development LP and Hewlett Packard Enterprise Company for the purchase of eight United States
Patents for a purchase price of $350,000. The Company paid $35,000 upon execution of the agreement with the balance payable within 30
days. The Company requested a capital advance from QFL in the amount of $350,000, which will be used to make payment of the balance pursuant
to the terms of the purchase agreement.