EDGAR 10-K Filing

Company CIK: 824416
Filing Year: 2021
Filename: 824416_10-K_2021_0001213900-21-021718.json

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ITEM 1. BUSINESS
ITEM
1. BUSINESS
Overview
We
are an intellectual property asset management company. Our principal operations include the acquisition, licensing and enforcement
of intellectual property rights that are either owned or controlled by us or one of our wholly-owned subsidiaries. We currently
own, control or manage twelve intellectual property portfolios, which principally consist of patent rights. Our twelve intellectual
property portfolios include the portfolios which we acquired from Intellectual Ventures Assets 16, LLC (“Intellectual Ventures”)
and seven of its affiliates. As part of our intellectual property asset management activities and in the ordinary course of our
business, it has been necessary for us or the intellectual property owner who we represent to initiate, and it is likely to continue
to be necessary to initiate, patent infringement lawsuits and engage in patent infringement litigation. We anticipate that our
primary source of revenue will come from the grant of licenses to use our intellectual property, including licenses granted as
part of the settlement of patent infringement lawsuits.
We
generate revenue from two sources:
● Patent licensing
fees relating to our intellectual property portfolio, which includes fees from the licensing of our intellectual property,
primarily from litigation relating to enforcement of our intellectual property rights.
● Licensed packaging
sales, which relate to the sale of licensed products, which have not constituted a significant source of revenue and was not
a source of revenue in 2020.
We
previously received management fees for managing litigation related to our intellectual property rights. We do not currently receive
these fees; we do not have any agreements that provide for such payments and we cannot assure you that we will generate revenue
from such fees in the future. Our agreement with QFL does not provide for any payment to us of management fees.
Intellectual
property monetization includes the generation of revenue and proceeds from the licensing of patents, patented technologies and
other intellectual property rights. Patent litigation is often a necessary element of intellectual property monetization where
a patent owner, or a representative of the patent owner, seeks to protect its patent rights against the unlicensed manufacture,
sale, and use of the owner’s patent rights or products which incorporate the owner’s patent rights. In general, we
seek to monetize the bundle of rights granted by the patents through structured licensing and when necessary enforcement of those
rights through litigation, although to date all of our patent license revenues have resulted from litigation.
We
intend to develop our business by acquiring intellectual property rights, either in the form of ownership of or an exclusive license
to the underlying intellectual property. Our goal is to enter into agreements with inventors of innovative technologies for which
there may be a significant market for products which use or incorporate the intellectual property. We seek to purchase all of,
or interests in, intellectual property in exchange for cash, securities of our company, the formation or a joint venture or separate
subsidiary in which the owner has an equity interest, and/or interests in the monetization of those assets. Our revenue from this
aspect of our business can be generated through licensing and, when necessary, which is typically the case, litigation. We engage
in due diligence and a principled risk underwriting process to evaluate the merits and potential value of any acquisition, partnership
or joint venture. We seek to structure the terms of our acquisitions in a manner that will achieve the highest risk-adjusted returns
possible, in the context of our financial condition. In connection with the acquisition of intellectual property portfolios,
we have granted the party providing the financing an interest in any recovery we have with respect to the intellectual property
purchased with the financing, and we expect that we will have to continue to grant such interests until and unless we have generated
sufficient cash from licensing our intellectual property to enable us to acquire additional intellectual property portfolios without
outside financing. However, we cannot assure you that we will ever generate sufficient revenues to enable us to purchase additional
intellectual property without third-party financing.
We
employ a due diligence process before completing the acquisition of an intellectual property interest. We begin with an investment
thesis supporting the potential transaction and then proceed to test the thesis through an examination of the critical drivers
of the value of the underlying intellectual property asset. Such an examination focuses on areas such as title and inventorship
issues, the quality of the drafting and prosecution of the intellectual property assets, legal risks inherent in licensing programs
generally, the applicability of the invention to the relevant marketplace and other issues such as the effects of venue and other
procedural issues. However, our financial position may affect our ability to conduct adequate due diligence with respect to intellectual
property rights. This due diligence effort is conducted by our chief executive officer.
It
is frequently necessary to commence litigation in order to obtain a recovery for past infringement of, or to license the use of,
our intellectual property rights. Intellectual property litigation is very expensive, with no certainty of any recovery. To the
extent possible we seek to engage counsel on a contingent fee or partial contingent fee basis, which significantly reduces our
litigation cost, but which also reduces the value of the recovery to us. We do not have the resources to enable us to fund the
cost of litigation. To the extent that we cannot fund litigation ourselves, we may enter into an agreement with a third party,
which may be the patent owner or the former patent owner who transferred the patent rights to us, or an independent third party.
In view of our limited cash and our working capital deficiency, we are not able to institute any monetization program that may
require litigation unless we engage counsel on a fully contingent basis or we obtain funding from third party funding sources.
In these cases, counsel may be afforded a greater participation in the recovery and the third party that funds the litigation
would be entitled to participate in any recovery.
Recent
Development
Set
forth below is a discussion of recent agreements which we entered into with QFL to provide us with a financing facility, funds
to make a payment due to Intellectual Partners and for working capital and an agreement with Intellectual Partners to restructure
our loan agreement and related agreements. The agreement with Intellectual Partners restated our agreements with United Wireless
Holdings, Inc. (“United Wireless”) which had been assigned to Intellectual Partners, an affiliate of United Wireless.
The descriptions below and elsewhere in this Form 10-K relating to our agreements with QFL and Intelligent Partners are summaries
only and are qualified in their entirety by reference to those agreements which are filed as exhibits to this Form 10-K
Summary
of Agreements with QPRC Finance LLC
On
February 22, 2021, we entered into a series of agreements, all dated February 19, 2021,with QFL, including a prepaid forward purchase
agreement (the “Purchase Agreement”), a security agreement (the “Security Agreement”), a subsidiary security
agreement (the “Subsidiary Security Agreement”), a subsidiary guaranty (the “Subsidiary Guarantee”), 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 us a financing facility of: (a) up to $25,000,000 for the acquisition
of mutually agreed patent rights that we intend to monetize; (b) up to $2,000,000 for operating expenses; and (iii) $1,750,000
to fund the cash payment portion of the restructure of our obligations to Intelligent Partners. In return we transferred to QFL
a right to receive a portion of net proceeds generated from the monetization of those patents. The terms of the Purchase Agreement
are described under “Purchase Agreement.”
(ii) We
used $1,750,000 of proceeds from the QFL financing as the cash payment portion of the restructure of our obligations to Intelligent
Partners as transferee of United Wireless Holdings, Inc. (“United Wireless”) pursuant to a restructure agreement (the
“Restructure Agreement”) between us and the Company and Intelligent Partners executed contemporaneously with the closing
of the Investment Documents. The payment was made directly from QFL to Intelligent Partners. The terms of the Restructure Agreement
are described under “Restructure Agreement.” We also requested and received in March 2021 $400,000 for working capital.
(iii) Pursuant
to the Security Agreement, our 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).
(iv) Pursuant
to the Subsidiary Guaranty, eight of our subsidiaries - Quest Licensing Corporation (“QLC”), Quest NetTech Corporation
(“NetTech”), Mariner IC Inc. (“Mariner”), Semcon IP Inc. (“Semcon”), IC Kinetics Inc. (“IC”),
CXT Systems Inc. (“CXT”), M-Red Inc. (“MRED”), and Audio Messaging Inc.(“AMI”), collectively,
the “Subsidiary Guarantors”) guaranteed our obligations to QFL under the Purchase Agreement.
(v) Pursuant
to the Subsidiary Security Agreement, the Subsidiary Guarantors grant QFL a security interest in the proceeds from the future
monetization of their respective patent portfolios.
(vi) Pursuant
to the Warrant Issue Agreement, we granted QFL ten-year warrants to purchase a total of up to 96,246,246 shares of our common
stock, with an exercise price of $0.0054 per share which may be exercised from February 19, 2021 through February 18, 2031on a
cash or cashless basis. Exercisability of the Warrant is limited if, upon exercise, the holder would beneficially own more than
4.99% (the “Maximum Percentage”) of our common stock, except that by written notice to us, 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 us. 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).
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.
(vii) We
agreed to take all commercially reasonable steps necessary to regain compliance with the OTCQB eligibility standards as soon as
practicable, but in no event later than 12 months from the closing date.
(viii) We
granted QFL certain registration rights with respect to the 96,246,246 shares of common stock issuable upon exercise of the warrant.
(ix) Commencing
six months from the closing date, if the shares owned by QFL 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
QFL.
(x) 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”), we 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.
Purchase
Agreement
Pursuant
to the Purchase Agreement, QFL agreed to make available to us a financing facility of: (i) up to $25,000,000 for the acquisition
of mutually agreed patent rights that we intend to monetize; (ii) up to $2,000,000 for operating expenses from which we may, at
our discretion, draw up to $200,000 per calendar quarter; and (iii) $1,750,000 to fund the cash payment portion of the restructure
of our obligations to Intelligent Partners. In return we transferred to QFL the right to receive a portion of net proceeds generated
from the monetization of those patents. After QFL has a negotiated rate of return, we and QFL shall share net proceeds equally
until QFL shall have achieved its Investment Return (as defined therein). Thereafter, we shall retain 100% of all net proceeds.
Except in an Event of Default, as defined therein, all payments by the Company to QFL pursuant to the Purchase Agreement are non-recourse
and shall be paid only if and after net proceeds from monetization of the patent rights owned or acquire by the Company are received,
or to be received.
Events
of Default include any breach of the Investment Documents, including non-payment, material misrepresentation, security interest
compromise, criminal indictment or felony conviction of one or our officers or directors, our current chief executive no longer
serving as our chief executive or as a director, the occurrence of any Event of Default under the Restructure Agreement with Intelligent
Partners, as defined therein, and our insolvency. In addition to all rights and remedies available under law and the Investment
Documents, upon and Event of Default, QFL may: (i) declare the Investment Return immediately due and payable, (ii) except in the
event of our insolvency, declare an amount equal to the aggregate amount of the capital provided pursuant to the Purchase Agreement,
plus a late charge, immediately due and payable, or (iii) cease making capital available to us.
Under the agreement, QFL may terminate capital advances other than in an Event of Default by giving written notice to us in which case QFL’s interest in Net Proceeds shall be an amount equal to the greater of (i) the capital advanced to the Company plus interest at the prime rate, on the one hand, and (ii) Net Proceeds received by the QFL prior to the date of such termination.
Grant
of Security Interests
Pursuant
to the Security Agreement and Subsidiary Security Agreement, payment of the obligations of the Company under the Purchase Agreement
with QFL are secured by (i) the Proceeds (as defined in the Purchase Agreement); (ii) the Patents; (iii) all General Intangibles
now or hereafter arising from or related to the foregoing; (iv) Proceeds (including, without limitation, Cash Proceeds and insurance
proceeds) and products of the foregoing and (v) the proceeds realized by the relative patent portfolios of the Subsidiary Guarantors.
The security interest in proceeds from the CXT and M-Red patents granted to QFL is junior to the security interest held by the
respective affiliates of Intellectual Ventures granted to secure the obligations of CXT and MRED pursuant to their applicable
patent purchase agreements.
Registration
Rights Agreement
Pursuant
to the Registration Rights Agreement, we agreed to file a registration statement with the SEC covering 50,000,000 of the 96,246,246
shares of common stock issuable upon exercise of the Warrant. We are required to file the registration statement by the second
business day following the earlier of (x) the date on which the Company is next required to file its financial statements on Form
10-K or Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (y) the date on
which the Company actually files its financial statements on Form 10-K or Form 10-Q under the Exchange Act, in each case without
regard to any extension pursuant to Rule 12b-25 under the Exchange Act (the “Initial Filing Deadline”); provided,
that, if our common stock is not quoted on an existing trading market for the purpose of conducting an at the market offering
under Rule 415 of the Securities Act of 1933, as amended, the Initial Filing Deadline shall be no earlier than the second business
day following the date on which the QFL provides the Company with written information as to the fixed price at which it plans
to offer and sell the Registrable Securities (as defined in the Registration Rights Agreement) pursuant to the registration statement.
We are also required to file additional Registration Statements (as defined in the Registration Rights Agreement) on the date
60 days after the date that we receive written notice from any Investor (as defined in the Registration Rights Agreement) that
60% of the Registrable Securities held by all Investors registered under the immediately preceding registration statement have
been sold. The Registration Rights Agreement provides for us to pay damages in the event that we do not meet the required deadlines.
Intercreditor
Agreement
In
connection with the agreements with QFL and the agreements with Intelligent Partners described below, we and our Subsidiaries
entered into an intercreditor agreement with QFL and Intelligent Partners which sets forth the priority of QFL in the collateral
under the Investment Documents.
Summary
of Agreements with Intelligent Partners
Securities
Purchase Agreement and Related Agreements with United Wireless
We,
together with certain of our subsidiaries, and United Wireless, entered into a Securities Purchase Agreement dated October 22,
2015 (the “SPA”) and related Transaction Documents, as defined therein, pursuant to which the Company sold 50,000,000
shares (the “Shares”) of our common stock, par value $0.00003 per share (the “Common Stock”) at $0.05
per share, or an aggregate of $250,000; we issued our 10% secured convertible promissory notes due September 30, 2020 to United,
and granted United an option (the “2015 Purchase Option”) to purchase up to an additional 50,000,000 shares of Common
Stock in three tranches at the prices as set forth therein. The 2015 Purchase Option expired unexercised on September 30, 2020.
The Shares are currently owned by Andrew C. Fitton (“Fitton”) and Michael Carper (“Carper”) and United
Wireless subsequently transferred its note and assigned all of its remaining rights under the agreements to Intelligent Partners,
which is an affiliate of United Wireless and is owned by Fitton and Carper. Our agreements with United Wireless, also included
various monetization proceeds agreements, which we refer to as MPAs, pursuant to which we granted to Intelligent Partners, as
the assignee of United Wireless, rights to the monetization proceeds from revenue generated from certain of our intellectual property,
a security agreement and a registration rights agreement.
At
September 30, 2020, promissory notes in the aggregate principal amount of $4,672,810 were outstanding. The notes became due by
their terms on September 30, 2020, and we did not make any payment on account of principal of and interest on the notes. As a
result, Intelligent Partners had the right to declare a default under the Notes, and, if Intelligent Partners had taken such action,
it would have been necessary for us to seek protection under the Bankruptcy Act. Subsequent to September 30, 2020, we engaged
in negotiations with Intelligent Partners in parallel with our negotiations with QFL, with a view to restructuring our obligations
under the United Wireless agreements, including the Notes, so that we 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 our agreements with QFL. We also made interest payments totaling $117,780 between September
30, 2020 and February 22, 2021, the date we signed the Restructure Agreement with Intelligent Partners. One of QFL’s requirements
to provide us with a funding facility was the restructure of our obligations to Intelligent Partners so that we no longer had
any debt obligations to Intelligent Partners. Neither QFL nor any other financing source, would provide us with funding while
Intelligent Partners had a right to call a default under our notes to Intelligent Partners. As part of the restructure of our
agreements with Intelligent Partners, we amended the existing MPAs and granted Intelligent Partners certain rights in the monetization
proceeds from any new intellectual property we acquire, as describe below. Under these MPAs, Intelligent Partners participates
in the monetization proceeds we receive 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 Fitton and 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, we and Intelligent Partners agreed to extinguish the Note and Transferred Note, and terminate or amend and
restate the SPA and Transaction Documents, pursuant to a series of agreements including: a Restructure Agreement (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, we paid Intelligent Partners $1,750,000 at closing, which we received from QFL and which QFL paid
directly to Intelligent Partners, and recognized a further non-interest bearing total monetization proceeds obligation (the “TMPO”)
of $2,805,000, 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. Further
details regarding the TMPO are provided under “TMPO”;
(ii) Pursuant
to the Stock Purchase Agreement, we issued to Fitton and Carper, as holders of the Transferred Note, a total of 46,296,296 shares
of our restricted common stock at a purchase price of $0.0054 per share, which purchase price was paid by the conversion and in
full satisfaction of the Transferred Note (the “Conversion Shares”).
(iii) Pursuant
to the Option Grant, we granted Intelligent Partners an option to purchase a total of 50,000,000 shares of common stock, with
an exercise price of $0.0054 per share which vests immediately and may be exercised through February 9, 2026.
(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 can be generated from the intellectual property covered by the
agreement.
(v) Pursuant
to the Subsidiary Security Agreement, our obligations under our 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.
(vi) 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.
(vii) We
granted Intelligent Partners, Andrew Fitton and Michael Carper certain registration rights with respect to (i) the 50,000,000
Shares currently owned by Fitton and Carper; (ii) the 46,296,296 Conversion Shares being issued to Fitton and Carper, and (iii)
the 50,000,000 shares of common stock issuable upon exercise of the Restructure Option;
(viii) Commencing
six months from the closing date, if the shares owned by 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.
(ix) Pursuant
to the Board Observation Rights Agreement, until the Total Monetization Proceeds Obligation has been satisfied (the “Observation
Period”), we 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.
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 million dollars to another provider of financing following
a final determination by arbitration or other judicial proceeding that such obligation is due and owing.
Registration
Rights Agreement
Pursuant
to a registration rights agreement, we granted Intelligent Partners, Andrew Fitton and Michael Carper certain registration rights
with respect to (i) the 50,000,000 Shares currently owned by Fitton and Carper; (ii) the 46,296,296 Conversion Shares issued to
Fitton and Carper, and (iii) the 50,000,000 shares of common stock issuable upon exercise of the Restructure Option. We agreed
to file a registration statement with the SEC covering up to a maximum of 50,000,000 of the Shares, Conversion Shares and Options
Shares. We are required to file the registration statement by the earlier of the 2nd Business Day following the date on which
we (x) are next required to file our financial statements on Form 10-K or Form 10-Q under the Exchange Act, and (y) actually files
its financial statements on Form 10-K or Form 10-Q under the Exchange Act, in each case without regard to any extension pursuant
to Rule 12b-25 under the Exchange Act. We are required to have the registration statement declared effective by the SEC within
120 days of the closing if the registration statement is not subject to a full review by the SEC and 180 days if the registration
statement is subject to a full review. The registration rights agreements provides for us to pay damages in the event that we
do not meet the required deadlines.
Effects
of the COVID-19 Pandemic on our Business
Although
we do not manufacture or sell products, the COVID-19 pandemic and the work shutdown imposed in the United States and other countries
to limit the spread of the virus can have a negative impact on our business. Our revenue is generated almost exclusively from
license fees generated from litigation seeking damages for infringement of our intellectual property rights. The work shutdown
has affected the court system, with courts operating on a reduced schedule. As a result, patent infringement actions are likely
to be lower priority items in allocation of court resources, with the effect that deadlines are likely to be postponed which delays
may give defendants an incentive to delay negotiations or offer a lower amount than they might otherwise accept. In addition,
the effect of the COVID-19 and the public response may adversely affect the financial condition and prospects of defendants and
potential defendants, which would make it less likely that they would be willing to settle our claim or which may result in a
defendant or potential defendant reducing or discontinuing its operations or taking advantage of the Bankruptcy Act.
The
COVID-19 pandemic and the response to limit the spread of the infection may affect the financial condition of financing sources
and the willingness of potential financing sources to provide funding for our litigation. In addition, these factors may affect
a law firms’ ability and willingness to provide us with legal services on a contingent or partial contingent.
Further,
to the extent that holders of intellectual property rights see these factors impacting our ability to generate revenue from their
intellectual property, they may be reluctant to sell intellectual property to us on terms which are acceptable to us, if at all.
Purchase
of Intellectual Property from Intellectual Ventures Entities
On
October 22, 2015, pursuant to an agreement with an effective date of July 8, 2015, as amended, between us and Intellectual Ventures,
we purchased three groups of patents from Intellectual Ventures for a purchase price of $3,000,000, which was paid in three annual
installments of $1,000,000 from the proceeds of our loans from United Wireless. The patent portfolios which we acquired from Intellectual
Ventures are the anchor structure portfolio, the power management/bus control portfolio and the diode on chip portfolio, which
are described under “Business - Our Intellectual Property Portfolios.”
On
January 26, 2018, Photonic Imaging Solutions Inc. (“PIS”), a wholly-owned subsidiary, entered into an agreement with
Intellectual Ventures Assets 64 LLC (“IV 64”) pursuant to which PIS advanced $10,000 to IV 64 at closing and IV 64
assigned to PIS all right, title, and interest in a portfolio of eleven United States patents and sixteen foreign patents (the
“CMOS Portfolio”). Under the agreement, PIS will distribute to IV 64 70% of the first $1,500,000 of revenue, as defined
in the agreement, 30% of the next $1,500,000 of revenue and 50% of revenue over $3,000,000; with the $10,000 advance being treated
as an advance against the first distributions of net proceeds payable to IV 64. PIS’ obligations under the monetization
proceeds agreement are secured by a security interest in the proceeds (from litigation or otherwise) from the portfolio. The patent
portfolio which we acquired from IV 64 is the CMOS portfolio which is described under “Business - Our Intellectual
Property Portfolios.”
On July 28, 2017, CXT, a wholly-owned subsidiary, entered into an agreement with Intellectual Ventures Assets 34 LLC and Intellectual Ventures Assets 37 LLC (“IV 34/37”) pursuant to which CTX paid IV 34/37 $25,000 and IV34/37 transferred to CXT all right, title and interest in a portfolio of thirteen United States patents (the “CXT Portfolio”). Under the agreement, CXT will distribute 50% of net proceeds, as defined, to IV 34/37, as long as we generate revenue from the CXT Portfolio. The $25,000 payment to IV 34/37 was made from a loan from United Wireless and was paid directly by United Wireless to IV 34/37. The agreement with IV 34/37, as amended on January 26, 2018, provides that if, on December 31, 2018, December 31, 2019 and December 31, 2020, cumulative distributions to IV 34/37 total less than $100,000, $375,000 and $975,000, respectively, CXT shall pay the difference between such cumulative amounts and the amount paid to IV 34/37 within ten days after the applicable date. The $25,000 advance is treated as an advance against distributions of net proceeds payable to IV 34/37. The useful lives of the patents, at the date of acquisition, was 5-6 years. Neither we nor any affiliate of CXT has guaranteed the minimum payments. As of December 31, 2020, cumulative distributions did not total $975,000 and CXT did not pay the difference to IV 34/37 within ten days. Non-payment which is not cured within 30 days after written notice from IV 34/37 would constitute an Acceleration Event under the agreement, following which, in addition to any other remedies available under the agreement, all outstanding minimum cumulative distributions would become due and payable within thirty days. As of the date of filing, no such written notice of non-payment has been given by IV 34/37. CXT’s obligations under the agreement with IV 34/37 are secured by a security interest in the proceeds (from litigation or otherwise) from the CXT Portfolio. The patent portfolio which we acquired from IV 34/37 is the CXT portfolio which is described under “Business - Our Intellectual Property Portfolios.”
On
January 26, 2018, CXT entered into an agreement with Intellectual Ventures Assets 62 LLC and Intellectual Ventures Assets 71 LLC
“(IV 62/71”) pursuant to which CXT advanced IV 62/71 $10,000 at closing and IV 62/71 assigned to CXT all right, title,
and interest in a portfolio of sixteen United States patents and three pending applications. Under the agreement, CXT will distribute
50% of net proceeds, as defined, to IV 62/71, as long as we generate net proceeds from this portfolio. The initial $10,000 advance
is treated as an advance toward our future distributions of net proceeds payable to IV 62/71. CXT’s obligations under the
agreement are secured by a security interest in the proceeds (from litigation or otherwise) from the CXT Portfolio. In March 2021,
we made a payment to IV 62/71 in the amount of $64,238. We agreed to modify the monetization proceeds agreement between CXT and
United Wireless to include the patents acquired from IV 62/71. The monetization proceeds amendment was further amended by
the MPA-CXT Agreement in connection with the restructure of our agreements with Intelligent Partners.
On March 15, 2019, M-RED Inc. (“M-RED”), a wholly-owned subsidiary, entered into an agreement with Intellectual Ventures Assets 113 LLC and Intellectual Ventures Assets 108 LLC (“IV 113/108”) pursuant to which M-RED paid IV 113/108 $75,000 and IV 113/108 transferred to M-RED all right, title and interest in a portfolio of sixty United States patents and eight foreign patents (the “M-RED Portfolio”). Under the agreement, M-RED will distribute 50% of net proceeds, as defined, to IV 113/108, as long as we generate revenue from the M-RED Portfolio. The agreement with IV 113/108 provides that if, on September 30, 2020, September 30, 2021 and September 30, 2022, cumulative distributions to IV 113/108 total less than $450,000, $975,000 and $1,575,000, respectively, M-RED shall pay the difference between such cumulative amounts and the amount paid to IV 113/108 within ten days after the applicable date. The $75,000 advance is treated as an advance against the first distributions of net proceeds payable to IV 113/108. On September 30, 2020 cumulative distributions to IV 113/108 totaled less than $450,000 and M-RED did not pay the difference to IV 113/108 within ten days. In March 2021, M-RED paid IV 113/108 $114,952 in cumulative distributions Non-payment which is not cured within 30 days after written notice from IV 113/108 would constitute an Acceleration Event under the agreement, following which, in addition to any other remedies available under the agreement, all outstanding minimum cumulative distributions would become due and payable within thirty days. As of the date of filing, no such written notice of non-payment has been given by IV 113/108. The useful lives of the patents, at the date of acquisition, was approximately nine years. Neither we nor any affiliate of M-RED has guaranteed the minimum payments. M-RED’s obligations under the agreement with IV 113/108 are secured by a security interest in the proceeds (from litigation or otherwise) from the M-RED Portfolio. The patent portfolio which we acquired from IV 113/108 is the M-RED portfolio which is described under “Business - Our Intellectual Property Portfolios.” Pursuant to the MPA-MR, Intelligent Partners is entitled to receive 60% of the net proceeds as defined in the agreement.
A default under the agreements with the Intellectual Ventures affiliates could result in a default under our agreements with QFL, and, even if it does not declare a default, QFL may be reluctant to finance our intellectual property acquisition if we are in default under any of our patent acquisition agreements with Intellectual Venture affiliates. Further, it may be necessary for any defaulting subsidiary to seek protection under the Bankruptcy Act if we are not able to enter into modification agreements with the Intellectual Ventures affiliates.
Our
Organization
We
were incorporated in Delaware on July 17, 1987 under the name Phase Out of America. On September 21, 1997, we changed our name
to Quest Products Corporation, and, on June 6, 2007, we changed our name to Quest Patent Research Corporation. We have been engaged
in the intellectual property monetization business since 2008. Our executive principal office is located at 411 Theodore Fremd
Ave., Suite 206S, Rye, New York 10580-1411, telephone (888) 743-7577. Our website is www.qprc.com. Information contained on or
derived from our website or any other website does not constitute a part of this annual report.
Our
Intellectual Property Portfolios
Mobile
Data
The
real-time mobile data portfolio relates to the automatic update of information delivered to a mobile device without the need for
a manual refreshing. The portfolio is comprised of U.S. Patent No. 7,194,468 “Apparatus and Method for Supplying Information”
and all related patents, patent applications, and all continuations, continuations-in-part, divisions, extensions, renewals, reissues
and re-examinations relating to all inventions thereof (the “Mobile Data Portfolio”).
Through
December 31, 2020, we did not receive any proceeds from the Mobile Data Portfolio.
Flexible
Packaging - Turtle PakTM
In
March 2008, we entered into an agreement with Emerging Technologies Trust whereby our majority-owned subsidiary, Quest Packaging
Solutions Corporation, acquired the exclusive license to make, use, sell, offer for sale or sublicense the intellectual property
of Emerging Technologies Trust (the “Turtle Pak™ Portfolio”). The Turtle Pak portfolio relates to a cost effective,
high-protection packaging system recommended for fragile items weighing less than ten pounds. The intellectual property consists
of two U.S. patents, U.S. Patent No. RE36,412 and U.S. Patent No.6,490,844, and the Turtle PakTM trademark. Turtle
Pak™ brand packaging is suited for such uses as electrical and electronic components, medical, dental, and diagnostic equipment,
instrumentation products, and control components. Turtle Pak™ brand packaging materials are 100% curbside recyclable.
As
the exclusive licensee and manager of the manufacture and sale of licensed product, we coordinate the manufacture and sale of
licensed products to end users; we contract for the manufacture and assembly of the product components, and we coordinate order
receipt, fulfillment and invoicing. Revenues from the TurtlePakTM product sales were approximately $0 and $25,000 for
the years ended December 31, 2020 and 2019, respectively.
Universal
Financial Data System
The
invention describes a universal financial data system which allows its holder to use the device to access one or more accounts
stored in the memory of the device as a cash payment substitute as well as to keep track of financial and transaction records
and data, such as transaction receipts, in a highly portable package, such as a cellular device (the “Financial Data Portfolio”).
The inventive universal data system is capable of supporting multiple accounts of various types, including but not limited to
credit card accounts, checking/debit accounts, and loyalty accounts. Our wholly-owned subsidiary, Wynn Technologies Inc., acquired
US Patent No. 5,859,419, from the owner, Sol Wynn. In January 2001, we filed a reissue application for the patent, and the United
States Patent and Trademark Office issued patent RE38,137. This reissued patent, which contains 35 separate claims, replaces the
original patent, which had seven claims. In February 2011, we entered into a new agreement with Sol Li (formerly Sol Wynn), pursuant
to which we issued to Mr. Li a 35% interest in Wynn Technologies and warrants to purchase up to 5,000,000 shares of our common
stock at an exercise price of $0.001 per share. These warrants expired unexercised. We also agreed that Mr. Li would receive 40%
of the net licensing revenues generated by Wynn Technologies with respect to this patent, which is the only patent owned by Wynn
Technologies. On December 17, 2018, Wynn Technologies, Inc. granted an exclusive license to the Financial Data Portfolio, including
the right to enforce, to our wholly owned subsidiary, Quest NetTech. Under the agreement, Quest NetTech receives 100% of the net
proceeds, as defined by the agreement. On April 11, 2019 Quest NetTech Corporation merged with Wynn Technologies, Inc. with Quest
NetTech Corporation being the surviving entity with Mr. Li having a 35% interest. On April 12, 2019, Quest NetTech brought a patent
infringement suit in the U.S. District for the Eastern District of Texas against Apple, Inc. The case was dismissed in May 2020.
Our
revenue for the year ended December 31, 2020 includes revenue from the Financial Data Portfolio.
Rich
Media
The
rich media portfolio is directed to methods, systems, and processes that permit typical Internet users to design rich-media production
content (i.e., rich-media applications), such as websites. The portfolio consists of U.S. Patent No. 7,000,180, “Methods,
Systems, and Processes for the Design and Creation of Rich Media Applications via the Internet” and all related patents,
patent applications, corresponding foreign patents and foreign patent applications and foreign counterparts, and all continuations,
continuations-in-part, divisions, extensions, renewals, reissues and re-examinations relating to all inventions thereof (the “Rich
Media Portfolio”). In July 2008, we entered into a consulting and licensing program management agreement with Balthaser
Online, Inc., the patent owner, pursuant to which we performed services related to the establishment and management of a licensing
program to evaluate and analyze the relevant market and to obtain licenses for the Rich Media Portfolio in exchange for management
fees as well as an irrevocable entitlement to a distribution of 15% of all proceeds generated by the Rich Media Portfolio for
the remaining life of the portfolio regardless of whether those proceeds are derived from litigation, settlement, licensing or
otherwise. Our 15% distribution right is subject to reduction to 7.5% in the event that we refuse or are unable to perform the
services detailed in the agreement.
Through
December 31, 2020, we did not generate any revenue from the rich media patents.
Anchor
Structure Portfolio
This
portfolio, which we acquired from Intellectual Ventures in October 2015 and transferred to a newly formed subsidiary, Mariner
IC Inc., consists of two United States patents which relate to technology for incorporating metal structures in the corners and
edges of semiconductor dies to prevent cracking from stresses.
In
March 2016, we entered into a funding agreement whereby a third party agreed to provide funds to us to enable us to implement
a structured licensing program, including litigation if necessary, for the Anchor Structure Portfolio and engaged counsel on a
partial contingency basis in connection with a proposed patent infringement action relating to the Anchor Structure Portfolio.
Under the funding agreement, the third party receives an interest in the proceeds from the program, and we have no other obligation
to the third party.
In
March 2018, Mariner IC brought patent infringement suits in the United States District Court for the Eastern District of Texas
against Acer Inc., Schneider Electric, Sharp Corporation, AsusTek Computer Inc., and Bose Corporation. In April 2018, the actions
against Acer Inc., Schneider Electric and Bose Corporation were dismissed. In April 2018, Mariner IC brought patent infringement
actions in the United States District Court for the Eastern District of Texas against TiVo Corporation and Huawei Device Co.,
Ltd et.al. In August 2018, the action against Huawei Device Co., Ltd et. al. was voluntarily dismissed. In September 2018, Mariner
IC brought a patent infringement action in the United States District Court for the Eastern District of Texas against Huawei Device
Co., Ltd et. al. All suits were settled and dismissed in 2019 and our revenue for the year ended December 31, 2019 includes revenue
from these settlements. We did not generate license fees from the Anchor Structure Portfolio in 2020.
Power
Management/Bus Control Portfolio
This
portfolio, which is the second portfolio which we acquired from Intellectual Ventures and transferred to a newly-formed subsidiary,
Semcon IP Inc., consists of four United States patents that cover fundamental technology for adjusting the processor clock and
voltage to save power based on the operating characteristics of the processor and one United States patent that relates to coordinating
direct bus communications between subsystems in an assigned channel.
In
March 2016, we entered into a funding agreement whereby a third party agreed to provide funds to us to enable us to implement
a structured licensing program, including litigation if necessary, for the Power Management/Bus Control Portfolio and engaged
counsel on a partial contingency basis in connection with a proposed patent infringement action relating to the Power Management/Bus
Control. Under the funding agreement, the third party receives an interest in the proceeds from the program, and we have no other
obligation to the third party.
Pursuant
to the terms of the funding agreement and the partial contingency agreement with counsel, we do not have any liability or obligations
with respect to the costs associated with prosecuting the actions, and we do not receive any payments for any assistance which
we may provide in connection with the litigation. Both the funding source and counsel will participate in any recovery in these
lawsuits.
Following
the execution of the funding agreement and partial contingency agreement with counsel, in April 2016, Semcon IP Inc. brought patent
infringement suits in the United States District Court for the Eastern District of Texas against Huawei Technologies, MediaTek
Inc., STMicroelectronics Inc., Texas Instruments Incorporated and ZTE Corporation. As of December 31, 2018, these actions had
been settled and dismissed.
In
May 2018, Semcon brought patent infringement actions in the United States District Court for the Eastern District of Texas against
Amazon.com, Inc., AsusTeK Computer Inc., TCT Mobile International Limited et. al., Kyocera Corporation, LVMH Moet Hennessy Louis
Vuitton, SE, Shenzhen OnePlus Science & Technology Co., Ltd., and Michael Kors Holdings Ltd.
The
Michael Kors, Kyocera and Amazon actions were settled in 2019, and our revenue for the year ended December 31, 2019 includes revenue
from these settlements. The AsusTeK Computer Inc., TCT Mobile International Limited et. al., LVMH Moet Hennessy Louis Vuitton,
SE, and Shenzhen OnePlus Science & Technology Co., Ltd., actions were settled in 2020 and our revenue for the year ended December
31, 2020 includes revenue from these settlements.
Diode
on Chip Portfolio
This
portfolio, which is the third portfolio which we acquired from Intellectual Ventures and transferred to a newly-formed subsidiary,
IC Kinetics Inc., consists of three United States patents and one pending continuation application which cover technology relating
to on-chip temperature measurement for semiconductors. As of December 31, 2020, we did not generate any revenue from this portfolio.
CXT
Portfolio
This
portfolio consists of thirty United States patents and three pending continuation applications which cover technology relating
to systems and methods of operating an accessible information database which provides for inventory evaluation, filtering according
to preferences, alternative product recommendations, and access to a database of consumer feedback/evaluation.
In
April 2018 CXT brought patent infringement suits in the United States District Court for the Eastern District of Texas against
Academy Ltd., The Container Store Group, Inc. and Pier 1 Imports, Inc. In May 2018 CXT brought patent infringement suits in the
United States District Court for the Eastern District of Texas against Conn’s, Inc., Fossil Group, Inc., JC Penney Company,
Inc., Stage Stores, Inc. and Tailored Brands, Inc. In May 2019, CXT brought patent infringement actions in the United States District
Court for the Eastern District of Texas against Harbor Freight Tools USA, Inc., Hallmark.com, LLC, Retail Concepts, Inc. and CC
Filson Co. In August 2019, CXT brought patent infringement suits in the United States District Court for the Eastern District
of Texas against Neiman Marcus Group Ltd., General Nutrition Corporation and Steve Madden, Ltd.
In
March 2021 CXT brought patent infringement suits in the United States District Court for the Eastern District of Texas against
Advanced Auto Parts, Inc., Costco Wholesale Corporation, The Sherwin-Williams Company, V.F. Corporation and IKEA North America
Services, LLC.
The
actions against The Container Store, Pier 1 Imports and Stage Stores were settled in 2019 and revenue for the year ended December
31, 2019 included revenue from these settlements.
The
actions against Conn’s, Inc., Academy Ltd., Fossil Group, Inc., JC Penney Company, Inc., Tailored Brands, Inc., Harbor Freight
Tools USA, Inc., Hallmark, CC Filson, General Nutrition, Steve Madden, Ltd. and Neiman Marcus Group Ltd. were resolved in 2020
and revenue for the year ended December 31, 2020 includes revenue from any related settlements.
CMOS
Portfolio
This
portfolio consists of eleven United States patents and sixteen foreign patents which cover technology relating to digital image
sensor technology systems and methods which PIS acquired on January 26, 2018.
In
April 2018 PIS brought patent infringement actions in the United States District Court for the District of Delaware against Lenovo
Group Ltd., AsusTek Computer Inc., Lorex Technology Inc., and NETGEAR, Inc. As of December 31, 2019, all actions had been settled
and revenue for the year ended December 31, 2019 incudes revenue from these settlements. We did not generate revenue from the
CMOS Portfolio in 2020.
M-RED
Portfolio
This
portfolio consists of sixty United States patents and eight foreign patents which cover technology relating to processor and power
management which M-RED acquired on March 15, 2019.
On
April 29, 2019, M-Red brought patent infringement suits in the U.S. District for the Eastern District of Texas against MediaTek
Inc. and Acer Inc. On July 16, 2019, M-Red Inc. brought patent infringement suits in the U.S. District for the Eastern District
of Texas against Panasonic Corporation. As of December 31, 2020, all actions were settled and dismissed and revenue for the year
ended December 31, 2020 incudes revenue from settlements. We did not generate revenue from the M-RED Portfolio in 2019.
In
March 2021, M-Red brought patent infringement suits in the U.S. District for the Eastern District of Texas against Nintendo CO.,
Ltd., Mitsubishi Electric Corporation and Xiaomi Corporation et. al.
Audio
Messaging Portfolio
This
portfolio consists of five issued United States patents and one pending application which generally relate to systems and methods
for associating an audio clip with an object which our wholly-owned subsidiary, Audio Messaging Inc. (“AMI”), acquired
in May of 2020.
Peregrin
Portfolio
Acquired in February 2021, this portfolio consists of eight issued United States patents which generally relate to systems and methods for processing inbound and outbound communications, for example, determining the location of a caller and routing the inbound communication to an entity in the caller’s location.
Competition
We
encounter and expect to continue to encounter competition in the areas of intellectual property acquisitions for the sake of licensure
from both private and publicly traded companies that engage in intellectual property monetization activities. Such competitors
and potential competitors include companies seeking to acquire the same intellectual property assets and intellectual property
rights that we may seek to acquire. Entities such as Acacia Research Corporation, Document Security Systems, Inc., Intellectual
Ventures, Quarterhill Inc., Conversant Intellectual Property Management Inc., VirnetX Holding Corporation, Network-1 Security
Solutions, Interdigital, Inc., IPValue Management Inc., Pendrell Corporation , Inventergy Global, Inc., Netlist Inc., Parkervision
Inc., , Walker Innovation, Inc., Daedalus Group LLC and others derive all or a substantial portion of their revenue from intellectual
property monetization activities, and we expect more entities to enter the market. Most of our competitors have longer operating
histories and significantly greater financial resources and personnel than we have.
We
also compete with venture capital firms, strategic corporate buyers and various industry leaders for intellectual property and
technology acquisitions and licensing opportunities. Many of these competitors have more financial and human resources than our
company. In seeking to obtain intellectual property assets or intellectual property rights, we seek to both demonstrate our understanding
of the intellectual property that we are seeking to acquire or license and our ability to monetize their intellectual property
rights. Our weak cash position and history of losses, together with our low stock price, may impair our ability to negotiate successfully
with the intellectual property owners.
Other
companies may develop competing technologies that offer better or less expensive alternatives to intellectual property rights
that we may acquire and/or out-license. Many potential competitors may have significantly greater resources than we do. The development
of technological advances or entirely different approaches could render certain of the technologies owned or controlled by our
operating subsidiaries obsolete and/or uneconomical.
Intellectual
Property Rights
We
have twelve intellectual property portfolios: financial data, mobile data, Turtle Pak, anchor structure, power management/bus
control, diode on chip, rich media, CXT, CMOS, M-RED, Audio Messaging and Peregrin. The following table sets forth information
concerning our patents and other intellectual property. Each patent or other intellectual property right listed in the table below
that has been granted is publicly accessible on the Internet website of the U.S. Patent and Trademark Office at www.uspto.gov. In
the table below, the anchor structure portfolio is referred to as Mariner, the power management/bus control portfolio is referred
to as Semcom, the diode on chip portfolio is referred to as IC and the Audio Messaging is referred to as AMI.
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
Financial Data
US Patent
RE38,137
Programmable multiple
company credit card system
1/11/2001
6/10/2003
9/28/2015
Mobile
Data
US Patent
7,194,468
Apparatus
and method for supplying information
4/13/2000
3/20/2007
4/13/2020
Mobile Data
US Patent
9,288,605
Apparatus and method
for supplying information
11/12/2009
3/15/2016
4/13/2020
Mobile Data
US Patent
9,913,068
Apparatus and method
for supplying information
3/15/2013
3/6/2018
7/20/2021
Mobile Data
US Application
15/877,820
Apparatus and method
for supplying information
1/23/2018
5/31/2018
N/A
Turtle Pak
US Patent
6,490,844
Film wrap packaging
apparatus and method
6/21/2001
12/10/2002
7/10/2021
Turtle Pak
US Trademark
Turtle pak - design
plus words, letters, and/or numbers
8/1/1995
6/4/1996
N/A
Mariner
US Patent
5,650,666
Method and apparatus
for preventing cracks in semiconductor die
11/22/1995
7/22/1997
11/22/2015
Mariner
US
Patent
5,846,874
Method and apparatus
for preventing cracks in semiconductor die
2/28/1997
12/8/1998
11/22/2015
Semcon
US Patent
7,100,061
Adaptive power control
1/18/2000
8/29/2006
1/18/2020
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
Semcon
US Patent
7,596,708
Adaptive power control
4/25/2006
9/29/2009
1/18/2020
Semcon
US Patent
8,566,627
Adaptive power control
7/14/2009
10/22/2013
1/18/2020
Semcon
US Patent
8,806,247
Adaptive power control
12/21/2012
8/12/2014
1/18/2020
Semcon
PCT Application
PCT/US2001/001684
Adaptive power control
1/16/2001
7/26/2001
N/A
Semcon
Reexam
Certificate
7,100,061C1
Adaptive power control
6/13/2007
8/4/2009
N/A
Semcon
US Patent
5,978,876
System and method
for controlling communications between subsystems
4/14/1997
11/2/1999
4/14/2017
IC
US Patent
7,118,273
System for on-chip
temperature measurement in integrated circuits
4/10/2003
10/10/2006
4/10/2023
IC
US Patent
7,108,420
System for on-chip
temperature measurement in integrated circuits
10/7/2004
9/19/2006
4/10/2023
IC
US Patent
9,222,843
System for on-chip
temperature measurement in integrated circuits
9/23/2011
12/29/2015
4/10/2023
IC
US Application
16/537,200
System for on-chip
temperature measurement in integrated circuits
8/9/2019
11/28/2019
N/A
Rich Media
Patent Proceeds
Interest
7,000,180
Methods, systems,
and processes for the design and creation of rich media applications via the internet
02/09/2001
02/14/2006
10/16/2023
CXT
US Patent
7,103,568
Online product exchange
system
2/23/2004
9/5/2006
8/8/2015
CXT
US Patent
7,933,806
Online product exchange
system with price-sorted matching products
9/11/2006
4/26/2011
8/8/2015
CXT
US Patent
8,024,226
Product exchange
system
11/6/2006
4/26/2011
8/8/2015
CXT
US Patent
5,983,220
Suppporting intuitive
decision in complex multi-attributive domains using fuzzy, hierarchial expert models
11/14/1996
11/9/1999
11/14/2016
CXT
US Patent
6,463,431
Database evaluation
system suppporting intuitive decision in complex multi-attributive domains using fuzzy, hierarchial expert models
6/25/1999
10/8/2002
11/14/2016
CXT
US Patent
5,940,807
Automated and independently
accessible inventory information exchange system
5/28/1997
8/17/1999
5/23/17
CXT
US Patent
6,081,789
Automated and independently
accessible inventory information exchange system
1/8/1999
6/27/2000
5/23/17
CXT
US Patent
6,601,043
Automated and independently
accessible inventory information exchange system
6/26/2000
7/29/2003
5/23/17
CXT
US Patent
6,011,537
System for delivering
and simultaneously displaying primary and secondary information, and for displaying only the secondary information during
interstitial space
1/27/1998
1/4/2000
1/27/2018
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
CXT
US Patent
7,133,835
Online exchange
market system with a buyer auction and a seller auction
10/30/1995
11/7/2006
5/27/2018
CXT
US Patent
6,412,012
System, method,
and article of manufacture for making a compatibility aware recommendation to a user
12/23/1998
6/25/2002
12/23/2018
CXT
US Patent
6,493,703
System and method
for implementing intelligent online community message board
5/11/1999
12/10/2002
5/11/2019
CXT
US Patent
6,571,234
System and method
for managing online message board
5/11/1999
5/27/2003
5/11/2019
CXT
US Patent
6,721,748
Online content provider
system and method
5/13/2002
4/13/2004
5/11/2019
CXT
US Patent
6,778,982
Online content provider
system and method
2/20/2003
8/17/2004
5/11/2019
CXT
US Patent
6,804,675
Online content provider
system and method
3/17/2003
10/12/2004
5/11/2019
CXT
US Patent
7,159,011
System and method
for managing an online messaging board
8/16/2004
1/2/2007
5/11/2019
CXT
US Patent
7,162,471
Content query system
and method
8/16/2004
1/9/2007
5/11/2019
CXT
US Patent
RE43,835
Online content tabulating
system and method
2/22/2007
11/27/2012
5/11/2019
CXT
US Patent
RE45,661
Online content tabulating
system and method
11/20/2012
9/1/2015
5/11/2019
CXT
US Patent
7,065,494
Electronic customer
service and rating system and method
6/25/1999
6/20/2006
6/25/2019
CXT
US Patent
7,340,411
System and method
for generating, capturing, and managing customer lead information over a computer network
10/20/2003
3/4/2008
8/2/2021
CXT
US Patent
8,260,806
Storage, management
and distribution of consumer information
6/29/2007
9/4/2012
10/17/2021
CXT
US Patent
7,487,130
Consumer-controlled
limited and constrained access to a centrally stored information account
1/6/2006
2/3/2009
11/7/2021
CXT
US Patent
7,016,877
Consumer-controlled
limited and constrained access to a centrally stored information account
11/7/2001
3/21/2006
2/22/2023
CXT
US Patent
7,257,581
Storage, management
and distribution of consumer information
8/6/2001
8/14/2007
6/2/2023
CXT
US Patent
7,467,141
Branding and revenue
sharing models for facilitating storage, management and distribution of consumer information
8/20/2001
12/16/2008
8/11/2023
CXT
US Patent
7,016,875
Single sign-on for
access to a central data repository
10/9/2001
3/21/2006
8/19/2023
CXT
US Patent
8,566,248
Initiation of an
information transaction over a network via a wireless device
11/20/2001
10/22/2013
6/17/2026
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
CXT
US Patent
9,928,508
Single sign-on for
access to a central data repository
1/6/2006
3/27/18
5/22/2027
CMOS
US Patent
6,624,404
CMOS image sensor
having enhanced photosensitivity and method for fabricating the same
11/26/2001
9/23/2003
12/30/2019
CMOS
Korean Patent
KR10-0303774
Method for fabricating
cmos image sensor
12/30/1998
7/13/2001
12/30/2018
CMOS
US Patent
6,348,361
CMOS image sensor
having enhanced photosensitivity and method for fabricating the same
12/30/1999
2/19/2002
12/30/2019
CMOS
US Patent
6,184,055
CMOS image sensor
with equivalent potential diode and method for fabricating the same
2/26/1999
2/6/2001
2/26/2019
CMOS
Chinese Patent
CNZL99105588.8
Complementary mos
image sensor and making method thereof
2/28/1999
10/13/2004
2/27/2019
CMOS
Chinese Patent
CNZL200310104488.4
Image sensing device
and its manufacturing method
2/28/1999
3/26/2008
2/27/2019
CMOS
German Patent
DE19908457.2
Photodiode used
in cmos image sensing device
2/26/1999
11/28/2013
2/26/2019
CMOS
French Patent
FR2775541
Photodiode for use
in a cmos image sensor and method for fabricating the same
3/1/1999
8/2/2002
3/1/2019
CMOS
French Patent
FR2779870
Photodiodes for
image sensors
3/1/1999
5/13/2005
3/1/2019
CMOS
United Kingdom Patent
GB2334817
Photodiode for use
in a cmos image sensor and method for fabricating the same
3/1/1999
7/1/2003
3/1/2019
CMOS
United Kingdom Patent
GB2383900
CMOS image sensor
and method for fabricating the same
3/1/1999
8/20/2003
3/1/2019
CMOS
Japanese Patent
JP4390896
CMOS image sensor
and manufacture thereof
3/1/1999
10/16/2009
3/1/2019
CMOS
Korean Patent
KR10-0278285
CMOS image sensor
and manufacturing method thereof
2/24/1999
10/18/2000
2/24/2019
CMOS
Taiwanese Patent
TWI141677
CMOS image sensor
with equivalent potential diode
3/22/1999
10/1/2001
3/21/2019
CMOS
US Patent
6,180,969
CMOS image sensor
with equivalent potential diode
2/26/1999
1/30/2001
2/26/2019
CMOS
US Patent
6,563,187
CMOS image sensor
integrated together with memory device
6/29/1999
5/13/2003
6/29/2019
CMOS
US Patent
6,949,388
CMOS image sensor
integrated together with memory device
5/12/2003
9/27/2005
11/9/2019
CMOS
Korean Patent
KR10-0464955
CMOS image sensor
integrated with memory device
6/29/1998
12/24/2004
6/29/2018
CMOS
US Patent
6,627,929
Solid state ccd
image sensor having a light shielding layer
6/13/2001
9/30/2003
10/13/2018
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
CMOS
Korean Patent
KR10-0263473
Solid state image
device and fabrication method thereof
2/16/1998
5/17/2000
2/16/2018
CMOS
US Patent
6,300,157
Solid state image
sensor and method for fabricating the same
10/13/1998
10/9/2001
10/13/2018
CMOS
US Patent
7,113,203
Method and system
for single-chip camera
5/7/2002
9/26/2006
5/13/2022
CMOS
US Patent
6,706,550
Photodiode having
a plurality of PN junctions and image sensor having the same
10/16/2002
3/16/2004
2/26/2019
CMOS
Japanese Patent
JP4139931
Pinned photodiode
of image sensor, and its manufacture
6/28/1999
6/20/2008
6/28/2019
CMOS
Korean Patent
KR10-0275123
Pinned photodiode
of image sensor and manufacturing method thereof
6/29/1998
9/19/2000
6/29/2018
CMOS
Taiwanese Patent
TWI133257
Photodiode having
a plurality of PN junctions and image sensor having the same
6/30/1999
5/28/2001
6/29/2019
CMOS
US Patent
6,489,643
Photodiode having
a plurality of PN junctions and image sensor having the same
6/28/1999
12/3/2002
6/28/2019
M-RED
US Patent
6,853,259
Ring oscillator
dynamic adjustments for auto calibration
8/15/2001
2/8/2005
8/15/2021
M-RED
US Patent
7,068,557
Ring oscillator
dynamic adjustments for auto calibration
1/25/2005
6/27/2006
8/15/2021
M-RED
US Patent
7,209,401
Ring oscillator
dynamic adjustments for auto calibration
5/2/2006
4/24/2007
8/15/2021
M-RED
US Patent
6,221,682
Method and apparatus
for evaluating a known good die using both wire bond and flip-chip interconnects
5/28/1999
4/24/2001
5/28/2019
M-RED
US Patent
RE43,607
Method and apparatus
for evaluating a known good die using both wire bond and flip-chip interconnects
5/31/2007
8/28/2012
12/31/2019
M-RED
US Patent
6,177,843
Oscillator circuit
controlled by programmable logic
5/26/1999
1/23/2001
5/26/2019
M-RED
US Patent
6,628,171
Method, architecture
and circuit for controlling and/or operating an oscillator
1/23/2001
9/30/2003
5/26/2019
M-RED
US Patent
6,831,690
Electrical sensing
apparatus and method utilizing an array of transducer elements
12/7/1999
12/14/2004
12/7/2019
M-RED
US Patent
7,511,754
Electrical sensing
apparatus and method utilizing an array of transducer elements
10/26/2004
3/31/2009
2/7/2022
M-RED
US Patent
6,498,399
Low dielectric-constant
dielectric for etchstop in dual damascene backend of integrated circuits
9/8/1999
12/24/2002
9/8/2019
M-RED
US Patent
6,744,311
Switching amplifier
with voltage-multiplying output stage
4/23/2002
6/1/2004
4/23/2022
M-RED
US Patent
6,646,465
Programmable Logic
Device Including Bi-Directional Shift Register
2/7/2002
11/11/2003
2/7/2022
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
M-RED
US Patent
6,721,310
Multiport non-blocking
high capacity atm and packet switch
11/2/2001
4/13/2004
11/2/2021
M-RED
US Patent
6,456,183
Inductor for Integrated
Circuit
2/24/2000
9/24/2002
2/24/2020
M-RED
US Patent
6,838,970
Inductor for Integrated
Circuit
7/26/2002
1/4/2005
9/30/2020
M-RED
US Patent
6,459,135
Monolithic Integrated
Circuit Incorporating An Inductive Component And Process For Fabricating Such An Integrated Circuit
3/15/2000
10/1/2002
3/15/2020
M-RED
US Patent
6,388,322
Article comprising
a mechanically compliant bump
1/17/2001
5/14/2002
1/17/2021
M-RED
US Patent
6,458,411
Method of making
a mechanically compliant bump
10/5/2001
10/1/2002
1/17/2021
M-RED
US Patent
6,506,648
Method of fabricating
a high power RF field effect transistor with reduced hot electron injection and resulting structure
9/2/1998
1/14/2003
6/27/2019
M-RED
US Patent
6,735,422
Calibrated DC compensation
system for a wireless communication device configured in a zero intermediate frequency architecture
10/2/2000
5/11/2004
10/2/2020
M-RED
US Patent
6,674,998
System and method
for detecting and correcting phase error between differential signals
12/21/2000
1/6/2004
10/2/2020
M-RED
US Patent
6,891,440
Quadrature oscillator
with phase error correction
12/21/2000
1/6/2004
8/8/2022
M-RED
US Patent
6,763,228
Precision automatic
gain control circuit
12/21/2001
7/13/2004
10/3/2021
M-RED
US Patent
6,748,200
Automatic gain control
system and method for a ZIF architecture
4/4/2003
6/8/2004
10/2/2020
M-RED
US Patent
RE42,799
Packet acquisition
and channel tracking for a wireless communication device configured in a zero intermediate frequency architecture
6/27/2008
10/4/2011
1/22/2023
M-RED
US Patent
6,560,448
DC compensation
system for a wireless communication device configured in a zero intermediate frequency architecture
10/2/2000
5/6/2003
8/29/2021
M-RED
US Patent
6,448,910
Method and apparatus
for convolution encoding and viterbi decoding of data that utilize a configurable processor to configure a plurality of re-configurable
processing elements
3/26/2001
9/10/2002
3/26/2021
M-RED
US Patent
7,127,588
Apparatus and method
for an improved performance VLIW processor
12/5/2000
10/24/2006
3/17/2022
M-RED
US Patent
6,757,752
Micro Controller
Development System
1/14/2002
6/29/2004
1/14/2022
M-RED
US Patent
6,509,646
Apparatus For Reducing
An Electrical Noise Inside A Ball Grid Array Package
5/22/2000
1/21/2003
5/22/2020
M-RED
US Patent
6,365,970
Bond Pad Structure
And Its Method Of Fabricating
12/10/1999
4/2/2002
12/10/2019
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
M-RED
US Patent
6,912,601
Method of programming
PLDs using a wireless link
6/28/2000
6/28/2005
5/11/2022
M-RED
US Patent
6,496,054
Control signal generator
for an overvoltage-tolerant interface circuit on a low voltage process
5/9/2001
12/17/2002
5/9/2021
M-RED
US Patent
6,194,279
Fabrication method
for gate spacer
6/28/1999
2/27/2001
6/28/2019
M-RED
US Patent
6,281,554
Electrostatic discharge
protection circuit
3/20/2000
8/28/2001
3/20/2020
M-RED
US Patent
6,657,263
MOS transistors
having dual gates and self-aligned interconnect contact windows
6/28/2001
12/2/2003
3/24/2020
M-RED
US Patent
6,461,908
Method of manufacturing
a semiconductor device
4/10/2001
10/8/2002
4/10/2021
M-RED
US Patent
6,737,995
Clock and data recovery
with a feedback loop to adjust the slice level of an input sampling circuit
4/10/2002
5/18/2004
4/18/2022
M-RED
US Patent
6,747,522
Digitally controlled
crystal oscillator with integrated coarse and fine control
5/3/2002
6/8/2004
5/17/2022
M-RED
US Patent
6,275,116
Method, circuit
and/or architecture to improve the frequency range of a voltage controlled oscillator
6/8/1999
8/14/2001
6/8/2019
M-RED
US Patent
6,608,763
Stacking system
and method
9/15/2000
8/19/2003
5/24/2021
M-RED
US Patent
6,404,043
Panel stacking of
BGA devices to form three-dimensional modules
6/21/2000
6/11/2002
6/21/2020
M-RED
US Patent
6,472,735
Three-dimensional
memory stacking using anisotropic epoxy interconnections
4/5/2001
10/29/2002
6/27/2020
M-RED
US Patent
6,544,815
Panel stacking of
BGA devices to form three-dimensional modules
8/6/2001
4/8/2003
6/21/2020
M-RED
US Patent
6,566,746
Panel stacking of
BGA devices to form three-dimensional modules
12/14/2001
5/20/2003
6/21/2020
M-RED
US Patent
6,878,571
Panel stacking of
BGA devices to form three-dimensional modules
12/11/2002
4/12/2005
4/30/2021
M-RED
US Patent
6,627,984
Chip stack with
differing chip package types
7/24/2001
9/30/2003
7/24/2021
M-RED
US Patent
6,908,792
Chip stack with
differing chip package types
10/3/2002
6/21/2005
2/21/2022
M-RED
US Patent
6,205,524
Multimedia arbiter
and method using fixed round-robin slots for real-time agents and a timed priority slot for non-real-time agents
9/16/1998
3/20/2001
9/16/2018
M-RED
US Patent
6,157,978
Multimedia round-robin
arbitration with phantom slots for super-priority real-time agent
1/6/1999
12/5/2000
9/16/2018
M-RED
US Patent
6,117,750
Process for obtaining
a layer of single-crystal germanium or silicon on a substrate of single-crystal silicon or germanium, respectively
12/21/1998
9/12/2000
12/21/2018
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration
M-RED
US Patent
6,429,098
Process for obtaining
a layer of single-crystal germanium or silicon on a substrate of single-crystal silicon or germanium, respectively, and multilayer
products obtained
9/11/2000
8/6/2002
12/21/2018
M-RED
US Patent
6,134,176
Disabling a defective
element in an integrated circuit device having redundant elements
11/24/1998
10/17/2000
11/24/2018
M-RED
US Patent
6,366,998
Reconfigurable functional
units for implementing a hybrid vliw-simd programming model
10/14/1998
4/2/2002
10/14/2018
M-RED
US Patent
6,401,217
Method For Error
Recognition In A Processor System
7/22/1998
6/4/2002
7/22/2018
M-RED
US Patent
6,169,028
Method for fabricating
metal interconnected structure
1/26/1999
1/2/2001
1/26/2019
M-RED
US Patent
6,190,981
Method for fabricating
metal oxide semiconductor
2/3/1999
2/20/2001
2/3/2019
M-RED
US Patent
6,130,823
Stackable ball grid
array module and method
2/1/1999
10/10/2000
2/1/2019
M-RED
US Patent
6,208,004
Semiconductor device
with high-temperature-stable gate electrode for sub-micron applications and fabrication thereof
8/19/1998
3/27/2001
8/19/2018
M-RED
US Patent
6,479,362
Semiconductor device
with high-temperature-stable gate electrode for sub-micron applications and fabrication thereof
2/14/2001
11/12/2002
8/19/2018
M-RED
Korean Patent
KR10-0796825
Method of manufacturing
a semiconductor device
4/3/2001
6/24/2009
4/3/2021
M-RED
British Patent
GB0930382
Process for obtaining
a layer of single crystal germanium or silicon on single crystal silicon or germanium substrate respectively, and multilayer
products thus obtained
12/9/1998
8/21/2002
12/9/2018
M-RED
Italian Patent
IT0930382
Process for obtaining
a layer of single crystal germanium or silicon on single crystal silicon or germanium substrate respectively, and multilayer
products thus obtained
12/9/1998
8/21/2002
12/9/2018
M-RED
Korean Patent
KR10-0633947
Method of fabricating
a high power rf field effect transistor with reduced hot electron injection and resulting structure
8/17/1999
10/4/2006
8/17/2019
M-RED
French Patent
FR2791470
Monolithic Integrated
Circuit Comprising An Inductor And A Method Of Fabricating The Same
3/23/1999
6/1/2001
3/23/2019
M-RED
French Patent
FR2790328
Inductive Component,
Integrated Transformer, In Particular For A Radio Frequency Circuit, And Associated Integrated Circuit With Such Inductive
Component Or Integrated Transformer
2/26/1999
4/20/2001
2/26/2019
Segment
Type
Number
Title
File
Date
Issue
/ Publication
Date
Expiration*
M-RED
Japanese Patent
JP4846167
Method of manufacturing
a semiconductor device
4/3/2001
10/21/2011
4/3/2021
M-RED
Japanese Patent
JP5051939
Electric sensor
device, method for generating electric signal from array of converter element
12/5/2000
8/3/2012
12/5/2020
AMI
US Patent
8,280,014
System and method
for associating audio clips with objects
11/29/2006
10/02/2012
11/08/2030
AMI
US Patent
9,088,667
System and method
for associating audio clips with objects
09/06/2012
07/21/2015
06/30/2027
AMI
US Patent
10,033,876
System and method
for associating audio clips with objects
06/02/2015
07/24/2018
11/29/2026
AMI
US Patent
10,348,909
System and method
for associating audio clips with objects
06/18/2018
07/09/2019
11/29/2026
AMI
US Patent
10,938,995
System and method
for associating audio clips with objects
05/23/2019
03/02/2021
11/29/2026
AMI
US Patent Application
17/162,354
System and method
for associating audio clips with objects
01/29/2021
n/a
n/a
Peregrin
US Patent
7,761,371
Analyzing a credit
counseling agency
07/19/2007
07/20/2010
10/19/2020
Peregrin
US Patent
7,827,097
System for transferring
an inbound communication to one of a plurality of credit-counseling agencies
10/19/2000
11/02/2010
10/23/2024
Peregrin
US Patent
7,860,785
Communication system
to automatically refer an inbound communication
07/19/2007
12/28/2010
10/19/2020
Peregrin
US Patent
8,209,257
System for transferring
an inbound communication to one of a plurality of credit-counseling agencies
11/01/2010
06/26/2012
11/27/2020
Peregrin
US Patent
8,725,630
Method of processing
a phone call
06/25/2012
05/13/2014
10/19/2020
Peregrin
US Patent
9,948,771
Using an interactive
voice response apparatus
05/12/2014
04/17/2018
12/23/2022
Peregrin
US Patent
10,230,840
Method of using
an apparatus processing phone call routing
05/12/2014
03/12/2019
01/05/2022
Peregrin
US Patent
10,735,582
Apparatus processing
phone calls
03/11/2019
08/04/2020
10/19/2020
* Subject to any terminal disclaimer or patent term extension
Research
and Development
Research
and development expense are incurred by us in connection with the evaluation of patents. We did not incur research and development
expenses during 2020 or 2019.
Consulting
Contracts
On
February 22, 2021, we entered into advisory service agreement with three consultants - William Gates, Crystal Nicolson and
Jeff Toler pursuant to which they will provide services to us in connection with the development of our business. The agreements
have a term of ten years and may be terminated by us for cause or upon the death or disability of the consultants.
Pursuant
to the agreements with Mr. Gates and Ms. Nicolson, the compensation payable to each of them consists of a restricted stock grant
of 10,000,000 shares of Common Stock which immediately vests in full and a ten-year option to purchase a total of 30,000,000 shares
of Common Stock, which become exercisable cumulatively as follows:
● 10,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement
of trading of our common stock on the OTCQB.
● 10,000,000
shares at an exercise price of $0.03 per share, becoming exercisable on the first day
on which we file with the SEC a Form 10-K or Form 10-Q which stockholders’ equity
of at least $5,000,000, and
● 10,000,000
shares at an exercise price of $0.05/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.
Pursuant
to the agreement with Mr. Toler, the compensation payable to him consists of a restricted stock grant of 10,000,000 shares of
Common Stock which immediately vests in full and a ten-year option to purchase 30,000,000 shares of Common Stock, which becomes
exercisable cumulatively as follows:
● 10,000,000
shares at an exercise price of $0.01 per share upon the first anniversary of the agreement;
● 10,000,000
shares at an exercise price of $0.03 per share upon the second anniversary of the agreement;
and
● 10,000,000
shares at an exercise price of $0.05 per share upon the third anniversary of the agreement.
Employees
As
of March 27, 2021, we have no employees other than our two officers, only one of whom, Mr. Jon Scahill, our chief executive
officer and president, is full time. Our employees are not represented by a labor union, and we consider our employee relations
to be good.

---

ITEM 1A. RISK FACTORS
ITEM
1A. RISK FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together
with all of the other information included in this annual report before making an investment decision with regard to our securities.
The statements contained in this annual report include forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. The risks
set forth below are not the only risks facing us. Additional risks and uncertainties may exist that could also adversely affect
our business, prospects or operations. If any of the following risks actually occurs, our business, financial condition or results
of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or a significant
part of your investment.
Risks
Relating to our Financial Conditions and Operations
We
have a history of losses and are continuing to incur losses. During the period from 2008, when we changed our business to become an intellectual property management company, through December 31, 2020, we generated a cumulative loss of approximately $21.3 million on cumulative revenues of less than $21.3 million, and our losses are continuing. We did not generate any revenue during the fourth quarter of 2020. Our total assets were approximately $3.5 million at December 31, 2020, of which approximately $2.2 million represented the book value of patents we acquired from Intellectual Ventures and its affiliates. At December 31, 2020, we had a working capital deficiency of approximately $8.2 million. Our working capital deficiency reflected a loan payable to Intelligent Partners of approximately $4.7 million, which loan payable has been terminated as part of the restructure agreement with Intelligent Partners. We cannot give assurance that we can or will ever operate profitably.
We
did not generate any revenue during the fourth quarter of 2020. During the fourth quarter of 2020, we did not generate any
revenue. Because we were in default under our loans to Intelligent Partners (as successor to United Wireless), with Intelligent
Partners having the ability to declare a default on our notes in the principal amount of $4,672,810, with the possibility of our
seeking protection under the Bankruptcy Act, we ceased our monetization activities, since no counsel would represent us on a contingent
basis in view of the default and possible bankruptcy, and devoted our efforts in negotiating the agreements with QFL and Intelligent
Partners.
Our
independent auditors have included a going concern qualification in their report on our financial statements for the year ended
December 31, 2020. Because of our history of losses, deficiency in stockholders’ equity, working capital deficiency
and the uncertainty of generating revenues in the future, our independent auditors have included a going concern qualification
in their report on our financial statements for the year ended December 31, 2020.
We
require significant funding in order to develop our business. Our business requires substantial funding to evaluate and acquire
intellectual property rights and to develop and implement programs to monetize our intellectual property rights, including the
prosecution of any litigation necessary to enable us to monetize our intellectual property rights. Our failure to develop and
implement these programs could both jeopardize our relationships under our existing agreements and could inhibit our ability to
generate new business, either through the acquisition of intellectual property rights or through exclusive management agreements.
We cannot be profitable unless we are able to obtain the funding necessary to develop our business, including litigation to monetize
our intellectual property. Although we have an agreement with QFL which provides a funding line to acquire and monetize intellectual
property rights, QFL must approve any intellectual property we acquire and, if QFL does not fund an intellectual property acquisition,
we may not be able to acquire and monetize the intellectual property. We cannot assure you that we will be able to obtain necessary
funding or to develop our business.
The
terms of our agreements with QFL and Intelligent Partners may make it difficult for us to generate cash flow from our operations.
Although we have an agreement with QFL pursuant to which QFL agreed to make available to us a financing facility of (i) up to
$25,000,000 for the acquisition of mutually agreed patent rights that the Company intends to monetize; (ii) up to $2,000,000 for
operating expenses from which the Company may, at its discretion, draw up to $200,000 per calendar quarter; and (iii) $1,750,000
to fund the cash payment portion of the restructure of our obligations to Intelligent Partners, which was paid directly to Intelligent
Partners. Pursuant to the QFL agreement, QFL receive all proceeds payable to us from the monetization of those patents which have
been financed by QFL until QFL has received its negotiated rate of return, then we and QFL share equally in the proceeds from
monetization until QFL has received its investment return and thereafter we receive all of the net proceeds. Pursuant to our restructure
agreement with Intelligent Partners, we have an obligation to pay total monetization proceeds obligations (“TMPO”)
totaling $2,805,000. Under our amended monetization proceeds agreements with Intelligent Partners, we pay Intelligent Partners
60% of the net monetization proceeds from associated intellectual property portfolios. Further, until we have paid Intellectual
Partners a total of $2,805,000 under all of the monetization proceeds agreements, for net proceeds between $0 and $1,000,000 we
are to pay Intelligent Partners 10% of the net proceeds realized from new assets acquired by us, provided, that, if, in any calendar
quarter, our net proceeds realized exceed $1,000,000, Intelligent Partner’s entitlement for that quarter shall increase
to 30% on the portion of net proceeds in excess of $1,000,000 but less than $3,000,000, and if in the same calendar quarter, net
proceeds exceed $3,000,000, Intelligent Partner’s entitlement for that quarter shall increase to 50% on the portion of net
proceeds in excess of $3,000,000. These payments come from our share of the proceeds after QFL has recovered it negotiated rate
of return. In these agreements, the monetization proceeds is determined after payment of contingent legal fees and certain other
expenses, including payments due by us to the party that sold us the intellectual property rights. We cannot assure you that,
as a result of these provisions, that we will generate any meaningful cash flow from the intellectual property we acquire. If
we do not generate sufficient cash flow from our monetization activities, we may not be able to fund our operations or continue
in business.
Our failure to make required payments to sellers of two of our patent portfolios may result in a default under the agreements. Pursuant to our subsidiaries’ agreements with IV 34/37, with respect to the CTX portfolio, and IV 113/108 with respect to the M-RED portfolio, respectively, our subsidiaries are to pay to the sellers 50% of net recoveries, as defined, from the respective portfolios which we purchased from them, IV 34/37 and IV 113/108. These agreements provided that if the cumulative distributions did not equal or exceed specified amounts, the subsidiaries would pay the difference. As of the date of this annual report, the cumulative unpaid distributions were $600,000 to IV 34/37 and approximately $260,000 to IV 113/108. In April 2021, the parties entered into a non-binding letter of intent pursuant to which IV 34/37 and IV 113/108 would not take any action with respect to the delinquent payment while the parties negotiated an amended payment schedule. We can give no assurance that we will be able to negotiate an amended payment schedule or that IF 34/38 or IV 113/108 will not take action to enforce its remedies under the patent purchase agreement, A default under these agreements could result in a default under our agreements with QFL, and , even if it does not declare a default, QFL may be reluctant to finance our intellectual property acquisition if we are in default under any of our patent acquisition agreements with Intellectual Venture affiliates. Further, it may be necessary for CXT or M-RED to seek protection under the Bankruptcy Act if we are not able to enter into modification agreements with the Intellectual Ventures affiliates
Our
business may be impaired by the effects of the COVID-91 pandemic and the effects of the response to the pandemic. Although
we do not manufacture or sell products, the COVID-19 pandemic and the work shutdown imposed in the United States and other countries
to limit the spread of the virus can have a negative impact on our business. Our revenue is generated almost exclusively from
license fees generated from litigation seeking damages for infringement of our intellectual property rights. The work shutdown
has affected the court system and, with courts operating on a reduced schedule. As a result, patent infringement actions are likely
to be lower priority items in allocation of court resources, with the effect that deadlines are likely to be postponed which delays
may give defendants an incentive to delay negotiations or offer a lower amount than they might otherwise accept. In addition,
the effect of the COVID-19 and the public response may adversely affect the financial condition and prospects of defendants and
potential defendants, which would make it less likely that they would be willing to settle our claim.
The
COVID-19 pandemic and the response to limit the spread of the infection may affect the financial condition of financing sources
and the willingness of potential financing sources to provide funding for our litigation. In addition, these factors may affect
a law firms’ ability and willingness to provide us with legal services on a contingent or partial contingent and may result
in the impairment or discontinuation of business of or the filing of a petition under the Bankruptcy Act by or against any defendant
or potential defendant.
Further,
to the extent that holders of intellectual property rights see these factors impacting our ability to generate revenue from their
intellectual property, they may be reluctant to sell intellectual property to us on terms which are acceptable to us.
We
are dependent upon our chief executive officer. We are dependent upon Jon Scahill, our chief executive officer and president
and sole full-time employee, for all aspects of our business including locating, evaluating and negotiating and performing due
diligence with respect to intellectual property rights from the owners, managing our intellectual property portfolios, engaging
in licensing activities and monetizing the rights through licensing and managing and monitoring any litigation with respect to
our intellectual property as well as defending any actions by potential licensees seeking a declaratory judgment that they do
not infringe. The loss of Mr. Scahill would materially impair our ability to conduct our business. Although we have an employment
agreement with Mr. Scahill, the employment agreement does not ensure that Mr. Scahill will remain with us.
Any
equity funding we obtain may result in significant dilution to our stockholders. Because of our financial position, our continuing
losses and our negative working capital from operations, we do not expect that we will be able to obtain any debt financing for
our operations. Our stock price has generally been trading at a price which is less than $0.01 per share for more than the past
two years, and, because our stock price fell below $0.01 per share, our stock is traded on the OTC Pink Market. As a result, it
will be very difficult for us to raise funds in the equity markets. However, in the event that we are able to raise funds in the
equity market, the sale of shares would result in significant dilution to the present stockholders, and even a modest equity investment
could result in the issuance of a very significant number of shares.
Risks
Relating to Monetizing our Intellectual Property Rights
We
may not be able to monetize our intellectual property portfolios. Although our business plan is to generate revenue from our
intellectual property portfolios, we have not been successful in generating any significant revenue from our portfolios and we
have not generated any revenues from several of our intellectual property portfolios. We cannot assure you that we will be able
to generate any significant revenue from our existing portfolios or that we will be able to acquire new intellectual property
rights that will generate significant revenue.
If
we are not successful in monetizing our portfolios, we may not be able to continue in business. Although we have ownership
of some of our intellectual property, we also license the rights pursuant to agreements with the owners of the intellectual property.
If we are not successful in generating revenue for those parties who have an interest in the results of our efforts, those parties
may seek to renegotiate the terms of our agreements with them, which could both impair our ability to generate revenue from our
intellectual property and make it more difficult for us to obtain rights to new intellectual property rights. If we continue to
be unable to generate revenue from our existing intellectual property portfolios and any new portfolios we may acquire, we may
be unable to continue in business.
If
we are not successful in patent litigation, the defendants may seek to have the court award attorneys’ fees to them against
us which could result in the bankruptcy of the plaintiff subsidiary and may result in a default under our agreement QFL. The
United States patent laws provide that “the court in exceptional cases may award reasonable attorney fees to the prevailing
party.” Although the patents are owned by our subsidiaries and any judgment would be awarded against the subsidiaries, the
subsidiaries have no assets other than the patent rights. Our funding sources for our patent litigation do not provide for the
funding source to pay any judgment against us. Thus, if any defendants obtain a judgment against one of our subsidiaries, they
may seek to enforce their judgment against the patents owned by the subsidiary or seek to put the subsidiary into bankruptcy and
acquire the patents in the bankruptcy proceeding. As a result, it is possible that an adverse verdict in a petition for legal
fees could result in the loss of the patents owned by the subsidiary and a default under our agreement with QFL.
Our
inability to acquire intellectual property portfolios will impair our ability to generate revenue and develop our business.
We do not have the personnel to develop patentable technology by ourselves. Thus, we need to depend on acquiring rights to intellectual
property and intellectual property portfolios from third parties. In acquiring intellectual property rights, there are delays
in (i) identifying the intellectual property which we may want to acquire, (ii) negotiating an agreement with the owner or holder
of the intellectual property rights, and (iii) generating revenue from those intellectual property rights which we acquire. During
these periods, we will continue to incur expenses with no assurance that we will generate revenue. We currently hold intellectual
property portfolios from which we have not generated any revenue to date, and we cannot assure you that we will generate revenue
from our existing intellectual property portfolios or any additional intellectual properties which we may acquire.
We
may be unable to enforce our intellectual property rights unless we obtain third party funding. Because of the expense of
litigation and our lack of working capital, we may be unable to enforce our intellectual property rights unless we obtain the
agreement of a third party to provide funding in support of our litigation. We cannot assure you that QFL or any other funding
source provide us the any necessary funding, and the failure to obtain such funding may impair our ability to monetize our intellectual
property portfolio or continue in business.
Because
we need to rely on third-party funding sources to provide us with funds to enforce our intellectual property rights we are dependent
upon the perception by potential funding sources of the value of our intellectual property. Because we do not have funds to
pursue litigation to enforce our intellectual property rights, we are dependent upon the valuation which potential funding sources,
which currently is QFL, give to our intellectual property or any intellectual property we may acquire. In determining whether
to provide funding for intellectual property litigation, the funding sources need to make an evaluation of the strength of our
patents, the likelihood of success, the nature of the potential defendants and a determination as to whether there is a sufficient
potential recovery to justify a significant investment in intellectual property litigation. Typically, such funding sources receive
a percentage of the recovery after litigation expenses, and seek to generate a sufficient return on investment to justify the
investment. Under our agreement with QFL, QFL is allocated all of the net proceeds (after allowable expenses) until it has received
a negotiated return. Unless QFL or any other funding source believes that it will generate a sufficient return on investment,
it will not fund litigation. If QFL does not fund our acquisition or monetization of intellectual property we propose to acquire,
we cannot assure you that we will be able to negotiate funding agreements with third party funding sources on terms reasonably
acceptable to us, if at all. Because of our financial condition, we may only be able to obtain funding on terms which are less
favorable to us than we would otherwise be able to obtain.
Although
we have a funding agreements with QFL, there is no assurance that we will generate revenue from the funded litigation. Although
the funding source makes its evaluation as to the likelihood of success, patent litigation is very uncertain, and we cannot assure
you that, just because we obtain litigation funding, we will be successful or that any recovery we may obtain will be significant.
Because
QFL and Intelligent Partners hold a security interest in almost all of our intellectual property and the proceeds from our intellectual
property, we may not be able to raise funds through a debt financing. Pursuant to our agreements with QFL and Intelligent
Partners, we granted them a security interest in the stock of our subsidiaries that hold the intellectual property acquired from
Intellectual Ventures and in the proceeds from the monetization of intellectual property acquired from Intellectual Ventures and
our mobile data and financial data portfolios. The inability to grant a security interest in these assets to a new lender would
materially impair our ability to obtain debt financing for our operations, and may also impair our ability to obtain financing
to acquire additional intellectual property rights.
Because
of our financial condition and our having generated a loss from operations in 2019 and 2020 from our existing portfolios, we may
not be able to obtain intellectual property rights to the most advanced technologies. In order to generate meaningful revenues
from intellectual property rights, we need to be able to identify, negotiate rights to and offer technologies for which there
is a developing market. Because of our financial condition and the terms under which we obtain financing for our litigation, we
may be unable to negotiate rights to technology for which there which will be a strong developing market, or, if we are able to
negotiate agreements for such intellectual property, the terms of our purchase or license may not be favorable to us. Accordingly,
we cannot assure you that we will be able to acquire intellectual property rights to the technology for which there is a strong
market demand.
Potential
acquisitions may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential
acquisition. Our ability to grow depends, in large part, on our ability to acquire interests in intellectual property, including
patented technologies, patent portfolios, or companies holding such patented technologies and patent portfolios. Accordingly,
we intend to engage in acquisitions to expand our intellectual property portfolios and we intend to continue to explore such acquisitions.
Such acquisitions are subject to numerous risks, including the following:
●
our failure to have
sufficient funding to enable us to make the acquisition, together with the terms on which such funding is available, if at
all;
● our failure to have
sufficient personal to satisfy the seller that we have the personnel to monetize the assets we propose to acquire;
● dilution to our
stockholders to the extent that we use equity in connection with any acquisition;
● our inability to
enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into such agreement,
our inability to consummate the potential acquisition;
● difficulty integrating
the operations, technology and personnel of the acquired entity;
● our inability to
achieve the anticipated financial and other benefits of the specific acquisition;
● difficulty in maintaining
controls, procedures and policies during the transition and monetization process;
● diversion of our
management’s attention from other business concerns, especially considering that we have only one full-time employee/officer
who is responsible for performing due diligence, negotiating agreements, negotiating funding and implementing a monetization
program; and
● our failure, in
our due diligence process, to identify significant issues, including issues with respect to patented technologies and intellectual
property portfolios, and other legal and financial contingencies.
If
we are unable to manage these risks and other risks effectively as part of any acquisition, our business could be adversely affected.
Our
acquisition of intellectual property rights may be time consuming, complex and costly, which could adversely affect our operating
results. Acquisitions of patent or other intellectual property assets, which are and will be critical to the development of
our business, are often time consuming, complex and costly to consummate. We may utilize many different transaction structures
in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur
significant operating expenses and may be required to raise capital during the negotiations even if the acquisition is ultimately
not consummated. Even if we are able to acquire particular intellectual property assets, there is no guarantee that we will generate
sufficient revenue related to those intellectual property assets to offset the acquisition costs. We may also identify intellectual
property assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to
organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any intellectual property
assets or, if consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results.
If
we acquire technologies that are in the early stages of market development, we may be unable to monetize the rights we acquire.
We may acquire patents, technologies and other intellectual property rights that are in the early stages of adoption in the commercial,
industrial and consumer markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation
based upon the rate at which companies may adopt our intellectual property in their products and services. As a result, there
can be no assurance as to whether technologies we acquire or develop will have value that we can monetize. It may also be necessary
for us to develop additional intellectual property and file new patent applications as the underlying commercial market evolves,
as a result of which we may incur substantial costs with no assurance that we will ever be able to monetize our intellectual property.
Our
intellectual property monetization cycle is lengthy and costly and may be unsuccessful. We expect to incur significant marketing,
legal and sales expenses prior to entering into monetization events that generate revenue for us. We will also spend considerable
resources educating potential licensees on the benefits of entering into an agreement with us that may include a non-exclusive
license for future use of our intellectual property rights. Thus, we may incur significant losses in any particular period before
any associated revenue stream begins. If our efforts to convince potential licensees of the benefits of a settlement arrangement
are unsuccessful, we may need to continue with the litigation process or other enforcement action to protect our intellectual
property rights and to realize revenue from those rights. We may also need to litigate to enforce the terms of existing agreements,
protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Enforcement proceedings are
typically protracted and complex. The costs are typically substantial, and the outcomes are unpredictable. Enforcement actions
will divert our managerial, technical, legal and financial resources from business operations.
We
may not be successful in obtaining judgments in our favor. We have commenced litigation seeking to monetize our intellectual
property portfolios and it will be necessary for us to commence ligation in the future. All litigation is uncertain, and a number
of the actions we commenced have been dismissed by the trial court. We cannot assure you that any litigation will be decided in
our favor or that, if damages are awarded or a license is negotiated, that we will generate any significant revenue from the litigation
or that any recovery may be allocated to counsel and third party funding source which may result in little if any revenue to us.
Our
financial condition may cause both intellectual property rights owners and potential licensees to believe that we do not have
the financial resources to commence and prosecute litigation for infringement. Because of our financial condition, both intellectual
property rights owners and potential licensees may believe that we do not have the ability to commence and prosecute sustained
and expensive litigation to protect our intellection rights with the effect that (i) intellectual property rights owners may be
reluctant to grant us rights to their intellectual property and (ii) potential licensees may be less inclined to pay for license
rights from us or settle any litigation we may commence on terms which generate any meaningful monetization.
Any
patents which may be issued to us pursuant to patent applications which we filed or may file may fail to give us necessary protection.
We cannot be certain that patents will be issued as a result of any pending or future patent applications, or that any of our
patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented
or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific
or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make additional new
inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued
patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant
fees or royalties in order to enable us to conduct our business. As to those patents that we may acquire, our continued rights
will depend on meeting any obligations to the seller and we may be unable to do so. Our failure to obtain or maintain intellectual
property rights for our inventions would lead to the loss of our investments in such activities, which would have a material adverse
effect on us.
The
provisions of Federal Declaratory Judgment Act may affect our ability to monetize our intellectual property. Under the Federal
Declaratory Judgment Act, it is possible for a party who we consider to be infringing upon our intellectual property to commence
an action against us seeking a declaratory judgment that such party is not infringing upon our intellectual property rights. In
such a case, the plaintiff could choose the court in which to bring the action and we would be the defendant in the action. Common
claims for declaratory judgment in patent cases are claims of non-infringement, patent invalidity and unenforceability. Although
the commencement of an action requires a claim or controversy, a court may find a letter from us to the alleged infringer seeking
a royalty for the use of our intellectual property rights to form the basis of a controversy. In such a case, the plaintiff, rather
than we, would choose the court in which to bring the action and the timing of the action. In addition, when we commence an action
as plaintiff, we may be able to enter into a contingent fee arrangement with counsel, it is possible that counsel may be less
willing to accept such an arrangement if we are the defendant. Further, we would not have the opportunity of choosing against
which party to bring the action. An adverse decision in a declaratory judgment action could significantly impair our ability to
monetize the intellectual property rights which are the subject of the litigation. We have been a defendant in one declaratory
judgment action, which resulted in a settlement. We cannot assure you that potential infringers will not be able to use the Declaratory
Judgment Act to reduce our ability to monetize the patents that are the subject of the action.
A
2014 Supreme Court decision could significantly impair business method and software patents. In June 2014, the United States
Supreme Court, in Alice v. CLS Bank, struck down patents covering a computer-implemented scheme for mitigating “settlement
risk” by using a third party intermediary, holding the patent claims to be ineligible as being drawn to a patent-ineligible
abstract idea. The courts have been dealing for many years over what business methods are patentable. We cannot predict the extent
to which the decision in Alice as well as prior Supreme Court decisions dealing with patents, will be interpreted by courts.
To the extent that the Supreme Court decision in Alice gives businesses reason to believe that business model and software
patents are not enforceable, it may become more difficult for us to monetize patents which are held to be within the ambit of
the patents before the Supreme Court in Alice and for us to obtain counsel willing to represent us on a contingency basis.
As a result, the decision in Alice could materially impair our ability to obtain patent rights and monetize those which
we do obtain.
Legislation,
regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease
our revenue. We may apply for patents and may spend a significant amount of resources to enforce those patents. If legislation,
regulations or rules are implemented either by Congress, the United States Patent and Trademark Office, or the courts that impact
the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively
affect our expenses and revenue. For example, new rules regarding the burden of proof in patent enforcement actions could significantly
both increase the cost of our enforcement actions and make it more difficult to sign licenses without litigation, changes in standards
or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions,
and any rules requiring that the losing party pay legal fees of the prevailing party could also significantly increase the cost
of our enforcement actions. United States patent laws were recently amended with the enactment of the Leahy-Smith America Invents
Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant
changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and
the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the
America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that
such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or
activities. The America Invents Act and its implementation increases the uncertainties and costs surrounding the enforcement of
our patented technologies, which could have a material adverse effect on our business and financial condition. In addition, the
U.S. Department of Justice has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries
in which those patents relate. It is possible that the findings and recommendations of the Department of Justice could impact
the ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding
the enforcement of any such patented technologies.
Proposed
legislation may affect our ability to conduct our business. There are presently pending or proposed a number of laws which,
if enacted, may affect the ability of companies such as us to generate revenue from our intellectual property rights. Typically,
these proposed laws cover legal actions brought by companies which do not manufacture products or supply services but seek to
collect licensing fees based on their intellectual property rights and, if they are not able to enter into a license, to commence
litigation. Although a number of such bills have been proposed in Congress, we do not know which, if any, bills will be enacted
into law or what the provisions will be and, therefore, we cannot predict the effect, if any, that such laws, if passed by Congress
and signed by the president, would provide. However, we cannot assure you that legislation will not be enacted which would impair
our ability to operate by making it more difficult for us to commence litigation against a potential licensee or infringer. To
the extent that an alleged infringer believes that we will not prevail in litigation, it would be more difficult to negotiate
a license agreement without litigation.
The
unpredictability of our revenues may harm our financial condition. Our revenues from licensing have typically been lump sum
payments entered into at the time of the license, which may be in connection with the settlement of litigation, and not from licenses
that pay an ongoing royalty. Due to the nature of the licensing business and uncertainties regarding the amount and timing of
the receipt of license and other fees from potential infringers, stemming primarily from uncertainties regarding the outcome of
enforcement actions, rates of adoption of our patented technologies, the growth rates of potential licensees and certain other
factors, our revenues, if any, may vary significantly from quarter to quarter, which could make our business difficult to manage,
adversely affect our business and operating results, cause our quarterly results to fall below market expectations and adversely
affect the market price of our common stock.
Our
success depends in part upon our ability to retain the qualified legal counsel to represent us in patent enforcement litigation.
The success of our licensing business may depend upon our ability to retain the qualified legal counsel to prosecute patent infringement
litigation. As our patent enforcement actions increase, it will become more difficult to find the preferred choice for legal counsel
to handle all of our cases because many of these firms may have a conflict of interest that prevents their representation of us
or because they are not willing to represent us on a contingent or partial contingent fee basis.
Our
reliance on representations, warranties and opinions of third parties may expose us to certain material liabilities. From
time to time, we rely upon the representations and warranties of third parties, including persons claiming ownership of intellectual
property rights, and opinions of purported experts. In certain instances, we may not have the opportunity to independently investigate
and verify the facts upon which such representations, warranties and opinions are made. By relying on these representation, warranties
and opinions, we may be exposed to liability in connection with the licensing and enforcement of intellectual property and intellectual
property rights which could have a material adverse effect on our operating results and financial condition.
In
connection with patent enforcement actions, counterclaims may be brought against us and a court may rule against us in counterclaims
which may expose us and our operating subsidiaries to material liabilities. In connection with patent enforcement actions,
it is possible that a defendant may file counterclaims against us or a court may rule that we have 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 us or our operating subsidiaries or award
attorney’s fees and/or expenses to the counterclaiming defendant, which could be material, and if we or our operating subsidiaries
are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating
results, our financial position and our ability to continue in business.
Trial
judges and juries may find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal
adverse decisions by lower courts in order to successfully enforce our patents. It is difficult to predict the outcome of
patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented
technologies, and, as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard
business litigation. Regardless of whether we prevail in the trial court, appeals are expensive and time consuming, resulting
in increased costs and delayed revenue, and attorneys may be less likely to represent us in an appeal on a contingency basis especially
if we are seeking to appeal an adverse decision. Although we may diligently pursue enforcement litigation, we cannot predict the
decisions made by juries and trial courts.
More
patent applications are filed each year resulting in longer delays in getting patents issued by the United States Patent and Trademark
Office. We hold a number of pending patents and may file or acquire rights to additional patent applications. We have identified
a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending
patent applications. The application delays could cause delays in recognizing revenue, if any, from these patents and could cause
us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
U.S.
Federal courts are becoming more crowded, and, as a result, patent enforcement litigation is taking longer. Patent enforcement
actions are almost exclusively prosecuted in federal district courts. In May 2017, the United States Supreme Court, in TC Heartland
v. Kraft Foods Groups Brands, held that a corporate defendant may be sued either in its state of incorporation, or where it
has committed acts of infringement and has a regular and established place of business. To the extent that the Supreme Court decision
in TC Heartland concentrates patent litigation in districts within states popular for business incorporation, such as the
Federal District Court for the District of Delaware, such courts may become increasingly crowded. Federal trial courts that hear
patent enforcement actions also hear criminal and other civil cases. Criminal cases always take priority over patent enforcement
actions. As a result, it is difficult to predict the length of time it will take to complete any enforcement action. Moreover,
we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings, and, as a result, we believe that
the risk of delays in patent enforcement actions will have a significant effect on our business in the future unless this trend
changes.
Any
reductions in the funding of the United States Patent and Trademark Office could have an adverse impact on the cost of processing
pending patent applications and the value of those pending patent applications. Our primary assets are our patent portfolios,
including pending patent applications before the United States Patent and Trademark Office. The value of our patent portfolios
is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the United States Patent and
Trademark Office could negatively impact the value of our assets. Further, reductions in funding from Congress could result in
higher patent application filing and maintenance fees charged by the United States Patent and Trademark Office, causing an unexpected
increase in our expenses.
The
rapid development of technology may impair our ability to monetize intellectual property that we own. In order for us to generate
revenue from our intellectual property, we need to offer intellectual property that is used in the manufacture or development
of products. Rapid technological developments have reduced the market for products using less advanced technology. To the extent
that technology develops in a manner in which our intellectual property is not a necessary element or to the extent that others
design around our intellectual property, our ability to license our intellectual property portfolios or successfully prosecute
litigation will be impaired. We cannot assure you that we will have rights to intellectual property for most advanced technology
or that there will be a market for products which require our technology.
The
intellectual property management business is highly competitive. A large number of other companies seek to obtain rights to
new intellectual property and to market existing intellectual property. Most of these companies have significantly both greater
resources that we have and industry contacts which place them in a better position to generate new business. Further, our financial
position, our lack of executive personnel and our inability to generate revenue from our portfolio can be used against us by our
competitors. We cannot assure you that we will be successful in obtaining intellectual property rights to new developing technologies.
As
intellectual property enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license
our intellectual property. We believe that the more prevalent intellectual property enforcement actions become, the
more difficult it will be for us to voluntarily license our intellectual property rights. As a result, we may need to increase
the number of our intellectual property enforcement actions to cause infringing companies to license the intellectual property
or pay damages for lost royalties.
Weak
global economic conditions may cause potential licensees to delay entering into licensing agreements, which could prolong our
litigation and adversely affect our financial condition and operating results. Our business depends significantly on strong
economic conditions that would encourage potential licensees to enter into license agreements for our intellectual property rights.
The United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions
poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income
or asset values. This response could have a material adverse effect on the willingness of parties infringing on our assets to
enter into settlements or other revenue generating agreements voluntarily.
If
we are unable to adequately protect our intellectual property, we may not be able to compete effectively. Our ability
to compete depends in part upon the strength of the intellectual property and intellectual property rights that we own or may
hereafter acquire in our technologies, brands and content and our ability to protect such intellectual property rights. We rely
on a combination of patent and intellectual property laws and agreements to establish and protect our patent, intellectual property
and other proprietary rights. The efforts we take to protect our patents, intellectual property and other proprietary rights may
not be sufficient or effective at stopping unauthorized use of our patents, intellectual property and other proprietary rights.
In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every
country in which we have rights. There may be instances where we are not able to protect or utilize our patent and other intellectual
property in a manner that maximizes competitive advantage. If we are unable to protect our patent assets and intellectual property
and other proprietary rights from unauthorized use, the value of those assets may be reduced, which could negatively impact our
business. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter our
markets and produce or sell the same or similar products as those covered by our intellectual property rights. In addition, protecting
our intellectual property and intellectual property rights is expensive and diverts our critical and limited managerial resources.
If any of the foregoing were to occur, or if we are otherwise unable to protect our intellectual property and proprietary rights,
our business and financial results could be impaired. If it becomes necessary for us to commence legal proceedings to enforce
our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our intellectual property rights
could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. We also rely on trade secrets and contract
law to protect some of our intellectual property rights. We will enter into confidentiality and invention agreements with our
employees and consultants. Nevertheless, these agreements may not be honored and they may not effectively protect our right to
our un-patented trade secrets and know-how. Moreover, others may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets and know-how.
Risks
Concerning our Common Stock
There
is a limited market for our common stock, which may make it difficult for you to sell your stock. Our common stock trades
on the OTC Pink market under the symbol “QPRC.” The OTC Pink market is not a national securities exchange and does
not provide the benefits to stockholders which a national exchange provides. The OTC Pink “is for all types of companies
that are there by reasons of default, distress or design, which is why they are further segmented based on the level of information
that they provide.” Our common stock had been traded on the OTCQB but ceased to be traded on that market because the stock
price dropped below $0.01 per share. To be eligible for OTCQB, companies must be current in their reporting and undergo an annual
verification and management certification process. Companies must meet $0.01 bid test and may not be in bankruptcy.” There
is a limited trading market for our common stock and our common stock has frequently traded for less than $0.01. Accordingly,
there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of
our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock. Further, because
of the thin float, the reported bid and asked prices may have little relationship to the price you would pay if you wanted to
buy shares or the price you would receive if you wanted to sell shares.
Because
our common stock is a penny stock, you may have difficulty selling our common stock in the secondary trading market. Our common
stock fits the definition of a penny stock and therefore is subject to the rules adopted by the SEC regulating broker-dealer practices
in connection with transactions in penny stocks. The SEC rules may have the effect of reducing trading activity in our common
stock making it more difficult for investors to purchase and sell their shares. The SEC’s rules require a broker or dealer
proposing to effect a transaction in a penny stock to deliver the customer a risk disclosure document that provides certain information
prescribed by the SEC, including, but not limited to, the nature and level of risks in the penny stock market. The broker or dealer
must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction
prior to consummating the transaction. In addition, the SEC’s rules also require a broker or dealer to make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement
to the transaction before completion of the transaction. The existence of the SEC’s rules may result in a lower trading
volume of our common stock and lower trading prices. Further, some broker-dealers will not process transactions in penny stocks.
Many brokers do not trade in penny stocks and stock that are not listed on a stock exchange.
Our
lack of internal controls over financial reporting may affect the market for and price of our common stock. Our disclosure
controls and our internal controls over financial reporting are not effective. Since we became engaged in the intellectual property
management business in 2008, we have not had the financial resources or personnel to develop or implement systems that would provide
us with the necessary information on a timely basis so as to be able to implement financial controls. Our continued poor financial
condition together with the fact that we have one full time employee, who is both our chief executive officer and chief financial
officer, makes it difficult for us to implement a system of internal controls over financial reporting, and we cannot assure you
that we will be able to develop and implement the necessary controls. The absence of internal controls over financial reporting
may inhibit investors from purchasing our shares and may make it more difficult for us to raise debt or equity financing.
Our
lack of a full-time chief financial officer could affect our ability to develop financial controls, which could affect the market
price for our common stock. We do not have a full-time chief financial officer. At present, our chief executive officer, who
does not have an accounting background, is also acting as our chief financial officer. We do not anticipate that we will be able
to hire a qualified chief financial officer unless our financial condition improves significantly. The lack of an experienced
chief financial officer, together with our lack of internal controls, may impair our ability to raise money through a debt or
equity financing, the market for our common stock and our ability to enter into agreements with owners of intellectual property
rights.
Our
stock price may be volatile and your investment in our common stock could suffer a decline in value. As of the date of this
annual report, there has only been limited trading activity in our common stock. There can be no assurance that any significant
market will ever develop in our common stock. Because of the low public float and the absence of any significant trading volume,
the reported prices may not reflect the price at which you would be able to sell shares if you want to sell any shares you own
or buy shares if you wish to buy share. Further, stocks with a low public float may be more subject to manipulation than a stock
that has a significant public float. The price may fluctuate significantly in response to a number of factors, many of which are
beyond our control. These factors include, but are not limited to, the following, in addition to the risks described above and
general market and economic conditions:
● our low stock price,
which may result in a modest dollar purchase or sale of our common stock having a disproportionately large effect on the stock
price;
● the effect of the
COVID-19 pandemic and the response to the pandemic on the market both generally and on penny stock;
● the market’s
perception as to our ability to generate positive cash flow or earnings from our intellectual property portfolios;
● changes in our or
securities analysts’ estimate of our financial performance;
● our ability or perceived
ability to obtain necessary financing for operations and for the monetization of our intellectual property rights;
● the market’s
perception of the effects of legislation or court decisions on our business;
● the market’s
perception that a defendant may obtain a judgement against a subsidiary and foreclose on the intellectual property of the
subsidiary, which may result in a default under our agreement with United Wireless;
● the effects or perceived
effects of the potential convertibility of convertible notes issued by us;
● the results or anticipated
results of litigation by or against us;
● the anticipated
or actual results of our operations;
● events or conditions
relating to the enforcement of intellectual property rights generally;
● changes in market
valuations of other intellectual property marketing companies;
● any discrepancy
between anticipated or projected results and actual results of our operations;
● the market’s
perception or our ability to continue to make our filings with the SEC in a timely manner;
● actions by third
parties to either sell or purchase stock in quantities which would have a significant effect on our stock price; and
● other matters not
within our control.
Raising
funds by issuing equity or convertible debt securities could dilute the value of the common stock and impose restrictions on our
working capital. If we were to raise additional capital by issuing equity securities, either alone or in connection with a
non-equity financing, the value of the then outstanding common stock could decline. If the additional equity securities were issued
at a per share price less than the per share value of the outstanding shares, which is customary in the private placement of equity
securities, the holders of the outstanding shares would suffer a dilution in value with the issuance of such additional shares.
Because of the low price of our stock and our working capital deficiency, the dilution to our stockholders could be significant.
We may have difficulty in raising funds through the sale of debt securities because of both our financial position, the lack of
any collateral on which a lender may place a value, and the absence of any history of significant monetizing of our intellectual
property rights. If we are able to raise funds from the sale of debt securities, the lenders may impose restrictions on our operations
and may impair our working capital as we service any such debt obligations.
Our
failure to have filed reports with the SEC may impair the market for and the value of our common stock and may result in liability
to us. We did not file reports with the SEC from 2003 until December 2014. We filed our Form 10-K for the year ended December
31, 2012 on December 15, 2014; our Form 10-K for the year ended December 31, 2013 on April 10, 2015; and our Form 10-K for the
year ended December 31, 2014 on August 18, 2015. Our failure to have made such filings may affect both the market for our common
stock and the value of our common stock as well as the willingness of investors to purchase our stock. Further, because we did
not have current information concerning our business and operations available, we have potential liability resulting from our
failure to have been current in our SEC filings, and the SEC has broad power to take action against us for our failure to have
been in compliance with the reporting requirement of the Securities Exchange Act of 1934. Although the SEC permits an issuer to
file an omnibus 10-K covering the periods for which filings were not made, the SEC is not foreclosed from seeking enforcement
action for our filing delinquencies. Any such action could have a material adverse effect upon us and the market for and price
of our common stock.
Because
we have a classified board of directors, it may be more difficult for a third party to obtain control of us. As a result of
the approval by our stockholders of our amended and restated certificate of incorporation, our board of directors is a classified
board, which means that at each annual meeting, the stockholder will vote for only one-third of the board. A classified board
of directors may make it more difficult for a third party of gain control of us which may affect the opportunity of our stockholders
to receive any potential benefit which could be available from a third party seeking to obtain control over us.
We
do not intend to pay any cash dividends in the foreseeable future. We have not paid any cash dividends on our common stock
and do not intend to pay cash dividends on our common stock in the foreseeable future.
ITEM
2. PROPERTIES
We
do not own or lease any real property.
ITEM
3. LEGAL PROCEEDINGS
None
ITEM
4. MINE SAFETY DISCLOSURES.
Not
Applicable
PART
II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Our
common stock trades on the OTC Pink market under the symbol QPRC. Any over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Stockholders
of Record
As of April 13, 2021, we had 426 record holders of our common stock.
Transfer
Agent
Continental
Stock Transfer & Trust Company, One State Street, 30th floor, New York, New York 10004-1561 is the transfer agent for our
common stock.
Dividends
We
have not paid any cash dividends to date and do not anticipate or contemplate paying dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for the development of our business.
Securities
Authorized for Issuance under Equity Compensation Agreements
The
following table gives information concerning common stock that may be issued upon the exercise of options granted to certain officers,
directors and consultants under their respective individual compensation agreements with us as of December 31, 2020.
Equity Compensation Agreements Information
Plan category Number
of securities to be issued upon exercise of outstanding options, warrants and rights
(#) Weighted-
average exercise price of outstanding options, warrants and rights
($) Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in
column (a)
(#)
As of December 31, 2020
Equity compensation plans approved by security holders - $ - -
Equity compensation plans not approved by security holders (1) - $ - 80,000,000
Total - $ - 80,000,000
A
summary of the status of our equity grants and changes is set forth below:
(1) On November
10, 2017, the board of directors adopted the 2017 Equity Incentive Plan pursuant to which we can issue up to 150,000,000 shares
of common stock pursuant to non-qualified stock options, restricted stock grants and other equity-based incentives. At December
31, 2020, 80,000,000 shares are available under the plan.
No
warrants or options were granted or exercised in 2020.
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 500,000,000 shares of common stock pursuant to non-qualified stock options, restricted
stock grants and other equity-based incentives, and the amendment to the Plan became effective upon the closing of the agreements
with QFL, which was February 22, 2021. In connection with the increase in the shares of common stock issuable pursuant to the
plan, the board;
● granted
restricted stock grants for 10,000,000 share, which vested immediately, to each of three
consultants pursuant to agreements with the consultants;
● granted
restricted stock grants for a total of 69,000,000 shares to our directors, Jon C. Scahill
(49,000,000 shares), Timothy J. Scahill (10,000,000 shares) and Dr. William R. Carroll
(10,000,000 shares) as compensation for services rendered;
● granted
a restricted stock grant to Ryan T. Logue for 5,000,000 shares upon his acceptance of
his appointment as a director;
● granted
ten-year non-qualified stock options to purchase 30,000,000 shares to each of three consultants
pursuant to agreements with the consultants, the options to vest as provided in their
agreements;
● granted
a ten-year non-qualified stock option to purchase 60,000,000 shares to Jon C. Scahill,
which vest in installments as described under Item 11. Executive Compensation.
Recent
sales of unregistered securities.
We
did not sell any unregistered securities during since the beginning of the year ended December 31, 2020 other than issuances that
were reported in our SEC filings.
ITEM
6. SELECTED FINANCIAL DATA
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements
that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results
could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk
Factors” and elsewhere in this report.
Overview
Our
principal operations include the development, acquisition, licensing and enforcement of intellectual property rights that are
either owned or controlled by us or one of our wholly owned subsidiaries. We currently own, control or manage ten intellectual
property portfolios, which principally consist of patent rights. As part of our intellectual property asset management activities
and in the ordinary course of our business, it has been necessary for either us or the intellectual property owner who we represent
to initiate, and it is likely to continue to be necessary to initiate, patent infringement lawsuits and engage in patent infringement
litigation.
We
generate revenue from two sources:
● Patent licensing
fees relating to our intellectual property portfolio, which includes fees from the licensing of our intellectual property,
primarily from litigation relating to enforcement of our intellectual property rights.
● Licensed packaging
sales, which relate to the sale of licensed products, although we did not generate any revenue from licensed packaging sales
in the year ended December 31, 2020.
We
previously received management fees for managing litigation related to our intellectual property rights. We do not currently receive
these fees, we do not have any agreements that provide for such payments and we may not generate revenue from such fees in the
future.
To
a significantly lesser extent, we generate revenue from sale of packaging materials based on our TurtlePakTM technology.
We did not generate any revenue from our TurtlePakTM in the year ended December 31, 2020. Our gross profit from sales
reflects the cost of contract manufacturing and labor. We did not generate any revenue from the TurtlePakTM Portfolio
other than from the sale of products using our technology.
Because
of the nature of our business transactions to date, we recognize revenues from licensing upon execution of a license agreement
following settlement of litigation and not over the life of the patent. Thus, we would recognize revenue when we enter into the
agreement pursuant to which we are to receive the license fee or settlement payment. Although we intend to seek to develop portfolios
of intellectual property rights that provide us for a continuing stream of revenue, to date we have not been successful in doing
so, and we cannot give you any assurance that we will be able to generate any significant revenue from licenses that provide a
continuing stream of revenue. Thus, to the extent that we continue to generate cash from single payment licenses, our revenues
can, and are likely to, vary significantly from quarter to quarter and year to year. Our gross profit from license fees reflects
any royalties which we pay in connection with our license.
Our
agreements with our funding sources have typically provided that the funding source pay the litigation costs and receive a percentage
of the recovery, thus reducing our recovery in connection with any settlement of the litigation. To the extent that our counsel
represents us on a contingent fee basis, our recovery would also be reduced by the percentage of the settlement payable to counsel.
From September 2015 until December 2020, under our agreements with Intelligent Partners, as the assignee of United Wireless, and
under the terms of our agreements to purchase certain intellectual property portfolios, a portion of our recovery may be payable
to Intelligent Partners or the seller of the intellectual property rights. All of these payments, which are reflected as cost
of revenues, significantly reduce the net payment to us.
On
October 22, 2015, we, together with certain of our subsidiaries, and United Wireless, entered into a securities purchase agreement
and related agreements, pursuant to which, among other actions, we issued our 10% secured convertible promissory notes due September
30, 2020 to United Wireless. The rights of United Wireless under the securities purchase agreement and the related notes were
assigned to Intelligent Partners. The proceeds of the notes were used to purchase certain of our intellectual portfolios. At September
30, 2020, promissory notes in the aggregate principal amount of $4,672,810 were outstanding. The notes became due by their terms
on September 30, 2020, and we did not have the resources to make, and we did not make, payments due on September 30, 2020. As
a result of the possibility that Intelligent Partners could declare a default under the securities purchase agreement and the
note, which would likely to result in our seeking protection under the Bankruptcy Act, we were not able to obtain any litigation
financing and no litigation counsel would represent us on a contingency fee basis. Accordingly, we did not generate any revenue
during the fourth quarter of 2020, and we devoted our efforts to negotiating a funding agreement with QFL and a restructure of
our agreement with Intelligent Partners, which was required by QFL as a condition to entering into a funding agreement with us.
Agreements
for QFL and Intelligent Partners
On
February 22, 2020, we entered into a funding agreement with QFL and a restructure agreement with Intelligent Partners.
Pursuant
to the Purchase Agreement with QFL, QFL agreed to make available to us a financing facility of: (a) up to $25,000,000 for the
acquisition of mutually agreed patent rights that we intend to monetize; (b) up to $2,000,000 for operating expenses; and (iii)
$1,750,000 to fund the cash payment portion of the restructure of our obligations to Intelligent Partners. In return we transferred
to QFL a right to receive a portion of net proceeds generated from the monetization of those patents. We used $1,750,000 of proceeds
from the QFL financing as the cash payment portion of the restructure of our obligations to Intelligent Partners. Our obligations
to QFL are secured by the proceeds from the patents acquired with their funding, the patents and all general intangibles now or
hereafter arising from or related to the foregoing and the proceeds and products of the foregoing. We also granted QFL a ten-year
warrant to purchase a total of up to 96,246,246 shares of our common stock, with an exercise price of $0.0054 per share which
may be exercised from February 19, 2021 through February 18, 2031on a cash or cashless basis, subject to certain limitations on
exercisability. 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 our capital stock (determined on a fully diluted basis). 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. We also agreed to take all commercially reasonable steps
necessary to regain compliance with the OTCQB eligibility standards as soon as practicable, but in no event later than 12 months
from the closing date, and granted QFL registration rights with respect to the common stock issuable upon exercise of the warrants.
We also granted QFL certain board observation rights. Pursuant to the Purchase Agreement, the all of the net proceeds from the
monetization of the intellectual property acquired with funds from QFL are paid directly to QFL. After QFL has received a negotiated
rate of return, we and QFL share net proceeds equally until QFL achieves its investment return, as defined in the agreement. Thereafter,
we retain 100% of all net proceeds. Except in an Event of Default, as defined therein, all payments by us to QFL pursuant to the
Purchase Agreement are non-recourse and shall be paid only if and after net proceeds from monetization of the patent rights owned
or acquire by us are received, or to be received.
Contemporaneously
with the execution of the agreement with QFL, we entered into a restructure agreement with Intelligent Partners to eliminate
any obligations we had with respect to the outstanding notes and the securities purchase agreement. As part of the restructure
of our agreements with Intelligent Partners, we amended the existing MPAs and granted Intelligent Partners certain rights in the
monetization proceeds from any new intellectual property we acquire. Under these MPAs, Intelligent Partners receives a 60% interest
in the proceeds from our intellectual property owned by the eight Subsidiary Guarantors. Intelligent Partners also participates
in the monetization proceeds from new intellectual property that we acquire until the total payments under all the monetization
participation agreements equal $2,805,000, as follows: for net proceeds between $0 and $1,000,000, Intelligent Partners receives
10% of the net proceeds realized from new patents, except that if, in any calendar quarter, net proceeds realized by us 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.
The payments with respect to the new patents terminate once total payments to Intelligent Partners under all monetization participation
agreements reach $2,805,000. The payments to Intellectual Partners with respect new patents are payable from the proceeds which
are allocated to us under the QFL agreements, which start after QFL has received a negotiated rate of return.
Inventor
Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses
In
connection with the investment in certain patents and patent rights, certain of our operating subsidiaries executed agreements
which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on
future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective
patents or patent portfolios.
Our
operating subsidiaries may engage third party funding sources to provide funding for patent licensing and enforcement. The agreements
with the third party funding sources may provide that the funding source receives a portion of any negotiated fees, settlements
or judgments. In certain instances, these third party funding sources are entitled to receive a significant percentage of any
proceeds realized until the third party funder has recouped agreed upon amounts based on formulas set forth in the underlying
funding agreement, which may reduce or delay and proceeds due to us.
Our
operating subsidiaries may retain the services of law firms in connection with their licensing and enforcement activities. These
law firms may be retained on a contingent fee basis whereby the law firms are paid by the funding source on a scaled percentage
of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Depending on the amount of any recovery, it is possible that all the proceeds from a specific settlement may be paid to the funding
source and legal counsel.
The
economic terms of the inventor agreements, funding agreements and contingent legal fee arrangements associated with the patent
portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, proceeds sharing rates, contingent
fee rates and other terms, vary across the patent portfolios owned or controlled by the operating subsidiaries. Inventor royalties,
payments to non-controlling interests, payments to third party funding providers and contingent legal fees 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 royalties, payments to third party funding sources and contingent legal fees expenses will continue to fluctuate and
may continue to vary significantly period to period, based primarily on these factors.
In
December 2018, we entered into a funding agreement whereby a third party agreed to provide funds to us to enable us to support
our structured licensing programs for the CMOS and M-RED portfolios. Under the funding agreement, the third party receives an
interest in the proceeds from the programs, and we have no other obligation to the third party. As of December 31, 2020, the third
party funding source advanced $150,000 for costs and expenses, and has no further obligation to provide additional funds. Under
the terms of the funding agreement, the third party funder is entitled to a priority return of funds advanced from net proceeds
recovered.
In
connection with any litigation seeking to enforce our intellectual property rights, 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 us 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 us or its operating subsidiaries, could materially harm
our operating results and financial position. 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 judgement may result in the bankruptcy of the subsidiary and/or the loss of the patents, which are the subsidiaries’
only assets.
At
present, we are pursuing litigation with respect to the CXT portfolio and MRED portfolio. The actions are described in Item 1.
Business. We cannot estimate when or whether we will receive any revenue from these litigations, or whether, in the event we do
not prevail, the defendant will not obtain an award of legal fees against our plaintiff subsidiary which could result in the bankruptcy
of the subsidiary and a default under our agreements with QFL and Intelligent Partners.
Restricted
Stock Grants and Options
In
February 2021, we issued restricted stock grants to consultants (30,000,000 shares) and to our officers and directors (74,000,000
shares) all of which vested immediately. The value of the shares will be reflected as non-cash compensation in the first quarter
of 2021. Also in February 2021, we granted restricted stock options to consultants (90,000,000 shares) and to our chief executive
officer (60,000,000 shares). With respect to two of the consultants and the chief executive officer the options become cumulatively
exercisable as follows: 1/3rd at an exercise price of $0.01 per share, becoming exercisable upon the commencement of
trading of the Common Stock on the OTCQB; 1/3rd at an exercise price of $0.03 per share becoming exercisable on the
first day on which we file with the SEC a Form 10-K or Form 10-Q with stockholders’ equity of at least $5,000,000; and 1/3rd
at an exercise price of $0.05 per share on the date on which the Common Stock is listed for trading on the Nasdaq Stock
Market or the New York Stock Exchange. We will incur non-cash compensation with respect to the value of the options, based of
Black-Scholes valuation, as the options become exercisable.
Results
of Operations
Years
Ended December 31, 2020 and 2019
The
following table shows the revenue and cost of revenue from our two categories of revenue for the years ended December 31, 2020
and 2019:
Year ended December 31,
Revenues:
Patent licensing fees $ 5,488,088 100.9 % $ 4,117,895 99.4 %
Licensed packaging sales - 0.0 % 25,274 0.6 %
Total 5,488,088 100.0 % 4,143,169 100.0 %
Cost of revenues:
Cost of sales - 0.0 % 4,520 0.1 %
Litigation and licensing expenses 4,692,969 100.0 % 3,383,948 99.8 %
Management support services - 0.0 % 2,093 0.1 %
Total 4,692,969 100.0 % 3,390,561 100.0 %
Revenues
for the year ended December 31, 2020 were $5,488,088, as compared with $4,143,169 in 2019, an increase of $1,344,919, or approximately
32.5%. The increase in 2020 principally reflects an increase in patent licensing fees of $1,370,193, or 33.3%. Our licensing fees
reflect the settlement of litigation for infringement of our patent rights. These fees are one-time fees, with the result that
there is no continuity of revenues from period to period, and any revenue we generate in future periods will be solely dependent
upon the results of pending and future litigation. We cannot assure you that we will generate any revenue from patent licensing
fees in the future. The patent licensing fees for 2020 resulted from licensing and settlements of Power Management/Bus Control
Portfolio, the CXT Portfolio, the MRED Portfolio and the Financial Data Portfolio. The patent licensing fees of $4,117,895 in
2019 resulted from the licensing and settlements of Power Management/Bus Control Portfolio, the CXT Portfolio, the Anchor Structure
Portfolio and the CMOS Portfolio litigations. Our revenue, at least in the near future if not longer, may be affected by factors
relating to the COVID-19 pandemic. See “Item 1. Business - Effects of the COVID-19 Pandemic on our Business.”
Cost
of revenues was approximately $4,693,000 for 2020 as compared with approximately $3,391,000 for 2019. Our cost of revenue includes
expenses which we incurred in connection with our pending litigations and fees we pay to litigation funding sources, legal counsel,
prior owners and pursuant to monetization proceeds agreements in connection with license fees. Cost of revenue for 2020 includes
approximately $4,693,000 of litigation and licensing fees paid to litigation funding sources and legal counsel in connection with
the Power Management/Bus Control, the CXT Portfolio, the MRED Portfolio and the Financial Data Portfolio licensing programs. Cost
of revenues for 2019 includes approximately $3,384,000 of litigation and licensing fees paid to litigation funding sources and
legal counsel in connection with the Power Management/Bus Control, the CXT Portfolio, the Anchor Structure Portfolio and the CMOS
Portfolio licenses, approximately $2,000 for management support services in connection with management of the Mobile Data Portfolio,
and approximately $5,000 relating to TurtlePakTM. We did not have any sales or cost of sales relating to TurtlePakTM
for 2020.
Selling,
general, and administrative expenses for 2020 increased by approximately $292,000, or approximately 24%, from approximately $1,222,000
in 2019 to approximately $1,514,000 in 2020. Our principal selling, general and administrative expense for 2020 and 2019 was amortization
expense of approximately $648,000 and approximately $529,000 for 2020 and 2019, respectively, related to amortization of the patent
assets acquired from Intellectual Ventures in October 2015, IV 34/37 in July 2017, and IV 62/71 in January 2018 and IV 113/108.
Selling, general and administrative expenses also reflect executive compensation, which was approximately $300,000 for 2020 and
2019.
Other
expense consists primarily of interest expense of approximately $804,000 in 2020 as compared with approximately $808,000 in 2019.
In 2020, we recognized a $275,000 gain on derivative liability as compared with $55,000 loss on derivative liability in 2019.
Other income in 2020 reflects miscellaneous income of $1,000. Other expense in 2019 reflect a $28,000 gain on forgiveness of debt.
As a result of the termination of our obligations under the United Wireless notes, commencing in 2021, we no longer have a derivative
liability. See Note 4 of Notes to Consolidated Financial Statements.
We had an income tax expense of approximately $65,000 for 2020 as compared with approximately $5,000 in 2019. The income tax expense results primarily from foreign taxes paid with respect to certain of our settlement agreements.
As
a result of the foregoing we had a net loss of approximately $1,313,000, or $0.00 per share (basic and diluted) for 2020 compared
to net loss of approximately $1,309,000, or $0.00 per share (basic and diluted), for 2019.
Liquidity
and Capital Resources
At December 31, 2020, we had current assets of approximately $1,287,000, current liabilities of approximately $9,497,000. Our current liabilities at December 31, 2020 include approximately $4,673,000 payable to Intelligent Partners, which was due and payable on September 30, 2020 and subsequently restructured, and loans payable of $147,000 and accrued interest of approximately $285,000 due to former directors and minority stockholders. As of December 31, 2020, we have an accumulated deficit of approximately $21,281,000 and a negative working capital of approximately $8,210,000. Other than salary to our chief executive officer, we do not contemplate any other material operating expense in the near future other than normal general and administrative expenses, including expenses relating to our status as a public company filing reports with the SEC. Because our agreements with our litigation funding sources do not require us to make any payments relating to the litigation, we do not incur expenses with respect to litigation covered by the funding sources.
As
a result of our restructure of our agreement with Intelligent Partners, the outstanding notes to Intelligent Partners were cancelled
and replaced with agreements that provide for payments if we receive proceeds from our intellectual property as described above
under “Agreements for QFL and Intelligent Partners.” If the note payable to Intelligent Partners were excluded from
current liabilities, we would have a pro forma working capital deficiency of approximately $3,500,000.
For 2020, we used approximately $246,000 in operations. Our cash flow used in operations for 2020 reflected our loss of approximately $1,300,000, and the amount used in operations increased primarily by a decrease in accounts payable and accrued expenses of approximately $471,000, and the gain on derivative liability of $275,000 offset by a decrease in accounts receivable of approximately $750,000, depreciation and amortization of approximately $648,000, amortization of debt discount of approximately $435,000 and bad debt expense of $66,000.
For
2019, we had cash flow from operations $746,523 in our operations, reflecting our loss of $1,310,295, which was offset principally
by depreciation and amortization of our intellectual property rights of $529,486, amortization of debt discount on the loan from
United Wireless of $349,691, an increase in accounts receivable of $1,850,375, an increase in account payable and accrued liabilities
of $954,806,and decreased by the $55,000 loss on derivative liability, and increased by a gain on forgiveness of debt of $27,628
and accrued but unpaid interest of $8,700.
Cash flow from financing activities for 2020 reflected the proceeds of an SBA loan of approximately $172,000, the payment of the purchase price of patents of approximately $194,000 and proceeds from the sale of future revenues of approximately $95,000 offset by payment made on the sale of future revenues of approximately $20,000. Under the agreement with the litigation funder, the third party lender receives an interest in the proceeds.
Cash
flow from financing activities in 2019 included repayments to the third party in the amount of approximately $130,000, the payment
of the purchase price of patents of approximately $156,000 and the payment of $16,000 of a loan from a third party.
In
2020 and 2019, cash flow from investing activities included $95,000 and $75,000, respectively for the purchase of patents from
third parties.
In
2020 we did not have non-cash investing and financing activities. In 2019, non-cash investing and financing activities consisted
of an account payable of $1,238,219 representing the $1,500,000 payment due to Intellectual Ventures, net of $75,000 advanced
at closing and imputed interest of $336,781.
We
cannot assure you that we will be successful in generating future revenues, in obtaining additional debt or equity financing or
that such additional debt or equity financing will be available on terms acceptable to us, if at all, or that we will be able
to obtain any third party funding in connection with any of our intellectual property portfolios.
Historically,
our only source of financing was loans from officers and directors. In October 2015, we entered into an agreement with United
Wireless, pursuant to which provided us with funds to purchase intellectual property.
We
cannot predict the success of any pending or future litigation seeking to enforce our intellectual property rights.
In
February 2021, we signed a funding agreement with QFL, as described in “Overview” and under “Recent Developments”
in Item 1. Business.
As
noted below, there is a substantial doubt about our ability to continue as a going concern.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is based upon our financial statements that have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities.
On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability
of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that
we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Principles
of Consolidation
Our
consolidated financial statements are prepared in accordance with US GAAP and present the financial statements of us and our wholly-owned
subsidiary. In the preparation of our consolidated financial statements, intercompany transactions and balances are eliminated.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition
We
adopted ASC Topic 606, Revenue from Contracts with Customers as of January 1, 2018 using the modified retrospective transition
method. The core principle of the revenue recognition standard is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify
the contract with the customer
● Step 2: Identify
the performance obligations in the contract
● Step 3: Determine
the transaction price
● Step 4: Allocate
the transaction price to the performance obligations in the contract
● Step 5: Recognize
revenue when the company satisfies a performance obligation
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account
in ASC 606. In order to identify the performance obligations in a contract with a customer, a company must assess the promised
goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets
ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following
criteria are met:
●
The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer
(i.e., the good or service is capable of being distinct).
● The entity’s
promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e.,
the promise to transfer the good or service is distinct within the context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
Variable consideration
● Constraining estimates
of variable consideration
● The existence of
a significant financing component in the contract
● Noncash consideration
● Consideration payable
to a customer
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
In
general, we are required to make certain judgments and estimates in connection with the accounting for revenue contracts with
customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of
performance obligations, determining whether a promise of consideration, whether a license to intellectual property or an entitlement
to payment of a percentage of net proceeds, is distinct from other promised goods or services, evaluating whether consideration
transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations,
determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time
for licensed sales.
Patent
Licensing Fees
Revenue
is recognized upon transfer of control of promised bundled intellectual property rights and other contractual performance obligations
to licensees in an amount that reflects the consideration we expect to receive in exchange for those intellectual property rights.
Revenue contracts that provide promises to grant “the right” to use intellectual property rights as they exist at
the point in time at which the intellectual property rights are granted, are accounted for as performance obligations satisfied
at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and
all other revenue recognition criteria have been met.
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. 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 30-90 days of execution
of the contract. Contractual payments made by licensees are generally non-refundable. We do 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.
Licensed
Sales
The
balance of our revenue in 2019, from licensed sales, was not significant but included sales-based revenue contracts pursuant to
purchase orders. There was no sales-based revenue in 2020. There is only one distinct performance obligation in each purchase
order, transfer of the promised good to the customer, and the customer can benefit from the good together with other resources
readily available to the customer. For licensed sales, the transaction price is allocated to the performance obligation on a relative
standalone selling price basis per the purchase order, and the Company includes in the transaction price some or all of an amount
of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates
are generally based on historical levels of activity, if available. Notwithstanding, revenue is recognized for a licensed
sale when the performance obligation has been satisfied - transfer of the good to the customer. The purchase order
generally provides for payment of contractual amounts within 30 days of transfer of the goods to the customer, therefore there
is no significant financing component or consideration payable to the customer in these transactions.
Cost
of Revenues
Cost
of revenues include the costs and expenses incurred in connection with our patent licensing and enforcement activities, including
inventor royalties paid to original patent owners, contingent litigation funding fees, contingent legal fees paid to external
patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research,
consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. These costs are included
under the caption “Cost of revenues” in the accompanying consolidated statements of operations. No such fees are recognized
as a cost of revenue to the extent that we have no obligation with respect to fees prior to a settlement or license.
Inventor
Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses.
Inventor
royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. Contingent
litigation funding and legal fees are expensed in the consolidated statements of operations in the period that the related revenues
are recognized. In instances where there are no recoveries from potential infringers, no contingent litigation funding fees are
due.
Accounts
Receivable
Accounts receivable, which generally relate to licensed sales, are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. We recorded an allowance for doubtful accounts of $66,000 and $0 as of December 31, 2020 and December 31, 2019, respectively.
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 (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.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the
assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value
exceeds the fair value. No impairment was recorded for the either the year ended December 31, 2020 or of the year ended December
31, 2019.
Derivative
Financial Instruments
Management
evaluates the embedded conversion feature within its convertible debt instruments under ASC 815-15 and ASC 815-40 to determine
if the conversion feature meets the definition of a liability and, if so, whether to bifurcate the conversion feature and account
for it as a separate derivative liability. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported in the statements of operations. For stock-based derivative financial instruments, management uses a Black Scholes model,
in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12
months after the balance sheet date.
Fair
Value of Financial Instruments
We
adopted Financial Accounting Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures”,
for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value
to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring
fair value and expands disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Observable inputs
such as quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based
inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs
for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
In
addition, FASB ASC 825-10-25 “Fair Value Option” was effective for January 1, 2008. ASC 825-10-25 expands opportunities
to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value.
Income
Tax
We record revenues on a gross basis, before deduction for income taxes. We incurred income tax expenses of approximately $65,000 and $5,000 for the years ended December 31, 2020 and 2019, respectively.
Stock-based
Compensation
We
account for 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 services, and, since January1, 2019,
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,
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 is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), to provide a new comprehensive model for lease accounting
under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including
subleases) and eliminate the concept of operating leases and off-balance-sheet leases. Recognition, measurement and presentation
of expenses will depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting
in-line with revenue recognition guidance.
We
adopted Topic 842 as of January 1, 2019 using the modified retrospective transition method with no impact on the consolidated
financial position or results of operations.
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
We
have an accumulated deficit of approximately $21.3 million and negative working capital of approximately $8.2 million as of December
31, 2020. Because of our continuing losses, our working capital deficiency, the uncertainty of future revenue, the possible effect
of a judgement against one or more of our subsidiaries for legal fees; our low stock price and the absence of a trading market
in our common stock, our ability to raise funds in equity market or from lenders is severely impaired. These conditions raise
substantial doubt as to our ability to continue as a going concern. Although we may seek to raise funds and to obtain third party
funding for litigation to enforce its intellectual property rights, the availability of such funds in uncertain, and our use of
the funds from funding sources relating to the monetization of our intellectual property may not be available for working capital
purposes. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements start on Page.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Management’s
Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
We
conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”),
as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as of December 31, 2020, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation
was done under the supervision and with the participation of management, including our chief executive officer and chief financial
officer, who is the same person and our sole full-time employee. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer
concluded that, due to our limited internal audit function and our very limited staff, our disclosure controls were not effective
as of December 31, 2020, such that the information required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) accumulated and communicated to the chief executive officer/chief financial officer, as appropriate to allow timely
decisions regarding disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness
of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
404”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In
making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. During our assessment of the effectiveness of internal control over financial
reporting as of December 31, 2020, management identified material weaknesses related to (i) our internal audit functions (ii)
inadequate levels of review of the financial statements and (iii) a lack of segregation of duties within accounting functions.
Therefore, our internal controls over financial reporting were not effective as of December 31, 2020.
Management
has determined that our internal controls contain material weaknesses due to the absence of segregation of duties, as well as
lack of qualified accounting personnel and excessive reliance on third party consultants for accounting, financial reporting and
related activities. The lack of any separation of duties, with the same person, who is our only full time employee, serving as
both chief executive officer and chief financial officer, and who does not have an accounting background, makes it unlikely that
we will be able to implement effective internal controls over financial reporting in the near future.
Due
to our size and nature, segregation of all conflicting duties is not possible. However, to the extent possible, we plan to implement
procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed
by separate individuals if and when we have sufficient income to enable us to hire such individuals, and we cannot give any assurance
that we will be able to hire such personnel. Since we became engaged in the intellectual property management business in 2008
we have not had the financial resources to develop or implement systems that would provide us with the necessary information on
a timely basis so as to be able to implement financial controls. Our financial condition makes it difficult for us to implement
a system of internal controls over financial reporting.
Until
we generate significantly greater revenues and employ accounting personnel, it is doubtful that we will be able implement any
system which provides us with any degree of internal controls over financial reporting. Due to the nature of this material weakness
in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material
to our annual or interim financial statements could not be prevented or detected.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency,
or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of our financial reporting.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes
in Internal Control over Financial Reporting.
During
the period ended December 31, 2020, there was no change in our internal control over financial reporting (as such term is defined
in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table presents information with respect to our officers, directors:
Name
Age
Position(s)
Jon
C. Scahill
Chief executive
officer, president, acting chief financial officer, secretary and director
Timothy
J. Scahill
Chief technology
officer and director
Dr.
William Ryall Carroll
Director
Ryan
T. Logue
Director
Prior
to January 2016, our directors were elected to serve for a term of one year until our next annual meeting of the stockholders
or unless he resigns earlier. On January 22, 2016, following approval by the stockholders, we amended and restated our certificate
of incorporation. Our amended and restated certificate of incorporation provides for a classified board of directors. Our classified
board of directors has three classes of directors - Class I directors, Class II directors and Class III directors. The Class
I director has a term of which expired in 2020, the Class II director has a term which expired in 2018, and the Class III director
has a term which expired in 2019. Directors are elected for a term of three years. Since we did not have an annual meeting of
stockholders in 2018, 2019 and 2020, the Class I, Class II and Class III directors continue in office until the next meeting of
stockholders, at which all directors will be elected.
Jon
C. Scahill, a Class I director, has been president and chief executive officer since January 2014 and a director since 2007. He
was appointed secretary in April 2014. He also served as president and chief operating officer from May 2007 to December 2013.
From December 2006 to May 2007, Mr. Scahill was founder and managing director of the Urban-Rigney Group, LLC, a private consultancy
specializing in new business/new venture development, operations optimization, and strategic analysis. Prior to launching his
consultancy business, Mr. Scahill held numerous positions in sales and marketing, technical management, and product development
in the consumer products/flexible packaging arena. Mr. Scahill holds a B.S. in chemical engineering from the University of Rochester,
an MBA in finance, strategy and operations from Rochester’s Simon Graduate School of Business and a JD from Pace Law School.
Mr. Scahill is admitted to practice in New York, Florida and the District of Columbia, and he is a registered patent attorney
admitted to practice before the United States Patent and Trademark Office.
Timothy
J. Scahill, a Class II director, has a director since October 2014 and our chief technology officer since 2007. Mr. Scahill is
also currently a managing partner of Managed Services Team LLC, an IT services provider. Prior to Managed Services Team, he was
president of Layer 8 Group, Inc. from August 2005 to December 2012, at which time Layer 8 merged with Structured Technologies
Inc. to form Managed Services Team LLC. In his roles he has taken the responsibility for business strategy, acquisition, execution,
as well as financial management. His entrepreneurial acumen and proven record of successful management with sole discretionary
responsibility, demonstrate the scope of his capability and his value to delivering results. He serves on the boards of the Upstate
New York Technology Council, is an investor in Greater Rochester Enterprise, Pariemus Rochester and also serves on the Corporate
Advisory Board for Habitat for Humanity. He is a member of Greater Rochester Enterprise and CEO Roundtable Chair.
Dr.
William Ryall Carroll, a Class III director, has been a director since October 2014. Dr. Carroll has been associate professor
and chairman of the marketing department at St. John’s University College of Business since July 2014. From September 2008
until June 2014, Dr. Carroll was an assistant professor in the marketing department of St. John’s University College of
Business. Dr. Carroll is founder, chief executive officer and owner of Raiserve Inc., a web-based platform for monetizing non-profit
programmatic work in the area of service formed in October 2014. Dr. Carroll’s research focuses on consumer behavior and
behavioral decision theory. Dr. Carroll’s work has been published in top academic journals including the Journal of Advertising,
Marketing Letters, as well in books such as Psycholinguistic Phenomena in Marketing Communications. In addition to his research
Dr. Carroll has taught Marketing at the executive, graduate and undergraduate level across in the United States, Europe and Asia.
Prior to pursuing his academic career, Dr. Carroll held various marketing positions at NOP Worldwide Marketing Research Company
and Ralston Purina Company. Dr. Carroll earned his BA in Economics from the University of Rochester, his MS in Marketing Research
from the University of Texas in Arlington, and his PhD from City University of New York - Baruch College.
Ryan
T. Logue, a Class I director, is an investment advisory representative Lincoln Investment, a position he has held since 2019.
Prior to joining Lincoln Investment, he spent 16 years with Morgan Stanley in the private wealth management department. Mr. Logue
has spent the majority of his career focused on investing in both public and private opportunities department. Mr. Logue graduated
with a BA from Colgate University and an MBA from Columbia University and has previously served on the board of the Columbia Alumni
Association of Fairfield County.
Timothy
J. Scahill and Jon C. Scahill are first cousins.
Director
Independence
Dr.
Carroll and Mr. Logue are “independent” directors based on the definition of independence in the listing standards
of the NYSE.
Code
of Ethics
We
have not yet adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, since we have been focusing our efforts on developing
our business. We expect to adopt a code as we develop our business.
Committees
of the Board of Directors
We
do not have any committees of our board of directors.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers and directors of issuers whose securities
are registered pursuant to the Securities Exchange Act and persons who own more than 10% of a registered class of our equity securities
to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning
their ownership of the our common stock and other equity securities, on Form 3, 4 and 5 respectively. Because our common stock
is not registered pursuant to the Securities Exchange Act, our officers, directors and 10% stockholders are not required to make
such filings.
ITEM
11: EXECUTIVE COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the years ended December 31, 2020 and 2019, earned by or paid to our executive officers.
Name
and Principal
Position Year Salary Bonus
Awards Stock
Awards Options/ Warrant
Awards (1) Non-Equity Plan
Compensation Nonqualified
Deferred Earnings All Other
Compensation Total
($) ($) ($) ($) ($) ($) ($) ($)
Jon Scahill, $ 300,000 - - - - - 57,000 (1) $ 357,000
CEO and President 300,000 - - - - - - 300,000
(1) Represents the payments
made by the Company under the SEP IRA adopted in March 2020
Employment
Agreements
Pursuant to the restated employment agreement, dated November 30, 2014, we agreed to employ Jon C. Scahill 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 annual salary of $252,000, which may be increased, but not decreased, by the board or the compensation committee. In March 2016, the board of directors increased Mr. Scahill’s annual salary to $300,000, effective January 1, 2016. Mr. Scahill is entitled to a bonus if we meet or exceed performance criteria established by the compensation committee. In August 2016, the board of directors approved annual bonus compensation to Mr. Scahill equal to 30% of the amount by which our consolidated income before income taxes exceeds $500,000, but, if we are 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). Mr. Scahill is also eligible to participate in any executive incentive plans which we may adopt. Pursuant to the agreement, we issued to Mr. Scahill warrants to purchase 60,000,000 shares, representing the warrants that had been previously covered in his prior employment agreement but which had never been issued, and we issued to Mr. Scahill a restricted stock grant for 30,000,000 shares which vested on January 15, 2015. In the event that we terminate Mr. Scahill’s employment other than for cause or as a result of his death or disability, we will pay him severance equal to his salary for the balance of the term and, if he received a bonus for the previous year, an amount equal to that bonus, as well as continuation of his insurance benefits. Mr. Scahill also waived accrued compensation of $1,167,705, representing his accrued salary for periods prior to January 1, 2014. The restated employment agreement also includes mutual general releases between Mr. Scahill and us. In March 2020, the Company adopted a SEP IRA plan for its employees. Mr. Scahill is our only employee covered by the plan.
Pension
Benefits
In
March 2020, we adopted a SEP IRA plan for our employees pursuant to which we deposit into a SEP IRA account of each of our 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 presented to and reviewed by the directors of this Corporation. For the year ending
December 31, 2020 the percentage was set at 19%. Mr. Scahill is our only employee covered by the plan.
Equity Incentive Plan
On
November 10, 2017, the board of directors adopted the 2017 Equity Incentive Plan (the “Plan”) pursuant to which 150,000,000
shares of common stock may be issued. In February 2021, the board amended the Plan to increase the number of shares subject to
the plan to 500,000,000. Set forth below is a summary of the plan, as amended, but this summary is qualified in its entirety by
reference to the full text of the plan, a copy of which is included as an exhibit to this annual report.
The
plan provides for the grant of non-qualified options, stock grants and other equity-based incentives to employees, including officers,
directors and consultants.
On
February 19, 2021, the board of directors:
● granted
restricted stock grants for 10,000,000 share, which vested immediately upon grant, to
each of three consultants pursuant to agreements with the consultants;
● granted
restricted stock grants for a total of 69,000,000 shares, which vested immediately upon
grant, to our directors, Jon C. Scahill (49,000,000 shares), Timothy J. Scahill (10,000,000
shares) and Dr. William R. Carroll (10,000,000 shares) as compensation for services rendered;
● granted
a restricted stock grant to Ryan T. Logue for 5,000,000 shares upon his acceptance of
his appointment as a director;
● granted non-qualified ten-year stock options to purchase 30,000,000 shares to each of three consultants pursuant to agreements with the consultants, the options to vest as provided in their agreements.
● granted
a non-qualified ten-year stock option to purchase 60,000,000 shares to Jon C. Scahill,
which vest in installments as described under Item 11. Executive Compensation.
The
options granted to two of the consultants, William Gates and Crystal Nicolson, become exercisable as follows:
● 10,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement
of trading of the Common Stock on the OTCQB.
● 10,000,000
shares at an exercise price of $0.03 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 stockholders’
equity of at least $5,000,000, and
● 10,000,000
shares at an exercise price of $0.05/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
options granted the third consultant, Jeff Toler, become exercisable as follows:
● 10,000,000
shares at an exercise price of $0.01 per share upon the first anniversary of the agreement.
● 10,000,000
shares at an exercise price of $0.03 per share upon the second anniversary of the agreement;
and
● 10,000,000
shares at an exercise price of $0.05 per share upon the third anniversary of the agreement.
The
options granted to Jon C. Scahill become exercisable as follows:
● 20,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement
of trading of the Common Stock on the OTCQB.
● 20,000,000
shares at an exercise price of $0.03 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 stockholders’
equity of at least $5,000,000, and
● 20,000,000
shares at an exercise price of $0.05/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.
Outstanding
Equity Awards at Fiscal Year-End
There
were no outstanding equity awards granted to and held by the officers as of December 31, 2020.
Directors’
Compensation
We
do not have any agreements or formal plan for compensating our directors for their service in their capacity as directors, although
our board has, and may in the future, award stock grants or options to purchase shares of common stock to our directors.
The
following table provides information concerning the compensation of each member of our board of directors whose compensation is
not included in the Summary Compensation Table for his services as a director for 2020.
Name Fees Earned
or Paid in
Cash Stock
Awards Total
Timothy J. Scahill $ - $ - $ -
Dr. William Ryall Carroll - - -
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as to shares of common stock beneficially owned as of April 13, 2021, by:
● Each director;
● Each current officer
named in the summary compensation table;
● Each person owning
of record or known by us, based on information provided to us by the persons named below, at least 5% of our common stock;
and
● All directors and
officers as a group.
For purposes of the following table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or sole or shared investment power with respect to a security, or any combination thereof, and the right to acquire such power (for example, through the exercise of warrants granted by us) within 60 days of April 13, 2021.
Name and Address (1) of Beneficial Owner
Amount and
Nature of
Beneficial
Ownership
% of Class
Jon C. Scahill
140,000,000
26.2 %
Andrew C. Fitton (2)
300 Bowie St., Apt. 2803
Austin, TX
117,407,407
22.0 %
Intelligent Partners, LLC (3)
300 Bowie St., Apt. 2803
Austin, TX 78703
50,000,000
8.6 %
Michael R. Carper (4)
13218 Tamayo Drive
Austin, TX 78729
78,888,889
14.8 %
Tomas Arce
3463 State Street
Suite 327
Santa Barbara, CA 93105
26,699,627
5.0 %
Dr. William Ryall Carroll
15,484,633
2.9 %
Timothy J. Scahill
15,105,000
2.8 %
Ryan T. Logue
5,000,000
*
All officers and directors as a group (four individuals)
176,087,257
33.0 %
* Less
than 1%.
(1) The address of Jon
C. Scahill, Dr. Carroll, Timothy J. Scahill and Ryan T. Logue is c/o Quest Patent Research Corporation, 411 Theodore Fremd
Ave., Suite 206S, Rye, New York 10580-1411.
(2) Represents (a) 67,407,407
shares owned by Mr. Fitton and (b) 50,000,000 shares issuable upon exercise of an option held by Intelligent Partners.
(3) Represents 50,000,000
shares of common stock issuable upon exercise of options held by Intelligent Partners. Andrew C. Fitton and Michael R. Carper,
as the members of Intelligent Partners, have the right to vote and dispose of the shares owned by Intelligent Partners.
(4) Represents (a) 28,888,889
shares of common stock owned by Mr. Carper and (b) 50,000,000 shares issuable upon exercise of an option held by Intelligent
Partners.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related
Transactions
As
a result of the September 2015 sale to United Wireless of 50,000,000 shares of common stock, representing 13.0% of our common
stock and its right to name a director, United Wireless is a related party as of December 31, 2020. United Wireless had no relationship
with us prior to the closing of the securities purchase agreement and related agreements in October 2015. United Wireless transferred
its shares to its principals, Andrew C. Fitton and Michael R. Carper, it transferred its option, the notes and its remaining rights
under the agreements to Intelligent Partners LLC, of which Mr. Fitton and Mr. Carper are the members.
Reference
is made to the discussion of our agreements with Intelligent Partners, Mr. Fitton and Mr. Carper under “Item 1. Business
- Recent Developments” and “Overview” in Item 5
Managed
Services Team LLC, an entity for which Timothy Scahill, our chief technology officer and a director, is a managing partner, provides
information technology services to us. We are obligated to pay for these services at usual and customary rates. The cost of these
services for 2020 and 2019 was approximately $464 and $464, respectively.
We 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 our intellectual property rights on matters in which the firm is serving as counsel to us. In connection with the engagement, we recorded patent service costs of approximately $909,000 and $0 for the years ended December 31, 2020 and 2019, respectively. The amount recorded in 2020 includes approximately $407,000 in accrued expenses and outstanding as of December 31, 2020. In prior periods, we engaged a firm at which the father-in-law of the chief executive was formerly a partner. Because his interest in the prior firm was less than 10%, the prior firm was not considered a related party in prior periods.
Director
Independence
Dr. Carroll and Mr. Logue are “independent” directors based on the definition of independence in the listing standards of the NYSE.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table sets forth the fees billed by our independent accountants, Malone Bailey, LLP, for each of our last two fiscal
years for the categories of services indicated.
Fiscal Year Ended
December 31
Audit fees
$ 58,360
$ 55,000
Audit - related fees
-
-
Tax fees
-
-
All other fees
-
1,500
Audit
fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements.
All
other fees relate to professional services rendered in connection our registration statement.
Our
policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services
may include audit services, audit-related services, tax services and other services. Under our audit committee’s policy,
pre-approval is generally provided for particular services or categories of services, including planned services, project based
services and routine consultations. In addition, the audit committee may also pre-approve particular services on a case-by-case
basis. Our board approved all services that our independent accountants provided to us in the past two fiscal years.
PART
IV
ITEM
15. EXHIBITS
EXHIBIT
Exhibit
No.
Description
3.1
Amended and Restated Articles of Incorporation of the Company.(5)
3.2
Bylaws of the Company. (3)
10.1
Restated Employment Agreement dated as of November 30, 2014 between the issuer and between the Company and Jon C. Scahill. (1)
10.2
Restricted Stock Grant dated October 30, 2014 between the Company and Jon C. Scahill. (1)
10.3
License Agreement dated March 26, 2008 between the Company and Emerging Technologies Trust. (1)
10.4
Licensing Services Agreement dated July 10, 2008 between the Company and Balthaser Online, Inc. (1)
10.5
Patent Purchase Agreement dated December 21, 2009 between Company and Intertech Holdings, LLC. (1)
10.6
Consulting Agreement dated August 11, 2010 between the Company and Alex W. Hart.(1)
10.7
Agreement dated February 8, 2011 between the Company and Sol Li. (1)
10.8
Agreement dated June 26, 2013 between the Company and The Betting Service Ltd. and Neil Riches.(1)
10.9
Funding Agreement dated March 13, 2014 between the Company and Longford Capital Fund I, LP, (subject to order granting confidential treatment (1))#
10.10
Agreement dated April 1, 2014 between the Company and Allied Standard Limited. (1)
10.11
Form of warrant issued to former officers and directors.(1)
10.12
Form of warrant issued to Mr. Jon C. Scahill. (1)
10.13
Indemnification agreement, dated December 8, 2014 between the Company and Jon C. Scahill. (4)
10.14
Indemnification agreement, dated December 8, 2014 between the Company and Timothy J. Scahill. (4)
10.15
Indemnification agreement, dated December 8, 2014 between the Company and Dr. William Ryall Carroll. (4)
10.16
Patent Sale Agreement, effective July 8, 2015 between Intellectual Ventures Assets 16 LLC and the Company.(2)
10.17
2017 Equity Incentive Plan(6)
10.18
Purchase Agreement dated February 19, 2021 among the Company and QPRC Finance LLC (7)
10.19
Ex. A to Purchase Agreement - Security Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)†
10.20
Ex. B to Purchase Agreement - Subsidiary Continuing Guaranty Agreement dated February 19, 2021 among Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and QPRC Finance LLC. (7)
10.21
Ex. C to Purchase Agreement - Subsidiary Patent Proceeds Security Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and QPRC Finance LLC. (7)
10.22
Ex. D to Purchase Agreement - Warrant Issuance Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.23
Ex. E to Purchase Agreement - Board Observation Rights Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.24
Registration Rights Agreement - dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.25
Form of Warrant - dated February 19, 2021 among the Company and QPRC Finance LLC (7)
10.26
Restructure Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.27
Ex. A to Restructure Agreement - Stock Purchase Agreement dated February 19, 2021 among the Company, Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.28
Ex. B to Restructure Agreement - Option Grant dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.29
Ex. C to Restructure Agreement - Amended and Restated Pledge Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.24
Ex. D to Restructure Agreement - Amended and Restated Registration Rights Agreement dated February 19, 2021 among the Company, Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.30
Ex. E to Restructure Agreement - Board Observation Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.31
Ex. F to Restructure Agreement - Amended and Restated MPA-CP dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation and Intelligent Partners LLC. (7)
10.32
Ex. G to Restructure Agreement - Amended and Restated MPA-CXT dated February 19, 2021 among CXT Systems, Inc. and Intelligent Partners LLC. (7)
10.33
Ex. H to Restructure Agreement - Monetization Proceeds Agreement dated February 19, 2021 among M-RED Inc. and Intelligent Partners LLC. (7)
10.34
Ex. I to Restructure Agreement - Monetization Proceeds Agreement dated February 19, 2021 among Audio Messaging Inc. and Intelligent Partners LLC. (7)
10.35
Ex. J to Restructure Agreement - Amended and Restated 2015 Patent Proceeds Security Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and Intelligent Partners LLC. (7)
10.36
Ex. K to Restructure Agreement - MPA-NA dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.37
Ex. L to Restructure Agreement - MPA-NA Security Interest Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.38
Form of Consulting Agreement
10.39
Form of Restricted Stock Agreement
10.40
Form of Option Agreement
31.1
Certification of Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Schema Document
101.CAL
XBRL Taxonomy Calculation Document
101.DEF
XBRL Taxonomy Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
(1) Incorporated by
reference to the Form 10-K for the year ended December 31, 2012, which was filed by the Company on December 15, 2014.
(2) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on October 28, 2015 and incorporated herein by reference.
(3) Filed as an exhibit
to the Company’s Form 10-K, for the year ended December 31, 2013, which was filed with the SEC on April 10, 2015.
(4) Filed as exhibit
to Amendment No. 1 to the Company’s registration statement on Form S-1, which was filed with the SEC on February 3,
2016, and incorporated herein by reference.
(5) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on January 26, 2016 and incorporated herein by reference.
(6) Incorporated by
reference to the Form 10-K for the year ended December 31, 2017, which was filed by the Company on April 2, 2018.
(7) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on February 24, 2021 and incorporated herein by reference.
# Certain portions
of this exhibit are omitted pursuant to an order granting confidential treatment. The omitted information has been filed separately
with the SEC.
† Certain confidential
information has been deleted from this Exhibit.
ITEM
16. FORM 10-K SUMMARY
Not
applicable.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date:
April 15, 2021
QUEST
PATENT RESEARCH CORPORATION
By: /s/
Jon C. Scahill
Name: Jon
C. Scahill
Title: Chief
Executive Officer and President
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes
Jon C. Scahill as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or
her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Signature
Title
Date
/s/
Jon C. Scahill
Director, chief
executive officer, acting chief financial officer and president
April 15,
Jon C. Scahill
(principal executive,
financial and accounting officer)
/s/
Timothy J. Scahill
Director
April 15,
Timothy J. Scahill
/s/
Dr. William Ryall Carroll
Director
April 15,
Dr. William Ryall
Carroll
/s/
Ryan T. Logue
Director
April 15,
Ryan T. Logue
QUEST
PATENT RESEARCH CORPORATION
DECEMBER
31, 2020
Index
to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Quest Patent Research Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quest Patent Research Corporation and its subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Impairment of Intangible Assets
Description of the Matter
As discussed in Note 2 to the financial statements, the Company’s intangible assets consist of patents which are amortized using the straight-line method over the estimated useful lives and are reviewed for impairment upon any triggering event that may give rise to the assets ultimate recoverability. We identified the impairment assessment of the intangible assets as a critical audit matter due to its materiality to the financial statements and the significant estimates involved, the audit of which required a high degree of auditor judgment.
How We Addressed the Matter in Our Audit
We tested the Company’s determination of the carrying value of the intangible assets by comparing the year-end balances to the undiscounted future cash flows and evaluated the reasonableness of the inputs of the future cash flows to verifiable data.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company's auditor since 2013.
Houston, Texas
April 15, 2021
Quest
Patent Research Corporation and Subsidiaries
Consolidated
Balance Sheets
December 31,
ASSETS
Current assets
Cash and cash equivalents
$ 247,862
$ 537,198
Accounts receivable, net
1,032,886
1,850,375
Other current assets
5,934
17,180
Total current assets
1,286,682
2,404,753
Patents, net of accumulated amortization of $2,266,158 and $1,617,762, respectively
2,200,959
2,754,354
Total assets
$ 3,487,641
$ 5,159,107
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities
$ 2,892,025
$ 3,362,932
Loans payable - third party
147,000
147,000
Purchase price of patents, current portion
1,500,000
569,386
Loan payable - related party, net of unamortized discount and debt issuance costs of $0 and $189,705, respectively
4,672,810
4,483,105
Accrued interest - loans payable related party
-
117,780
Accrued interest - loans payable third party
284,885
270,185
Derivative liability
-
595,000
Total current liabilities
9,496,720
9,545,388
Non-current liabilities
Contingent funding liabilities
-
20,378
Loan payable - SBA
174,392
-
Purchase price of patents, net of unamortized discount of $131,793 and $282,503, respectively
658,207
1,442,497
Total liabilities
10,329,319
11,008,263
Stockholders’ deficit
Preferred stock, par value $0.00003 per share - authorized 10,000,000 shares - no shares issued and outstanding
Common stock, par value $0.00003 per share; authorized 10,000,000,000 at December 31, 2020 and 2019; shares issued and outstanding 383,038,334 at December 31, 2020 and 2019
11,491
11,491
Additional paid-in capital
14,427,782
14,107,782
Accumulated deficit
(21,281,179 )
(19,968,668 )
Total Quest Patent Research Corporation stockholders’ deficit
(6,841,906 )
(5,849,395 )
Non-controlling interest in subsidiary
Total stockholders’ deficit
(6,841,678 )
(5,849,156 )
Total liabilities and stockholders’ deficit
$ 3,487,641
$ 5,159,107
See
accompanying notes to consolidated financial statements
Quest
Patent Research Corporation and Subsidiaries
Consolidated
Statements of Operations
Year Ended
December 31,
Revenues
Patent licensing fees $ 5,488,088 $ 4,117,895
Licensed packaging sales - 25,274
5,488,088 4,143,169
Operating expenses
Cost of revenues:
Cost of sales - 4,520
Litigation and licensing expenses 4,692,969 3,383,948
Management support services - 2,093
Selling, general and administrative expenses 1,513,822 1,222,024
Total operating expenses 6,206,791 4,612,585
Income (loss) from operations (718,703 ) (469,416 )
Other expense
Gain (loss) on derivative liability 275,000 (55,000 )
Gain on forgiveness of debt - 27,628
Other income 1,000 -
Interest expense (804,456 ) (808,273 )
Total other expense (528,456 ) (835,645 )
Net loss before income tax (1,247,159 ) (1,305,061 )
Income tax (65,363 ) (5,234 )
Net loss (1,312,522 ) (1,310,295 )
Net income attributable to non-controlling interest in subsidiary 1,519
Net Loss Attributable to Quest Patent Research Corporation $ (1,312,511 ) $ (1,308,776 )
Net loss per share - Basic and Diluted $ (0.00 ) $ (0.00 )
Weighted average shares outstanding - Basic and Diluted 383,038,334 383,038,334
See
accompanying notes to consolidated financial statements
Quest
Patent Research Corporation and Subsidiaries
Consolidated
Statements of Changes in Stockholders’ Deficit
Common Stock Additional
Paid-in
Non-controlling
Interest in Total
Stockholders’
Shares Amount Capital Deficit Subsidiaries Deficit
Balances as of December 31, 2018 383,038,334 11,491 14,107,782 (18,659,892 ) 1,758 (4,538,861 )
Net loss - - - (1,308,776 ) (1,519 ) (1,310,295 )
Balances as of December 31, 2019 383,038,334 11,491 14,107,782 (19,968,668 ) (5,849,156 )
Resolution of derivative liability
320,000
320,000
Net loss - - - (1,312,511 ) (11 ) (1,312,522 )
Balances as of December 31, 2020 383,038,334 $ 11,491 $ 14,427,782 $ (21,281,179 ) $ 228 $ (6,841,678 )
See
accompanying notes to consolidated financial statements
Quest
Patent Research Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
Year Ended
December 31,
Cash flows from operating activities:
Net loss
(1,312,522 )
$ (1,310,295 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount
435,415
349,691
Loss/(gain) on derivative liability
(275,000 )
55,000
Loss/(gain) on forgiveness of debt
-
(27,628 )
Depreciation and amortization
648,395
529,486
Bad debt expense
66,000
-
Changes in operating assets and liabilities
Accounts receivable
751,489
(1,850,375 )
Accrued interest - loans payable related party
(117,780 )
(25,000 )
Accrued interest - loans payable third party
17,360
16,300
Other current assets
11,246
(14,837 )
Accounts payable and accrued expenses
(470,907 )
3,024,181
Net cash provided by/(used in) operating activities
(246,304 )
746,523
Cash flows from investing activities:
Purchase of patents
(95,000 )
(75,000 )
Net cash used in investing activities
(95,000 )
(75,000 )
Cash flows from financing activities:
Proceeds from SBA loans
171,732
-
Repayment of purchase price of patents
(194,386 )
(155,614 )
Loan payable - third party
-
(16,000 )
Proceeds from sale of future revenues
95,000
-
Repayment from sale of future revenues
(20,378 )
(129,622 )
Net cash from/(used in) financing activities
51,968
(301,236 )
Net increase (decrease) in cash and cash equivalents
(289,336 )
370,287
Cash and cash equivalents at beginning of year
537,198
166,911
Cash and cash equivalents at end of year
$ 247,862
$ 537,198
Non Cash Investing and Financing Activities
Accounts payable for patent purchase, net of imputed interest of $336,781
$ -
$ 1,238,219
Resolution of derivative liability
320,000
-
Accrued interest added to principal
2,660
-
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes, including foreign taxing authorities withheld taxes of $60,255 and $5,000 during the years ended December 31, 2020, and 2019 respectively.
$ 65,363
$ 5,234
Interest
472,121
467,280
See
accompanying notes to consolidated financial statements
Quest
Patent Research Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1 - DESCRIPTION OF BUSINESS
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, the “Company”, “we”, “us” or “our” refers 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.
NOTE
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 December
31, 2020 and 2019.
The
consolidated financial statements include the accounts and operations of:
Quest
Patent Research Corporation (“The Company”)
Quest
Licensing Corporation (NY) (wholly owned)
Quest
Licensing Corporation (DE) (wholly owned)
Quest
Packaging Solutions Corporation (90% owned)
Quest
Nettech Corporation (65% owned)
Semcon
IP, Inc. (wholly owned)
Mariner
IC, Inc. (wholly owned)
IC
Kinetics, Inc. (wholly owned)
CXT
Systems, Inc. (wholly owned)
Photonic
Imaging Solutions Inc. (wholly owned)
M-RED
Inc. (wholly owned)
Audio
Messaging Inc. (wholly owned)
Peregrin
Licensing LLC (wholly owned)
Prior
to April 2019, the operations of Wynn Technologies, Inc. were not included in the Company’s consolidated financial statements
as there were significant contingencies related to its control of Wynn Technologies, Inc. The sole asset of Wynn Technologies,
Inc. was US Patent No. RE38,137E. Wynn Technologies, Inc. could not transfer, assign, sell, hypothecate or otherwise encumber
US Patent No. RE38,137E without the express written consent of Sol Li, owner of 35% of Wynn Technologies, Inc., unless, as of
the date of such transfer, assignment, sale, hypothecation or other encumbrance, Mr. Li had received a total of at least $250,000.
US Patent No. RE38,137E expired on September 28, 2015. The Company accounted for its 65% interest in Wynn Technologies, Inc. under
the equity method whereby the investment accounts were increased for contributions by the Company plus its 60% share of income
pursuant to the contractual agreement which provides that Sol Li, owner of 35% of Wynn Technologies, Inc. retained 40% of the
income, and reduced for distributions and its 60% share of losses incurred, respectively, with the restriction whereby the account
balances cannot go below zero. On April 11, 2019, Quest NetTech Corporation merged with Wynn Technologies, Inc. with Quest NetTech
Corporation being the surviving entity. Pursuant to the merger agreement, we issued to Mr. Li a 35% interest in Quest NetTech
Corporation. Significant intercompany transaction and balances have been eliminated in consolidation.
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.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturity dates of three months or less when purchased, to be cash
equivalents.
Accounts
Receivable
Accounts receivable, which generally relate to licensed sales, are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company recorded an allowance for doubtful accounts of $66,000 and $0 at December 31, 2020 and December 31, 2019, respectively.
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.
Impairment
of long-lived assets
Long-lived
assets, including intangible assets with a finite life, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized
for the amount by which the carrying value exceeds the fair value.
Derivative
Financial Instruments
The
Company evaluates the embedded conversion feature within its convertible debt instruments under ASC 815-15 and ASC 815-40 to determine
if the conversion feature meets the definition of a liability and, if so, whether to bifurcate the conversion feature and account
for it as a separate derivative liability. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black Scholes model,
in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12
months after the balance sheet date.
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 derivative liabilities.
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.
Revenue
Recognition
The
Company adopted ASC Topic 606, Revenue from Contracts with Customers as of January 1, 2018 using the modified retrospective
transition method. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step
1: Identify the contract with the customer
● Step
2: Identify the performance obligations in the contract
● Step
3: Determine the transaction price
● Step
4: Allocate the transaction price to the performance obligations in the contract
● Step
5: Recognize revenue when the company satisfies a performance obligation
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account
in ASC 606. In order to identify the performance obligations in a contract with a customer, a company must assess the promised
goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets
ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following
criteria are met:
●
The
customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service is capable
of being distinct).
●
The
entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the
contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
Variable
consideration
●
Constraining
estimates of variable consideration
●
The
existence of a significant financing component in the contract
●
Noncash
consideration
●
Consideration
payable to a customer
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
In
general, the Company is required to make certain judgments and estimates in connection with the accounting for revenue contracts
with customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction
of performance obligations, determining whether a promise of consideration, whether a license to intellectual property or an entitlement
to payment of a percentage of net proceeds, is distinct from other promised goods or services, evaluating whether consideration
transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations,
determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time
for licensed sales.
Patent
Licensing Fees
Revenue
is recognized upon transfer of control of promised bundled intellectual property rights and other contractual performance obligations
to licensees in an amount that reflects the consideration we expect to receive in exchange for those intellectual property rights.
Revenue contracts that provide promises to grant “the right” to use intellectual property rights as they exist at
the point in time at which the intellectual property rights are granted, are accounted for as performance obligations satisfied
at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and
all other revenue recognition criteria have been met.
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. 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 (i) 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 (ii) 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
30-90 days of execution of the contract. Contractual payments made by licensees are generally non-refundable. We do 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.
Licensed
Sales
The
balance of our revenue, from licensed sales, is not significant but includes sales-based revenue contracts pursuant to purchase
orders. There is only one distinct performance obligation in each purchase order, transfer of the promised good to the customer,
and the customer can benefit from the good together with other resources readily available to the customer. For licensed sales,
the transaction price is allocated to the performance obligation on a relative standalone selling price basis per the purchase
order, and the Company includes in the transaction price some or all of an amount of estimated variable consideration to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur
when the uncertainty associated with the variable consideration is subsequently resolved. Estimates are generally based on historical
levels of activity, if available. Notwithstanding, revenue is recognized for a licensed sale when the performance obligation has
been satisfied - transfer of the good to the customer. The purchase order generally provides for payment of contractual
amounts within 30 days of transfer of the goods to the customer, therefore there is no significant financing component or consideration
payable to the customer in these transactions.
Cost
of Revenues
Cost
of revenues include the costs and expenses incurred in connection with our patent licensing and enforcement activities, including
inventor royalties paid to original patent owners, contingent litigation funding fees, contingent legal fees paid to external
patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research,
consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. These costs are included
under the caption “Cost of revenues” in the accompanying consolidated statements of operations. No such fees are recognized
as cost of revenue to the extent that the Company has no obligation with respect to such fees prior to a settlement or license.
Inventor
Royalties, Litigation Funding Fees and Contingent Legal 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 specialize in providing 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. 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.
Research
and development
Research
and development costs are expensed as incurred. We did not incur any research and development costs in the years ended December
31, 2020 and 2019.
Income
Taxes
Deferred
income tax assets and liabilities are recognized for the expected future income tax consequences of events that have been included
in the consolidated financial statements or income tax returns. Deferred income tax assets and liabilities are determined based
on differences between the financial statement and tax bases of assets and liabilities using tax rates in effect for the years
in which the differences are expected to reverse.
In
evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that
the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that
all or a portion of the deferred income tax assets will not be utilized. The ultimate realization of deferred income tax assets
is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carryforwards.
The
Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income
taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold,
the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded
as of December 31, 2020 and 2019.
The Company records revenues on a gross basis, before deduction for income taxes. The Company incurred income tax expenses of approximately $65,000 and $5,000 for the years ended December 31, 2020 and 2019, respectively.
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 services, and, since January 1, 2019, 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, 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).
Earnings
(loss) per share
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. Because the Company incurred losses in all periods covered by the financial statements and would be anti-dilutive, the diluted earnings per share is the same as the basic earnings per share.
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), to provide a new comprehensive model for lease accounting
under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including
subleases) and eliminate the concept of operating leases and off-balance-sheet leases. Recognition, measurement and presentation
of expenses will depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting
in-line with revenue recognition guidance.
The
Company adopted Topic 842 as of January 1, 2019 using the modified retrospective transition method with no impact on the consolidated
financial position or results of operations.
Concentration
of credit risk
The
Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not
experienced any such losses in these accounts.
Segment
reporting
The
Company reports each material operating segment in accordance with ASC 280, “Segment Reporting.” Operating segments
are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s
chief operating decision maker is the chief executive officer. The Company operates in two operational segments; intellectual
property licensing and licensed packaging sales. Licensed packaging sales segment is not reported separately as revenue constitutes
less than 10% of the combined revenue of all segments, reported profit is less than the combined profit of all operating segments
that did not report a loss, and assets are less than 10% of the combined assets of all operating segments. Certain corporate expenses
are not allocated to segments.
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
During the period from 2008, when the Company changed its business to become an intellectual property management company, through 2020, the Company generated a cumulative loss of approximately $21.3 million. The Company’s total current assets were approximately $1.3 million at December 31, 2020. At December 31, 2020, the Company had a working capital deficiency of approximately $8.2 million. The Company requires funding for its operations. Because of the Company’s continuing losses, the working capital deficiency, the uncertainty of future revenue, the Company’s low stock price and the absence of a trading market in its common stock, the ability of the Company to raise funds in equity market or from lenders is severely impaired, and there exists substantial doubt about the ability of the Company 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 in uncertain. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
3 - SHORT TERM DEBT AND LONG-TERM LIABILITIES
The
following table shows the Company’s debt at December 31, 2020 and 2019.
December 31, December 31,
Short-term
debt:
Loans
payable - third party  $ 147,000 $ 147,000
Purchase
price of patents - current portion 1,500,000 569,386
Net
short-term debt 1,647,000 716,386
Loan
payable - related party
Gross 4,672,810 4,672,810
Accrued
Interest - 117,780
Unamortized
discount - (189,705 )
Net
loans payable - related party $ 4,672,810 $ 4,600,885
Long-term
liabilities:
Loans
payable - SBA
Gross $ 170,832 -
Accrued
Interest 3,560 -
Net
loans payable SBA 174,392 -
Purchase
price of patents
Gross 790,000 1,725,000
Unamortized
discount (131,793 ) (282,503 )
Net
purchase price of patents - long-term $ 658,207 $ 1,442,497
Contingent
funding liabilities:
Gross - 20,378
Net
contingent funding liabilities $ - $ 20,378
Short-term
debt
The loan payable - third party are demand loans made to former officers and directors, now unrelated third parties, and shareholders in the amount of $147,000. During the years ended December 31, 2020 and 2019 the Company paid $0 and $16,000, respectively, against the loans. The loans are payable on demand plus accrued interest at 10% per annum.
The loan payable - related party at December 31, 2020 represents the principal amount of the Company’s 10% note to Intelligent Partners, as transferee of the notes issued to United Wireless Holdings, Inc. (“United Wireless”), in the principal amount of $4,672,810 pursuant to a securities purchase agreement (“SPA”) dated October 22, 2015. The note payable to Intelligent Partners, as transferee of United Wireless, has been classified as a current liability as of December 31, 2020.
Interest
on all notes issued pursuant to the securities purchase agreement, accrued through September 30, 2018, with accrued interest being
added to principal on September 30, 2016, 2017 and 2018. Accordingly, the accrued interest is included in loans payable, related
party. Since September 30, 2018, the Company has been required to pay interest quarterly. During the year ended December 31, 2020
the Company paid approximately $468,560 in interest on the notes.
At September 30, 2020, the notes in the aggregate principal amount of $4,672,810 were outstanding. 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.
Pursuant
to the securities purchase agreement and the related agreements that were executed contemporaneously with the securities purchase
agreement:
● The
Company granted United Wireless an option to purchase 50,000,000 shares of common stock at varying exercise prices. The option
expired unexercised on September 30, 2020. See Note 5.
● The
Company agreed to pay United Wireless 15% of the net monetization proceeds from the patents
acquired in October 2015 and the intellectual property in the Company’s mobile
data and financial data portfolios. The allocation of proceeds resulted in a discount
from the note payable of $188,023. In addition, the Company recognized a discount associated
with the 15% interest in net monetization proceeds of $450,000. These discounts and debt
issuance costs of $60,958, total $698,981, were amortized and charged to interest expense
over the life of the notes using the effective interest rate method. As of December 31,
2020 and December 31, 2019, $698,981 and $509,276 of the discount and debt issuance cost
have been amortized, respectively.
Subsequent to December 31, 2020, the Company entered into a restructure agreement with Intelligent Partners. See Note 11-Subsequent Events for a summary of the restructured agreement with Intelligent Partners.
Long
term liabilities
The loans payable-SBA at December 31, 2020 represents:
● An unsecured loan from JPMorgan Chase Bank, N.A. in the aggregate amount of $20,832, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, which was enacted March 27, 2020. The loan, which was taken down on April 23, 2020, matures on April 23, 2022 and bears interest at a rate of 0.98% per annum, with interest payable monthly commencing on November 23, 2020. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.
● 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 May 14, 2021. 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.
The purchase price of patents at December 31, 2020 represents the non-current portion of minimum payments due under the agreements between:
● CXT Systems, Inc. (“CXT”), a wholly owned subsidiary, and Intellectual Ventures Assets 34, LLC and Intellectual Ventures 37, LLC (“IV 34/37”) pursuant to which at closing CXT acquired by assignment all right, title, and interest in a portfolio of thirteen United States patents (the “CXT Portfolio”). Under the agreement, CXT will distribute 50% of net recoveries, as defined, to IV 34/37. CXT advanced $25,000 to IV 34/37 at closing, and agreed, pursuant to an amendment dated January 26, 2018, that in the event that, on December 31, 2018, December 31, 2019 and December 31, 2020, cumulative distributions to IV 34/37 total less than $100,000, $375,000 and $975,000, respectively, CXT shall pay the difference necessary to achieve the applicable minimum payment amount within ten days after the applicable date; with any advances being credited toward future distributions to IV 34/36. As of December 31, 2020, $600,000 of the minimum future cumulative distributions were presented as short-term debt based on payment due date. As of December 31, 2020, cumulative distributions did not total $975,000 and CXT did not pay the difference to IV 34/37 within ten days. Non-payment which is not cured within 30 days after written notice from IV 34/37 would constitute an Acceleration Event under the agreement, following which, in addition to any other remedies available under the agreement, all outstanding minimum cumulative distributions would become due and payable within thirty days. As of the date of filing, no such written notice of non-payment has been given by IV 34/37. No affiliate of CXT has guaranteed the minimum payments. CXT’s obligations under the agreement are secured by a security interest in the proceeds (from litigation or otherwise) from the CXT Portfolio. During the year ended December 31, 2020, CXT paid approximately $194,000 under the agreement.
● M-RED Inc. (“M-RED”), a wholly-owned subsidiary, and Intellectual Ventures Assets 113 LLC and Intellectual Ventures Assets 108 LLC (“IV 113/108”) pursuant to which at closing M-RED paid IV 113/108 $75,000 and IV 113/108 transferred to M-RED all right, title and interest in a portfolio of sixty United States patents and eight foreign patents (the “M-RED Portfolio”). Under the agreement, M-RED will distribute 50% of net proceeds, as defined, to IV 113/108, as long as we generate revenue from the M-RED Portfolio. The agreement with IV 113/108 provides that if, on September 30, 2020, September 30, 2021 and September 30, 2022, cumulative distributions to IV 113/108 total less than $450,000, $975,000 and $1,575,000, respectively, M-RED shall pay the difference between such cumulative amounts and the amount paid to IV 113/108 within ten days after the applicable date; with any advances being credited toward future distributions to IV 113/108. On September 30, 2020 cumulative distributions to IV 113/108 totaled less than $450,000 and M-RED did not pay the difference to IV 113/108 within ten days. Non-payment which is not cured within 30 days after written notice from IV 113/108 would constitute an Acceleration Event under the agreement, following which, in addition to any other remedies available under the agreement, all outstanding minimum cumulative distributions would become due and payable within thirty days. As of the date of filing, no such written notice of non-payment has been given by IV 113/108. As of December 31, 2020, $600,000 and $900,000 of the minimum future cumulative distributions were presented as long-term and short-term debt, respectively, based on payment due dates. No affiliate of M-RED has guaranteed the minimum payments. M-RED’s obligations under the agreement with IV 113/108 are secured by a security interest in the proceeds (from litigation or otherwise) from the M-RED Portfolio.
● 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.
The balance of the purchase price of the patents is reflected as follows:
Current Liabilities:
Purchase price of patents, current portion
1,500,000
$ 569,386
Unamortized discount
-
-
Non-current liabilities:
Purchase price of patents, long term
790,000
$ 1,725,000
Unamortized discount
(131,793 )
(282,503 )
Total current and non-current
2,158,207
2,011,883
Effective interest rate of Amortized over 2 years
9.4-14.5 %
9.6-12.5 %
Because the non-current minimum payment obligations are due over the next three years, the Company imputed interest of 10% which was recorded as a discount to the liabilities and amortized through the maturity date. Amortization recorded to interest expense amounted to $245,710 and $159,450 for the years ended December 31, 2020 and 2019, respectively.
In
December 2018, the Company entered into a funding agreement whereby a third party agreed to provide funds in the amount of $150,000,
in support of the structured licensing programs of PIS and M-RED. Under the funding agreement, the third party receives an interest
in the proceeds from the programs, and we have no other obligation to the third party.
Our relationship with the above investors meets the criteria in ASC 470-10-25 - Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to the investor, as of the acquisition date, as long-term debt in our consolidated balance sheets. This initial fair value measurement is based on the perspective of a market participant and includes significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy and are discussed further within Note 2. Our repayment obligations are contingent upon future patent licensing fee revenues generated from the licensing programs.
Under ASC 470, amounts recorded as debt shall be amortized under the interest method. The Company made an accounting policy election to utilize the prospective method when there is a change in the estimated future cash flows, whereby a new effective interest rate is determined based on the revised estimate of remaining cash flows. The new rate is the discount rate that equates the present value of the revised estimate of remaining cash flows with the carrying amount of the debt, and it will be used to recognize interest expense for the remaining periods. Under this method, the effective interest rate is not constant, and any change in expected cash flows is recognized prospectively as an adjustment to the effective yield. During periods ended December 31, 2020 and 2019, we paid the third party providing funds in support of the PIS and M-RED structured licensing programs approximately $130,000 and $20,000, respectively, under the funding agreement, satisfying the long-term debt balance in full. For the year ended December 31, 2020, the Company recognized amortization of $95,000.
NOTE
4 - DERIVATIVE LIABILITIES
Because there is not a fixed conversion price, remaining compliant with the reserve requirement under the notes held by Intelligent Partners as transferee of United Wireless, is outside of the control of the Company. As a result of this, the Company has a potential inability to have sufficient available authorized common shares to settle certain outstanding instruments beginning with the date that the reserve requirement went into effect on January 22, 2016. There is no limit on the number of shares issuable under the note, and absent an increase in the stock price or an increase in authorized shares, there are potentially not enough authorized shares to satisfy the exercise of the Company’s options, thus these options qualify as derivative liabilities under ASC Topic 815. On January 22, 2016, the Company reclassified all non-employee warrants and options as derivative liabilities and revalued them at their fair values at each balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The option expired unexercised on September 30, 2020. Consequently, the derivative liability as of the date the options expired was credited to additional paid in capital.
As
of December 31, 2020, and December 31, 2019, the aggregate fair value of the outstanding derivative liability was approximately
$0 and $595,000, respectively.
The
Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model using the following
key assumptions during the years ended December 31, 2020 and 2019:
Year Ended
December 31,
2020 (1)
Volatility
%
207-426 %
Risk-free interest rate
0.20 %
0.24 %
Expected dividends
-
- %
Expected term
-
0.75-4.70
(1) Inputs as of valuation on expiration date of September 30, 2020
The
following schedule summarizes the valuation of financial instruments that are remeasured on a recurring basis at fair value in
the balance sheets as of December 31, 2020 and 2019:
Fair Value Measurements as of
December 31, 2020
December 31, 2019
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Assets
None
$ -
$ -
$ -
$ -
$ -
$ -
Total assets
-
-
-
-
-
-
Liabilities
Conversion option derivative liability
-
-
-
-
-
595,000
Total liabilities
$ -
$ -
$ -
$ -
$ -
$ 595,000
The
following table sets forth a reconciliation of changes in the fair value of derivative liabilities classified as Level 3 in the
fair value hierarchy:
Significant Unobservable Inputs
(Level 3)
as of
December 31,
Balance - December 31, 2018 $ 540,000
Change in fair value 55,000
Balance - December 31, 2019 595,000
Change in fair value (275,000 )
Resolution of derivative liability (320,000 )
Balance - December 31, 2020 $ -
NOTE
5 - STOCKHOLDERS’ EQUITY
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, 2018 50,000,000 0.03 1.75
Granted - - -
Cancelled - - -
Expired - - -
Exercised - - -
Balance -
December 31, 2019 50,000,000 0.03 0.75
Granted - - -
Cancelled - - -
Expired 50,000,000 - -
Exercised - - -
Balance
- December 31, 2020 - - -
Options
exercisable at end of year - - -
NOTE
6 - INTANGIBLE ASSETS
Intangible assets include patents purchased and are recorded at their acquisition cost. Intangible assets consisted of the following:
Weighted
average
amortization
December 31,
period
(years)
Patents
$ 5,690,000
$ 5,595,000
6.5
Less: net monetization obligations
(509,811 )
(509,811 )
Imputed interest
(713,073 )
(713,073 )
Subtotal
4,467,116
4,372,116
Less: accumulated amortization
(2,266,157 )
(1,617,762 )
Net value of intangible assets
$ 2,200,959
$ 2,754,354
4.45
Intangible
assets are comprised of patents with estimated useful lives. The intangible assets at December 31, 2020 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;
● 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;
● patents (which were fully depreciated 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 depreciated 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.
● patents (which were fully depreciated 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.
The Company amortizes the costs of patents over their estimated useful lives on a straight-line basis. Costs incurred to acquire the patents, including legal costs, are also capitalized and amortized on a straight-line basis over the life of the associated patent. Amortization of patents is included as a selling, general and administrative expense as reflected in the accompanying consolidated statements of operations.
The Company assesses intangible assets for any impairment to the carrying values. As of December 31, 2020, management concluded that there was no impairment to the acquired assets.
Amortization expense for patents comprised $648,395 and $529,486 for the years ended December 31, 2020 and 2019, respectively. Future amortization of patents is as follows:
Year
ended December 31,
$ 549,345
495,742
323,071
306,776
and thereafter 526,025
Total $ 2,200,959
The
Company granted IV 34/37 a security interest in the patents transferred to the Company as security for the payment of the balance
of the purchase price. The security interest of IV 34/37 is senior to the security interest of United Wireless in the proceeds
derived from such patents.
NOTE
7 - NON-CONTROLLING INTEREST
The
following table reconciles equity attributable to the non-controlling interest related to Quest Packaging Solutions Corporation.
December 31,
Balance,
beginning of year $ 239 $ 1,758
Net
income (loss) attributable to non-controlling interest $ (11 ) $ (1,519 )
Balance,
end of year $ 228 $ 239
NOTE
8 - INCOME TAXES
The
Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences
of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.
As of December 31, 2020, the Company has generated approximately $8,355,942 of net operating loss (“NOL”) carry forwards
which will begin to expire in 2024. Internal Revenue Code section 382 (“Section 382”) restricts the use of these net
operating losses in future periods if the Company has a “substantial change in ownership” as defined by Section 382.
The Company has had significant equity transactions in prior periods. Due to this equity activity and the restrictions resulting
under Section 382, a portion of the Company’s NOLs may not be available to offset future taxable income. Therefore, the
Company has fully reserved the deferred tax asset resulting from the net operating loss carry forwards.
Deferred
tax asset consisted primarily of the following:
December 31,
Net
operating loss carry forward $ 2,172,545 $ 1,960,978
Bad
debt reserves 17,160
Intangible
assets 515,104 331,704
Valuation
allowance $ (2,704,809 ) $ (2,292,682 )
Balance,
end of year $ - $ -
Tax
expense consisted primarily of the following:
December 31,
Federal $ - $ -
State 5,108
Foreign 60,255 5,000
Deferred - -
Total $ 65,363 $ 5,234
The
Company’s tax expense does not reflect the statutory rate since the Company’s deferred tax asset is fully offset by
a valuation allowance. The statute of limitations is open for the tax years ending December 31, 2017 and thereafter.
The
Company’s foreign tax expense reflects the tax withheld by the foreign jurisdiction on royalty income received by the Company
and not exempt under the United States tax treaty, if any, with the respective foreign jurisdiction. In 2020, the Company was
subject to foreign source withholding tax of 20.4% in Japan. In 2019, the Company was subject to foreign source withholding tax
of 10% in the People’s Republic of China.
NOTE
9 - RELATED PARTY TRANSACTIONS
The
Company has at various times entered into transactions with related parties, including officers, directors and major shareholders,
wherein these parties have provided services, advanced or loaned money, or both, to the Company needed to support its daily operations.
The Company discloses all related party transactions.
See Notes 3 and 6 in connection with transactions with United Wireless. During periods ended December 31, 2020 and 2019, the Company incurred interest expense on the Company’s 10% notes issued to United Wireless and held by Intelligent Partners, an affiliate of United Wireless and a related party, pursuant to the securities purchase agreement dated October 22, 2015. The interest expense was approximately $351,000 and $467,000 for the year ended December 31, 2020 and 2019, respectively. On each of September 30, 2017 and 2018, accrued interest was added to the principal amount of the note. Subsequent to September 30, 2018, the Company is to pay interest quarterly.
See
Note 10 with respect to the employment agreement with the Company’s president and chief executive officer.
During
2020, 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 these services was approximately $464 and $464 for the year ended December 31, 2020 and 2019,
respectively.
During 2020, 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. In connection with the engagement, the Company recorded patent service costs of approximately $909,000 and $0 for the years ended December 31, 2020 and 2019 respectively The amount recorded in 2020 includes approximately $407,000 in accrued expenses and outstanding as of December 31, 2020. The accrued liability is recorded in “accounts payable and accrued liabilities.” In prior periods, the Company engaged a firm at which the father-in-law of the chief executive was formerly a partner. Because his interest in the prior firm was less than 10%, the prior firm was not considered a related party in prior periods.
NOTE
10 - 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 we meet or exceed 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 our 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, 2020 the percentage was set at 19%. The Company’s president and chief executive officer is the only participant and $57,000 was deposited his SEP IRA account.
Inventor
Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses
In
connection with the investment in certain patents and patent rights, certain of the Company’s operating subsidiaries executed
agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties
based on 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 engage third party funding sources to provide funding for patent licensing and enforcement. The
agreements with the third party funding sources may provide that the funding source receive a portion of any negotiated fees,
settlements or judgments. In certain instances, these third party funding sources are entitled to receive a significant percentage
of any proceeds realized until the third party funder has recouped agreed upon amounts based on formulas set forth in the underlying
funding agreement, which may reduce or delay and proceeds due to the Company.
The
Company’s operating subsidiaries may retain the services of law firms in connection with their licensing and enforcement
activities. These law firms may be retained on a contingent fee basis whereby the law firms are paid on a scaled percentage
of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Depending
on the amount of any recovery, it is possible that all the proceeds from a specific settlement may be paid to the funding source
and legal counsel.
The
economic terms of the inventor agreements, funding agreements and contingent legal fee arrangements associated with the patent
portfolios owned or controlled by the Company’s operating subsidiaries, if any, including royalty rates, proceeds sharing
rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by the operating subsidiaries. Inventor
royalties, payments to noncontrolling interests, payments to third party funding providers and contingent legal fees 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 royalties, payments to third party funding sources and contingent legal fees expenses will continue to fluctuate
and may continue to vary significantly period to period, based primarily on these factors.
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 harm the Company’s operating results
and financial position. 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 judgement
may result in the bankruptcy of the subsidiary and/or the loss of the patents, which are the subsidiaries’ only assets.
NOTE
11 - SUBSEQUENT EVENTS
Summary
of Agreements with QPRC Finance LLC (“QFL”)
On
February 22, 2021, we entered into a series of agreements, all dated February 19, 2021,with QFL, a non-affiliated party, including
a prepaid forward purchase agreement (the “Purchase Agreement”), a security agreement (the “Security Agreement”),
a subsidiary security agreement (the “Subsidiary Security Agreement”), a subsidiary guaranty (the “Subsidiary
Guarantee”), 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 us a financing facility of: (a) up to $25,000,000 for the acquisition of mutually agreed patent rights that we intend to monetize; (b) up to $2,000,000 for operating expenses; and (iii) $1,750,000 to fund the cash payment portion of the restructure of our obligations to Intelligent Partners. In return we transferred to QFL a right to receive a portion of net proceeds generated from the monetization of those patents. The terms of the Purchase Agreement are described under “Purchase Agreement.”
(ii) We used $1,750,000 of proceeds from the QFL financing as the cash payment portion of the restructure of our obligations to Intelligent Partners pursuant to a restructure agreement (the “Restructure Agreement”) between the Company and Intelligent Partners executed contemporaneously with the closing of the Investment Documents. The payment was made directly from QFL to Intelligent Partners. The terms of the Restructure Agreement are described under “Restructure Agreement.”
(iii) Pursuant to the Security Agreement, our 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).
(iv) Pursuant to the Subsidiary Guaranty, eight of our subsidiaries - Quest Licensing Corporation (“QLC”), Quest NetTech Corporation (“NetTech”), Mariner IC Inc. (“Mariner”), Semcon IP Inc. (“Semcon”), IC Kinetics Inc. (“IC”), CXT Systems Inc. (“CXT”), M-Red Inc. (“MRED”), and Audio Messaging Inc.(“AMI”), collectively, the “Subsidiary Guarantors”) guaranteed our obligations to QFL under the Purchase Agreement.
(v) Pursuant to the Subsidiary Security Agreement, the Subsidiary Guarantors grant QFL a security interest in the proceeds from the future monetization of their respective patent portfolios.
(vi) Pursuant to the Warrant Issue Agreement, we granted QFL ten-year warrants to purchase a total of up to 96,246,246 shares of our common stock, with an exercise price of $0.0054 per share which may be exercised from February 19, 2021 through February 18, 2031on a cash or cashless basis. Exercisability of the warrant is limited if, upon exercise, the holder would beneficially own more than 4.99% (the “Maximum Percentage”) of our common stock, except that by written notice to us, 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 us. 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). 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.
(vii) We agreed to take all commercially reasonable steps necessary to regain compliance with the OTCQB eligibility standards as soon as practicable, but in no event later than 12 months from the closing date.
(viii) We granted QFL certain registration rights with respect to the 96,246,246 shares of common stock issuable upon exercise of the warrant.
(ix) Commencing six months from the closing date, if the shares owned by QFL 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 QFL.
(x) 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”), we 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.
Summary
of Agreements with Intelligent Partners
Securities
Purchase Agreement and Related Agreements with United Wireless
We,
together with certain of our subsidiaries, and United Wireless, entered into a Securities Purchase Agreement dated October 22,
2015 (the “SPA”) and related Transaction Documents, as defined therein, pursuant to which the Company sold 50,000,000
shares (the “Shares”) of our common stock, par value $0.00003 per share (the “Common Stock”) at $0.05
per share, or an aggregate of $250,000; we issued our 10% secured convertible promissory notes due September 30, 2020 to United,
and granted United an option (the “2015 Purchase Option”) to purchase up to an additional 50,000,000 shares of Common
Stock in three tranches at the prices as set forth therein. The 2015 Purchase Option expired unexercised on September 30, 2020.
The Shares are currently owned by Andrew C. Fitton (“Fitton”) and Michael Carper (“Carper”) and United
Wireless subsequently transferred its note and assigned all of its remaining rights under the agreements to Intelligent Partners,
which is an affiliate of United Wireless and is owned by Fitton and Carper. Our agreements with United Wireless, also included
various monetization proceeds agreements, which we refer to as MPAs, pursuant to which we granted to Intelligent Partners, as
the assignee of United Wireless, rights to the monetization proceeds from revenue generated from certain of our intellectual property,
a security agreement and a registration rights agreement.
The notes became due by their terms on September 30, 2020, and we did not make any payment on account of principal of and interest on the notes. Subsequent to September 30, 2020, we engaged in negotiations with Intelligent Partners in parallel with our negotiations with QFL, with a view to restructuring our obligations under the United Wireless agreements, including the notes, so that we 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 our agreements with QFL. As part of the restructure of our agreements with Intelligent Partners, we amended the existing MPAs and granted Intelligent Partners certain rights in the monetization proceeds from any new intellectual property we acquire, as describe below. Under these MPAs, Intelligent Partners participates in the monetization proceeds we receive 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 Fitton and 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, we 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: a Restructure Agreement (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, we paid Intelligent Partners $1,750,000 at closing, which we received from QFL and which QFL paid directly to Intelligent Partners, and recognized a further non-interest bearing total monetization proceeds obligation (the “TMPO”) of $2,805,000, 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. Further details regarding the TMPO are provided under “TMPO”;
(ii) Pursuant to the Stock Purchase Agreement, we issued to Fitton and Carper, as holders of the Transferred Note, a total of 46,296,296 shares of our restricted common stock at a purchase price of $0.0054 per share, which purchase price was paid by the conversion and in full satisfaction of the Transferred Note (the “Conversion Shares”).
(iii) Pursuant to the Option Grant, we granted Intelligent Partners an option to purchase a total of 50,000,000 shares of common stock, with an exercise price of $0.0054 per share which vests immediately and may be exercised through September 30, 2025.
(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 can be generated from the intellectual property covered by the agreement.
(v) Pursuant to the MPA-NA, until the TMPO has been paid in full, IPLLC 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, IPLLC’s 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, IPLLC’s 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 IPLLC’s interest in new asset proceeds shall terminate.
(vi) Pursuant to the Subsidiary Security Agreement, our obligations under our 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.
(vii) 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.
(viii) We granted Intelligent Partners, Andrew Fitton and Michael Carper certain registration rights with respect to (i) the 50,000,000 Shares currently owned by Fitton and Carper; (ii) the 46,296,296 Conversion Shares being issued to Fitton and Carper, and (iii) the 50,000,000 shares of common stock issuable upon exercise of the Restructure Option;
(ix) Commencing six months from the closing date, if the shares owned by 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.
(x) Pursuant to the Board Observation Rights Agreement, until the Total Monetization Proceeds Obligation has been satisfied (the “Observation Period”), we 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 million dollars to another provider of financing following
a final determination by arbitration or other judicial proceeding that such obligation is due and owing.
Consulting
Agreements
On
February 22, 2021, the Company entered into advisory service agreement with three consultants - William Gates, Crystal Nicolson
and Jeff Toler 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 Mr. Gates and Ms. Nicolson, the compensation payable to each of them consists of a restricted stock grant
of 10,000,000 shares of Common Stock which immediately vests in full and a ten-year option to purchase a total of 30,000,000 shares
of Common Stock, which become exercisable cumulatively as follows:
a. 10,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement of trading of the Common Stock on the
OTCQB.
b. 10,000,000
shares at an exercise price of $0.03 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 stockholders’ equity of at least $5,000,000, and
c. 10,000,000
shares at an exercise price of $0.05/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.
Pursuant
to the agreement with Mr. Toler, the compensation payable to him consists of a restricted stock grant of 10,000,000 shares of
Common Stock which immediately vests in full and a ten-year option to purchase 30,000,000 shares of Common Stock, which becomes
exercisable cumulatively as follows:
a. 10,000,000
shares at an exercise price of $0.01 per share upon the first anniversary of the agreement.
b. 10,000,000
shares at an exercise price of $0.03 per share upon the second anniversary of the agreement; and
c. 10,000,000
shares at an exercise price of $0.05 per share upon the third anniversary of the agreement.
Compensatory Arrangements of Certain Officers
(i) amended the 2017 Equity Incentive Plan (the “Plan”) increasing the shares the Company can issue under the plan to 500,000,000 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, as described in Items 1.01 and 5.02, to be effective upon the closing of the agreements with QFL.
(ii) Granted restricted stock grants for services rendered and vesting in full upon grant, to:
a. Jon C. Scahill - 49,000,000 shares
b. Timothy J. Scahill - 10,000,000 shares
c. Dr. William R. Carroll - 10,000,000 shares
(iii) Granted Jon Scahill a ten-year option (the “Option”) to purchase 60,000,000 shares of Common Stock which become exercisable cumulatively as follows:
a. 20,000,000 shares at an exercise price of $0.01 per share becoming exercisable upon the commencement of trading of the Common Stock on the OTCQB.
b. 20,000,000 shares at an exercise price of $0.03 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 stockholders’ equity of at least $5,000,000, and
c. 20,000,000 shares at an exercise price of $0.05/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
(iv) Appointed Ryan T. Logue to the board of directors and granted Mr. Logue a restricted stock grant of 5,000,000 shares of common stock which vests upon his acceptance of his appointment as a director.
Patent Portfolio Acquisition
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 the Company shall make a second installment payment or payments in the aggregate amount of $93,900, which shall be due and payable to PKT from time to time as gross proceeds are realized, paid to PKT with reimbursement to third parties of costs incurred in realizing gross proceeds. Thereafter, PKT is entitled to a percentage of gross proceeds realized, if any. The Company requested and received a capital advance in the amount of the $350,000 initial installment payment from the facility with QFL.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
ITEM
2. PROPERTIES
We
do not own or lease any real property.

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ITEM 3. LEGAL PROCEEDINGS
ITEM
3. LEGAL PROCEEDINGS
None

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM
4. MINE SAFETY DISCLOSURES.
Not
Applicable
PART
II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Our
common stock trades on the OTC Pink market under the symbol QPRC. Any over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Stockholders
of Record
As of April 13, 2021, we had 426 record holders of our common stock.
Transfer
Agent
Continental
Stock Transfer & Trust Company, One State Street, 30th floor, New York, New York 10004-1561 is the transfer agent for our
common stock.
Dividends
We
have not paid any cash dividends to date and do not anticipate or contemplate paying dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for the development of our business.
Securities
Authorized for Issuance under Equity Compensation Agreements
The
following table gives information concerning common stock that may be issued upon the exercise of options granted to certain officers,
directors and consultants under their respective individual compensation agreements with us as of December 31, 2020.
Equity Compensation Agreements Information
Plan category Number
of securities to be issued upon exercise of outstanding options, warrants and rights
(#) Weighted-
average exercise price of outstanding options, warrants and rights
($) Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in
column (a)
(#)
As of December 31, 2020
Equity compensation plans approved by security holders - $ - -
Equity compensation plans not approved by security holders (1) - $ - 80,000,000
Total - $ - 80,000,000
A
summary of the status of our equity grants and changes is set forth below:
(1) On November
10, 2017, the board of directors adopted the 2017 Equity Incentive Plan pursuant to which we can issue up to 150,000,000 shares
of common stock pursuant to non-qualified stock options, restricted stock grants and other equity-based incentives. At December
31, 2020, 80,000,000 shares are available under the plan.
No
warrants or options were granted or exercised in 2020.
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 500,000,000 shares of common stock pursuant to non-qualified stock options, restricted
stock grants and other equity-based incentives, and the amendment to the Plan became effective upon the closing of the agreements
with QFL, which was February 22, 2021. In connection with the increase in the shares of common stock issuable pursuant to the
plan, the board;
● granted
restricted stock grants for 10,000,000 share, which vested immediately, to each of three
consultants pursuant to agreements with the consultants;
● granted
restricted stock grants for a total of 69,000,000 shares to our directors, Jon C. Scahill
(49,000,000 shares), Timothy J. Scahill (10,000,000 shares) and Dr. William R. Carroll
(10,000,000 shares) as compensation for services rendered;
● granted
a restricted stock grant to Ryan T. Logue for 5,000,000 shares upon his acceptance of
his appointment as a director;
● granted
ten-year non-qualified stock options to purchase 30,000,000 shares to each of three consultants
pursuant to agreements with the consultants, the options to vest as provided in their
agreements;
● granted
a ten-year non-qualified stock option to purchase 60,000,000 shares to Jon C. Scahill,
which vest in installments as described under Item 11. Executive Compensation.
Recent
sales of unregistered securities.
We
did not sell any unregistered securities during since the beginning of the year ended December 31, 2020 other than issuances that
were reported in our SEC filings.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM
6. SELECTED FINANCIAL DATA
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements
that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results
could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk
Factors” and elsewhere in this report.
Overview
Our
principal operations include the development, acquisition, licensing and enforcement of intellectual property rights that are
either owned or controlled by us or one of our wholly owned subsidiaries. We currently own, control or manage ten intellectual
property portfolios, which principally consist of patent rights. As part of our intellectual property asset management activities
and in the ordinary course of our business, it has been necessary for either us or the intellectual property owner who we represent
to initiate, and it is likely to continue to be necessary to initiate, patent infringement lawsuits and engage in patent infringement
litigation.
We
generate revenue from two sources:
● Patent licensing
fees relating to our intellectual property portfolio, which includes fees from the licensing of our intellectual property,
primarily from litigation relating to enforcement of our intellectual property rights.
● Licensed packaging
sales, which relate to the sale of licensed products, although we did not generate any revenue from licensed packaging sales
in the year ended December 31, 2020.
We
previously received management fees for managing litigation related to our intellectual property rights. We do not currently receive
these fees, we do not have any agreements that provide for such payments and we may not generate revenue from such fees in the
future.
To
a significantly lesser extent, we generate revenue from sale of packaging materials based on our TurtlePakTM technology.
We did not generate any revenue from our TurtlePakTM in the year ended December 31, 2020. Our gross profit from sales
reflects the cost of contract manufacturing and labor. We did not generate any revenue from the TurtlePakTM Portfolio
other than from the sale of products using our technology.
Because
of the nature of our business transactions to date, we recognize revenues from licensing upon execution of a license agreement
following settlement of litigation and not over the life of the patent. Thus, we would recognize revenue when we enter into the
agreement pursuant to which we are to receive the license fee or settlement payment. Although we intend to seek to develop portfolios
of intellectual property rights that provide us for a continuing stream of revenue, to date we have not been successful in doing
so, and we cannot give you any assurance that we will be able to generate any significant revenue from licenses that provide a
continuing stream of revenue. Thus, to the extent that we continue to generate cash from single payment licenses, our revenues
can, and are likely to, vary significantly from quarter to quarter and year to year. Our gross profit from license fees reflects
any royalties which we pay in connection with our license.
Our
agreements with our funding sources have typically provided that the funding source pay the litigation costs and receive a percentage
of the recovery, thus reducing our recovery in connection with any settlement of the litigation. To the extent that our counsel
represents us on a contingent fee basis, our recovery would also be reduced by the percentage of the settlement payable to counsel.
From September 2015 until December 2020, under our agreements with Intelligent Partners, as the assignee of United Wireless, and
under the terms of our agreements to purchase certain intellectual property portfolios, a portion of our recovery may be payable
to Intelligent Partners or the seller of the intellectual property rights. All of these payments, which are reflected as cost
of revenues, significantly reduce the net payment to us.
On
October 22, 2015, we, together with certain of our subsidiaries, and United Wireless, entered into a securities purchase agreement
and related agreements, pursuant to which, among other actions, we issued our 10% secured convertible promissory notes due September
30, 2020 to United Wireless. The rights of United Wireless under the securities purchase agreement and the related notes were
assigned to Intelligent Partners. The proceeds of the notes were used to purchase certain of our intellectual portfolios. At September
30, 2020, promissory notes in the aggregate principal amount of $4,672,810 were outstanding. The notes became due by their terms
on September 30, 2020, and we did not have the resources to make, and we did not make, payments due on September 30, 2020. As
a result of the possibility that Intelligent Partners could declare a default under the securities purchase agreement and the
note, which would likely to result in our seeking protection under the Bankruptcy Act, we were not able to obtain any litigation
financing and no litigation counsel would represent us on a contingency fee basis. Accordingly, we did not generate any revenue
during the fourth quarter of 2020, and we devoted our efforts to negotiating a funding agreement with QFL and a restructure of
our agreement with Intelligent Partners, which was required by QFL as a condition to entering into a funding agreement with us.
Agreements
for QFL and Intelligent Partners
On
February 22, 2020, we entered into a funding agreement with QFL and a restructure agreement with Intelligent Partners.
Pursuant
to the Purchase Agreement with QFL, QFL agreed to make available to us a financing facility of: (a) up to $25,000,000 for the
acquisition of mutually agreed patent rights that we intend to monetize; (b) up to $2,000,000 for operating expenses; and (iii)
$1,750,000 to fund the cash payment portion of the restructure of our obligations to Intelligent Partners. In return we transferred
to QFL a right to receive a portion of net proceeds generated from the monetization of those patents. We used $1,750,000 of proceeds
from the QFL financing as the cash payment portion of the restructure of our obligations to Intelligent Partners. Our obligations
to QFL are secured by the proceeds from the patents acquired with their funding, the patents and all general intangibles now or
hereafter arising from or related to the foregoing and the proceeds and products of the foregoing. We also granted QFL a ten-year
warrant to purchase a total of up to 96,246,246 shares of our common stock, with an exercise price of $0.0054 per share which
may be exercised from February 19, 2021 through February 18, 2031on a cash or cashless basis, subject to certain limitations on
exercisability. 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 our capital stock (determined on a fully diluted basis). 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. We also agreed to take all commercially reasonable steps
necessary to regain compliance with the OTCQB eligibility standards as soon as practicable, but in no event later than 12 months
from the closing date, and granted QFL registration rights with respect to the common stock issuable upon exercise of the warrants.
We also granted QFL certain board observation rights. Pursuant to the Purchase Agreement, the all of the net proceeds from the
monetization of the intellectual property acquired with funds from QFL are paid directly to QFL. After QFL has received a negotiated
rate of return, we and QFL share net proceeds equally until QFL achieves its investment return, as defined in the agreement. Thereafter,
we retain 100% of all net proceeds. Except in an Event of Default, as defined therein, all payments by us to QFL pursuant to the
Purchase Agreement are non-recourse and shall be paid only if and after net proceeds from monetization of the patent rights owned
or acquire by us are received, or to be received.
Contemporaneously
with the execution of the agreement with QFL, we entered into a restructure agreement with Intelligent Partners to eliminate
any obligations we had with respect to the outstanding notes and the securities purchase agreement. As part of the restructure
of our agreements with Intelligent Partners, we amended the existing MPAs and granted Intelligent Partners certain rights in the
monetization proceeds from any new intellectual property we acquire. Under these MPAs, Intelligent Partners receives a 60% interest
in the proceeds from our intellectual property owned by the eight Subsidiary Guarantors. Intelligent Partners also participates
in the monetization proceeds from new intellectual property that we acquire until the total payments under all the monetization
participation agreements equal $2,805,000, as follows: for net proceeds between $0 and $1,000,000, Intelligent Partners receives
10% of the net proceeds realized from new patents, except that if, in any calendar quarter, net proceeds realized by us 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.
The payments with respect to the new patents terminate once total payments to Intelligent Partners under all monetization participation
agreements reach $2,805,000. The payments to Intellectual Partners with respect new patents are payable from the proceeds which
are allocated to us under the QFL agreements, which start after QFL has received a negotiated rate of return.
Inventor
Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses
In
connection with the investment in certain patents and patent rights, certain of our operating subsidiaries executed agreements
which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on
future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective
patents or patent portfolios.
Our
operating subsidiaries may engage third party funding sources to provide funding for patent licensing and enforcement. The agreements
with the third party funding sources may provide that the funding source receives a portion of any negotiated fees, settlements
or judgments. In certain instances, these third party funding sources are entitled to receive a significant percentage of any
proceeds realized until the third party funder has recouped agreed upon amounts based on formulas set forth in the underlying
funding agreement, which may reduce or delay and proceeds due to us.
Our
operating subsidiaries may retain the services of law firms in connection with their licensing and enforcement activities. These
law firms may be retained on a contingent fee basis whereby the law firms are paid by the funding source on a scaled percentage
of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Depending on the amount of any recovery, it is possible that all the proceeds from a specific settlement may be paid to the funding
source and legal counsel.
The
economic terms of the inventor agreements, funding agreements and contingent legal fee arrangements associated with the patent
portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, proceeds sharing rates, contingent
fee rates and other terms, vary across the patent portfolios owned or controlled by the operating subsidiaries. Inventor royalties,
payments to non-controlling interests, payments to third party funding providers and contingent legal fees 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 royalties, payments to third party funding sources and contingent legal fees expenses will continue to fluctuate and
may continue to vary significantly period to period, based primarily on these factors.
In
December 2018, we entered into a funding agreement whereby a third party agreed to provide funds to us to enable us to support
our structured licensing programs for the CMOS and M-RED portfolios. Under the funding agreement, the third party receives an
interest in the proceeds from the programs, and we have no other obligation to the third party. As of December 31, 2020, the third
party funding source advanced $150,000 for costs and expenses, and has no further obligation to provide additional funds. Under
the terms of the funding agreement, the third party funder is entitled to a priority return of funds advanced from net proceeds
recovered.
In
connection with any litigation seeking to enforce our intellectual property rights, 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 us 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 us or its operating subsidiaries, could materially harm
our operating results and financial position. 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 judgement may result in the bankruptcy of the subsidiary and/or the loss of the patents, which are the subsidiaries’
only assets.
At
present, we are pursuing litigation with respect to the CXT portfolio and MRED portfolio. The actions are described in Item 1.
Business. We cannot estimate when or whether we will receive any revenue from these litigations, or whether, in the event we do
not prevail, the defendant will not obtain an award of legal fees against our plaintiff subsidiary which could result in the bankruptcy
of the subsidiary and a default under our agreements with QFL and Intelligent Partners.
Restricted
Stock Grants and Options
In
February 2021, we issued restricted stock grants to consultants (30,000,000 shares) and to our officers and directors (74,000,000
shares) all of which vested immediately. The value of the shares will be reflected as non-cash compensation in the first quarter
of 2021. Also in February 2021, we granted restricted stock options to consultants (90,000,000 shares) and to our chief executive
officer (60,000,000 shares). With respect to two of the consultants and the chief executive officer the options become cumulatively
exercisable as follows: 1/3rd at an exercise price of $0.01 per share, becoming exercisable upon the commencement of
trading of the Common Stock on the OTCQB; 1/3rd at an exercise price of $0.03 per share becoming exercisable on the
first day on which we file with the SEC a Form 10-K or Form 10-Q with stockholders’ equity of at least $5,000,000; and 1/3rd
at an exercise price of $0.05 per share on the date on which the Common Stock is listed for trading on the Nasdaq Stock
Market or the New York Stock Exchange. We will incur non-cash compensation with respect to the value of the options, based of
Black-Scholes valuation, as the options become exercisable.
Results
of Operations
Years
Ended December 31, 2020 and 2019
The
following table shows the revenue and cost of revenue from our two categories of revenue for the years ended December 31, 2020
and 2019:
Year ended December 31,
Revenues:
Patent licensing fees $ 5,488,088 100.9 % $ 4,117,895 99.4 %
Licensed packaging sales - 0.0 % 25,274 0.6 %
Total 5,488,088 100.0 % 4,143,169 100.0 %
Cost of revenues:
Cost of sales - 0.0 % 4,520 0.1 %
Litigation and licensing expenses 4,692,969 100.0 % 3,383,948 99.8 %
Management support services - 0.0 % 2,093 0.1 %
Total 4,692,969 100.0 % 3,390,561 100.0 %
Revenues
for the year ended December 31, 2020 were $5,488,088, as compared with $4,143,169 in 2019, an increase of $1,344,919, or approximately
32.5%. The increase in 2020 principally reflects an increase in patent licensing fees of $1,370,193, or 33.3%. Our licensing fees
reflect the settlement of litigation for infringement of our patent rights. These fees are one-time fees, with the result that
there is no continuity of revenues from period to period, and any revenue we generate in future periods will be solely dependent
upon the results of pending and future litigation. We cannot assure you that we will generate any revenue from patent licensing
fees in the future. The patent licensing fees for 2020 resulted from licensing and settlements of Power Management/Bus Control
Portfolio, the CXT Portfolio, the MRED Portfolio and the Financial Data Portfolio. The patent licensing fees of $4,117,895 in
2019 resulted from the licensing and settlements of Power Management/Bus Control Portfolio, the CXT Portfolio, the Anchor Structure
Portfolio and the CMOS Portfolio litigations. Our revenue, at least in the near future if not longer, may be affected by factors
relating to the COVID-19 pandemic. See “Item 1. Business - Effects of the COVID-19 Pandemic on our Business.”
Cost
of revenues was approximately $4,693,000 for 2020 as compared with approximately $3,391,000 for 2019. Our cost of revenue includes
expenses which we incurred in connection with our pending litigations and fees we pay to litigation funding sources, legal counsel,
prior owners and pursuant to monetization proceeds agreements in connection with license fees. Cost of revenue for 2020 includes
approximately $4,693,000 of litigation and licensing fees paid to litigation funding sources and legal counsel in connection with
the Power Management/Bus Control, the CXT Portfolio, the MRED Portfolio and the Financial Data Portfolio licensing programs. Cost
of revenues for 2019 includes approximately $3,384,000 of litigation and licensing fees paid to litigation funding sources and
legal counsel in connection with the Power Management/Bus Control, the CXT Portfolio, the Anchor Structure Portfolio and the CMOS
Portfolio licenses, approximately $2,000 for management support services in connection with management of the Mobile Data Portfolio,
and approximately $5,000 relating to TurtlePakTM. We did not have any sales or cost of sales relating to TurtlePakTM
for 2020.
Selling,
general, and administrative expenses for 2020 increased by approximately $292,000, or approximately 24%, from approximately $1,222,000
in 2019 to approximately $1,514,000 in 2020. Our principal selling, general and administrative expense for 2020 and 2019 was amortization
expense of approximately $648,000 and approximately $529,000 for 2020 and 2019, respectively, related to amortization of the patent
assets acquired from Intellectual Ventures in October 2015, IV 34/37 in July 2017, and IV 62/71 in January 2018 and IV 113/108.
Selling, general and administrative expenses also reflect executive compensation, which was approximately $300,000 for 2020 and
2019.
Other
expense consists primarily of interest expense of approximately $804,000 in 2020 as compared with approximately $808,000 in 2019.
In 2020, we recognized a $275,000 gain on derivative liability as compared with $55,000 loss on derivative liability in 2019.
Other income in 2020 reflects miscellaneous income of $1,000. Other expense in 2019 reflect a $28,000 gain on forgiveness of debt.
As a result of the termination of our obligations under the United Wireless notes, commencing in 2021, we no longer have a derivative
liability. See Note 4 of Notes to Consolidated Financial Statements.
We had an income tax expense of approximately $65,000 for 2020 as compared with approximately $5,000 in 2019. The income tax expense results primarily from foreign taxes paid with respect to certain of our settlement agreements.
As
a result of the foregoing we had a net loss of approximately $1,313,000, or $0.00 per share (basic and diluted) for 2020 compared
to net loss of approximately $1,309,000, or $0.00 per share (basic and diluted), for 2019.
Liquidity
and Capital Resources
At December 31, 2020, we had current assets of approximately $1,287,000, current liabilities of approximately $9,497,000. Our current liabilities at December 31, 2020 include approximately $4,673,000 payable to Intelligent Partners, which was due and payable on September 30, 2020 and subsequently restructured, and loans payable of $147,000 and accrued interest of approximately $285,000 due to former directors and minority stockholders. As of December 31, 2020, we have an accumulated deficit of approximately $21,281,000 and a negative working capital of approximately $8,210,000. Other than salary to our chief executive officer, we do not contemplate any other material operating expense in the near future other than normal general and administrative expenses, including expenses relating to our status as a public company filing reports with the SEC. Because our agreements with our litigation funding sources do not require us to make any payments relating to the litigation, we do not incur expenses with respect to litigation covered by the funding sources.
As
a result of our restructure of our agreement with Intelligent Partners, the outstanding notes to Intelligent Partners were cancelled
and replaced with agreements that provide for payments if we receive proceeds from our intellectual property as described above
under “Agreements for QFL and Intelligent Partners.” If the note payable to Intelligent Partners were excluded from
current liabilities, we would have a pro forma working capital deficiency of approximately $3,500,000.
For 2020, we used approximately $246,000 in operations. Our cash flow used in operations for 2020 reflected our loss of approximately $1,300,000, and the amount used in operations increased primarily by a decrease in accounts payable and accrued expenses of approximately $471,000, and the gain on derivative liability of $275,000 offset by a decrease in accounts receivable of approximately $750,000, depreciation and amortization of approximately $648,000, amortization of debt discount of approximately $435,000 and bad debt expense of $66,000.
For
2019, we had cash flow from operations $746,523 in our operations, reflecting our loss of $1,310,295, which was offset principally
by depreciation and amortization of our intellectual property rights of $529,486, amortization of debt discount on the loan from
United Wireless of $349,691, an increase in accounts receivable of $1,850,375, an increase in account payable and accrued liabilities
of $954,806,and decreased by the $55,000 loss on derivative liability, and increased by a gain on forgiveness of debt of $27,628
and accrued but unpaid interest of $8,700.
Cash flow from financing activities for 2020 reflected the proceeds of an SBA loan of approximately $172,000, the payment of the purchase price of patents of approximately $194,000 and proceeds from the sale of future revenues of approximately $95,000 offset by payment made on the sale of future revenues of approximately $20,000. Under the agreement with the litigation funder, the third party lender receives an interest in the proceeds.
Cash
flow from financing activities in 2019 included repayments to the third party in the amount of approximately $130,000, the payment
of the purchase price of patents of approximately $156,000 and the payment of $16,000 of a loan from a third party.
In
2020 and 2019, cash flow from investing activities included $95,000 and $75,000, respectively for the purchase of patents from
third parties.
In
2020 we did not have non-cash investing and financing activities. In 2019, non-cash investing and financing activities consisted
of an account payable of $1,238,219 representing the $1,500,000 payment due to Intellectual Ventures, net of $75,000 advanced
at closing and imputed interest of $336,781.
We
cannot assure you that we will be successful in generating future revenues, in obtaining additional debt or equity financing or
that such additional debt or equity financing will be available on terms acceptable to us, if at all, or that we will be able
to obtain any third party funding in connection with any of our intellectual property portfolios.
Historically,
our only source of financing was loans from officers and directors. In October 2015, we entered into an agreement with United
Wireless, pursuant to which provided us with funds to purchase intellectual property.
We
cannot predict the success of any pending or future litigation seeking to enforce our intellectual property rights.
In
February 2021, we signed a funding agreement with QFL, as described in “Overview” and under “Recent Developments”
in Item 1. Business.
As
noted below, there is a substantial doubt about our ability to continue as a going concern.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is based upon our financial statements that have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities.
On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability
of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that
we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Principles
of Consolidation
Our
consolidated financial statements are prepared in accordance with US GAAP and present the financial statements of us and our wholly-owned
subsidiary. In the preparation of our consolidated financial statements, intercompany transactions and balances are eliminated.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition
We
adopted ASC Topic 606, Revenue from Contracts with Customers as of January 1, 2018 using the modified retrospective transition
method. The core principle of the revenue recognition standard is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify
the contract with the customer
● Step 2: Identify
the performance obligations in the contract
● Step 3: Determine
the transaction price
● Step 4: Allocate
the transaction price to the performance obligations in the contract
● Step 5: Recognize
revenue when the company satisfies a performance obligation
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account
in ASC 606. In order to identify the performance obligations in a contract with a customer, a company must assess the promised
goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets
ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following
criteria are met:
●
The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer
(i.e., the good or service is capable of being distinct).
● The entity’s
promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e.,
the promise to transfer the good or service is distinct within the context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
Variable consideration
● Constraining estimates
of variable consideration
● The existence of
a significant financing component in the contract
● Noncash consideration
● Consideration payable
to a customer
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
In
general, we are required to make certain judgments and estimates in connection with the accounting for revenue contracts with
customers. Such areas may include identifying performance obligations in the contract, estimating the timing of satisfaction of
performance obligations, determining whether a promise of consideration, whether a license to intellectual property or an entitlement
to payment of a percentage of net proceeds, is distinct from other promised goods or services, evaluating whether consideration
transfers to a customer at a point in time or over time, allocating the transaction price to separate performance obligations,
determining whether contracts contain a significant financing component, and estimating revenues recognized at a point in time
for licensed sales.
Patent
Licensing Fees
Revenue
is recognized upon transfer of control of promised bundled intellectual property rights and other contractual performance obligations
to licensees in an amount that reflects the consideration we expect to receive in exchange for those intellectual property rights.
Revenue contracts that provide promises to grant “the right” to use intellectual property rights as they exist at
the point in time at which the intellectual property rights are granted, are accounted for as performance obligations satisfied
at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and
all other revenue recognition criteria have been met.
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. 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 30-90 days of execution
of the contract. Contractual payments made by licensees are generally non-refundable. We do 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.
Licensed
Sales
The
balance of our revenue in 2019, from licensed sales, was not significant but included sales-based revenue contracts pursuant to
purchase orders. There was no sales-based revenue in 2020. There is only one distinct performance obligation in each purchase
order, transfer of the promised good to the customer, and the customer can benefit from the good together with other resources
readily available to the customer. For licensed sales, the transaction price is allocated to the performance obligation on a relative
standalone selling price basis per the purchase order, and the Company includes in the transaction price some or all of an amount
of estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates
are generally based on historical levels of activity, if available. Notwithstanding, revenue is recognized for a licensed
sale when the performance obligation has been satisfied - transfer of the good to the customer. The purchase order
generally provides for payment of contractual amounts within 30 days of transfer of the goods to the customer, therefore there
is no significant financing component or consideration payable to the customer in these transactions.
Cost
of Revenues
Cost
of revenues include the costs and expenses incurred in connection with our patent licensing and enforcement activities, including
inventor royalties paid to original patent owners, contingent litigation funding fees, contingent legal fees paid to external
patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research,
consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. These costs are included
under the caption “Cost of revenues” in the accompanying consolidated statements of operations. No such fees are recognized
as a cost of revenue to the extent that we have no obligation with respect to fees prior to a settlement or license.
Inventor
Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses.
Inventor
royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. Contingent
litigation funding and legal fees are expensed in the consolidated statements of operations in the period that the related revenues
are recognized. In instances where there are no recoveries from potential infringers, no contingent litigation funding fees are
due.
Accounts
Receivable
Accounts receivable, which generally relate to licensed sales, are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. We recorded an allowance for doubtful accounts of $66,000 and $0 as of December 31, 2020 and December 31, 2019, respectively.
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 (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.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the
assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value
exceeds the fair value. No impairment was recorded for the either the year ended December 31, 2020 or of the year ended December
31, 2019.
Derivative
Financial Instruments
Management
evaluates the embedded conversion feature within its convertible debt instruments under ASC 815-15 and ASC 815-40 to determine
if the conversion feature meets the definition of a liability and, if so, whether to bifurcate the conversion feature and account
for it as a separate derivative liability. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported in the statements of operations. For stock-based derivative financial instruments, management uses a Black Scholes model,
in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12
months after the balance sheet date.
Fair
Value of Financial Instruments
We
adopted Financial Accounting Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures”,
for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value
to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring
fair value and expands disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Observable inputs
such as quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based
inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs
for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
In
addition, FASB ASC 825-10-25 “Fair Value Option” was effective for January 1, 2008. ASC 825-10-25 expands opportunities
to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value.
Income
Tax
We record revenues on a gross basis, before deduction for income taxes. We incurred income tax expenses of approximately $65,000 and $5,000 for the years ended December 31, 2020 and 2019, respectively.
Stock-based
Compensation
We
account for 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 services, and, since January1, 2019,
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,
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 is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), to provide a new comprehensive model for lease accounting
under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including
subleases) and eliminate the concept of operating leases and off-balance-sheet leases. Recognition, measurement and presentation
of expenses will depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting
in-line with revenue recognition guidance.
We
adopted Topic 842 as of January 1, 2019 using the modified retrospective transition method with no impact on the consolidated
financial position or results of operations.
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
We
have an accumulated deficit of approximately $21.3 million and negative working capital of approximately $8.2 million as of December
31, 2020. Because of our continuing losses, our working capital deficiency, the uncertainty of future revenue, the possible effect
of a judgement against one or more of our subsidiaries for legal fees; our low stock price and the absence of a trading market
in our common stock, our ability to raise funds in equity market or from lenders is severely impaired. These conditions raise
substantial doubt as to our ability to continue as a going concern. Although we may seek to raise funds and to obtain third party
funding for litigation to enforce its intellectual property rights, the availability of such funds in uncertain, and our use of
the funds from funding sources relating to the monetization of our intellectual property may not be available for working capital
purposes. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-balance
Sheet Arrangements
We
have no off-balance sheet arrangements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements start on Page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM
9A. CONTROLS AND PROCEDURES
Management’s
Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
We
conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”),
as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as of December 31, 2020, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation
was done under the supervision and with the participation of management, including our chief executive officer and chief financial
officer, who is the same person and our sole full-time employee. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer
concluded that, due to our limited internal audit function and our very limited staff, our disclosure controls were not effective
as of December 31, 2020, such that the information required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) accumulated and communicated to the chief executive officer/chief financial officer, as appropriate to allow timely
decisions regarding disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness
of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
404”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In
making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. During our assessment of the effectiveness of internal control over financial
reporting as of December 31, 2020, management identified material weaknesses related to (i) our internal audit functions (ii)
inadequate levels of review of the financial statements and (iii) a lack of segregation of duties within accounting functions.
Therefore, our internal controls over financial reporting were not effective as of December 31, 2020.
Management
has determined that our internal controls contain material weaknesses due to the absence of segregation of duties, as well as
lack of qualified accounting personnel and excessive reliance on third party consultants for accounting, financial reporting and
related activities. The lack of any separation of duties, with the same person, who is our only full time employee, serving as
both chief executive officer and chief financial officer, and who does not have an accounting background, makes it unlikely that
we will be able to implement effective internal controls over financial reporting in the near future.
Due
to our size and nature, segregation of all conflicting duties is not possible. However, to the extent possible, we plan to implement
procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed
by separate individuals if and when we have sufficient income to enable us to hire such individuals, and we cannot give any assurance
that we will be able to hire such personnel. Since we became engaged in the intellectual property management business in 2008
we have not had the financial resources to develop or implement systems that would provide us with the necessary information on
a timely basis so as to be able to implement financial controls. Our financial condition makes it difficult for us to implement
a system of internal controls over financial reporting.
Until
we generate significantly greater revenues and employ accounting personnel, it is doubtful that we will be able implement any
system which provides us with any degree of internal controls over financial reporting. Due to the nature of this material weakness
in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material
to our annual or interim financial statements could not be prevented or detected.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency,
or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of our financial reporting.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes
in Internal Control over Financial Reporting.
During
the period ended December 31, 2020, there was no change in our internal control over financial reporting (as such term is defined
in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM
9B. OTHER INFORMATION
None.
PART
III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table presents information with respect to our officers, directors:
Name
Age
Position(s)
Jon
C. Scahill
Chief executive
officer, president, acting chief financial officer, secretary and director
Timothy
J. Scahill
Chief technology
officer and director
Dr.
William Ryall Carroll
Director
Ryan
T. Logue
Director
Prior
to January 2016, our directors were elected to serve for a term of one year until our next annual meeting of the stockholders
or unless he resigns earlier. On January 22, 2016, following approval by the stockholders, we amended and restated our certificate
of incorporation. Our amended and restated certificate of incorporation provides for a classified board of directors. Our classified
board of directors has three classes of directors - Class I directors, Class II directors and Class III directors. The Class
I director has a term of which expired in 2020, the Class II director has a term which expired in 2018, and the Class III director
has a term which expired in 2019. Directors are elected for a term of three years. Since we did not have an annual meeting of
stockholders in 2018, 2019 and 2020, the Class I, Class II and Class III directors continue in office until the next meeting of
stockholders, at which all directors will be elected.
Jon
C. Scahill, a Class I director, has been president and chief executive officer since January 2014 and a director since 2007. He
was appointed secretary in April 2014. He also served as president and chief operating officer from May 2007 to December 2013.
From December 2006 to May 2007, Mr. Scahill was founder and managing director of the Urban-Rigney Group, LLC, a private consultancy
specializing in new business/new venture development, operations optimization, and strategic analysis. Prior to launching his
consultancy business, Mr. Scahill held numerous positions in sales and marketing, technical management, and product development
in the consumer products/flexible packaging arena. Mr. Scahill holds a B.S. in chemical engineering from the University of Rochester,
an MBA in finance, strategy and operations from Rochester’s Simon Graduate School of Business and a JD from Pace Law School.
Mr. Scahill is admitted to practice in New York, Florida and the District of Columbia, and he is a registered patent attorney
admitted to practice before the United States Patent and Trademark Office.
Timothy
J. Scahill, a Class II director, has a director since October 2014 and our chief technology officer since 2007. Mr. Scahill is
also currently a managing partner of Managed Services Team LLC, an IT services provider. Prior to Managed Services Team, he was
president of Layer 8 Group, Inc. from August 2005 to December 2012, at which time Layer 8 merged with Structured Technologies
Inc. to form Managed Services Team LLC. In his roles he has taken the responsibility for business strategy, acquisition, execution,
as well as financial management. His entrepreneurial acumen and proven record of successful management with sole discretionary
responsibility, demonstrate the scope of his capability and his value to delivering results. He serves on the boards of the Upstate
New York Technology Council, is an investor in Greater Rochester Enterprise, Pariemus Rochester and also serves on the Corporate
Advisory Board for Habitat for Humanity. He is a member of Greater Rochester Enterprise and CEO Roundtable Chair.
Dr.
William Ryall Carroll, a Class III director, has been a director since October 2014. Dr. Carroll has been associate professor
and chairman of the marketing department at St. John’s University College of Business since July 2014. From September 2008
until June 2014, Dr. Carroll was an assistant professor in the marketing department of St. John’s University College of
Business. Dr. Carroll is founder, chief executive officer and owner of Raiserve Inc., a web-based platform for monetizing non-profit
programmatic work in the area of service formed in October 2014. Dr. Carroll’s research focuses on consumer behavior and
behavioral decision theory. Dr. Carroll’s work has been published in top academic journals including the Journal of Advertising,
Marketing Letters, as well in books such as Psycholinguistic Phenomena in Marketing Communications. In addition to his research
Dr. Carroll has taught Marketing at the executive, graduate and undergraduate level across in the United States, Europe and Asia.
Prior to pursuing his academic career, Dr. Carroll held various marketing positions at NOP Worldwide Marketing Research Company
and Ralston Purina Company. Dr. Carroll earned his BA in Economics from the University of Rochester, his MS in Marketing Research
from the University of Texas in Arlington, and his PhD from City University of New York - Baruch College.
Ryan
T. Logue, a Class I director, is an investment advisory representative Lincoln Investment, a position he has held since 2019.
Prior to joining Lincoln Investment, he spent 16 years with Morgan Stanley in the private wealth management department. Mr. Logue
has spent the majority of his career focused on investing in both public and private opportunities department. Mr. Logue graduated
with a BA from Colgate University and an MBA from Columbia University and has previously served on the board of the Columbia Alumni
Association of Fairfield County.
Timothy
J. Scahill and Jon C. Scahill are first cousins.
Director
Independence
Dr.
Carroll and Mr. Logue are “independent” directors based on the definition of independence in the listing standards
of the NYSE.
Code
of Ethics
We
have not yet adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, since we have been focusing our efforts on developing
our business. We expect to adopt a code as we develop our business.
Committees
of the Board of Directors
We
do not have any committees of our board of directors.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers and directors of issuers whose securities
are registered pursuant to the Securities Exchange Act and persons who own more than 10% of a registered class of our equity securities
to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning
their ownership of the our common stock and other equity securities, on Form 3, 4 and 5 respectively. Because our common stock
is not registered pursuant to the Securities Exchange Act, our officers, directors and 10% stockholders are not required to make
such filings.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM
11: EXECUTIVE COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the years ended December 31, 2020 and 2019, earned by or paid to our executive officers.
Name
and Principal
Position Year Salary Bonus
Awards Stock
Awards Options/ Warrant
Awards (1) Non-Equity Plan
Compensation Nonqualified
Deferred Earnings All Other
Compensation Total
($) ($) ($) ($) ($) ($) ($) ($)
Jon Scahill, $ 300,000 - - - - - 57,000 (1) $ 357,000
CEO and President 300,000 - - - - - - 300,000
(1) Represents the payments
made by the Company under the SEP IRA adopted in March 2020
Employment
Agreements
Pursuant to the restated employment agreement, dated November 30, 2014, we agreed to employ Jon C. Scahill 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 annual salary of $252,000, which may be increased, but not decreased, by the board or the compensation committee. In March 2016, the board of directors increased Mr. Scahill’s annual salary to $300,000, effective January 1, 2016. Mr. Scahill is entitled to a bonus if we meet or exceed performance criteria established by the compensation committee. In August 2016, the board of directors approved annual bonus compensation to Mr. Scahill equal to 30% of the amount by which our consolidated income before income taxes exceeds $500,000, but, if we are 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). Mr. Scahill is also eligible to participate in any executive incentive plans which we may adopt. Pursuant to the agreement, we issued to Mr. Scahill warrants to purchase 60,000,000 shares, representing the warrants that had been previously covered in his prior employment agreement but which had never been issued, and we issued to Mr. Scahill a restricted stock grant for 30,000,000 shares which vested on January 15, 2015. In the event that we terminate Mr. Scahill’s employment other than for cause or as a result of his death or disability, we will pay him severance equal to his salary for the balance of the term and, if he received a bonus for the previous year, an amount equal to that bonus, as well as continuation of his insurance benefits. Mr. Scahill also waived accrued compensation of $1,167,705, representing his accrued salary for periods prior to January 1, 2014. The restated employment agreement also includes mutual general releases between Mr. Scahill and us. In March 2020, the Company adopted a SEP IRA plan for its employees. Mr. Scahill is our only employee covered by the plan.
Pension
Benefits
In
March 2020, we adopted a SEP IRA plan for our employees pursuant to which we deposit into a SEP IRA account of each of our 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 presented to and reviewed by the directors of this Corporation. For the year ending
December 31, 2020 the percentage was set at 19%. Mr. Scahill is our only employee covered by the plan.
Equity Incentive Plan
On
November 10, 2017, the board of directors adopted the 2017 Equity Incentive Plan (the “Plan”) pursuant to which 150,000,000
shares of common stock may be issued. In February 2021, the board amended the Plan to increase the number of shares subject to
the plan to 500,000,000. Set forth below is a summary of the plan, as amended, but this summary is qualified in its entirety by
reference to the full text of the plan, a copy of which is included as an exhibit to this annual report.
The
plan provides for the grant of non-qualified options, stock grants and other equity-based incentives to employees, including officers,
directors and consultants.
On
February 19, 2021, the board of directors:
● granted
restricted stock grants for 10,000,000 share, which vested immediately upon grant, to
each of three consultants pursuant to agreements with the consultants;
● granted
restricted stock grants for a total of 69,000,000 shares, which vested immediately upon
grant, to our directors, Jon C. Scahill (49,000,000 shares), Timothy J. Scahill (10,000,000
shares) and Dr. William R. Carroll (10,000,000 shares) as compensation for services rendered;
● granted
a restricted stock grant to Ryan T. Logue for 5,000,000 shares upon his acceptance of
his appointment as a director;
● granted non-qualified ten-year stock options to purchase 30,000,000 shares to each of three consultants pursuant to agreements with the consultants, the options to vest as provided in their agreements.
● granted
a non-qualified ten-year stock option to purchase 60,000,000 shares to Jon C. Scahill,
which vest in installments as described under Item 11. Executive Compensation.
The
options granted to two of the consultants, William Gates and Crystal Nicolson, become exercisable as follows:
● 10,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement
of trading of the Common Stock on the OTCQB.
● 10,000,000
shares at an exercise price of $0.03 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 stockholders’
equity of at least $5,000,000, and
● 10,000,000
shares at an exercise price of $0.05/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
options granted the third consultant, Jeff Toler, become exercisable as follows:
● 10,000,000
shares at an exercise price of $0.01 per share upon the first anniversary of the agreement.
● 10,000,000
shares at an exercise price of $0.03 per share upon the second anniversary of the agreement;
and
● 10,000,000
shares at an exercise price of $0.05 per share upon the third anniversary of the agreement.
The
options granted to Jon C. Scahill become exercisable as follows:
● 20,000,000
shares at an exercise price of $0.01 per share becoming exercisable upon the commencement
of trading of the Common Stock on the OTCQB.
● 20,000,000
shares at an exercise price of $0.03 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 stockholders’
equity of at least $5,000,000, and
● 20,000,000
shares at an exercise price of $0.05/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.
Outstanding
Equity Awards at Fiscal Year-End
There
were no outstanding equity awards granted to and held by the officers as of December 31, 2020.
Directors’
Compensation
We
do not have any agreements or formal plan for compensating our directors for their service in their capacity as directors, although
our board has, and may in the future, award stock grants or options to purchase shares of common stock to our directors.
The
following table provides information concerning the compensation of each member of our board of directors whose compensation is
not included in the Summary Compensation Table for his services as a director for 2020.
Name Fees Earned
or Paid in
Cash Stock
Awards Total
Timothy J. Scahill $ - $ - $ -
Dr. William Ryall Carroll - - -

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as to shares of common stock beneficially owned as of April 13, 2021, by:
● Each director;
● Each current officer
named in the summary compensation table;
● Each person owning
of record or known by us, based on information provided to us by the persons named below, at least 5% of our common stock;
and
● All directors and
officers as a group.
For purposes of the following table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or sole or shared investment power with respect to a security, or any combination thereof, and the right to acquire such power (for example, through the exercise of warrants granted by us) within 60 days of April 13, 2021.
Name and Address (1) of Beneficial Owner
Amount and
Nature of
Beneficial
Ownership
% of Class
Jon C. Scahill
140,000,000
26.2 %
Andrew C. Fitton (2)
300 Bowie St., Apt. 2803
Austin, TX
117,407,407
22.0 %
Intelligent Partners, LLC (3)
300 Bowie St., Apt. 2803
Austin, TX 78703
50,000,000
8.6 %
Michael R. Carper (4)
13218 Tamayo Drive
Austin, TX 78729
78,888,889
14.8 %
Tomas Arce
3463 State Street
Suite 327
Santa Barbara, CA 93105
26,699,627
5.0 %
Dr. William Ryall Carroll
15,484,633
2.9 %
Timothy J. Scahill
15,105,000
2.8 %
Ryan T. Logue
5,000,000
*
All officers and directors as a group (four individuals)
176,087,257
33.0 %
* Less
than 1%.
(1) The address of Jon
C. Scahill, Dr. Carroll, Timothy J. Scahill and Ryan T. Logue is c/o Quest Patent Research Corporation, 411 Theodore Fremd
Ave., Suite 206S, Rye, New York 10580-1411.
(2) Represents (a) 67,407,407
shares owned by Mr. Fitton and (b) 50,000,000 shares issuable upon exercise of an option held by Intelligent Partners.
(3) Represents 50,000,000
shares of common stock issuable upon exercise of options held by Intelligent Partners. Andrew C. Fitton and Michael R. Carper,
as the members of Intelligent Partners, have the right to vote and dispose of the shares owned by Intelligent Partners.
(4) Represents (a) 28,888,889
shares of common stock owned by Mr. Carper and (b) 50,000,000 shares issuable upon exercise of an option held by Intelligent
Partners.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related
Transactions
As
a result of the September 2015 sale to United Wireless of 50,000,000 shares of common stock, representing 13.0% of our common
stock and its right to name a director, United Wireless is a related party as of December 31, 2020. United Wireless had no relationship
with us prior to the closing of the securities purchase agreement and related agreements in October 2015. United Wireless transferred
its shares to its principals, Andrew C. Fitton and Michael R. Carper, it transferred its option, the notes and its remaining rights
under the agreements to Intelligent Partners LLC, of which Mr. Fitton and Mr. Carper are the members.
Reference
is made to the discussion of our agreements with Intelligent Partners, Mr. Fitton and Mr. Carper under “Item 1. Business
- Recent Developments” and “Overview” in Item 5
Managed
Services Team LLC, an entity for which Timothy Scahill, our chief technology officer and a director, is a managing partner, provides
information technology services to us. We are obligated to pay for these services at usual and customary rates. The cost of these
services for 2020 and 2019 was approximately $464 and $464, respectively.
We 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 our intellectual property rights on matters in which the firm is serving as counsel to us. In connection with the engagement, we recorded patent service costs of approximately $909,000 and $0 for the years ended December 31, 2020 and 2019, respectively. The amount recorded in 2020 includes approximately $407,000 in accrued expenses and outstanding as of December 31, 2020. In prior periods, we engaged a firm at which the father-in-law of the chief executive was formerly a partner. Because his interest in the prior firm was less than 10%, the prior firm was not considered a related party in prior periods.
Director
Independence
Dr. Carroll and Mr. Logue are “independent” directors based on the definition of independence in the listing standards of the NYSE.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table sets forth the fees billed by our independent accountants, Malone Bailey, LLP, for each of our last two fiscal
years for the categories of services indicated.
Fiscal Year Ended
December 31
Audit fees
$ 58,360
$ 55,000
Audit - related fees
-
-
Tax fees
-
-
All other fees
-
1,500
Audit
fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements.
All
other fees relate to professional services rendered in connection our registration statement.
Our
policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services
may include audit services, audit-related services, tax services and other services. Under our audit committee’s policy,
pre-approval is generally provided for particular services or categories of services, including planned services, project based
services and routine consultations. In addition, the audit committee may also pre-approve particular services on a case-by-case
basis. Our board approved all services that our independent accountants provided to us in the past two fiscal years.
PART
IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM
15. EXHIBITS
EXHIBIT
Exhibit
No.
Description
3.1
Amended and Restated Articles of Incorporation of the Company.(5)
3.2
Bylaws of the Company. (3)
10.1
Restated Employment Agreement dated as of November 30, 2014 between the issuer and between the Company and Jon C. Scahill. (1)
10.2
Restricted Stock Grant dated October 30, 2014 between the Company and Jon C. Scahill. (1)
10.3
License Agreement dated March 26, 2008 between the Company and Emerging Technologies Trust. (1)
10.4
Licensing Services Agreement dated July 10, 2008 between the Company and Balthaser Online, Inc. (1)
10.5
Patent Purchase Agreement dated December 21, 2009 between Company and Intertech Holdings, LLC. (1)
10.6
Consulting Agreement dated August 11, 2010 between the Company and Alex W. Hart.(1)
10.7
Agreement dated February 8, 2011 between the Company and Sol Li. (1)
10.8
Agreement dated June 26, 2013 between the Company and The Betting Service Ltd. and Neil Riches.(1)
10.9
Funding Agreement dated March 13, 2014 between the Company and Longford Capital Fund I, LP, (subject to order granting confidential treatment (1))#
10.10
Agreement dated April 1, 2014 between the Company and Allied Standard Limited. (1)
10.11
Form of warrant issued to former officers and directors.(1)
10.12
Form of warrant issued to Mr. Jon C. Scahill. (1)
10.13
Indemnification agreement, dated December 8, 2014 between the Company and Jon C. Scahill. (4)
10.14
Indemnification agreement, dated December 8, 2014 between the Company and Timothy J. Scahill. (4)
10.15
Indemnification agreement, dated December 8, 2014 between the Company and Dr. William Ryall Carroll. (4)
10.16
Patent Sale Agreement, effective July 8, 2015 between Intellectual Ventures Assets 16 LLC and the Company.(2)
10.17
2017 Equity Incentive Plan(6)
10.18
Purchase Agreement dated February 19, 2021 among the Company and QPRC Finance LLC (7)
10.19
Ex. A to Purchase Agreement - Security Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)†
10.20
Ex. B to Purchase Agreement - Subsidiary Continuing Guaranty Agreement dated February 19, 2021 among Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and QPRC Finance LLC. (7)
10.21
Ex. C to Purchase Agreement - Subsidiary Patent Proceeds Security Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and QPRC Finance LLC. (7)
10.22
Ex. D to Purchase Agreement - Warrant Issuance Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.23
Ex. E to Purchase Agreement - Board Observation Rights Agreement dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.24
Registration Rights Agreement - dated February 19, 2021 among the Company and QPRC Finance LLC. (7)
10.25
Form of Warrant - dated February 19, 2021 among the Company and QPRC Finance LLC (7)
10.26
Restructure Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.27
Ex. A to Restructure Agreement - Stock Purchase Agreement dated February 19, 2021 among the Company, Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.28
Ex. B to Restructure Agreement - Option Grant dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.29
Ex. C to Restructure Agreement - Amended and Restated Pledge Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.24
Ex. D to Restructure Agreement - Amended and Restated Registration Rights Agreement dated February 19, 2021 among the Company, Intelligent Partners LLC, Andrew Fitton and Michael Carper. (7)
10.30
Ex. E to Restructure Agreement - Board Observation Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.31
Ex. F to Restructure Agreement - Amended and Restated MPA-CP dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation and Intelligent Partners LLC. (7)
10.32
Ex. G to Restructure Agreement - Amended and Restated MPA-CXT dated February 19, 2021 among CXT Systems, Inc. and Intelligent Partners LLC. (7)
10.33
Ex. H to Restructure Agreement - Monetization Proceeds Agreement dated February 19, 2021 among M-RED Inc. and Intelligent Partners LLC. (7)
10.34
Ex. I to Restructure Agreement - Monetization Proceeds Agreement dated February 19, 2021 among Audio Messaging Inc. and Intelligent Partners LLC. (7)
10.35
Ex. J to Restructure Agreement - Amended and Restated 2015 Patent Proceeds Security Agreement dated February 19, 2021 among the Company, Quest Licensing Corporation, Mariner IC Inc., Semcon IP Inc., IC Kinetics Inc., Quest NetTech Corporation, CXT Systems, Inc., M-Red Inc., Audio Messaging Inc. and Intelligent Partners LLC. (7)
10.36
Ex. K to Restructure Agreement - MPA-NA dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.37
Ex. L to Restructure Agreement - MPA-NA Security Interest Agreement dated February 19, 2021 among the Company and Intelligent Partners LLC. (7)
10.38
Form of Consulting Agreement
10.39
Form of Restricted Stock Agreement
10.40
Form of Option Agreement
31.1
Certification of Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Schema Document
101.CAL
XBRL Taxonomy Calculation Document
101.DEF
XBRL Taxonomy Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
(1) Incorporated by
reference to the Form 10-K for the year ended December 31, 2012, which was filed by the Company on December 15, 2014.
(2) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on October 28, 2015 and incorporated herein by reference.
(3) Filed as an exhibit
to the Company’s Form 10-K, for the year ended December 31, 2013, which was filed with the SEC on April 10, 2015.
(4) Filed as exhibit
to Amendment No. 1 to the Company’s registration statement on Form S-1, which was filed with the SEC on February 3,
2016, and incorporated herein by reference.
(5) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on January 26, 2016 and incorporated herein by reference.
(6) Incorporated by
reference to the Form 10-K for the year ended December 31, 2017, which was filed by the Company on April 2, 2018.
(7) Filed as an exhibit
to the Company’s Form 8-K, which was filed with the SEC on February 24, 2021 and incorporated herein by reference.
# Certain portions
of this exhibit are omitted pursuant to an order granting confidential treatment. The omitted information has been filed separately
with the SEC.
† Certain confidential
information has been deleted from this Exhibit.