QUEST PATENT RESEARCH CORPORATION 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.
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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 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, including contingent legal fees and the
portion of the recovery payable to
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
Agreements with
On
Pursuant to the Purchase Agreement with QFL, QFL agreed to make available to us
a financing facility of: (a) up to
Contemporaneously with the execution of the agreement with QFL, we entered into
a restructure agreement with
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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
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 several of our
intellectual property portfolios. 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
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Restricted Stock Grants and Options
In
Results of Operations
Years Ended
The following table shows the revenue and operating expenses for the years endedDecember 31, 2021 and 2020: Year ended December 31, 2021 2020 Revenues (patent licensing fees)$ 2,050,000 $ 5,488,088
Cost of revenue (litigation and licensing expenses) 1,314,928 4,692,969 Selling, general and administrative expenses
3,848,611 1,513,822
Total operating expenses 5,163,539 6,206,791
Loss from operations (3,113,539 ) (718,703 )
Revenues for the year ended
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Cost of revenues for 2021 was
Selling, general, and administrative expenses for 2021 increased by
approximately
Other income (expense) for 2021 included an approximately
Other income also reflects a gain on forgiveness of debt of approximately
Other income also reflects interest expense of approximately
We had an income tax expense of approximately
As a result of the foregoing, we had a net loss of approximately
Liquidity and Capital Resources
At
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As a result of our restructure of our agreement with
The following table shows the summary cash flows for the years endedDecember 31, 2021 and 2020: Year endedDecember 31, 2021 2020
Cash flows from operating activities
16,978 (289,336 )
Cash at beginning of year 247,862 537,198
Cash at end of year 264,840 247,862
For 2021, we used approximately
For 2020, we used approximately
Cash flow from financing activities in 2021 included proceeds from a third-party
loan of approximately
Cash flow from financing activities for 2020 reflected the proceeds of an SBA
loan of approximately
In 2021 and 2020, cash flow from investing activities included
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In 2021, non-cash investing and financing activities consisted of shares issued
for conversion of debt of approximately
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.
We cannot predict the success of any pending or future litigation seeking to enforce our intellectual property rights.
In
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
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 subsidiaries. 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
Revenue Recognition 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.
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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.
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
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.
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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 twenty 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 in accordance with Accounting
Standards Codification ("ASC") 360, "Property, Plant, and Equipment" 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. In the event that management decides
to no longer allocate resources to a patent portfolio, an impairment loss equal
to the remaining carrying value of the asset is recorded. For the year ended
Warrant liability
We reflect a warrant liability with respect to warrants for which number of shares underlying the warrants is not fixed until the date of the initial exercise. The amount of the liability is determined at the end of each fiscal period and the period to period change in the amount of warrant liability is reflected as a gain or loss in warrant liability and is include under other income (expense). See Note 4 of Notes to Consolidated Financial Statements.
Fair Value of Financial Instruments
We adopted
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
Income Tax
We record revenues on a gross basis, before deduction for income taxes. We
incurred income tax expenses of approximately
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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).
Business Combinations
The acquisition of
Gain from Cancelation of Indebtedness
We recognized a gain from the elimination of liability for minimum cumulative net proceeds distributions constituting a portion of the purchase price due to the seller of two of our patent portfolios and the reduction of liability for legal services resulting from the settlement of our recorded obligation for unpaid legal services. See Note 3 of Notes to Consolidated Financial Statements.
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
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements.
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