Item 1. Financial Statements
QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,372
|
|
|
$
|
208,324
|
|
Accounts receivable
|
|
|
3,107
|
|
|
|
54,994
|
|
Other current assets
|
|
|
2,982
|
|
|
|
2,490
|
|
Total current assets
|
|
|
20,461
|
|
|
|
265,808
|
|
|
|
|
|
|
|
|
|
|
Patents, net of accumulated amortization of $452,930 and $319,284, respectively
|
|
|
1,923,301
|
|
|
|
2,056,947
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,943,762
|
|
|
$
|
2,322,755
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
162,442
|
|
|
|
$
123, 803
|
|
Loans payable – third party
|
|
|
163,000
|
|
|
|
163,000
|
|
Purchase price of patents, current portion, net of unamortized discount of $37,412 and $80,528, respectively
|
|
|
962,588
|
|
|
|
919,472
|
|
Loan payable – related party, net of unamortized discount and debt issuance costs of $571,110 and $616,176, respectively
|
|
|
2,046,955
|
|
|
|
2,001,889
|
|
Accrued interest – loans payable related party
|
|
|
198,044
|
|
|
|
62,348
|
|
Accrued interest - loans payable third party
|
|
|
257,063
|
|
|
|
248,913
|
|
Derivative liability
|
|
|
60,000
|
|
|
|
140,000
|
|
Total current liabilities
|
|
|
3,850,092
|
|
|
|
3,659,425
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,850,092
|
|
|
|
3,659,425
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock – par value $.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 shares and 1,250,000,000 at June 30, 2017 and December 31, 2016, respectively; shares issued and outstanding 313,038,334 and 313,038,334, at June 30, 2017 and December 31, 2016, respectively
|
|
|
9,391
|
|
|
|
9,391
|
|
Additional paid-in capital
|
|
|
14,032,882
|
|
|
|
14,032,882
|
|
Accumulated deficit
|
|
|
(15,952,301
|
)
|
|
|
(15,381,430
|
)
|
Total Quest Patent Research Corporation deficit
|
|
|
(1,910,028
|
)
|
|
|
(1,339,157
|
)
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in subsidiary
|
|
|
3,698
|
|
|
|
2,487
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(1,906,330
|
)
|
|
|
(1,336,670
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,943,762
|
|
|
$
|
2,322,755
|
|
See accompanying notes to unaudited consolidated
financial statements.
QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
FOR THE
|
|
|
FOR THE
|
|
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensed Sales
|
|
$
|
2,846
|
|
|
$
|
9,975
|
|
|
$
|
5,663
|
|
|
$
|
19,857
|
|
Patent licensing fees
|
|
|
621,250
|
|
|
|
-
|
|
|
|
621,250
|
|
|
|
-
|
|
Management fees
|
|
|
11,311
|
|
|
|
315,124
|
|
|
|
24,302
|
|
|
|
464,403
|
|
|
|
|
635,407
|
|
|
|
325,099
|
|
|
|
651,215
|
|
|
|
484,260
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
632
|
|
|
|
10,048
|
|
|
|
1,072
|
|
|
|
13,313
|
|
Royalties
|
|
|
524,993
|
|
|
|
-
|
|
|
|
524,993
|
|
|
|
-
|
|
Management support services
|
|
|
11,481
|
|
|
|
446,376
|
|
|
|
24,672
|
|
|
|
696,700
|
|
Selling, general and administrative expenses
|
|
|
214,573
|
|
|
|
228,227
|
|
|
|
412,871
|
|
|
|
419,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
751,679
|
|
|
|
684,651
|
|
|
|
963,608
|
|
|
|
1,129,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(116,272
|
)
|
|
|
(359,552
|
)
|
|
|
(312,393
|
)
|
|
|
(645,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on derivative
|
|
|
30,000
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
-
|
|
Interest expense
|
|
|
(118,506
|
)
|
|
|
(72,220
|
)
|
|
|
(232,027
|
)
|
|
|
(155,379
|
)
|
Total Other Income and (expenses)
|
|
|
(88,506
|
)
|
|
|
(72,220
|
)
|
|
|
(152,027
|
)
|
|
|
(155,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax
|
|
|
(204,778
|
)
|
|
|
(431,772
|
)
|
|
|
(464,420
|
)
|
|
|
(800,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
|
(101,565
|
)
|
|
|
(9
|
)
|
|
|
(105,240
|
)
|
|
|
(2,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(306,343
|
)
|
|
|
(431,781
|
)
|
|
|
(569,660
|
)
|
|
|
(802,695
|
)
|
Net income (loss) attributable to non-controlling interest in subsidiaries
|
|
|
148
|
|
|
|
(130
|
)
|
|
|
(1,211
|
)
|
|
|
(195
|
)
|
Net loss attributable to Quest Patent Research Corporation
|
|
$
|
(306,195
|
)
|
|
$
|
(431,911
|
)
|
|
$
|
(570,871
|
)
|
|
$
|
(802,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
313,038,334
|
|
|
|
313,038,334
|
|
|
|
313,038,334
|
|
|
|
313,038,334
|
|
See accompanying notes to unaudited consolidated
financial statements.
QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH
FLOWS
|
|
FOR THE
|
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(569,660
|
)
|
|
$
|
(802,695
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of debt discounts
|
|
|
88,182
|
|
|
|
84,729
|
|
Gain on derivative
|
|
|
(80,000
|
)
|
|
|
-
|
|
Interest accrued but not paid
|
|
|
135,696
|
|
|
|
62,500
|
|
Depreciation and amortization
|
|
|
133,646
|
|
|
|
122,478
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
51,887
|
|
|
|
(120,369
|
)
|
Other current assets
|
|
|
(492
|
)
|
|
|
2,929
|
|
Accounts payable and accrued expenses
|
|
|
46,789
|
|
|
|
408,688
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(193,952
|
)
|
|
|
(241,740
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(193,952
|
)
|
|
|
(241,740
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
208,324
|
|
|
|
331,506
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
14,372
|
|
|
$
|
89,766
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
3,990
|
|
|
|
2,150
|
|
Interest
|
|
|
-
|
|
|
|
-
|
|
See accompanying notes to unaudited consolidated
financial statements.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company is a Delaware corporation, incorporated on July
17, 1987 and has been engaged in the intellectual property monetization business since 2008.
As used herein, the “Company” 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.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the US (GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these interim financial statements do not
include all of the information and notes required by GAAP for complete financial statements. All adjustments (consisting of normal
recurring items) necessary to present fairly the Company’s consolidated financial position have been included. These interim
financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in
our Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the interim periods presented herein
are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.
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 June 30, 2017.
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 (wholly-owned)
|
Semcon IP, Inc. (wholly-owned)
|
Mariner IC, Inc. (wholly-owned)
|
IC Kinetics, Inc. (wholly-owned)
CXT Systems, Inc. (wholly-owned)
|
The operations of Wynn Technologies Inc. are not included in
the Company’s consolidated financial statements as there are significant contingencies related to its control of Wynn Technologies
Inc. The sole asset of Wynn Technologies Inc. is US Patent No. RE38,137E. Wynn Technologies Inc. cannot transfer, assign, sell,
hypothecate or otherwise encumber US Patent No. RE38,173E 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 has received a total
of at least $250,000.
The Company accounts for its 65% interest in Wynn Technologies,
Inc. under the equity method whereby the investment accounts are increased for contributions by the Company plus its 60% share
of income pursuant to the contractual agreement which provide that Sol Li retains 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.
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.
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.
Income Tax
The Company records revenues on a gross basis, before deduction
for income taxes. The Company incurred foreign income tax expenses of approximately $102,000 and approximately $105,000 for the
three- and six-months ended June 30, 2017. The Company did not incur foreign income tax expense in the comparable period in 2016.
Inventor/Former Owner Royalties and Contingent Legal/Litigation
Finance Expenses
In connection with the investment in certain patents and patent
rights, certain of the Company’s operating subsidiaries may execute related agreements which grant to the inventors and/or
former owners of the respective patents or patent rights, the right to receive a percentage of future net revenues (as defined
in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios.
The Company’s operating subsidiaries may retain the services
of law firms that specialize in patent licensing and enforcement and patent law in connection with their licensing and enforcement
activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid a percentage of any
negotiated fees, settlements or judgments awarded.
The Company’s operating subsidiaries may engage with funding
sources that 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.
Going Concern
As shown in the accompanying financial statements, the Company
has an accumulated deficit of approximately $15,952,000 and negative working capital of approximately $3,830,000 as of June 30,
2017. 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. These conditions raise substantial doubt as to the Company’s ability
to continue as a going concern. Although the Company may seek to raise funds and to obtain third party funding for litigation to
enforce its intellectual property rights, the availability of such funds is uncertain. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – DEBT
The following table shows the Company’s short-term and
long-term debt at June 30, 2017 and December 31, 2016.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Debt:
|
|
|
|
|
|
|
Loans payable – third party
|
|
$
|
163,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
Loan payable – related party
|
|
|
|
|
|
|
|
|
Gross
|
|
|
2,618,065
|
|
|
|
2,618,065
|
|
Accrued Interest
|
|
|
198,044
|
|
|
|
62,348
|
|
Unamortized discount
|
|
|
(571,110
|
)
|
|
|
(616,176
|
)
|
Net loans payable – related party
|
|
$
|
2,244,999
|
|
|
$
|
2,064,237
|
|
The loan payable – third party is a demand loan made by
former officers and directors, who are unrelated third parties at June 30, 2016 and December 31, 2015, in the amount of $163,000.
The loans are payable on demand plus accrued interest at 10% per annum. These third parties are also shareholders, but their
stockholdings are not significant.
The loan payable – related party at June 30, 2017 represents the principal amount of the Company’s
10% note to United Wireless Holdings, Inc. (“United Wireless”) in the amount of $2,618,065 pursuant to securities purchase
agreement dated October 22, 2015 more fully described in the Company’s Annual Report on Form 10-K for the year ended December
31, 2016. On March 16, 2017, the Company received a letter from counsel to United Wireless claiming that the Company is in violation
of the requirements of the registration rights agreement dated October 22, 2015 on the grounds that the Company did not update
the registration statement in November 2016. On June 12, 2017, the Company entered into a standstill agreement with United Wireless
pursuant to which the Company agreed (i) to increase its authorized common stock to 10,000,000,000 shares, (ii) to file by June
30, 2017, a post-effective amendment to the registration statement covering the sale of the shares of common stock initially issued
to United Wireless pursuant to the Securities Purchase Agreement and the shares of common stock issuable upon the option granted
to United Wireless pursuant to the Securities Purchase agreement, (iii) if the existing warrant held by the Company’s chief
executive officer is not exercised prior to its expiration date, any re-issuance will not have an exercise price less than the
current exercise price and the existing warrants will not be amended to lower the exercise price, and (iv) United Wireless no longer
has any obligation to purchase any note pursuant to the Securities Purchase Agreement other than the $1,000,000 note related to
the final payment to Intellectual Ventures, except in connection with the potential acquisition by the Company of patent rights
which would trigger a $25,000 working capital loan in connection with the potential acquisition and require United Wireless to
make $125,000 working capital loans to the Company, at the Company’s sole discretion, on December 31, 2017, March 31, 2018
and June 30, 2018 pursuant to securities purchase agreement dated October 22, 2015 more fully described in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016 and, in such event, United Wireless would have a 7½% net
proceeds percentage interest in the net proceeds from such patent. On June 15, 2017, the Company amended its certificate of incorporation
to increase its authorized common stock to 10,000,000,000 shares. On June 30, 2017, the Company filed a post-effective amendment
to the registration statement covering the sale of the shares of common stock initially issued to United Wireless pursuant to the
Securities Purchase Agreement and the shares of common stock issuable upon the option granted to United Wireless pursuant to the
Securities Purchase agreement. The registration statement went effective on July 6, 2017. The note payable to United Wireless has
been classified as a current liability as of December 31, 2016. Because of its stock ownership in the Company and its right to
elect a director of the Company, United Wireless is treated as a related party. Prior to the purchase by United Wireless of debt
and equity on October 22, 2015 pursuant to the securities purchase agreement dated such date, the Company had no relationship with
United Wireless.
NOTE 4 –DERIVATIVE LIABILITIES
Because there is not a fixed conversion price, the ability of
the Company to remain compliant with the requirement under the United Wireless notes that the Company have sufficient authorized
common stock in the event that the notes become convertible is outside of the control of the Company. Although there is a limit
on the number of shares issuable under the note, absent an increase in the stock price or an increase in authorized shares, it
is possible the Company will not have enough authorized shares to satisfy the exercise of the options, which was the case during
a portion of the six months ended June 30, 2017. Thus, the Company determined the 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 other income (expense)
for each reporting period at each balance sheet date.
As of June 30, 2017, and December 31, 2016, the aggregate fair
value of the outstanding derivative liability was approximately $60,000 and $140,000, 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 period ended
June 30, 2017:
|
|
Period Ended
June 30,
|
|
|
|
2017
|
|
Volatility
|
|
|
417 % - 440%
|
|
Risk-free interest rate
|
|
|
1.36%
|
|
Expected dividends
|
|
|
-%
|
|
Expected term
|
|
|
3.25 – 3.75 years
|
|
The following schedule summarizes the valuation
of financial instruments at fair value in the balance sheets as of June 30, 2017 and December 31, 2016:
|
|
Fair Value Measurements as of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,000
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
140,000
|
|
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
March 31,
2017
|
|
Beginning balance
|
|
$
|
140,000
|
|
Change in fair value
|
|
|
(80,000
|
)
|
Ending balance
|
|
$
|
60,000
|
|
NOTE 5 – STOCKHOLDERS’ EQUITY
Increase in Authorized Common Stock
On June 15, 2017, the Company amended its certificate of incorporation
to increase its authorized common stock to 10,000,000,000 shares.
Issuance of Common Stock and Options
As of June 30, 2017, there was no unamortized option expense
associated with compensatory options.
A summary of the status of the Company’s stock options
and changes is set forth below:
|
|
Number of Options
(#)
|
|
|
Weighted Average Exercise
Price ($)
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance - December 31, 2016
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
3.75
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance – June 30, 2017
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
3.25
|
|
Warrants
A summary of the status of the Company’s stock warrants
and changes is set forth below:
|
|
Number of Warrants
(#)
|
|
|
Weighted Average Exercise
Price ($)
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance - December 31, 2016
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
1.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance – June 30, 2017
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
0.67
|
|
NOTE 6 – NON-CONTROLLING INTEREST
The following table reconciles equity attributable to the non-controlling
interest related to Quest Packaging Solutions Corporation.
Balance as of December 31, 2016
|
|
$
|
2,487
|
|
Net income attributable to non-controlling interest
|
|
$
|
1,211
|
|
Balance as of June 30, 2017
|
|
$
|
3,698
|
|
NOTE 7 – RELATED PARTY TRANSACTIONS
The Company has at various times entered into transactions with
related parties, including officers, directors and major stockholders, pursuant to which, these related 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.
During the three and six months ended June 30, 2017 and 2016,
the Company contracted with an entity owned by the chief technology officer for the provision of information technology services
to the Company. The cost of such services was approximately $180 and $725 for the three and six months ended June 30, 2017, respectively,
and $600 and $1200 for the three and six months ended June 30, 2016, respectively.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
Pursuant to a restated employment agreement, dated November
30, 2014, with the Company’s president and chief executive officer, the Company agreed to employ him as president and chief
executive officer for a term of three years, commencing January 1, 2014, and continuing on a year-to-year basis unless terminated
by either party on not less than 90 days’ notice prior to the expiration of the initial term or any one-year extension. The
agreement provides for an initial annual salary of $252,000, which may be increased, but not decreased, by the board or the compensation
committee. In March 2016, the Company’s board of directors increased the chief executive officer’s annual salary to
$300,000, effective January 1, 2016. The chief executive officer is entitled to a bonus if 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.
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.
In March 2014, the Company entered into a funding agreement
whereby a third party agreed to provide funds to the Company to enable the Company to implement a structured licensing program,
including litigation if necessary, for the Mobile Data. Under the funding agreement, the third party receives an interest in the
proceeds from the program, and the Company has no other obligation to the third party. In April and June 2014, as part of a structured
licensing program for the Mobile Data portfolio, Quest Licensing Corporation brought patent infringement suits in the U.S. District
for the District of Delaware against Bloomberg LP et. al., FactSet Research Systems Inc., Interactive Data Corporation, SunGard
Data Systems Inc. and The Charles Schwab Corporation et. al. These cases have been consolidated for trial. In June and August 2016,
Quest Licensing Corporation entered into a settlement agreement with SunGard Data Systems Inc. and FactSet Research Systems Inc.
As of the date of filing the third-party funder has advanced approximately $3,000,000 in litigation fees, costs and expenses. Under
the terms of the funding agreement, the third-party funder is entitled to a priority return of funds advanced from any proceeds
recovered. The Company’s management fees and management support services expenses relate to this agreement.
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 and could result in a default under the Company’s
loans. 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.
On January 19, 2017, the court in the Mobile Data Portfolio
litigation granted the defendants’ motion for summary judgment of non-infringement, which Quest Licensing Corporation has
appealed. Following the court’s decision granting the defendant’s motion for summary judgment, the defendants moved
for an award of attorneys’ fees under Section 285 of the patent act which provides that “the court in exceptional cases
may award reasonable attorney fees to the prevailing party.” Such a motion, if granted, would result in a judgment against
Quest Licensing Corporation, which does not have the financial resources to enable it to pay any judgment which may be rendered
against it, and, the defendants may seek to enforce their judgment by seeking to foreclose on the patents owned by the subsidiary
or seek to force the subsidiary into bankruptcy and purchase the patents in the bankruptcy proceeding, either of which could result
in a default under the Company’s agreement with United Wireless. The possible amount of any judgment cannot be estimated
and the funding source for the litigation will not provide the Company with funds to pay an adverse judgment. On June 29, 2017,
the defendants’ motion for attorney fees in the Mobile Data litigation was denied, without prejudice. Defendants may renew
their motion thirty days from the decision of the appellate court.
NOTE 9 – SUBSEQUENT EVENTS
On July 28, 2017, CXT Systems, Inc. (“CXT”), a wholly owned subsidiary, entered into an agreement
with 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 fourteen United States patents, five foreign patents
and six related applications (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. In the event that, on August 31, 2018, August 31, 2019 and
August 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. 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.
On July 31, 2017, the Company issued to United Wireless a 10% promissory note due September 30, 2020 in
the principal amount of $25,000 pursuant to securities purchase agreement dated October 22, 2015 more fully described in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016, for which the Company received $25,000, which was used to make
the $25,000 payment to IV 34/37 referred to in the previous paragraph.
On July 31, 2017. CXT entered into a monetization proceeds agreement pursuant to which United Wireless
received the right to receive 7.5% of the net monetization proceeds received from the CXT Portfolio. CXT’s obligations under
the monetization proceeds agreement are secured by a security interest in the proceeds (from litigation or otherwise) from the
CXT Portfolio. The security interest in the proceeds from the CXT Portfolio is junior to the security interest held by IV 34/37
in the CXT Portfolio and proceeds thereof. United Wireless is required to make $125,000 working capital loans to the Company, at
the Company’s sole discretion, on December 31, 2017, March 31, 2018 and June 30, 2018 pursuant to securities purchase agreement
dated October 22, 2015 more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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 eight 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. To date, we have not generated
any significant revenues from our intellectual property rights.
We seek to generate revenue from three 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.
|
|
●
|
Management fees, which we receive for managing structured licensing programs, including litigation, related to our intellectual property rights.
|
|
●
|
Licensed packaging sales, which relate to the sale of licensed products
|
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 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 revenue can, and is 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.
Fees generated in connection with the management of litigation
are paid to us by one of the third-party funding source in support of the litigation seeking to enforce our intellectual property
rights. Our agreement with the funding source provides that the funding source pays the litigation costs and provides that this
funding source receives a percentage of the recovery, thus reducing our recovery in connection with any settlement of the litigation.
As a result, in connection with litigation funded by the third party, we would, if the litigation is successful, receive fees both
for managing the litigation, if the agreement with the funding source provides for such payments, and from a license of the intellectual
property, which will be net of that portion of the recovery payable to the funding source. To the extent that we have agreements
with counsel and/or litigation funding sources pursuant to which payments made to them represent a portion of the gross recovery,
and such payment is contingent upon a recovery, our revenue from litigation reflects the gross recovery from litigation as licensing
fees, and payments to counsel and/or litigation funding sources are reflected as cost of revenue. Our gross profit from management
fees reflects payments to third party support services providers which we pay in connection with management of the licensing program.
To a significantly lesser extent, we generate revenue from sale
of packaging materials based on our TurtlePak
TM
technology. Our gross profit from sales reflects the cost of contract
manufacturing and labor. We did not generate any revenue from the TurtlePak
TM
Portfolio other than from the sale of
products using our technology.
In April 2016, Mariner IC brought patent infringement suits
in the United States District Court for the Eastern District of Texas against MediaTek Inc., Texas Instruments Incorporated, LG
Electronics, Inc., Toshiba Corporation, and Funai Electric Co., Ltd. As of June 30, 2017, all the cases have settled and been dismissed
or were stayed pending settlement. Our revenue for the quarter ended June 30, 2017 included revenue from these settlements.
On March 16, 2017, we received a letter from counsel to United Wireless claiming that we were in violation
of the requirements of the registration rights agreement dated October 22, 2015 on the grounds that we did not update the registration
statement in November 2016. We disputed the claim that we violated such agreement. On June 12, 2017, we entered into a standstill
agreement with United Wireless pursuant to which we agreed (i) to increase our authorized common stock to 10,000,000,000 shares,
(ii) to file by June 30, 2017, a post-effective amendment to the registration statement covering the sale of the shares of common
stock initially issued to United Wireless pursuant to the Securities Purchase Agreement and the shares of common stock issuable
upon the option granted to United Wireless pursuant to the Securities Purchase agreement, (iii) if the existing warrant held by
the Company’s chief executive officer is not exercised prior to its expiration date, any re-issuance will not have an exercise
price less than the current exercise price and the existing warrants will not be amended to lower the exercise price, and (iv)
United Wireless no longer has any obligation to purchase any note pursuant to the Securities Purchase Agreement other than the
$1,000,000 note related to the final payment to Intellectual Ventures, except in connection with the potential acquisition by us
of a patent portfolio from Intellectual Ventures 34, LLC and Intellectual Ventures 37, LLC (“IV34/37”), which would
(x) trigger a $25,000 working capital loan in connection with such acquisition and (y) require United Wireless to make $125,000
working capital loans to us, at our discretion, on December 31, 2017, March 31, 2018 and June 30, 2018 pursuant to securities purchase
agreement dated October 22, 2015 more fully described in the Company’s Annual Report on Form 10-K for the year ended December
31, 2016. Pursuant to the agreement, since United Wireless purchased the $25,000 note, we granted United Wireless a 7½%
net proceeds percentage interest in the net proceeds from such patent portfolio.
On June 15, 2017, we amended our certificate of incorporation
to increase our authorized common stock to 10,000,000,000 shares. On June 30, 2017, we filed a post-effective amendment to the
registration statement covering the sale of the shares of common stock initially issued to United Wireless pursuant to the Securities
Purchase Agreement and the shares of common stock issuable upon the option granted to United Wireless pursuant to the Securities
Purchase agreement. The registration statement was declared effective on July 6, 2017.
On January 19, 2017, the court in the Mobile Data Portfolio
litigation granted the defendants’ motion for summary judgment of non-infringement, which Quest Licensing Corporation has
appealed. Following the court’s decision granting the defendant’s motion for summary judgment, the defendants moved
for an award of attorneys’ fees under Section 285 of the patent act which provides that “the court in exceptional cases
may award reasonable attorney fees to the prevailing party.” Such a motion, if granted, would result in a judgment against
Quest Licensing Corporation, which does not have the financial resources to enable it to pay any judgment which may be rendered
against it, and, the defendants may seek to enforce their judgment by seeking to foreclose on the patents owned by the subsidiary
or seek to force the subsidiary into bankruptcy and purchase the patents in the bankruptcy proceeding, either of which could result
in a default under our agreements with United Wireless. On June 29, 2017, the defendants’ motion for attorney fees in the
Mobile Data litigation was denied, without prejudice. The defendants may renew their motion thirty days from the decision of the
appellate court.
On July 28, 2017, CXT Systems, Inc. (“CXT”), a wholly owned subsidiary, entered into an agreement
with IV 34/37 pursuant to which at closing CXT acquired by assignment all right, title, and interest in a portfolio of fourteen
United States patents, five foreign patents and six related applications (the “CXT Portfolio”). Under the agreement,
CXT will distribute 50% of net proceeds, as defined, to IV 34/37. CXT advanced $25,000 to IV 34/37 at closing, which it received
as a loan from United Wireless. The agreement with IV34/37 provides that if, on August 31, 2018, August 31, 2019 and August 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. 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.
On July 31, 2017, we issued to United Wireless our 10% promissory note due September 30, 2020 in the principal
amount of $25,000 pursuant to securities purchase agreement dated October 22, 2015 more fully described in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016, for which we received $25,000, of which $25,000 was paid to IV
34/37 as the initial payment to IV 34/37.
On July 31, 2017, CXT entered into a monetization proceeds agreement pursuant to which United Wireless
received the right to receive 7.5% of the net monetization proceeds received from the CXT Portfolio. CXT’s obligations under
the monetization proceeds agreement are secured by a security interest in the proceeds (from litigation or otherwise) from the
CXT Portfolio. The security interest in the proceeds from CXT Portfolio is junior to the security interest held by IV 34/37 in
the CXT Portfolio and proceeds thereof. United Wireless is required to make $125,000 working capital loans to the Company, at the
Company’s sole discretion, on December 31, 2017, March 31, 2018 and June 30, 2018 pursuant to securities purchase agreement
dated October 22, 2015 more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Results of Operations
Three and six months ended June 30, 2017 and 2016
Revenues for the three months ended June 30, 2017 were approximately
$635,000, an increase of approximately $310,000, or 95%, from the comparable period of 2016, which were approximately $325,000.
Revenues for the six months ended June 30, 2017 were approximately $651,000, an increase of approximately $167,000, or 34%, from
the comparable period of 2016, which was approximately $484,000. We generated revenue from patent fees of approximately $620,000
for the three and six months ended June 30, 2017 from settlements in the anchor structure portfolio actions. We did not generate
any revenue from patent fees during the three or six months ended June 30, 2016.
Operating expenses for the three months ended June 30, 2017
increased by approximately $67,000, or 10%. Operating expenses for the six months ended June 30, 2017 decreased by approximately
$166,000, or 15%, compared to the six months ended June 30, 2016. Our principal operating expense for both the three and six months
ended June 30, 2017 was patent service costs of approximately $525,000, which represent fees payable to attorneys and third-party
funding sources associated with the anchor structure portfolio settlements. These fees became payable as a result of settlement
agreements that provided for a recovery. The total settlement recovery is included in revenue and the associated costs are deducted
as cost of revenue. When the settlement funds are disbursed we receive the net amount due us after deducting the associated settlement
costs. We had no settlement costs during the three and six months ended June 30, 2016. Our principal operating expense for the
three and six months ended June 30, 2016 was management support services in support of mobile data portfolio litigation which are
paid by the firm that is providing the funding for the litigation. Management support services was approximately $11,000 and $25,000
for the three and six months ended June 30, 2017, respectively, and approximately $446,000 and $697,000 for the three and six months
ended June 30, 2016, respectively. The decrease in management support services expenses in the both the three and six months ended
June 30, 2017 from the comparable periods in 2016 reflected the reduced level of revenue from management fees. Due to the timing
of payables and receivables, management support services paid exceeded management fees during the three- and six-months ended June
30, 2016.
Other income (expense) included interest expense of $118,506
and $232,027 for the three- and six-months ended June 30, 2017, respectively, and $72,220 and $155,379 for the three and six months
ended June 30, 2016, respectively. The increase in interest expense primarily reflect the accrued interest on our note to United
Wireless.
During the period we incurred income tax expense of approximately
$102,000 and approximately $105,000 for the three- and six-months ended June 30, 2017, respectively, compared to $9 and $2,150
for the three- and six-months ended June 30, 2016, respectively. The increase in income tax expense primarily reflect foreign income
taxes related to foreign source patent fees. We did not incur foreign income tax expenses in the comparable period in 2016.
As a result of the foregoing, we sustained a net loss of approximately
$306,000, or $0.00 per share (basic and diluted), for the three months ended June 30, 2017 and a net loss of approximately $571,000,
or $0.00 per share (basic and diluted), for the six months ended June 30, 2017, compared to net loss of approximately $432,000,
or $0.00 per share (basic and diluted), for the three months ended June 30, 2016 and a net loss of approximately $803,000, or $0.00
per share (basic and diluted), for the six months ended June 30, 2016.
Liquidity and Capital Resources
At June 30, 2017, we had current assets of approximately $20,000,
and current liabilities of approximately $3,850,000. Our current liabilities include $1,000,000 payment due to Intellectual Ventures
on account of the purchase price of the patent portfolios we purchased from Intellectual Ventures and loans payable of $163,000
and accrued interest of approximately $257,000 due to former directors and minority stockholders. Our agreement with United Wireless
requires United Wireless to lend us the funds to make the payments to Intellectual Ventures. As of June 30, 2017, we have an accumulated
deficit of approximately $15,952,000 and a negative working capital of approximately $3,830,000. 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.
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 have no credit facilities.
We have an agreement with a funding source which is providing
litigation financing in connection with our pending litigation relating to our mobile data portfolio, and we have two agreements
with a second funding source which is providing litigation financing in connection with our pending litigation relating to our
power management/bus control and anchor structure portfolios. We cannot predict the success of any pending or future litigation.
Our obligations to United Wireless are not contingent upon the success of any litigation. If we fail to generate a sufficient recovery
in these actions (net of any portion of any recovery payable to the funding source or our legal counsel) in a timely manner to
enable us to pay United Wireless on the present loans and the additional loans which United Wireless has agreed to make to us,
we would be in default under our agreements with United Wireless which could result in United Wireless obtaining ownership of the
three subsidiaries which own the patent rights we acquired from Intellectual Ventures. Our agreements with the funding sources
provide that the funding sources will participate in any recovery which is generated. We believe that our financial condition,
our history of losses and negative cash flow from operations, and our low stock price make it difficult for us to raise funds in
the debt or equity markets.
In April 2016, Mariner IC brought patent infringement suits
in the United States District Court for the Eastern District of Texas against MediaTek Inc., Texas Instruments Incorporated, LG
Electronics, Inc., Toshiba Corporation, and Funai Electric Co., Ltd. As of June 30, 2017 all the cases have settled and been dismissed
or were stayed pending settlement. The gross settlement is reflected in revenue and the associated costs and expenses are included
in cost of revenue.
As noted below, there is a substantial doubt about our ability
to continue as a going concern.
Significant Accounting Policies and Estimates
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.
Management believes the following critical accounting policies
affect the significant judgments and estimates used in the preparation of the financial statements.
Principles of Consolidation
The consolidated financial statements are prepared in accordance
with US GAAP and present the financial statements of the Company 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.
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:
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Level 1:
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Observable inputs such as quoted market prices in active markets for identical assets or liabilities
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Level 2:
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Observable market-based inputs or unobservable inputs that are corroborated by market data
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Level 3:
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Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
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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 foreign income tax expenses of approximately $102,000 and approximately $105,000 for the three- and six-months
ended June 30, 2017. We did not incur foreign income tax expense in the comparable period in 2016.
Stock-based Compensation
We account for share-based awards issued to employees in accordance
with Accounting Standards Codification (ASC) 718, “Compensation-Stock Compensation.” Accordingly, employee share-based
payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over
the requisite service period, which is normally the vesting period. Share-based compensation to directors is treated in the same
manner as share-based compensation to employees, regardless of whether the directors are also employees. The Company accounts for
share-based compensation to persons other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other
than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the
equity instruments and is recognized as expense over the service period. The Company estimates the fair value of share-based payments
using the Black Scholes option-pricing model for common stock options and warrants and the closing price of the Company’s
common stock for common share issuances.
Long-Lived Assets
We review for impairment whenever events or circumstances indicate
that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, “Impairment
or Disposal of Long-Lived Assets”. We recognize an impairment loss when the sum of expected undiscounted future cash flows
is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Revenue Recognition
We recognize revenue in accordance with ASC Topic 605,
“Revenue Recognition”. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations
have been substantially performed, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured.
We consider our licensing and enforcement activities as one
unit of accounting under ASC 605-25, “Multiple-Element Arrangements” as the delivered items do not have value to customers
on a standalone basis, there are no undelivered elements and there is no general right of return relative to the license. Under
ASC 605-25, the appropriate recognition of revenue is determined for the combined deliverables as a single unit of accounting and
revenue is recognized upon delivery of the final elements, including the license for past and future use and the release. Also,
due to the fact that the settlement element and license element for past and future use are the major central business, we do not
present these two elements as different revenue streams in its statement of operations. We do not expect to provide licenses that
do not provide some form of settlement or release.
Cost of Revenue
Cost of revenues mainly includes expenses incurred in connection
with our patent enforcement activities, such as legal fees, consulting costs, patent maintenance, royalty fees for acquired patents
and other related expenses. Cost of revenue does not include expenses related to product development, patent amortization,
integration or support, as these are included in general and administrative expenses.
Inventor/Former Owner Royalties and Contingent Legal/Litigation
Finance Expenses
In connection with the investment in certain patents and patent
rights, certain of our 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.
Our 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.
Our 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 our 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. To the extent that we have agreements with counsel and/or litigation funding sources pursuant
to which payments made to them represent a portion of the gross recovery, and such payment is contingent upon a recovery, our revenue
from litigation reflects the gross recovery from litigation as licensing fees, and payments to counsel and/or litigation funding
sources are reflected as cost of revenue.
Recent Accounting Pronouncements
Management does not anticipate that the recently issued but
not yet effective accounting pronouncements will materially impact the Company’s financial condition.
Going Concern
We have an accumulated deficit of approximately $15,952,000
and negative working capital of approximately $3,830,000 as of June 30, 2017. Because of our continuing losses, our working capital
deficiency, the uncertainty of future revenue, our obligations to Intellectual Ventures and United Wireless, 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, and we may not be able to continue as a going concern. Although we may seek to raise funds and to obtain third party
funding for litigation to enforce our intellectual property rights, the availability of such funds in uncertain. Further, the funding
sources do not cover any liability which we may incur in the event that we do not prevail in litigation and we are required to
pay the defendant’s legal costs or a judgment against us by a defendant. In the event of a judgment against any of our subsidiaries,
it may be necessary for the subsidiary to seek protection under the Bankruptcy Act, which could result in a default under our notes
to United Wireless. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other
commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements.
Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity.