Item 1. Financial Statements
QUEST PATENT RESEARCH CORPORATION AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
239,214
|
|
|
$
|
331,506
|
|
Accounts receivable
|
|
|
90,636
|
|
|
|
41,552
|
|
Other current assets
|
|
|
1,078
|
|
|
|
5,924
|
|
Total current assets
|
|
|
330,928
|
|
|
|
378,982
|
|
|
|
|
|
|
|
|
|
|
Patents, net of accumulated amortization of $104,978 and $57,500, respectively
|
|
|
2,271,253
|
|
|
|
2,318,731
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,602,181
|
|
|
$
|
2,697,713
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
262,108
|
|
|
$
|
69,884
|
|
Loans payable – third party
|
|
|
163,000
|
|
|
|
163,000
|
|
Purchase price of patents, current portion
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Accrued interest - loans payable third party
|
|
|
236,688
|
|
|
|
232,613
|
|
Total current liabilities
|
|
|
1,661,796
|
|
|
|
1,465,497
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Loan payable – related party, net of unamortized discount and debt issuance costs of $672,082 and $687,754
|
|
|
633,484
|
|
|
|
586,563
|
|
Purchase price of patents, long term – net of unamortized discount of $141,607 and $173,769
|
|
|
858,393
|
|
|
|
826,231
|
|
Total liabilities
|
|
|
3,153,673
|
|
|
|
2,878,291
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock – par value $.00003 – authorized 10,000,000 Shares – no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.00003; authorized 1,250,000,000 shares and 1,250,000,000 at March 31, 2016 and December 31, 2015, respectively; shares issued and outstanding 313,038,334 and 313,038,334, at March 31, 2016 and December 31, 2015, respectively
|
|
|
9,391
|
|
|
|
9,391
|
|
Additional paid-in capital
|
|
|
14,232,882
|
|
|
|
14,232,882
|
|
Accumulated deficit
|
|
|
(14,796,297
|
)
|
|
|
(14,425,448
|
)
|
Total Quest Patent Research Corporation deficit
|
|
|
(554,024
|
)
|
|
|
(183,175
|
)
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in subsidiary
|
|
|
2,532
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(551,492
|
)
|
|
|
(180,578
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
2,602,181
|
|
|
$
|
2,697,713
|
|
See accompanying notes to unaudited
consolidated financial statements.
QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
FOR THE
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Licensed sales
|
|
$
|
9,882
|
|
|
$
|
10,732
|
|
Patent licensing fees
|
|
|
-
|
|
|
|
20,000
|
|
Management fees
|
|
|
149,279
|
|
|
|
84,939
|
|
|
|
|
159,161
|
|
|
|
115,671
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,265
|
|
|
|
3,031
|
|
Royalties
|
|
|
-
|
|
|
|
4,303
|
|
Management support services
|
|
|
154,064
|
|
|
|
17,821
|
|
Selling, general and administrative expenses
|
|
|
287,446
|
|
|
|
188,422
|
|
Total operating expenses
|
|
|
444,775
|
|
|
|
213,577
|
|
Loss from operations
|
|
|
(285,614
|
)
|
|
|
(97,906
|
)
|
|
|
|
|
|
|
|
|
|
Other Income and (expenses)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
32,182
|
|
Income tax
|
|
|
(2,141
|
)
|
|
|
(3,176
|
)
|
Interest expense
|
|
|
(83,159
|
)
|
|
|
(4,075
|
)
|
Total Other Income and (expenses)
|
|
|
(85,300
|
)
|
|
|
24,931
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(370,914
|
)
|
|
|
(72,975
|
)
|
Net income (loss) attributable to non-controlling interest in subsidiaries
|
|
|
65
|
|
|
|
(126
|
)
|
Net loss attributable to Quest Patent Research Corporation
|
|
$
|
(370,849
|
)
|
|
$
|
(73,101
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
313,038,334
|
|
|
|
258,038,334
|
|
See accompanying notes to unaudited consolidated
financial statements.
QUEST PATENT RESEARCH CORPORATION AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH
FLOWS
|
|
FOR THE
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(370,914
|
|
|
$
|
(72,975
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
47,833
|
|
|
|
-
|
|
Share-based compensation
|
|
|
-
|
|
|
|
63,000
|
|
Gain on settlement of accounts payable
|
|
|
-
|
|
|
|
(32,182
|
)
|
Depreciation and amortization
|
|
|
47,478
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accrued interest expense
|
|
|
31,250
|
|
|
|
-
|
|
Accounts receivable
|
|
|
(49,084
|
)
|
|
|
(30,776
|
)
|
Other current assets
|
|
|
4,846
|
|
|
|
415
|
|
Accounts payable and accrued expenses
|
|
|
196,299
|
|
|
|
29,704
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(92,292
|
)
|
|
|
(42,814
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(92,292
|
)
|
|
|
(42,814
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
331,506
|
|
|
|
91,690
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
239,214
|
|
|
$
|
48,876
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
2,141
|
|
|
|
3,176
|
|
Interest
|
|
|
-
|
|
|
|
-
|
|
See accompanying notes to unaudited
consolidated financial statements.
QUEST PATENT RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2016
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, 2015. Certain prior-period amounts have been reclassified to conform to the
current-period presentation. 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 March 31, 2016.
The consolidated financial statements include the accounts and operations
of:
Quest Patent Research Corporation
Quest Licensing Corporation (NY) (1)
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)
|
(1)
|
Quest Licensing Corporation (NY), a New York corporation, was a wholly owned subsidiary of the Company through October 31, 2012 when 50% of its issued and outstanding shares were transferred to Allied Standard Limited. The Company reconsolidated Quest Licensing Corporation (NY) on April 1, 2014 when Allied Standard relinquished its entitlement to a 50% interest in Quest Licensing Corporation (NY), in exchange for the Company’s commitment to fund a structured licensing program for the Mobile Data Portfolio. Between October 31, 2012 and April 1, 2014, the Company did not include Quest Licensing Corporation (NY) in its consolidated financial statements since there were significant contingencies related to the control of Quest Licensing Corporation.
|
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.
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 a 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 $14,796,297 and negative working capital of $1,330,000 as of March 31, 2016. 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, and 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 – SHORT-TERM AND LONG-TERM DEBT
The following table shows the Company’s short-term and long-term
debt at March 31, 2016 and December 31, 2015.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Short term debt:
|
|
|
|
|
|
|
Loans payable – third party
|
|
$
|
163,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
Loans payable – related party
|
|
|
|
|
|
|
|
|
Gross
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
Accrued Interest
|
|
|
55,566
|
|
|
|
24,316
|
|
Unamortized discount
|
|
|
(672,082
|
)
|
|
|
(687,754
|
)
|
Net loans payable – related party
|
|
$
|
633,484
|
|
|
$
|
586,562
|
|
Short term debt
The loan payable – third party is a
demand loan made by former officers and directors, who are unrelated third parties at March 31, 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.
Long-term debt
The loan payable at March 31, 2016 represents the principal
amount of the Company’s 10% note to United Wireless Holdings, Inc. (“United Wireless”) due September 30, 2020,
in the amount of $1,250,000 pursuant to securities purchase agreement dated October 22, 2015 more fully described in our Annual
Report on Form 10-K for the year ended December 31, 2015. 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 consummation of the transactions described
in this Note 3, the Company had no relationship with United Wireless.
NOTE 4 – STOCKHOLDERS’ EQUITY
Increase in Authorized Common Stock
On January 22, 2016, the Company amended and restated its certificate
of incorporation to increase its authorized common stock from 390,000,000 shares to 1,250,000,000 shares. The Company’s financial
statements at December 31, 2015 reflect this increase.
Issuance of Common Stock and Options
Pursuant to the restated employment agreement dated November 30,
2014, the Company issued to its chief executive officer a stock grant for 30,000,000 shares which vested on January 15, 2015. For
the period ended March 31, 2015 the Company recognized compensation expense of $63,000, representing closing price of the common
stock on the vesting date. There was no stock-based compensation expense for the three months ended March 31, 2016.
As of March 31, 2016, there was no unamortized option expense associated
with compensatory options.
A summary of the status of the Company's stock options and changes
is set forth below:
|
|
Number of Options
(#)
|
|
|
Weighted Average Exercise
Price ($)
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance - December 31, 2015
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
4.75
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - March 31, 2016
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
4.5
|
|
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, 2015
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
2.3
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - March 31, 2016
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
2.0
|
|
NOTE 5 – 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, 2015
|
|
$
|
2,597
|
|
Net income attributable to non-controlling interest
|
|
$
|
(65
|
)
|
Balance as of March 31, 2016
|
|
$
|
2,532
|
|
NOTE 6 – 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.
During 2003, the Company received loans from then officers and directors,
now unrelated third parties, in the amount of $79,490. The loans are payable on demand plus accrued interest at 10% per annum.
During 2014, all loan holders ceased to be related parties as a result of employee separation agreements and director resignations.
As a result, in 2014, approximately $54,490 in principal on the loans was cancelled pursuant to a separation agreement and $25,000
in principal was reclassified as loans payable to third parties upon resignation of the loan holder from the board.
During the three months ended March 31, 2016 and 2015, the
Company contracted with an entity owned by the chief technology officer for the provision of information technology services to
the Company. For the three months ended March 31, 2016 and 2015, the cost of these services was approximately $600 and $600 respectively.
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:
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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.
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Management fees, which we receive for managing structured licensing programs, including litigation, related to our intellectual
property rights, which was our principal source of revenue for the three months ended March 31, 2016 and 2015.
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Licensed packaging sales, which relate to the sale of licensed products
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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 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 and from a license of the intellectual property, which will be net of that portion of the recovery
payable to the funding source. 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 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 March 2016, we entered into two funding agreements 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, which is owned by our subsidiary Semcon IP, Inc., and the anchor structure portfolio, which is owned by Mariner IC,
Inc. These portfolios are two of the portfolios we acquired from Intellectual Ventures Assets 16 LLC (“Intellectual Ventures”)
in October 2015. We engaged counsel on a partial contingency basis in connection with a proposed patent infringement action relating
to these portfolios.
Following the execution of the funding agreements and the
engagement of counsel, in April 2016, (i) Semcon 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, and (ii) 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.
Pursuant to the terms of the funding agreements and the partial
contingency agreements 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.
Results of Operations
Three months ended March 31, 2016 and 2015
Revenues for the three months ended March 31, 2016 were approximately
$159,000, an increase of approximately $43,000, or 38%, compared to the three months ended March 31, 2015, which were approximately
$116,000. The increase in revenue was primarily due to an increase in management fees of approximately $65,000 relating to our
services in support of mobile data portfolio litigation which is paid by the firm that is providing the funding for the litigation.
Operating expenses for the three months ended March 31, 2016
increased by approximately $231,000, or 108%, compared to the three months ended March 31, 2015. Our principal operating expense
for the three months ended March 31, 2016 and 2015 were management support services, which were approximately $154,000 for the
three months ended March 31, 2016 and approximately $17,800 for the three months ended March 31, 2015. The increase in management
support services was primarily due to an increase in support services relating to the mobile data portfolio litigation.
Other income for the three months ended March 31, 2015 included $32,182,
reflecting the gain on the settlement of an account payable for less than the amount previously accrued. We did not realize a
gain on settlement in the comparable period of 2016. Other income reflects interest expense of $83,158 for the three months ended
March 31, 2016 and $4,075 for the three months ended March 31, 2015. The increase in interest expense reflects the interest accrued
on our note to United Wireless Holdings, Inc.
As a result of the foregoing, we realized
net loss of approximately $371,000, or $0.001 per share (basic and diluted), for the three months ended March 31, 2016, compared
to net loss of $73,000, or $0.000 per share (basic and diluted), for the three months ended March 31, 2015.
Liquidity and Capital Resources
At March 31, 2016, we had current assets of approximately $331,000, and current liabilities
of approximately $1,661,796. 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 $236,688 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 March 31, 2016, we have an accumulated deficit of approximately
$14,800,000 and a negative working capital of approximately $1,330,000. 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.
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 condensed 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.
Stock-based Compensation
The Company accounts 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 a 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.
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 $14,796,297 and negative working capital of $1,330,000 as of March 31, 2016. 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. 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.