NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
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, 2017. Operating results for the interim periods presented herein
are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. Reclassifications
have been made to conform with the current year presentation.
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, 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.
|
|
Photonic
Imaging Solutions Inc.
|
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.
Intangible
Assets
Intangible
assets consist of patents which are amortized using the straight-line method over their estimated useful lives or statutory lives
whichever is shorter and are reviewed for impairment upon any triggering event that may give rise to the assets ultimate recoverability
as prescribed under the guidance related to impairment of long-lived assets. Costs incurred to acquire patents, including legal
costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
Patents
include the cost of patents or patent rights (hereinafter, collectively “patents”) acquired from third-parties or
acquired in connection with business combinations. Patent acquisition costs are amortized utilizing the straight-line
method over their remaining economic useful lives, ranging from one to ten years. Certain patent application and prosecution costs
incurred to secure additional patent claims that, based on management’s estimates are deemed to be recoverable, are capitalized
and amortized over the remaining estimated economic useful life of the related patent portfolio.
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 $49,900 for the three months ended March 31, 2018. The Company did not incur foreign income tax expense in the
comparable period in 2017.
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.
Revenue
Recognition
The Company recognizes revenue in accordance with ASC Topic 606,
“Revenue from Contracts with Customers”. Revenue is recognized when control of the promised goods or services
is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange
for those goods or services. Under Topic 606, revenue is recognized when there is a contract which has commercial substance which
is approved by both parties and identifies the rights of the parties and the payment terms. The Company adopted Topic 606 as of
January 1, 2018 using the modified retrospective transition method, with no impact on the consolidated financial position or results
of operations.
Recent
Accounting Pronouncements
The
Company is currently evaluating ASC 842 “Leases” for future adoption. Other than those pronouncements, management
does not believe that there are any other recently issued, but not effective, accounting standards which, if currently adopted,
would have a material effect on the Company's financial statements.
Going
Concern
As
shown in the accompanying financial statements, the Company has an accumulated deficit of approximately $17,003,000 and negative
working capital of approximately $4,523,000 as of March 31, 2018. 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 DEBT AND LONG-TERM LIABILITIES
The
following table shows the Company’s short-term and long-term debt at March 31, 2018 and December 31, 2017.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Short-term debt:
|
|
|
|
|
|
|
Loans payable – third party
|
|
$
|
163,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
Loan payable – related party
|
|
|
|
|
|
|
|
|
Gross
|
|
|
4,027,351
|
|
|
|
4,027,351
|
|
Accrued Interest
|
|
|
185,060
|
|
|
|
85,757
|
|
Unamortized discount
|
|
|
(487,380
|
)
|
|
|
(517,182
|
)
|
Net loans payable – related party
|
|
$
|
3,725,031
|
|
|
$
|
3,595,926
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Purchase price of patents
|
|
|
|
|
|
|
|
|
Gross
|
|
|
875,000
|
|
|
|
875,000
|
|
Unamortized discount
|
|
|
(158,347
|
)
|
|
|
(175,243
|
)
|
Net purchase price of patents – long-term
|
|
$
|
716,653
|
|
|
$
|
699,757
|
|
The
loan payable – third party is a demand loan made by former officers and directors, who are unrelated third parties at March
31, 2018, and December 31, 2017, 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 March 31, 2018 represents the principal amount of the Company’s 10% note to United
Wireless Holdings, Inc. (“United Wireless”) in the amount of $4,027,351 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,
2017. 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. The Company disputed the claim that it was in breach of the registration rights agreement.
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 which was made in November 2017, except in connection with the potential acquisition by the Company of patent rights
which triggered a $25,000 working capital loan in connection with the acquisition and the Company can 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, 2017 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 was declared effective on July 6, 2017. The Company issued to
United Wireless a 10% promissory note due September 30, 2020 in the principal amount of $25,000 pursuant to the standstill agreement,
for which the Company received $25,000, which was used to make the $25,000 advance to Intellectual Ventures Assets 34 LLC and
Intellectual Ventures Assets 37 LLC (“IV 34/37”) as part of acquisition of intellectual property from IV 34/37. In
connection with the loan, the Company entered into a monetization agreement with United Wireless pursuant to which the Company
agreed to pay United Wireless 7.5% of the net monetization proceeds from the patents acquired by CXT from IV 34/37. This obligation
was recorded as an expense related to obtaining the standstill agreement and is reflected in interest expenses. 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. The notes payable to United Wireless have been classified as current liabilities
as of March 31, 2018. Because of its right to elect a director of the Company, United Wireless is treated as a related party.
Prior to the securities purchase agreement with United Wireless, the Company had no relationship with United Wireless.
Long
term liabilities
The
purchase price of patents at March 31, 2018 represents the non-current portion of minimum payments due under the agreement between
CXT Systems, Inc. (“CXT”), a wholly owned subsidiary, and 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, and agreed that 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.
NOTE
4 – DERIVATIVE LIABILITIES
Because
there is not a fixed conversion price, remaining compliant with the reserve requirement under the United Wireless note is outside
of the control of the Company. Because there is no set limit on the number of shares issuable under the note if the note becomes
convertible, absent an increase in the stock price or an increase in authorized shares, there are potentially not enough authorized
shares to satisfy the exercise of the Company’s options, thus the Company determined that certain 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 March 31, 2018, and December 31, 2017, the aggregate fair value of the outstanding derivative liability was approximately $100,000
and $90,000, 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 March 31, 2018:
|
|
|
Period
Ended March 31,
|
|
|
|
|
2018
|
|
Volatility
|
|
|
|
426
% - 452%
|
|
Risk-free
interest rate
|
|
|
|
1.36%
|
|
Expected
dividends
|
|
|
|
-%
|
|
Expected
term
|
|
|
|
2.50
– 2.75 years
|
|
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of March 31, 2018
and December 31, 2017:
|
|
Fair Value Measurements as of
|
|
|
|
31-Mar-18
|
|
|
31-Dec-17
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
90,000
|
|
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,
2018
|
|
Beginning balance
|
|
$
|
90,000
|
|
Change in fair value
|
|
|
10,000
|
|
Ending balance
|
|
$
|
100,000
|
|
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
There
was no stock-based compensation expense for the three months ended March 31, 2018 or 2017.
As
of March 31, 2018, 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
($)
|
|
|
Weighted Average Remaining Contractual
Life
(Years)
|
|
Balance - December 31, 2017
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
2.75
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - March 31, 2018
|
|
|
50,000,000
|
|
|
|
0.03
|
|
|
|
2.5
|
|
Warrants
As
of March 31, 2018, there was no unamortized warrant expense.
A
summary of the status of the Company's stock warrants and changes is set forth below:
|
|
Number of Warrants
(#)
|
|
|
Weighted Average Exercise
Price
($)
|
|
|
Weighted Average Remaining Contractual Life
(Years)
|
|
Balance - December 31, 2017
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
0.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
65,000,000
|
|
|
|
0.004
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets include patents purchased and are recorded based at their acquisition cost. Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
amortization
period
|
|
|
|
2018
|
|
|
2017
|
|
|
(years)
|
|
Patents
|
|
$
|
4,020,000
|
|
|
$
|
4,000,000
|
|
|
|
9.8
|
|
Less: net monetization obligations
|
|
|
(509,811
|
)
|
|
|
(509,811
|
)
|
|
|
|
|
Imputed interest
|
|
|
(376,291
|
)
|
|
|
(376,291
|
)
|
|
|
|
|
Subtotal
|
|
|
3,133,898
|
|
|
|
3,113,898
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(774,990
|
)
|
|
|
(650,560
|
)
|
|
|
|
|
Net value of intangible assets
|
|
$
|
2,358,908
|
|
|
$
|
2,463,338
|
|
|
|
8.2
|
|
Intangible
assets are comprised of patents with estimated useful lives. The intangible assets at March 31, 2018 represent: (1) patents acquired
in October 2015 for a purchase price of $3,000,000, the useful lives of the patents, at the date of purchase, was 6-10 years,
(2) patents acquired in July 2017 pursuant to an obligation to distribute 50% of net revenues to IV 34/37, against which $25,000
was advanced at closing and provided that in the event that, on December 31, 2018, December 31, 2019 and December 31, 2020, cumulative
distributions of 50% of net revenues 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; the useful lives of the patents, at the date of acquisition,
was 5-6 years, (3) patents (which were fully depreciated at the date of acquisition) acquired in January 2018 pursuant to an agreement
with to Intellectual Ventures Assets 62 LLC and Intellectual Ventures Assets 71 LLC “(IV 62/71”), pursuant to which
CXT obligation to distribute 50% of net revenues to IV 62/71 against which CXT advanced $10,000 at closing; and (4) patents acquired
in January 2018 by Photonic Imaging Solutions Inc. (“PIS”) from Intellectual Ventures Assets 64 LLC (“IV 64”)
pursuant to which PIS is to pay IV 64 (a) 70% of the first $1,500,000 of net revenue, (b) 30% of the next $1,500,000 of net revenue
and (c) 50% of net revenue in excess of $3,000,000, against which PIS advanced $10,000 at closing. The Company amortizes the costs
of intangible assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including
legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent. Amortization
of patents is included as a selling, general and administrative expense in the accompanying consolidated statements of operations.
The
Company assesses intangible assets for any impairment to the carrying values. As of March 31, 2017, and December 31, 2017,
management concluded that there was no impairment to the acquired assets. At March 31, 2018 and December 31, 2017, the book value
of the Company’s intellectual property was $2,358,908 and $2,463,338, respectively.
Amortization
expense for patents comprised $124,430 and $331,275 for the three months ended March 31, 2018 and the year ended December 31,
2017, respectively. Future amortization of intangible assets is as follows:
Year ended December 31,
|
|
|
|
2018
|
|
$
|
313,289
|
|
2019
|
|
|
417,719
|
|
2020
|
|
|
417,719
|
|
2021
|
|
|
413,658
|
|
2022 and thereafter
|
|
|
796,523
|
|
Total
|
|
$
|
2,358,908
|
|
Pursuant
to the 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, 15% of the net monetization proceeds from the patents acquired in October 2015 will
be paid to our lender, United Wireless. This monetization obligation was recognized as a discount to the loan and will be amortized
over the life of the loan using the effective interest method. In addition, the Company entered into a monetization agreement
with United Wireless pursuant to which the Company agreed to pay United Wireless 7.5% of the net monetization proceeds from the
patents acquired by CXT in July 2017. This obligation was recorded as an expense and is reflected in interest expense during the
third quarter of 2017.
The
Company granted Intellectual Ventures a security interest in the patents assigned to the Company as security for the payment of
the balance of the purchase price. The security interest of Intellectual Ventures is senior to the security interest of United
Wireless in the proceeds derived from such patents.
The
balance of the purchase price of the patents is reflected as follows:
|
|
March
31, 2018
|
|
|
December 31,
2017
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Purchase
price of patents, current portion
|
|
|
100,000
|
|
|
$
|
100,000
|
|
Unamortized
discount
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
|
Purchase
price of patents, long term
|
|
|
875,000
|
|
|
$
|
875,000
|
|
Unamortized
discount
|
|
|
(158,347
|
)
|
|
|
(175,243
|
)
|
Total current
and non-current
|
|
|
816,653
|
|
|
|
799,757
|
|
Effective
interest rate of Amortized over 2-3 years
|
|
|
|
|
|
|
9.2-9.6
|
%
|
Because
the non-current minimum payment obligations of $875,000 are due over the next three years, the Company imputed interest of 10%
and the interest will be accreted up to the maturity date.
NOTE
7 – 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, 2017
|
|
$
|
3,219
|
|
Net income attributable to non-controlling interest
|
|
$
|
(594
|
)
|
Balance as of March 31, 2018
|
|
$
|
2,625
|
|
NOTE
8 – 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
the three months ended March 31, 2018 and 2017, 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, 2018 and 2017, the cost
of these services was approximately $230 and $545 respectively.
NOTE
9 – 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 us to enable us 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 we have 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 litigation 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. 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, and oral argument has been scheduled for June 6, 2018, though
this date may change. 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 on Quest Licensing Corporation’s appeal.
NOTE
10 – SUBSEQUENT EVENTS
On April 6, 2018 and April 30, 2018 pursuant to the Company’s
agreements with United Wireless, United Wireless made a working capital loans in the amount of $25,000 and $100,000, respectively,
for which the Company issued its 10% promissory notes due September 30, 2020 in the principal amounts of $25,000 and $100,000,
respectively.