QUEST PATENT RESEARCH CORPORATION The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated unaudited financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See "Forward-Looking Statements." Our actual results could differ materially from those anticipated in the forward-looking statements.
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 eighteen intellectual property portfolios, which principally consist of patent rights. As part of our intellectual property asset management activities and in the ordinary course of our business, it has been necessary for either us or the intellectual property owner who we represent to initiate, and it is likely to continue to be necessary to initiate patent infringement lawsuits and engage in patent infringement litigation. We anticipate that our primary source of revenue will come from the grant of licenses to use our intellectual property, including licenses granted as part of the settlement of patent infringement lawsuits. Our business, like all businesses at the present time, are affected by the COVID-19 pandemic and the steps taken by states to seek to reduce the spread of the virus. Although we do not manufacture or sell products, the COVID-19 pandemic and the work shutdown imposed inthe United States and other countries to limit the spread of the virus can have a negative impact on our business. Our revenue is generated almost exclusively from license fees generated from litigation seeking damages for infringement of our intellectual property rights. The work shutdown has affected the court system, with courts operating on a reduced schedule. As a result, patent infringement actions are likely to be lower priority items in allocation of court resources, with the effect that deadlines are likely to be postponed which delays may give defendants an incentive to delay negotiations or offer a lower amount than they might otherwise accept. These delays continue to have an effect on the court system as a result of the backlog that developed as a result of court closures. In addition, the effect of the COVID-19 and the public response may adversely affect the financial condition and prospects of defendants and potential defendants, which would make it less likely that they would be willing to settle our claim. A number of defendants and potential defendants have filed to take advantage of the Bankruptcy Act or have announced that they may consider such action. If any defendant filed for protection under the Bankruptcy Act, the action would be stayed and we may not be able to obtain a judgment or recover on any judgment.
The COVID-19 pandemic and the response to limit the spread of the infection may affect the financial condition of financing sources and the willingness of potential financing sources to provide funding for our litigation. In addition, these factors may affect a law firms' ability and willingness to provide us with legal services on a contingent or partial contingent. The possibility that a defendant may seek protection under the Bankruptcy Act may make it less likely that a financing source would finance the litigation or that a law firm would work on a contingency or modified contingency basis. Further, as the population ofthe United States becomes vaccinated and restrictions that had been imposed to address the pandemic are lifted, we cannot assure you that our revenue will increase as a result of the reduction of such restrictions, including courts being open for longer hours and for in person hearings. Further, to the extent that holders of intellectual property rights see these factors impacting our ability to generate revenue from their intellectual property, they may be reluctant to sell intellectual property to us on terms which are acceptable to us, if at all. We seek to generate revenue from 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. All of the revenue for the three and nine months endedSeptember 30, 2022 were from patent licensing fees, of which approximately 100% was paid to the patent seller, funding sources and legal counsel pursuant to our agreements with patent sellers, funding sources and legal counsel. We did not generate revenue for the three and nine months endedSeptember 30, 2021 . 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 do not anticipate 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. 20 It is generally necessary to commence litigation in order to obtain a recovery for past infringement of, or to license the use of, our intellectual property rights. Intellectual property litigation is very expensive, with no certainty of any recovery. To the extent possible we seek to engage counsel on a contingent fee or partial contingent fee basis, which significantly reduces our litigation cost, but which also reduces the value of the recovery to us. We do not have the resources to enable us to fund the cost of litigation. To the extent that we cannot fund litigation ourselves, we may enter into an agreement with a third-party funding source. Our agreements with the funding sources typically provide that the funding source pays the litigation costs and that the funding source receives a percentage of the recovery, thus reducing our recovery in connection with any settlement of the litigation. In view of our limited cash and our working capital deficiency, we are not able to institute any monetization program that may require litigation unless we engage counsel on a fully contingent basis or we obtain funding from third party funding sources. In these cases, counsel may be afforded a greater participation in the recovery and the third party that funds the litigation would be entitled to participate in any recovery. 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. Because we were in default under our loans toIntelligent Partners (as successor toUnited Wireless ), withIntelligent Partners having the ability to declare a default on our notes in the principal amount of$4,672,810 , and with the possibility of our seeking protection under the Bankruptcy Act, we ceased our monetization activities, since no counsel would represent us on a contingent basis and no potential funding source would provide us with funding in view of the default and possible bankruptcy, and we devoted our efforts in negotiating the agreements withQFL and Intelligent Partners . We resumed our monetization activities inFebruary 2021 after we entered into our agreements withQFL and Intelligent Partners . However, the intellectual property monetization cycle is lengthy and may ultimately be unsuccessful. Accordingly, we did not generate revenues during the three and nine months endedSeptember 30, 2021 .
Agreements with
On
Pursuant to the Purchase Agreement with QFL, QFL agreed to make available to us a financing facility of: (a) up to$25,000,000 for the acquisition of mutually agreed patent rights that we intend to monetize, of which$2,210,000 has been advanced as ofMarch 31, 2022 ; (b) up to$2,000,000 for operating expenses, of which the we have requested and received$1,200,000 as ofMarch 31, 2022 ; and (iii)$1,750,000 to fund the cash payment portion of the restructure of our obligations toIntelligent Partners . In return we transferred to QFL a right to receive a portion of net proceeds generated from the monetization of those patents. We used$1,750,000 of proceeds from the QFL financing as the cash payment portion of the restructure of our obligations toIntelligent Partners . Our obligations to QFL are secured by the proceeds from the patents acquired with their funding, the patents and all general intangibles now or hereafter arising from or related to the foregoing and the proceeds and products of the foregoing. We also granted QFL a ten-year warrant to purchase a total of up to 962,463 shares of our common stock, with an exercise price of$0.54 per share which may be exercised throughFebruary 18, 2031 on a cash or cashless basis, subject to certain limitations on exercisability. The warrant also contains certain minimum ownership percentage antidilution rights pursuant to which the aggregate number of shares of common stock purchasable upon the initial exercise of the Warrant shall not be less than 10% of the aggregate number of outstanding shares of our capital stock (determined on a fully diluted basis). A portion of any gain from sale of the shares, net of taxes and costs of exercise, realized prior to the completion of all monetization activities shall be credited against the total return due to QFL pursuant to the Purchase Agreement. We also agreed to take all commercially reasonable steps necessary to regain compliance with the OTCQB eligibility standards as soon as practicable, but in no event later than 12 months from the closing date, and regained compliance onMay 7, 2021 and we granted QFL registration rights with respect to the common stock issuable upon exercise of the warrants. We also granted QFL certain board observation rights. Pursuant to the Purchase Agreement, all of the net proceeds from the monetization of the intellectual property acquired with funds from QFL are paid directly to QFL. After QFL has received a negotiated rate of return, we and QFL share net proceeds equally until QFL achieves its investment return, as defined in the agreement. Thereafter, we retain 100% of all net proceeds. Except in an Event of Default, as defined therein, all payments by us to QFL pursuant to the Purchase Agreement are non-recourse and shall be paid only if and after net proceeds from monetization of the patent rights owned or acquire by us are received, or to be received. Contemporaneously with the execution of the agreement with QFL, we entered into a restructure agreement withIntelligent Partners to eliminate any obligations we had with respect to the outstanding notes and the securities purchase agreement. As part of the restructure of our agreements withIntelligent Partners , we amended the existing MPAs and grantedIntelligent Partners certain rights in the monetization proceeds from any new intellectual property we acquire. Under these MPAs,Intelligent Partners receives a 60% interest in the proceeds from our intellectual property owned by the eight Subsidiary Guarantors.Intelligent Partners also participates in the monetization proceeds from new intellectual property that we acquire until the total payments under all the monetization participation agreements equal$2,805,000 , as follows: for net proceeds between$0 and$1,000,000 ,Intelligent Partners receives 10% of the net proceeds realized from new patents, except that if, in any calendar quarter, net proceeds realized by us exceed$1,000,000 ,Intelligent Partners' entitlement for that quarter only shall increase to 30% on the portion of net proceeds in excess of$1,000,000 but less than$3,000,000 . If in the same calendar quarter, net proceeds exceed$3,000,000 ,Intelligent Partners' entitlement for that quarter only shall increase to 50% on the portion of net proceeds in excess of$3,000,000 . The payments with respect to the new patents terminate once total payments toIntelligent Partners under all monetization participation agreements reach$2,805,000 . The payments toIntellectual Partners with respect new patents are payable from the proceeds which are allocated to us under the QFL agreements, which start after QFL has received a negotiated rate of return.
21
Effects of Possible Delisting of Common Stock on OTCQB
OnMay 23, 2022 , we received notice from OTC Markets Group, that, because the bid price for our common stock had closed below$0.01 per share for more than 30 consecutive days, we no longer met the Standards for Continued Eligibility under the OTC listing standards and, if this deficiency is not met byAugust 21, 2022 , our stock would be removed from the OTCQB marketplace, in which event our common stock will be traded on the OTC Pink market. Our registration rights agreement with QFL provides that, in the event of a failure to comply with certain covenants, which includes the failure of our common stock to be traded on the OTCQB, in addition to any other remedies available to QFL, we are to pay to QFL an amount in cash equal to 2.0% of the aggregate value ofQFL's Registrable Securities , as defined in the Registration Rights Agreement, whether or not included in such registration statement, on each of the following dates: (i) the initial day of a maintenance failure; (ii) on the 30th day after the date of such a failure and (iii) every 30th day thereafter (prorated for periods totaling less than thirty (30) days) until such failure is cured. InJuly 2022 , we amended our certificate of incorporation to effect a one-for-100 reverse split of our common stock We subsequently received advice from OTC Markets Group that the deficiency had been cured. We had previously received a similar notice, and our common stock taken off the OTCQB effectiveAugust 31, 2020 , and it traded on the OTC Pink Market untilMay 7, 2021 when trading resumed on the OTCQB. We cannot assure you that we will continue to meet the requirements for continued listing on the OTCQB, including the maintenance of a bid price of
at least$0.01 per share. Portfolios
InAugust 2021 , STX brought a patent infringement suit in the U.S. District for theEastern District ofTexas against Yamaha Corporation and Steinberg Media Technologies GMBH. InMarch 2022 , STX brought a patent infringement suit in the U.S. District for theEastern District ofTexas against Parrot SA, Delair SAS,Drone Volt, SA ,EHang Holdings Limited andFlyability SA . As ofSeptember 30, 2022 , the matter against Yamaha Corporation, Steinberg Media Technologies GMBH, Parrot SA,Drone Volt, SA , andFlyability SA have been resolved, and revenue for the nine months endedSeptember 30, 2022 includes revenue from the settlement.
In
InNovember 2021 , TLL brought patent infringement suits in the U.S. District for theEastern District ofTexas against Trend Micro Incorporated. InMarch 2022 , Trend Micro, Inc. filed a complaint against TLL in the U.S. District for theWestern District ofTexas seeking declaratory judgement of non-infringement of the patents in suit. InFebruary 2022 , TLL brought patent infringement suits in the U.S. District for theEastern District ofTexas againstCheckpoint Software Technologies Ltd. and Palo Alto Networks, Inc. InMarch 2022 , TLL voluntarily dismissed, without prejudice, the action against Palo Alto Networks, Inc. InMarch 2022 , Palo Alto Networks, Inc. filed a complaint against TLL and the Company in the U.S. District for theSouthern District ofNew York seeking declaratory judgement of non-infringement of the patents in suit. InMay 2022 , Trend Micro Inc. filed a motion with the Panel on Multidistrict Litigation seeking to have the pending actions consolidated into a centralized multidistrict litigation for pretrial proceedings. InAugust 2022 , theJudicial Panel on Multidistrict Litigation consolidated all actions in the U.S. District for theEastern District ofTexas . InOctober 2022 , TLL brought patent infringement suits in the U.S. District for theEastern District ofTexas against Fortinet, inc.,Crowdstrike, Inc. et.al., andMusarubra US, LLC . InMarch 2022 , LSC brought patent infringement suits in the U.S. District for theEastern District ofTexas against Microsoft Corporation,Google LLC , Cisco Systems, Inc. and Amazon.com, Inc. et.al. InNovember 2022 ,Google LLC filed a petition before the patent trial and appeal board for inter partes review of US Patent No. 10,154,092.
OnJanuary 27, 2022 , the Company acquired, via assignment from Intellectual Ventures Assets 181 LLC and Intellectual Ventures Assets 174 LLC, all right title and interest to four patent portfolios consisting of fifteenUnited States patents and three foreign patents for a purchase price of$1,060,000 . The Company requested and received a capital advance in the amount of the$1,060,000 purchase price from the facility with QFL. The patents were assigned to our wholly owned subsidiariesTyche Licensing LLC andDeepwell IP LLC . InMay 2022 , Tyche brought patent infringement suits in the U.S. District for theEastern District ofTexas against MediaTek Inc., Realtek Semiconductor Corporation, Texas Instruments Incorporated, Infineon Technologies AG and STMicroelectronics NV et. al. InMay 2022 , Tyche voluntarily dismissed, without prejudice, the action against STMicroelectronics NV et .al. InMay 2022 , STMicroelectronics, Inc. filed an action for declaratory judgement of non-infringement in the U.S. District for theNorthern District ofTexas , the action was dismissed without prejudice inJuly 2022 . InSeptember 2022 , the action against Texas Instruments Incorporated was dismissed with prejudice. 22
In
InJuly 2022 , EDI acquired, via assignment fromEdward D. Ioli Trust , all right title and interest to a portfolio of fiveUnited States patents relating to a system and method for controlling vehicles and for providing assistance to operated vehicles ("EDI Portfolio") for a purchase price consisting of 50% of the net proceeds resulting from monetization of the EDI Portfolio. InJuly 2022 , we entered into a purchase agreement withHewlett Packard Enterprise Development LP and Hewlett Packard Enterprise Company for the purchase of eight United States Patents for a purchase price of$350,000 . We paid$35,000 upon execution of the agreement with the balance payable within 30 days. We requested and received a capital advance from QFL in the amount of$350,000 , which was used to make payment of the balance inAugust 2022 pursuant to the terms of the purchase agreement. Results of Operations
Three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021Revenues (patent licensing fees)$ 275,000 $ -$ 397,000 $ - Cost of revenue (litigation and licensing expenses) 147,393 5,825 237,487 70,063 Selling, general and administrative expenses 476,812 363,402 1,561,987 3,482,360 Loss from operations (349,205 ) (369,227 ) (1,402,474 ) (3,552,423 ) Other income (expense)
Gain on settlement of accounts payable - 1,725,965 - 1,763,573 Warrant expense - - - (1,154,905 ) Change in fair market value of warrant liability 565,928 (394,610 ) 1,432,145 (779,645 ) Loss on conversion of debt - - - (305,556 ) Loss on debt extinguishment - - - (730,378 ) Interest expense (113,058 ) (90,509 ) (295,705 ) (216,667 ) Total other income (expense) 452,870 1,240,846
1,136,440 (1,423,578 )
Income (loss) before income tax 103,665 871,619
(266,034 ) (4,976,001 )
Income tax expense - - (12,884 ) (1,806 )
Net income (loss) $ 103,665 $ 871,619 $ (278,918 ) $ (4,977,807 ) We generated revenues of approximately$275,000 for the three months endedSeptember 30, 2022 and approximately$397,000 for the nine months endedSeptember 30, 2022 , as compared to no revenues for the three and nine months endedSeptember 30, 2021 . Our revenue for the nine months endedSeptember 30, 2022 was generated from settlements in the M-RED and STX portfolios. The failure to generate revenue for the nine months endedSeptember 30, 2021 resulted from our inability to engage counsel or secure financing for licensing programs on our intellectual property as a result of our default under the notes toIntelligent Partners . Our revenue, in the near future if not longer, is likely to be affected by factors relating to the COVID-19 pandemic as described under "Overview." The total settlement recovery is included in revenue and the associated costs are deducted as cost of revenue. Cost of revenue for the three months endedSeptember 30, 2022 and 2021 relating to patent service costs was approximately$147,000 and$6,000 , respectively. Cost of revenue for the nine months endedSeptember 30, 2022 and 2021 was approximately$237,000 and$70,000 , respectively. As discussed above, the timing and amount of our revenue is dependent upon the results of litigation seeking to enforce our intellectual property rights, and we cannot predict when or whether we will have a recovery and how much of the recovery will be received by us after payments to legal counsel, to our funding sources, to inventors/former patent owners and toIntelligent Partners who have an interest in our share of the recovery from certain patent portfolios after deducting payments due to counsel and the litigation funding source. 23 Selling, general, and administrative expenses for the three months endedSeptember 30, 2022 increased by approximately$113,000 , or approximately 31%, compared to the three months endedSeptember 30, 2021 . Selling, general, and administrative expenses for the nine months endedSeptember 30, 2022 decreased by approximately$1,920,000 , or approximately 55%, compared to the nine months endedSeptember 30, 2021 . Our principal expenses for the three and nine months endedSeptember 30, 2022 was amortization of intangible assets of approximately$198,000 and$712,000 and professional fees of$142,000 and$430,000 , respectively. We had stock-based compensation costs of approximately$25,000 and$92,000 for the three and nine months endedSeptember 30, 2022 , respectively. Our principal expense for the three months endedSeptember 30, 2021 was amortization expense of approximately$388,000 and was stock-based compensation expense of approximately$1,805,000 for the nine months endedSeptember 30, 2021 . As discussed above, the timing and amount of revenue is dependent upon the results of litigation seeking to enforce our intellectual property rights. Depending on the terms of the engagement with counsel, total fees payable across all our portfolio enforcement actions may exceed total settlement recoveries as of a specific date as the settlements do not occur simultaneously. Other income and expense for the three and nine months endedSeptember 30, 2022 included a gain on change in fair value of warrant liability of approximately$566,000 and approximately$1,432,000 , respectively. We realized a loss on change in fair value of warrant liability of approximately$395,000 for the three months endedSeptember 30, 2021 and approximately$780,000 for the nine months endedSeptember 30, 2021 . The fair value of the warrant liability is affected by the price of our common stock, so it increases as the stock price goes up and decreases as the stock price goes down. Other expense also reflects interest expense of approximately$113,000 and$296,000 for the three and nine months endedSeptember 30, 2022 , respectively and approximately$91,000 and$217,000 for the three and nine months endedSeptember 30, 2021 , respectively. The increase in interest expense reflects the accrued interest payable on the principal amount of QFL facility. During the three and nine months endedSeptember 30, 2021 , we realized a gain on settlement of accounts payable of approximately$1,726,000 and approximately$1,764,000 , respectively. We did not incur income tax expense for the three months endedSeptember 30, 2022 and 2021. We incurred income tax expense of$13,000 and$2,000 for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in income tax expense for the nine months endedSeptember 30, 2022 primarily reflects foreign income taxes related to foreign source patent licensing fees. As a result of the foregoing, we realized a net income of approximately$104,000 , or$0.02 per share (basic and diluted) and net loss of approximately$279,000 , or$0.05 per share (basic and diluted), for the three and nine months endedSeptember 30, 2022 , respectively, compared to net income of approximately$872,000 , or$0.16 per share (basic) and$0.13 per share (diluted), and net loss of approximately$4,978,000 , or$0.99 per share (basic and diluted) for the three and nine months endedSeptember 30, 2021 , respectively.
Liquidity and Capital Resources
AtSeptember 30, 2022 , we had current assets of approximately$305,000 , and current liabilities of approximately$9,410,000 . Our current liabilities include funding liabilities of approximately$5,284,000 payable to QFL, a non-interest bearing total monetization proceeds obligation (the "TMPO") toIntelligent Partners in the amount of$2,801,000 under the Restructure Agreement, both of which are only payable from money generated from the monetization of intellectual property, and loans payable of$138,000 and accrued interest of approximately$788,000 . As ofSeptember 30, 2022 , we have an accumulated deficit of approximately$25,715,000 and a negative working capital of approximately$9,105,000 . Other than salary and pension benefits to our chief executive officer, we do not contemplate any other material operating expense requiring cash in the near future other than normal general and administrative expenses, including expenses relating to our status as a public company filing reports with theSEC .
The following table shows the summary cash flows for the nine months ended
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