QUEST PATENT RESEARCH CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk Factors” and elsewhere in this report. Overview Our principal operations include the development, acquisition, licensing and enforcement of intellectual property rights that are either owned or controlled by us or one of our wholly owned subsidiaries. We currently own, control or manage ten intellectual property portfolios, which principally consist of patent rights. As part of our intellectual property asset management activities and in the ordinary course of our business, it has been necessary for either us or the intellectual property owner who we represent to initiate, and it is likely to continue to be necessary to initiate, patent infringement lawsuits and engage in patent infringement litigation. 39 Because of the nature of our business transactions to date, we recognize revenues from licensing upon execution of a license agreement following settlement of litigation and not over the life of the patent. Thus, we recognize revenue when we enter into the agreement pursuant to which we are to receive the license fee or settlement payment. Although we intend to seek to develop portfolios of intellectual property rights that provide us for a continuing stream of revenue, to date we have not been successful in doing so, and we cannot give you any assurance that we will be able to generate any significant revenue from licenses that provide a continuing stream of revenue. Thus, to the extent that we continue to generate cash from single payment licenses, our revenues can, and are likely to, vary significantly from quarter to quarter and year to year. Our gross profit from license fees reflects any royalties which we pay in connection with our license, including contingent legal fees and the portion of the recovery payable to QFL and Intelligent Partners. Our agreements with our funding sources have typically provided that the funding source pay the litigation costs and receive a percentage of the recovery, thus reducing our recovery in connection with any settlement of the litigation. To the extent that our counsel represents us on a contingent fee basis, our recovery would also be reduced by the percentage of the settlement payable to counsel. From September 2015 until December 2021, under our agreements with QFL and Intelligent Partners, as the assignee of United Wireless, and under the terms of our agreements to purchase certain intellectual property portfolios, a portion of our recovery may be payable to Intelligent Partners or the seller of the intellectual property rights. All of these payments, which are reflected as cost of revenues, significantly reduce the net payment to us. Agreements with QFL and Intelligent Partners On February 22, 2021, we entered into a funding agreement with QFL and a restructure agreement with Intelligent Partners. 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 $1,150,000 had been advanced at December 31, 2021 and $2,210,000 has been advanced at March 31, 2022; (b) up to $2,000,000 for operating expenses, of which $1,000,000 had been advanced at December 31, 2021 and $1,200,000 has been advanced at March 31, 2022; and (iii) $1,750,000 to fund the cash payment portion of the restructure of our obligations to Intelligent Partners, which was paid to Intelligent Partners at the closing. In return we transferred to QFL a right to receive a portion of net proceeds generated from the monetization of those patents. 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 96,246,246 shares of our common stock, with an exercise price of $0.0054 per share which may be exercised from February 19, 2021 through February 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) at the date of such exercise. A portion of any gain from the 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 granted QFL registration rights with respect to the common stock issuable upon exercise of the warrants and certain board observation rights. Pursuant to the Purchase Agreement, the 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 with Intelligent 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 with Intelligent Partners, we amended the existing MPAs and granted Intelligent 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 to Intelligent Partners under all monetization participation agreements reach $2,805,000. The payments to Intelligent 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. 40 Inventor Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses In connection with the investment in certain patents and patent rights, certain of our operating subsidiaries executed agreements which grant to the former owners of the respective patents or patent rights, the right to receive inventor royalties based on future net revenues (as defined in the respective agreements) generated as a result of licensing and otherwise enforcing the respective patents or patent portfolios. Our operating subsidiaries may engage third party funding sources to provide funding for patent licensing and enforcement. The agreements with the third party funding sources may provide that the funding source receives a portion of any negotiated fees, settlements or judgments. In certain instances, these third party funding sources are entitled to receive a significant percentage of any proceeds realized until the third party funder has recouped agreed upon amounts based on formulas set forth in the underlying funding agreement, which may reduce or delay and proceeds due to us. Our operating subsidiaries may retain the services of law firms in connection with their licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby the law firms are paid by the funding source on a scaled percentage of any negotiated fees, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained. Depending on the amount of any recovery, it is possible that all the proceeds from a specific settlement may be paid to the funding source and legal counsel. The economic terms of the inventor agreements, funding agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, proceeds sharing rates, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by the operating subsidiaries. Inventor royalties, payments to non-controlling interests, payments to third party funding providers and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties, payments to third party funding sources and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors. In December 2018, we entered into a funding agreement whereby a third party agreed to provide funds to us to enable us to support our structured licensing programs for the CMOS and M-RED portfolios. Under the funding agreement, the third party receives an interest in the proceeds from the programs, and we have no other obligation to the third party. As of December 31, 2021, the third-party funding source advanced $150,000 for costs and expenses, and has no further obligation to provide additional funds. Under the terms of the funding agreement, the third-party funder is entitled to a priority return of funds advanced from net proceeds recovered. There are not pending actions. In connection with any litigation seeking to enforce our intellectual property rights, it is possible that a defendant may request and/or a court may rule that an operating subsidiary has violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or its operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or its operating subsidiaries, could materially harm our operating results and financial position. Since the operating subsidiaries do not have any assets other than the patents, and the Company does not have any available financial resources to pay any judgment which a defendant may obtain against a subsidiary, such a judgement may result in the bankruptcy of the subsidiary and/or the loss of the patents, which are the subsidiaries’ only assets. At present, we are pursuing litigation with respect to several of our intellectual property portfolios. The actions are described in Item 1. Business. We cannot estimate when or whether we will receive any revenue from these litigations, or whether, in the event we do not prevail, the defendant will not obtain an award of legal fees against our plaintiff subsidiary which could result in the bankruptcy of the subsidiary and a default under our agreements with QFL and Intelligent Partners. 41 Restricted Stock Grants and Options In February 2021, we issued restricted stock grants to consultants (30,000,000 shares) and to our officers and directors (74,000,000 shares) all of which vested immediately. The value of the shares is be reflected as non-cash compensation in 2021. Also in February 2021, we granted restricted stock options to consultants (90,000,000 shares) and to our chief executive officer (60,000,000 shares). With respect to two of the consultants and the chief executive officer the options become cumulatively exercisable as follows: 1/3 rd at an exercise price of $0.01 per share, becoming exercisable upon the commencement of trading of the Common Stock on the OTCQB; 1/3 rd at an exercise price of $0.03 per share becoming exercisable on the first day on which we file with the SEC a Form 10-K or Form 10-Q with stockholders’ equity of at least $5,000,000; and 1/3 rd at an exercise price of $0.05 per share on the date on which the Common Stock is listed for trading on the Nasdaq Stock Market or the New York Stock Exchange. We will incur non-cash compensation with respect to the value of the options, based of Black-Scholes valuation, as the options become exercisable. Results of Operations Years Ended December 31, 2021 and 2020 The following table shows the revenue and operating expenses for the years ended December 31, 2021 and 2020: Year ended December 31, 2021 2020 Revenues (patent licensing fees) $ 2,050,000 $ 5,488,088 Cost of revenue (litigation and licensing expenses) 1,314,928 4,692,969 Selling, general and administrative expenses 3,848,611 1,513,822 Total operating expenses 5,163,539 6,206,791 Loss from operations (3,113,539 ) (718,703 ) Revenues for the year ended December 31, 2021 were $2,050,000, as compared with $5,488,088 in 2020, a decrease of $3,438,088, or approximately 63%. The decrease in 2021 principally reflects a decrease in patent licensing fees of $3,438,088, or 63%. Our licensing fees reflect the settlement of litigation for infringement of our patent rights. These fees are one-time fees, with the result that there is no continuity of revenues from period to period, and any revenue we generate in future periods will be solely dependent upon the results of pending and future litigation. We did not generate any revenue during the fourth quarter of 2020 or the first three quarters of 2021. We cannot assure you that we will generate any revenue from patent licensing fees in the future. The patent licensing fees of $2,050,000 in 2021 resulted from the licensing and settlements of the CXT Portfolio, the M-RED Portfolio, the Peregrin Portfolio and the Soundstreak Portfolio litigations. The patent licensing fees for 2020 resulted from licensing and settlements of Power Management/Bus Control Portfolio, the CXT Portfolio, the MRED Portfolio and the Financial Data Portfolio. Because we were in default under our loans to Intelligent Partners (as successor to United Wireless), with Intelligent Partners having the ability to declare a default on our notes in the principal amount of $4,672,810, 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 in view of the default and possible bankruptcy, and devoted our efforts in negotiating the agreements with QFL and Intelligent Partners. We resumed our efforts to monetize our intellectual property when we signed the agreements with QFL and Intelligent Partners in February 2021. Our revenue, at least in the near future if not longer, may be affected by factors relating to the COVID-19 pandemic and other domestic and international issues, including the Russian invasion of Ukraine. 42 Cost of revenues for 2021 was $1,314,928 which we incurred in connection with our pending litigations and fees we pay to litigation funding sources, legal counsel, prior owners and pursuant to monetization proceeds agreements in connection with CXT Portfolio, M-RED Portfolio, Peregrin Portfolio and Soundstreak Portfolio licenses. Cost of revenue for 2021 decreased approximately 72% from cost of revenue for 2020, reflecting the decline in revenue and the difference in the components of cost of revenue. Cost of revenue for 2020 was $4,692,969 of litigation and licensing fees paid to litigation funding sources and legal counsel in connection with the Power Management/Bus Control, the CXT Portfolio, the M-RED Portfolio and the Financial Data Portfolio licensing programs. Selling, general, and administrative expenses for 2021 increased by approximately $2,335,000, or by approximately 154%, from approximately $1,514,000 in 2020 to approximately $3,849,000 in 2021. Our principal selling, general and administrative expense for 2021 was stock-based compensation of approximately $1,916,000 resulting from stock and options granted to officers, directors and consultants. We did not incur stock-based compensation in 2020. Our principal selling, general and administrative expense for 2020 was amortization expense of approximately $648,000 relating to amortization of our patent portfolios. Amortization expense for 2021 was approximately $1,160,000 Other income (expense) for 2021 included an approximately $730,000 loss on the extinguishment of debt, an approximately $306,000 loss on conversion of debt and warrant expense of approximately $1,155,000. The warrants issued to QFL were accounted for as liabilities and the warrant liability is fair valued at each reporting period. The change in fair market value between reporting periods is recorded as other income. Other income (expense) for 2021 included an increase in the fair value of the warrant liability of approximately $481,000. We realized a gain of approximately $275,000 on derivative liability in the comparable period of 2020, which related to our obligations under our agreements with Intellectual Partners as transferee of United Wireless. In connection with the termination of our obligations under the United Wireless notes, the associated derivative liability was settled and written off to additional paid in capital and commencing in 2021, we no longer have a derivative liability. See Note 4 of Notes to Consolidated Financial Statements. Other income also reflects a gain on forgiveness of debt of approximately $3,593,000 for the year ended December 31, 2021 which represents the gain on resolution of the disputed and unpaid legal services performed our former legal counsel for services relating to the monetization of our intellectual property rights and the gain on forgiveness of debt resulting from amendment to our agreements with IV. The gain on forgiveness was offset by a loss on impairment of assets of approximately $1,652,000 associated with the write down of the Power Management/Bus Controller, CXT and M-RED portfolios resulting from our decision to no longer allocate resources to their monetization. Other income also reflects interest expense of approximately $292,000 for the year ended December 31, 2021 which reflects the accrued interest payable on the principal amount of QFL facility. Interest expense for the year ended December 31, 2020 was approximately $804,000 which reflects the interest accrued on our note to Intelligent Partners. The decrease in interest expense reflects the termination of accrued interest upon maturity on our note to Intelligent Partners. We had an income tax expense of approximately $2,000 for 2021 as compared with approximately $65,000 in 2020. The income tax expense in 2020 results primarily from foreign taxes paid with respect to certain of our settlement agreements. As a result of the foregoing, we had a net loss of approximately $4,155,000, or $0.01 per share (basic and diluted) for 2021 compared to net loss of approximately $1,313,000, or $0.00 per share (basic and diluted), for 2020. Liquidity and Capital Resources At December 31, 2021, we had current assets of approximately $277,000, current liabilities of approximately $8,403,000. Our current liabilities include liabilities of $3,203,000 payable to QFL, a non-interest bearing total monetization proceeds obligation (the “TMPO”) to Intelligent Partners in the amount of $2,805,000 under the Restructure Agreement, which is only payable from money generated from the monetization of intellectual property, loans payable of $138,000 due to former directors and minority stockholders and accrued interest of approximately $492,000. As of December 31, 2021, we have an accumulated deficit of approximately $25,436,000 and a negative working capital of approximately $8,126,000. 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 and the amortization of stock-based equity issued to consultants, which is a non-cash item. Because our agreements with our litigation funding sources do not require us to make any payments relating to the litigation, we do not incur expenses with respect to litigation covered by the funding sources. As of December 31, 2021, there was approximately $1,132,000 of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average expected term of 8 years. 43 As a result of our restructure of our agreement with Intelligent Partners, the outstanding notes to Intelligent Partners were cancelled and replaced with agreements that provide for payments if we receive proceeds from our intellectual property as described above under “Agreements for QFL and Intelligent Partners.” The following table shows the summary cash flows for the years ended December 31, 2021 and 2020: Year ended December 31, 2021 2020 Cash flows from operating activities $ (49,673 ) $ (246,304 ) Cash flows from investing activities (1,150,000 ) (95,000 ) Cash flows from financing activities 1,216,651 51,968 Net increase (decrease) in cash 16,978 (289,336 ) Cash at beginning of year 247,862 537,198 Cash at end of year 264,840 247,862 For 2021, we used approximately $50,000 in operations. Our cash flow used in operations for 2021 reflected our loss of approximately $4,155,000, which was offset principally by a loss on impairment of assets of approximately $1,652,000, stock based compensation of approximately $1,916,000, amortization of intangible assets of approximately $1,160,000, warrant expense of approximately $1,155,000, a decrease in accounts receivable of approximately $1,032,000, a decrease in accounts payable and accrued expenses of approximately $1,037,000, a loss on debt extinguishment of approximately $730,000, a loss on warrant liability of approximately $481,000 and a loss on conversion of debt of approximately $306,000, and increased by a gain on forgiveness of debt of approximately $1,850,000 and a gain on settlement of accounts payable of approximately $1,726,000. For 2020, we used approximately $246,000 in operations. Our cash flow used in operations for 2020 reflected our loss of approximately $1,300,000, and the amount used in operations increased primarily by a decrease in accounts payable and accrued expenses of approximately $471,000, and the gain on derivative liability of $275,000 offset by a decrease in accounts receivable of approximately $750,000, depreciation and amortization of approximately $648,000, amortization of debt discount of approximately $435,000 and bad debt expense of $66,000. Cash flow from financing activities in 2021 included proceeds from a third-party loan of approximately $3,900,000 offset by the payment of the purchase price of patents of approximately $924,000, payment of $1,750,000 of a loan from a related party from the proceeds of the third-party loan and the payment of $9,000 of a loan from a third party. Cash flow from financing activities for 2020 reflected the proceeds of an SBA loan of approximately $172,000, the payment of the purchase price of patents of approximately $194,000 and proceeds from the sale of future revenues of approximately $95,000 offset by payment made on the sale of future revenues of approximately $20,000. Under the agreement with the litigation funder, the third party lender receives an interest in the proceeds. In 2021 and 2020, cash flow from investing activities included $1,150,000 and $95,000, respectively for the purchase of patents from third parties. 44 In 2021, non-cash investing and financing activities consisted of shares issued for conversion of debt of approximately $556,000, interest added to principal of approximately $6,000 and options granted for settlement of debt of approximately $598,000. In 2020, non-cash investing and financing activities consisted of resolution of derivative liability of $320,000 and interest added to principal of approximately $3,000. We cannot assure you that we will be successful in generating future revenues, in obtaining additional debt or equity financing or that such additional debt or equity financing will be available on terms acceptable to us, if at all, or that we will be able to obtain any third party funding in connection with any of our intellectual property portfolios. We cannot predict the success of any pending or future litigation seeking to enforce our intellectual property rights. In February 2021, we signed a funding agreement with QFL, as described in “Agreements with QFL and Intelligent Partners” above and in “Summary of Agreements with QFL” in Item 1. Business. As noted below, there is a substantial doubt about our ability to continue as a going concern. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in 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. Principles of Consolidation Our consolidated financial statements are prepared in accordance with US GAAP and present the financial statements of us and our wholly-owned subsidiaries. In the preparation of our consolidated financial statements, intercompany transactions and balances are eliminated. Use of Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles in 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. Revenue Recognition Patent Licensing Fees Revenue is recognized upon transfer of control of promised bundled intellectual property rights and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange for those intellectual property rights. Revenue contracts that provide promises to grant “the right” to use intellectual property rights as they exist at the point in time at which the intellectual property rights are granted, are accounted for as performance obligations satisfied at a point in time and revenue is recognized at the point in time that the applicable performance obligations are satisfied and all other revenue recognition criteria have been met. For the periods presented, revenue contracts executed by the Company primarily provided for the payment of contractually determined, one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company’s operating subsidiaries. Intellectual property rights granted included the following, as applicable: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted were perpetual in nature, extending until the legal expiration date of the related patents. The individual intellectual property rights are not accounted for as separate performance obligations, as (a) the nature of the promise, within the context of the contract, is to transfer combined items to which the promised intellectual property rights are inputs and (b) the Company’s promise to transfer each individual intellectual property right described above to the customer is not separately identifiable from other promises to transfer intellectual property rights in the contract. 45 Since the promised intellectual property rights are not individually distinct, the Company combined each individual IP right in the contract into a bundle of IP rights that is distinct, and accounted for all of the intellectual property rights promised in the contract as a single performance obligation. The intellectual property rights granted were “functional IP rights” that have significant standalone functionality. The Company’s subsequent activities do not substantively change that functionality and do not significantly affect the utility of the IP to which the licensee has rights. The Company’s subsidiaries have no further obligation with respect to the grant of intellectual property rights, including no express or implied obligation to maintain or upgrade the technology, or provide future support or services. The contracts provide for the grant (i.e. transfer of control) of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the contract. Licensees legally obtain control of the intellectual property rights upon execution of the contract. As such, the earnings process is complete and revenue is recognized upon the execution of the contract, when collectability is probable and all other revenue recognition criteria have been met. Revenue contracts generally provide for payment of contractual amounts within 30-90 days of execution of the contract. Contractual payments made by licensees are generally non-refundable. We do not have any significant payment terms, as payment is received shortly after goods are delivered or services are provided, therefore there is no significant financing component or consideration payable to the customer in these transactions. Cost of Revenues Cost of revenues include the costs and expenses incurred in connection with our patent licensing and enforcement activities, including inventor royalties paid to original patent owners, contingent litigation funding fees, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third-parties and the amortization of patent-related investment costs. These costs are included under the caption “Cost of revenues” in the accompanying consolidated statements of operations. No such fees are recognized as a cost of revenue to the extent that we have no obligation with respect to fees prior to a settlement or license. Inventor Royalties, Contingent Litigation Funding Fees and Contingent Legal Expenses. Inventor royalties are expensed in the consolidated statements of operations in the period that the related revenues are recognized. Contingent litigation funding and legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized. In instances where there are no recoveries from potential infringers, no contingent litigation funding fees are due. Accounts Receivable Accounts receivable, which generally relate to licensed sales, are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. We recorded an allowance for doubtful accounts of $0 and $66,000 as of December 31, 2021 and December 31, 2020, respectively. 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. 46 Patents include the cost of patents or patent rights (collectively “patents”) acquired from third-parties or acquired in connection with business combinations. Patent acquisition costs are amortized utilizing the straight-line method over their remaining economic useful lives, ranging from one to twenty years. Certain patent application and prosecution costs incurred to secure additional patent claims, that based on management’s estimates are deemed to be recoverable, are capitalized and amortized over the remaining estimated economic useful life of the related patent portfolio. Impairment of long-lived assets Long-lived assets are reviewed for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “ Property, Plant, and Equipment ” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. In the event that management decides to no longer allocate resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is recorded. For the year ended December 31, 2021, the we recorded non-cash impairment charges of approximately $1,652,000 to write down finite lived intangible assets in the Power Management/Bus Controller, CXT and M-RED portfolios. See Note 6 of Notes to Consolidated Financial Statements. Warrant liability We reflect a warrant liability with respect to warrants for which number of shares underlying the warrants is not fixed until the date of the initial exercise. The amount of the liability is determined at the end of each fiscal period and the period to period change in the amount of warrant liability is reflected as a gain or loss in warrant liability and is include under other income (expense). See Note 4 of Notes to Consolidated Financial Statements. Fair Value of Financial Instruments We adopted 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: Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. In addition, FASB ASC 825-10-25 “Fair Value Option” was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. Income Tax We record revenues on a gross basis, before deduction for income taxes. We incurred income tax expenses of approximately $2,000 and $65,000 for the years ended December 31, 2021 and 2020, respectively. 47 Stock-based Compensation We account for stock-based compensation pursuant to ASC 718, “Compensation — Stock Compensation,” which prescribes accounting and reporting standards for all stock-based payment transactions in which employee services, and, since January1, 2019, non-employee services, are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options and other equity instruments such as employee stock ownership plans and stock appreciation rights. Stock-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Business Combinations The acquisition of STX and LS Cloud Storage Technologies, LLC (“LSC”) were accounted for in accordance with ASC 805, Business Combinations (“ASC 805”). ASC 805 provides, among other things, that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition which are accounted for using a cost accumulation and allocation model under which the cost of the acquisition is allocated to the assets acquired and liabilities assumed. The STX and LSC were recorded as asset acquisitions. See Note 9 of Notes to Consolidated Financial Statements. Gain from Cancelation of Indebtedness We recognized a gain from the elimination of liability for minimum cumulative net proceeds distributions constituting a portion of the purchase price due to the seller of two of our patent portfolios and the reduction of liability for legal services resulting from the settlement of our recorded obligation for unpaid legal services. See Note 3 of Notes to Consolidated Financial Statements. Recent Accounting Pronouncements Management does not believe that there are any recently issued, but not effective, accounting standards which, if currently adopted, would have a material effect on the Company’s financial statements. Going Concern We have an accumulated deficit of approximately $25.4 million and negative working capital of approximately $8.1 million as of December 31, 2021. Because of our continuing losses, our working capital deficiency, the uncertainty of future revenue, the possible effect of a judgement against one or more of our subsidiaries for legal fees; 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. These conditions raise substantial doubt as to our ability to continue as a going concern. Although we may seek to raise funds and to obtain third party funding for litigation to enforce its intellectual property rights, the availability of such funds in uncertain, and our use of the funds from funding sources relating to the monetization of our intellectual property may not be available for working capital purposes. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Off-balance Sheet Arrangements We have no off-balance sheet arrangements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.