QUEST PATENT RESEARCH CORP 10-Q

Item 1. Financial Statements QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2024 December 31, 2023 (unaudited) ASSETS Current assets Cash and cash equivalents $ 136,767 $ 563,484 Accounts receivable, net of allowance for credit losses of $ 0 and $ 0 , respectively 758,250 3,015,295 Other current assets 83,644 28,121 Total current assets 978,661 3,606,900 Patents, net of accumulated amortization of $ 2,743,495 and $ 2,412,397 , respectively 3,343,505 3,674,603 Total assets $ 4,322,166 $ 7,281,503 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities ($ 324,439 and $ 1,378,154 due to related parties at June 30, 2024 and December 31, 2023, respectively) $ 538,744 $ 1,674,690 Loans payable 138,000 138,000 Funding liability 6,634,381 7,325,502 Loan payable - related party 2,796,500 2,796,500 Warrant liability 240,615 281,809 Accrued interest 878,653 1,096,985 Total current liabilities 11,226,893 13,313,486 Non-current liabilities Loan payable – SBA 150,000 150,000 Purchase price of patents 53,665 53,665 Total liabilities $ 11,430,558 $ 13,517,151 Commitments and contingencies (Note 9) Stockholders' deficit: Preferred stock, par value $ 0.00003 per share - authorized 10,000,000 shares - no shares issued and outstanding — — Common stock, par value $ 0.00003 per share; authorized 30,000,000 at June 30, 2024 and December 31, 2023; 5,331,973 shares issued and outstanding at June 30, 2024 and December 31, 2023 160 160 Additional paid-in capital 17,680,793 17,674,985 Accumulated deficit ( 24,789,573 ) ( 23,911,021 ) Total Quest Patent Research Corporation stockholders' deficit ( 7,108,620 ) ( 6,235,876 ) Non-controlling interest in subsidiary 228 228 Total stockholders' deficit ( 7,108,392 ) ( 6,235,648 ) Total liabilities and stockholders' deficit $ 4,322,166 $ 7,281,503 See the accompanying notes to the unaudited condensed consolidated financial statements. 1 QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenues Patent licensing fees $ 850,000 $ — $ 1,895,000 $ 202,500 Cost of revenues Litigation and licensing expenses 386,631 97,504 948,183 285,477 Gross profit (loss) 463,369 ( 97,504 ) 946,817 ( 82,977 ) Operating expenses Selling, general and administrative expenses 816,434 649,904 1,393,713 1,427,761 Total operating expenses 816,434 649,904 1,393,713 1,427,761 Loss from operations ( 353,065 ) ( 747,408 ) ( 446,896 ) ( 1,510,738 ) Other income (expenses) Change in fair market value of warrant liability 240,616 ( 205,486 ) 41,194 ( 214,052 ) Interest expense, net ( 229,628 ) ( 216,752 ) ( 367,817 ) ( 354,221 ) Total other income (expenses) 10,988 ( 422,238 ) ( 326,623 ) ( 568,273 ) Loss before income tax ( 342,077 ) ( 1,169,646 ) ( 773,519 ) ( 2,079,011 ) Income tax expense ( 105,033 ) — ( 105,033 ) ( 30,000 ) Net loss $ ( 447,110 ) $ ( 1,169,646 ) $ ( 878,552 ) $ ( 2,109,011 ) Loss per share - basic and diluted $ ( 0.08 ) $ ( 0.22 ) $ ( 0.16 ) $ ( 0.40 ) Weighted average shares outstanding - basic and diluted 5,331,973 5,331,973 5,331,973 5,331,973 See the accompanying notes to the unaudited condensed consolidated financial statements. 2 QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT Common Stock Additional Paid-In Accumulated Non-controlling Interest in Total Stockholders' Shares Amount Capital Deficit Subsidiaries Deficit Balances as of January 1, 2023 5,331,973 $ 160 $ 17,626,279 $ ( 26,189,494 ) $ 228 $ ( 8,562,827 ) Stock-based compensation — — 18,573 — — 18,573 Net loss — — — ( 939,365 ) — ( 939,365 ) Balances as of March 31, 2023 5,331,973 160 17,644,852 ( 27,128,859 ) 228 ( 9,483,619 ) Stock-based compensation — — 9,972 — — 9,972 Net loss — — — ( 1,169,646 ) — ( 1,169,646 ) Balances as of June 30, 2023 5,331,973 $ 160 $ 17,654,824 $ ( 28,298,505 ) $ 228 $ ( 10,643,293 ) Common Stock Additional Paid-In Accumulated Non-controlling Interest in Total Stockholders' Shares Amount Capital Deficit Subsidiaries Deficit Balances as of December 31, 2023(Restated) 5,331,973 $ 160 $ 17,674,985 $ ( 23,911,021 ) $ 228 $ ( 6,235,648 ) Stock-based compensation — — 5,808 — — 5,808 Net loss — — — ( 431,442 ) — ( 431,442 ) Balances as of March 31, 2024 5,331,973 160 17,680,793 ( 24,342,463 ) 228 ( 6,661,282 ) Net loss — — — ( 447,110 ) — ( 447,110 ) Balances as of June 30, 2024 5,331,973 $ 160 $ 17,680,793 $ ( 24,789,573 ) $ 228 $ ( 7,108,392 ) See the accompanying notes to the unaudited condensed consolidated financial statements. 3 QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 878,552 ) $ ( 2,109,011 ) Adjustments to reconcile net loss to cash used in operating activities: Change in fair market value of warrant liability ( 41,194 ) 214,052 Stock-based compensation 5,808 28,545 Amortization of intangible assets 331,098 388,746 Change in operating assets and liabilities: Accounts receivable 2,257,045 — Accrued interest ( 218,332 ) 349,834 Other current assets ( 55,523 ) ( 28,043 ) Accounts payable and accrued liabilities ( 1,135,946 ) 57,883 Net cash provided by (used in) operating activities 264,404 ( 1,097,994 ) Cash flows from investing activities: Purchase of patents — ( 3,300,000 ) Net cash provided by (used in) investing activities — ( 3,300,000 ) Cash flows from financing activities: Proceeds from funding liability 834,381 4,500,000 Payment of funding liability ( 1,525,502 ) ( 64,110 ) Net cash provided by (used in) financing activities ( 691,121 ) 4,435,890 Net increase (decrease) in cash and cash equivalents ( 426,717 ) 37,896 Cash and cash equivalents at beginning of period 563,484 90,601 Cash and cash equivalents at end of period $ 136,767 $ 128,497 Non-cash investing and financing activities: Interest added to principal $ 1,402 $ 2,790 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 105,033 $ 30,000 Interest $ 4,386 $ 4,386 See the accompanying notes to the unaudited condensed consolidated financial statements. 4 QUEST PATENT RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS 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, “we”, “us”, “our”, the “Company” refer 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 operating subsidiaries. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 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 restated consolidated financial statements and accompanying notes included in amendment no.1 to the Company's annual report on Form 10-K/A for the year ended December 31, 2023. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Financial Statement Presentation The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and present the consolidated financial statements of the Company and its wholly owned and majority owned subsidiaries as of June 30, 2024. The consolidated financial statements include the accounts and operations of: Quest Patent Research Corporation Digital IP Advisors Inc. (“DIPA”) (wholly owned) (formerly Quest Licensing Corporation (NY)) Quest Licensing Corporation (DE) (“QLC”) (wholly owned) Quest Packaging Solutions Corporation ( 90 % owned) Quest Nettech Corporation (“NetTech”) ( 65 % owned) Semcon IP, Inc. (“Semcon”) (wholly owned) Mariner IC, Inc. (“Mariner”) (wholly owned) IC Kinetics, Inc. (“IC”) (wholly owned) CXT Systems, Inc. (“CXT”) (wholly owned) Photonic Imaging Solutions Inc. (“PIS”) (wholly owned) M-Red Inc. (“M-Red”) (wholly owned) Audio Messaging Inc. (“AMI”) (wholly owned) Peregrin Licensing LLC (“PLL”) (wholly owned) Taasera Licensing LLC (“TLL”) (wholly owned) Soundstreak Texas LLC (“STX”) (wholly owned) Multimodal Media LLC (“MML”) (wholly owned) LS Cloud Storage Technologies, LLC (“LSC”) (wholly owned) Tyche Licensing LLC (“Tyche”) (wholly owned) Deepwell IP LLC (“DIP”) (wholly owned) EDI Licensing LLC (“EDI”) (wholly owned) Koyo Licensing LLC (“Koyo”) (wholly owned) Harbor Island Dynamic LLC (“HID”) (wholly owned) Flash Uplink LLC ("FUL") (wholly owned) Significant intercompany transactions and balances have been eliminated in consolidation. 5 The non-controlling interests are presented in the unaudited condensed consolidated balance sheets, separately from equity attributable to the stockholders of the Company. During the three and six months ended June 30, 2024 and 2023, none of the Company’s net loss was attributable to non-controlling interests. 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. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturity dates of three months or less when purchased, to be cash equivalents. The Company had no cash equivalents as of June 30, 2024 and December 31, 2023. 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. The Company did not record an allowance for credit losses at June 30, 2024 and December 31, 2023. The accounts receivable balance at June 30, 2024 and December 31, 2023 of approximately $ 758,000 and $ 3,015,000 , respectively, represents amounts due and payable in connection with the settlement of patent infringement lawsuits. 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 impact 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 (collectively “patents”) acquired from third-parties or acquired in connection with business combinations. Patent acquisition costs are allocated equally across the patents in force at the time of acquisition. 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. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with a finite life, 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. There were no impairments of long-lived assets for the three and six months ended June 30, 2024 and 2023. Warrant Liability The Company records a warrant liability with respect to warrants for which the 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 change in fair market value of warrant liability and is included under 'Other income (expenses)' in the accompanying condensed consolidated statements of operations. 6 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 5 for information about our warrant liability. The fair value hierarchy, based on the three levels of inputs that may be used to measure fair value, is 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. The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates. The fair value of warrant liabilities are classified as Level 3 in the fair value hierarchy. Commitments and Contingencies 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 provide 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 and are included in 'Cost of revenues' as 'Litigation and licensing expenses' in the accompanying condensed consolidated statements of operations. 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. 7 Revenue Recognition Patent Licensing Fees 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. 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 as part of the settlement of litigation commenced by the Company’s 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. 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 to 90 days of execution of the contract. Contractual payments made by licensees are generally non-refundable. The Company does 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. The Company's revenue for the three and six months ended June 30, 2024 was generated from licenses pursuant to the settlement of patent infringement lawsuits in the TLL and Deepwell portfolios. Revenue for the six months ended June 30, 2023 was generated from licenses pursuant to the settlement of patent infringement lawsuits in the Tyche and STX portfolios. Cost of Revenues Cost of revenues mainly includes expenses incurred in connection with our patent enforcement activities, such as legal fees, consulting costs, patent maintenance, royalty fees for acquired patents and other related expenses. Cost of revenues does not include expenses related to product development, patent amortization, integration or support, as these are included in selling, general and administrative expenses. During the six months ended June 30, 2024 the Company received a reimbursement for costs expensed in prior periods in the amount of approximately $ 334,000 , resulting in a reduction of litigation and licensing expenses. Inventor Royalties, Litigation Funding Fees and Contingent Legal Expenses. In connection with the investment in or acquisition of certain patents and patent rights, certain of the Company’s operating subsidiaries may grant 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. 8 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. Income Taxes The Company incurred $ 105,033 and $0 of foreign income tax expense for the three months ended June 30, 2024 and 2023. The Company incurred $ 105,033 and $ 30,000 of foreign income tax expense for the six months ended June 30, 2024 and 2023. The foreign income tax expense incurred during the three and six months ended June 30, 2024 primarily relates to the withholding tax in connection with settlements of patent infringement litigations. Stock-Based Compensation The Company recognizes stock-based compensation for employees and non-employees pursuant to ASC 718, “Compensation — Stock Compensation,” which prescribes accounting and reporting standards for all stock-based payment transactions. Transactions include incurring liabilities, or issuing or offering to issue shares, options and other equity instruments. 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 estimated using a Black-Scholes option pricing model. 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). Concentration of Credit Risk The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any such losses in these accounts. Net Income (Loss) Per Share The Company calculates net income (loss) per share by dividing income or losses allocated to the Company’s stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted weighted average shares is computed using basic weighted average shares plus any potentially dilutive securities outstanding during the period using the treasury-stock-type method and the if-converted method, except when their effect is anti-dilutive. Because the Company incurred losses for the three and six months ended June 30, 2024 and 2023, potentially dilutive securities would be anti-dilutive, and therefore, the diluted net loss per share is the same as the basic net loss per share. The Company’s potentially dilutive securities include 962,463 potential shares of common stock issuable upon exercise of warrants granted to QPRC Finance LLC ("QFL") in connection with the Purchase Agreement, described in Note 4, 500,000 shares of common stock issuable upon exercise of stock options granted to Intelligent Partners in connection with the Restructure Agreement described in Note 4 and 700,000 shares of common stock issuable upon exercise of stock options granted to officers and consultants. See Notes 4, 5 and 6. 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 our financial statements. 9 Going Concern The Company has an accumulated deficit of $ 24,789,573 and negative working capital of approximately $ 10,248,000 as of June 30, 2024. Because of the Company's history of losses, its working capital deficiency, the uncertainty of future revenue, its obligations to Intelligent Partners, QF3, and QFL, the low stock price of the Company's common stock and the absence of an active trading market in its common stock and its failure to have effective internal controls over financial reporting, as reflected in the restatement of its financial statements for the year ended December 31, 2023, the Company's ability to raise funds in the equity market or from lenders is severely impaired. These conditions, as well as any adverse consequences which would result from the Company's failure to meet the continued listing requirements of the OTCQB (see Note 9), raise substantial doubt as to the Company's ability to continue as a going concern. The Company's revenue is generated exclusively from license fees generated from litigation seeking damages for infringement of its intellectual property rights. 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. 3. INTANGIBLE ASSETS Intangible assets include patents purchased and are recorded at their acquisition cost. Intangible assets consisted of the following: June 30, 2024 December 31, 2023 Patents $ 6,087,000 $ 6,087,000 Disposal — — Subtotal 6,087,000 6,087,000 Less: accumulated amortization ( 2,743,495 ) ( 2,412,397 ) Net value of intangible assets $ 3,343,505 $ 3,674,603 Weighted Average Amortization Period (Years) 5.07 5.47 Intangible assets are comprised of patents with estimated useful lives. The intangible assets at June 30, 2024 represent: ● patents (which were fully amortized at the date of acquisition) acquired in January 2018 pursuant to an agreement with Intellectual Ventures Assets 62 LLC and Intellectual Ventures Assets 71 LLC ("IV 62/71”), pursuant to which CXT has an obligation to distribute 50 % of net revenues to IV 62/71; ● patents (which were fully amortized at the date of acquisition) 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 ; ● patents (which were fully amortized at the date of acquisition) acquired in May 2020 for a purchase price of $ 95,000 pursuant to an agreement with Texas Technology Ventures 2, LLP (“TTV”), pursuant to which of the Company retains the first $ 230,000 of net proceeds, as defined in the agreement, after which the company has an obligation to distribute 50 % of net proceeds to TTV. ● patents (which were fully amortized at the date of acquisition) acquired in February 2021 pursuant to an agreement with PKT for a purchase price of $ 350,000 , pursuant to which $ 350,000 was paid at closing, and upon the realization of gross proceeds, as defined in the agreement, the Company shall make a subsequent or payments in the aggregate amount of $ 93,900 , representing reimbursement to PKT, as the prosecuting attorney, for legal fees associated with prosecution of the portfolio, such reimbursement shall be due and payable to PKT from time to time as gross proceeds are realized, if any, and paid to PKT along with and in proportion to reimbursement to other third parties of costs incurred in realizing gross proceeds. Thereafter, PKT is entitled to a percentage of gross proceeds realized, if any. ● patents (which were fully amortized at the date of acquisition) acquired in May 2021 for a purchase price of $ 250,000 . ● patents acquired in October 2021 from AI for a purchase price of $ 550,000 pursuant to which the Company retains an amount equal to the purchase price plus any fees incurred out of net proceeds, as defined in the agreement, after which AI is entitled to a percentage of further net proceeds realized, if any; the useful lives of the patents, at the date of acquisition, was approximately 3 - 14 years. 10 ● patents acquired in January 2022 for a purchase price of $ 1,060,000 , the useful lives of the patents, at the date of purchase, was approximately 1 - 3 years. ● patents acquired in July 2022 via assignment from AI for a purchase price of $ 92,000 , the useful lives of the patents, at the date of purchase, was approximately 2 - 4 years. ● patents acquired July 2022 pursuant to an agreement with Hewlett Packard Enterprise Development LP and Hewlett Packard Enterprise Company for a purchase price of $ 350,000 . The useful lives of the patents, at the date of purchase, was approximately 2 - 9 years. ● patents acquired March 2023 from Tower for a purchase price of $ 3,300,000 pursuant to which the Company retains an amount equal to the purchase price plus a negotiated return and any fees out of net proceeds, as defined in the agreement, after which Tower in entitled to a percentage of further net proceeds realized, if any. The useful lives of the patents, at the date of purchase, was approximately 5 - 15 years. ● patents acquired in August 2023 pursuant to an agreement with Koji Yoden for a purchase price of $ 30,000 . The useful lives of the patents, at the date of purchase, was approximately 9 - 10 years. 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. The Company assesses intangible assets for any impairment to the carrying values. As of June 30, 2024, management concluded that there was no impairment to the intangible assets. Amortization expense for patents was approximately $ 167,000 and $ 331,000 for the three and six months ended June 30, 2024, respectively. Amortization expense for patents was approximately $ 230,000 and $ 389,000 for the three and six months ended June 30, 2023, respectively. Amortization expense is included in 'Selling, general and administration expenses' in the accompanying condensed consolidated statements of operations. Future amortization of intangible assets is as follows: Year Ended December 31, Remainder of 2024 $ 305,256 2025 540,589 2026 500,064 2027 464,786 2028 397,345 Thereafter 1,135,465 Total $ 3,343,505 4. SHORT-TERM DEBT AND LONG-TERM LIABILITIES Short-Term Debt Loans Payable The loans payable represents demand loans made by former officers and directors, who are third parties and stockholders whose holdings were insignificant at June 30, 2024 and December 31, 2023, in the amount of $ 138,000 . The loans are payable on demand plus accrued interest at 10 % per annum. Accrued interest at June 30, 2024 and December 31, 2023 was approximately $ 317,000 and $ 310,000 , respectively. 11 Funding Liabilities The following table shows the Company’s funding liabilities to QFL and QF3 at June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 Funding liability – QFL $ — $ 1,525,502 Funding liability – QF3 6,634,381 5,800,000 Funding liabilities $ 6,634,381 $ 7,325,502 Funding Liabilities - QFL The QFL funding liabilities at June 30, 2024 and December 31, 2023 of $ 0 and $ 1,525,502 , respectively, represent the principal amount of the Company’s obligations to QFL pursuant to a purchase agreement (“Purchase Agreement”) dated February 22, 2021 and amended and restated on May 2, 2024, between the Company and QFL, as described below. As of June 30, 2024, the Company had made total repayments in the amount of approximately $ 6,402,000 since February 22, 2021. The obligation to QFL has no repayment term since payment is due solely from a portion of net proceeds generated from the monetization of the Company's intellectual property and was classified as a current liability as of December 31, 2023. During the six months ended June 30, 2024 the Company repaid the full outstanding principal balance of $ 1,525,502 . Accrued interest related to this funding liability as of June 30, 2024 and December 31, 2023 was approximately $ 0 and $ 478,000 , respectively. The Company did not request an operating capital advance during the three and six months ended June 30, 2024 and no further advances are to be made pursuant to the Purchase Agreement. The Company requested and received an operating capital advance in the amount of $ 0 and $ 200,000 from QFL pursuant to the Purchase Agreement during the three and six months ended June 30, 2023, respectively. Funding Liabilities - QF3 The QF3 funding liabilities at June 30, 2024 and December 31, 2023 of $ 6,634,381 and $ 5,800,000 , respectively, represent the principal amount of the Company’s obligations to QF3 pursuant to a purchase agreement (“QF3 Purchase Agreement”) dated March 12, 2023 between the Company and QF3, as described below. As of June 30, 2024, the Company has made no repayments on this funding liability. The obligation to QF3 has no repayment term since the payment is due from net proceeds generated from the monetization of the Company's intellectual property and has been classified as a current liability as of June 30, 2024 and December 31, 2023. Accrued interest related to this funding liability as of June 30, 2024 and December 31, 2023 was approximately $ 553,000 and $ 299,000 , respectively. On March 12, 2023, the Company and HID, entered into a series of agreements, all dated March 12, 2023, with QF3, a non-affiliated party, including a prepaid forward purchase agreement (the “Purchase Agreement QF3”), a security agreement (the “QF3 Security Agreement”), a patent security agreement (the “QF3 Patent Security Agreement” together with the QF3 Security Agreement, the QF3 Patent Security Agreement, and the QF3 Purchase Agreement, the “QF3 Investment Documents”) pursuant to which, at the closing held contemporaneously with the execution of the agreements on March 12, 2023: (i) Pursuant to the QF3 Purchase Agreement, QF3 agreed to make available to the Company a financing facility of: (a) up to $ 4,000,000 for operating expenses, of which the Company has requested and received $ 3,334,381 as of June 30, 2024, of which approximately $ 834,000 was received during the six months ended June 30, 2024; (b) $ 3,300,000 to fund the cash payment portion of the purchase of a patent portfolio from Tower Semiconductor Ltd. ("Tower"); and (c) up to an additional $ 25,000,000 for the acquisition of mutually agreed patent rights that the Company intends to monetize, of which no amounts have been requested or received as of June 30, 2024. In return, the Company transferred to QF3 a right to receive a portion of net proceeds generated from the monetization of those patents. (ii) On March 17, 2023, the Company used $ 3,300,000 of proceeds from the QF3 financing as the cash payment portion of the purchase of a seven-patent portfolio from Tower (the “HID Portfolio”). (iii) Pursuant to the QF3 Security Agreement and QF3 Patent Security Agreement, payment of the Company's obligations under the QF3 Purchase Agreement with QF3 are secured by (a) the value of anything received from the monetization of the intellectual property rights covered by the Security Agreement; (b) the patents (as defined in the Security Agreement); (c) all general intangibles now or hereafter arising from or related to the foregoing (a) and (b); and (d) proceeds (including, without limitation, cash proceeds and insurance proceeds) and products of the foregoing (a)-(c). 12 In connection with the agreements with QF3, the Company, HID and the Subsidiary Guarantors entered into an intercreditor agreement with QF3 and Intelligent Partners which sets forth the priority of QF3 in the collateral under the Investment Documents. Loan Payable Related Party The loan payable – related party at June 30, 2024 and December 31, 2023 represents the current amount of a non-interest bearing total monetization proceeds obligation (the “TMPO”) due to Intelligent Partners, LLC (“Intelligent Partners”) of $ 2,796,500 , pursuant to a restructure agreement (“Restructure Agreement”) dated February 22, 2021 whereby the Company and Intelligent Partners, extinguished the Company’s 10 % Note to Intelligent Partners as transferee of the notes issued to United Wireless Holdings, Inc. (“United Wireless”), in the amount of $ 4,672,810 pursuant to securities purchase agreement dated October 22, 2015 between the Company and United Wireless. The notes became due by their terms on September 30, 2020, and the Company did not make any payment on account of principal of and interest on the notes. Subsequent to September 30, 2020, the Company engaged in negotiations with Intelligent Partners in parallel with the Company’s negotiations with QFL, with a view to restructuring the Company’s obligations under the United Wireless agreements, including the notes, so that the Company no longer had any obligations under the notes or the SPA. These negotiations resulted in the Restructure Agreement, described below, which provided for the payment to Intelligent Partners of $ 1,750,000 from the proceeds from the Company’s agreements with QFL. As part of the restructure of the Company’s agreements with Intelligent Partners, the Company amended the existing MPAs and granted Intelligent Partners certain rights in the monetization proceeds from any new intellectual property the Company acquires, as described below. Under these MPAs, Intelligent Partners participates in the monetization proceeds the Company receives with respect to new patents after QFL and QF3 have received their negotiated rate of return. On or prior to the date of the Restructure Agreement, Intelligent Partners transferred to Andrew Fitton (“Fitton”) and Michael Carper (“Carper”) $ 250,000 of the notes (the “Transferred Note”), thereby reducing the principal amount of the notes held by Intelligent Partners to $ 4,422,810 . Because of the beneficial ownership percentage of its principals, Intelligent Partners is treated as a related party. Long-Term Liabilities Loan Payable – SBA The loans payable – SBA balance at June 30, 2024 and December 31, 2023 of $ 150,000 represents the total amount due under a secured Economic Injury Disaster Loan from the U.S. Small Business Association (“SBA”) in the aggregate amount of $ 150,000 , pursuant to Section 7(b) of the Small Business Act as part of the COVID-19 relief effort. The Company’s obligations on the loan are set forth in the Company’s note dated May 14, 2020 which matures on May 14, 2050 and bears interest at a rate of 3.75 % per annum, payable monthly commencing on November 14, 2022. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the Loan may be used solely as working capital to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter and to pay Uniform Commercial Code (UCC) lien filing fees and a third-party UCC handling charge of $ 100 which were deducted from the loan amount stated above. In addition to the loan, as part of the COVID-19 relief effort, the Company obtained an Emergency EIDL Grant from the SBA in the amount of $ 1,000 . The Company is not required to repay the grant. Purchase Price of Patents The purchase price of patents balance at June 30, 2024 and December 31, 2023 of $ 53,665 represents: The non-current portion of our obligations under the unsecured non-recourse funding agreement with a third-party funder entered into in May 2020 whereby the third-party agreed to provide acquisition funding in the amount of $ 95,000 for the Company’s acquisition of the audio messaging portfolio. Under the funding agreement, the third-party funder is entitled to a priority return of funds advanced from net proceeds, as defined, recovered until the funder has received $ 53,665 . The Company did not make any payments with respect to this obligation in 2024 to-date. The Company has no other obligation to the third-party and has no liability to the funder in the event that the Company does not generate sufficient net proceeds. Pursuant to ASC 470, the Company recorded this monetization obligation as debt and the difference between the purchase price and total obligation as a discount to the debt and fully expensed to interest during the period. 13 5. WARRANT LIABILITY On February 22, 2021, the Company issued warrants to purchase 962,463 shares of common stock to QFL in connection with its funding agreement (see Note 4). If on the date of initial exercise the aggregate number of warrant shares purchasable upon exercise of the warrant would yield less than an amount equal to 10 % of the aggregate number of outstanding shares of capital stock of the Company (determined on a fully diluted basis), then the number of warrant shares shall be increased to an amount equal to 10 % of the aggregate number of outstanding shares of capital stock of the Company (determined on a fully diluted basis), and therefore the number of shares underlying the warrants is not fixed until the date of the initial exercise. As such, the warrant issued to QFL requires classification as a liability pursuant to ASC Topic 480, Distinguishing Liabilities from Equity and is valued at its fair value as of the grant date and re-measured at each balance sheet date with the period-to-period change in the fair market value of the warrant liability reflected as a change in fair market value of warrant liability and included under 'Other income (expenses)' in the accompanying condensed consolidated statements of operations. As of June 30, 2024 and December 31, 2023, the aggregate fair value of the outstanding warrant liability was approximately $ 241,000 and $ 282,000 , respectively. The Company estimated the fair value of the warrant liability using the Black-Scholes option pricing model using the following key assumptions as of June 30, 2024 and December 31, 2023: As of June 30, December 31, 2024 2023 Volatility 397 % 395 % Exercise price $ 0.54 $ 0.54 Risk-free interest rate 1.37 % 1.37 % Expected dividends — % — % Expected term 6.6 7.1 The following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of June 30, 2024 and December 31, 2023: Fair Value Measurements as of June 30, 2024 December 31, 2023 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets None $ — $ — $ — $ — $ — $ — Total assets — — — — — — Liabilities Warrant liability — — $ 240,615 — — $ 281,809 Total liabilities $ — $ — $ 240,615 $ — $ — $ 281,809 The following table sets forth a reconciliation of changes in the fair value of warrant liabilities classified as Level 3 in the fair value hierarchy: Fair Value Balance at December 31, 2023 $ 281,809 Loss on subsequent measurement 199,422 Balance at March 31, 2024 481,231 Gain on subsequent measurement ( 240,616 ) Balance at June 30, 2024 $ 240,615 See Note 6 for information on the warrant issuance. 14 6. STOCKHOLDERS' EQUITY Issuance of 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 ($) Weighted Average Grant Date Fair Value ($) Weighted Average Remaining Contractual Life (Years) Balance - December 31, 2023 2,000,000 2.39 1.20 5.80 Granted — — — — Exercised — — — — Expired — — — — Cancelled — — — — Balance - June 30, 2024 2,000,000 2.39 1.20 5.30 Options exercisable at end of period 1,200,000 0.97 1.20 3.95 The outstanding options do not have an intrinsic value as of June 30, 2024 or December 31, 2023. As of June 30, 2024, there was approximately $ 960,000 of unrecognized compensation expense related to nonvested stock option awards with a weighted average expected term of approximately 6.65 years. The recognition of the unrecognized compensation expense is subject to certain conditions that the Company has currently deemed to not be probable of achieving. Issuance of Warrants A summary of the status of the Company’s warrants and changes is set forth below: Number of Warrants (#) Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life (Years) Balance - December 31, 2023 962,463 0.54 7.14 Granted — — — Exercised — — — Expired — — — Cancelled — — — Balance - June 30, 2024 962,463 0.54 6.65 The warrants contain 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 capital stock of the Company (determined on a fully diluted basis). The outstanding warrants do not have an intrinsic value as of June 30, 2024 or December 31, 2023. 7. NON-CONTROLLING INTEREST The following table reconciles equity attributable to the non-controlling interest related to Quest Packaging Solutions Corporation. Six months ended June 30, 2024 Year ended December 31, 2023 Balance, beginning of period $ 228 $ 228 Net loss attributable to non-controlling interest — — Balance, end of period $ 228 $ 228 15 8. RELATED PARTY TRANSACTIONS The Company has at various times entered into transactions with related parties, including officers, directors and major stockholders, wherein these parties have provided services, advanced or loaned money, or both, to the Company which was needed to support its daily operations. The Company discloses all related party transactions. See Note 4 in connection with the Restructure Agreement dated February 22, 2021 with Intelligent Partners. Because of its ownership percentage, Intelligent Partners is treated as a related party. During the three and six months ended June 30, 2024, the Company contracted with a law firm more than 10 percent owned by the chief executive officer. The firm is engaged as counsel in connection with general corporate matters, diligence and maintenance of the Company’s patent portfolio. In connection with the engagement, the Company recorded patent service costs of approximately $ 30,000 and $ 60,000 for the three and six months ended June 30, 2024, respectively, and these were recorded as part of 'Selling, general and administrative expenses' in the accompanying condensed consolidated statements of operations. As the Company did not contract with the law firm during the six months ended June 30, 2023, there are no equivalent costs for the comparative periods presented. During the three and six months ended June 30, 2024 and 2023, the Company contracted with a law firm more than 10 percent owned, but not controlled, by the father-in-law of the chief executive officer. The firm is engaged on a contingent fee basis and serves as escrow agent in connection with monetization of the Company’s patents in matters where the firm is serving as counsel to the Company. For the three and six months ended June 30, 2024, the cost of these services was approximately $ 318,000 and $ 781,000 , respectively. For the three and six months ended June 30, 2023, the cost of these services was approximately $ 0 and $ 62,000 , respectively. These costs were recorded as part of 'Litigation and licensing expenses' in the condensed consolidated statements of operations. As of June 30, 2024 and December 31, 2023, approximately $ 328,000 and $ 1,379,000 of such costs were payable to the related party, respectively. Since the services are on a contingent fee basis, no fees are incurred unless there is a recovery. 9. COMMITMENTS AND CONTINGENCIES SEP IRA Plan Pursuant to the SEP IRA plan adopted by the Company in March 2020, the Company deposited into a SEP IRA account of each of its participating employees a percentage of the employee’s compensation, subject to statutory limitations on the amount of the contribution all as set forth in the IRS Form 5305-SEP. For the year ending December 31, 2024, the percentage was set at 20 %. The Company’s chief executive officer and chief technology officer are the only participants and during the three and six months ended June 30, 2024, approximately $ 17,250 and $ 34,500 was deposited into the chief executive officer's SEP IRA account, respectively and approximately $ 3,450 and $ 3,450 was deposited into the chief technology officer's SEP IRA account, respectively. During the three and six months ended June 30, 2023, approximately $ 16,500 and $ 33,000 were deposited into the chief executive officer's SEP IRA account, respectively. No amounts were deposited into the chief technology officer's SEP IRA account during the three and six months ended June 30, 2023. 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. 16 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. 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 impair the Company’s operating results and financial position and could result in a default under the Company’s obligations to QFL and QF3. 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 judgment may result in the bankruptcy of the subsidiary and/or the loss of the patents, which are the subsidiaries’ only assets. Effects of possible delisting of common stock on OTCQB 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 of QFL’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. The Company cannot assure it 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. 17