What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-28 · 99 added, 119 removed, 46 unchanged (83% of the section changed)

9 unchanged sentences

We have made significant investments in developing and protecting our technologies, the returns on which are dependent upon the generation of future revenues for realization.

We continue to aggressively pursue licensing opportunities with wireless communications companies that make, use or sell semiconductors and/or products that incorporate RF. 

We believe there are a number of wireless communications companies that can benefit from the use of the RF technologies we have developed, whether through a license or, in certain cases, a joint product venture that may include licensing rights. 

Our licensing efforts to date have required litigation in order to enforce and/or defend our intellectual property rights. 

Since 2011, we have been involved in patent infringement litigation against Qualcomm and subsequently others for the unauthorized use of our technology. 

Refer to Note 13 to our consolidated financial statements included in Item 8 for a complete discussion of our legal proceedings. 

We continue to aggressively pursue licensing opportunities with wireless communications companies that make, use or sell semiconductors and/or products that incorporate RF.

Our licensing efforts to date have required litigation in order to enforce and/or defend our intellectual property rights.

Since 2011, we have been involved in patent infringement litigation against Qualcomm and subsequently others for the unauthorized use of our technology.

Refer to Note 13 to our consolidated financial statements included in Item 8 for a complete discussion of our legal proceedings.

We have expended significant resources since 2011 and incurred significant debt for the enforcement and defense of our intellectual property rights.

As of December 31, 2023, we had five licensees for our technologies, including one licensee added in 2023.

Recent Developments

Debt and Equity Financing

In January 2023, we received aggregate proceeds of approximately $0.7 million from the sale of convertible notes to accredited investors. 

The notes are convertible, at the holders' option, into shares of our common stock at a fixed conversion price of $0.16 per share and bear interest at a stated rate of 9% per annum. 

In addition, in January 2023, we received aggregate proceeds of approximately $0.14 million from the sale of common stock to accredited investors at a price of $0.16 per share. 

We entered into registration rights agreements with the investors pursuant to which we will register the shares. 

Refer to Note 18 to our consolidated financial statements included in Item 8 for a complete discussion of these financing transactions.

Legal Proceedings

In February 2023, we entered into a confidential patent license and settlement agreement and in March 2023, we received a payment of $25 million with respect thereto.

In February 2023, we dismissed our two patent enforcement actions against Intel Corporation.

Refer to Note 13 to our consolidated financial statements included in Item 8 for a complete discussion of our patent enforcement proceedings.

On November 6, 2023, we presented oral arguments in our appeal of the ParkerVision v.

Qualcomm district court rulings that ended our district court case in Orlando, Florida in March 2022.

We are currently awaiting a ruling from the appellate court.

Liquidity and Capital Resources

We have incurred significant losses from operations and negative cash flows in every year since inception, largely as a result of our significant investments in developing advanced technologies and protecting our intellectual property. 

With the exception of the year ended December 31, 2023, we have incurred significant losses from operations and negative cash flows in every year since inception, largely as a result of our significant investments in developing advanced technologies and protecting our intellectual property.

We have utilized the proceeds from sales of debt and equity securities and contingent funding arrangements with third parties to fund our operations, including the cost of litigation to enforce our intellectual property rights.

For the year ended December 31, 2022, we incurred a net loss of approximately $9.8 million and negative cash flows from operations of approximately $3.0 million. 

At December 31, 2022, we had cash and cash equivalents of approximately $0.1 million and an accumulated deficit of approximately $443.2 million. 

Additionally, a significant amount of future proceeds that we may receive from our patent enforcement and licensing programs will first be utilized to repay borrowings, legal fees, and litigation expenses under our contingent funding arrangements. 

At December 31, 2023, we had cash and cash equivalents of approximately $2.6 million, working capital of $0.4 million, and an accumulated deficit of approximately $433.7 million.

Despite the net income and cash flows generated during the year ended December 31, 2023, a significant amount of future proceeds that we may receive from our patent enforcement and licensing programs will first be utilized to repay borrowings, legal fees, and litigation expenses under our contingent funding arrangements.

In addition, we have approximately $1.5 million in convertible debt that, if not converted, will mature between June 2024 and January 2025.

Our independent registered public accounting firm has included in their audit report an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

See Note 2 to our consolidated financial statements included in Item 8 for a discussion of our liquidity and our ability to continue as a going concern.

We used cash for operations of approximately $3.0 million and $7.7 million for the years ended December 31, 2022 and 2021, respectively.

The decrease in cash used for operations from 2021 to 2022 is primarily due to the use of approximately $3.9 million in cash for the reduction of accounts payable and accrued expenses during the year ended December 31, 2021, as compared to a $0.4 million increase in accounts payable and accrued expenses during the year ended December 31, 2022. 

The reduction in accounts payable during the year ended December 31, 2021 is primarily the result of a $3.0 million payment to a law firm in settlement of our outstanding fees and expenses and in exchange for an agreed-upon reduction in potential success fees payable to the firm from future patent-related proceeds.

For the year ended December 31, 2022, we received aggregate net proceeds from the sale of debt and equity securities, including the exercise of outstanding options and warrants, of approximately $2.1 million compared to approximately $7.2 million in proceeds received for the year ended December 31, 2021. 

We repaid approximately $0.1 million in debt obligations during each of the years ended December 31, 2022 and 2021.

Significant portions of our litigation costs to date have been funded by contingent payment arrangements with legal counsel. 

Fee discounts offered by legal counsel in exchange for contingent payments upon successful outcome in our litigation are not recognized in expense until such time that the related proceeds on which the contingent fees are payable are considered probable. 

Contingent fees vary based on each firm’s specific fee agreement. 

We generated cash from operations of approximately $10.8 million for the year ended December 31, 2023 and used cash for operations of $3.0 million for the year ended December 31, 2022.

The increase in cash generated from operations from 2022 to 2023 is primarily due to proceeds received from the patent license and settlement agreement entered into in February 2023, net of contingent legal fees and expenses paid.

We made payments of $13.9 million on our secured contingent payment obligation during the year ended December 31, 2023, and paid approximately $0.3 million and $0.1 million in other debt obligations during the years ended December 31, 2023 and 2022, respectively.

For the year ended December 31, 2023, we received aggregate proceeds from new borrowings under our secured contingent payment obligation of $5.0 million and aggregate net proceeds from issuance of convertible debt, equity financings, and option exercises of approximately $0.9 million, compared to approximately $2.1 million in proceeds from issuance of convertible debt, equity financings, and option exercises for the year ended December 31, 2022.

Significant portions of our litigation costs to date have been funded by contingent payment arrangements with legal counsel.

Contingent fees vary based on each firm’s specific fee agreement.

We currently have contingent fee arrangements in place for all of our active cases.

In addition to our contingent fee agreements with legal counsel, we have secured and unsecured contingent payment obligations to litigation funders that have priority payments due from patent-related proceeds as discussed more fully under “Financial Condition - Contingent Payment Obligations”

In March 2023, we received $25.0 million in proceeds from a patent license and settlement agreement. 

These proceeds are expected to be used entirely for the payment of contingent legal fees and expenses and the repayment of principal on our secured contingent debt obligation and therefore our ability to meet our short-term liquidity needs is dependent upon one or more of (i) our ability to successfully negotiate future licensing agreements and/or settlements relating to the use of our technologies by others in excess of our contingent payment obligations to Brickell and legal counsel;

and/or (ii) our ability to raise additional capital from the sale of debt or equity securities or other financing arrangements. 

We are currently in discussions with Brickell regarding restructuring of our contingent payment obligation, including additional new funds. 

There can be no assurance that a favorable restructuring of our Brickell obligation will be achieved at all, or in a manner that provides significant future benefit to us.

Based on our current outstanding legal proceedings, funding arrangements and contingent payment arrangements, we estimate that up to 100% of our initial future proceeds will be used to repay contingent payment arrangements at least until the outstanding principal under our secured contingent payment obligation has been repaid. 

After repayment of principal, we estimate that approximately 75% of future proceeds could be payable to others until such time that minimum returns have been achieved, depending on the proceeding and the nature, amount and timing of proceeds, among other factors.

Patent enforcement litigation is costly and time-consuming, and the outcome is difficult to predict. 

We expect to continue to invest in the support of our patent enforcement and licensing programs. 

We expect that cash flows generated from proceeds received from patent enforcement actions and/or technology licenses in 2023, after deduction of contingent payment obligations, may not be sufficient to cover our operating expenses. 

In addition to our contingent fee agreements with legal counsel, we have secured and unsecured contingent payment obligations to third parties that have priority payments due from patent-related proceeds as discussed more fully under “Financial Condition - Contingent Payment Obligations” below.

Based on our current outstanding legal proceedings, funding arrangements and contingent payment arrangements, we estimate that up to 100% of our initial future proceeds will be used to repay contingent payment arrangements at least until the first $5.8 million of outstanding principal under our secured contingent payment obligation has been repaid.

After repayment of $5.8 million in principal, we estimate that at least 75% of future proceeds could be payable to others until such time that certain minimum repayments have been achieved or our non recourse note matures in August 2028.

The amount of proceeds payable to others depends on the proceeding and the nature, amount and timing of proceeds, among other factors.

Patent enforcement litigation is costly and time-consuming, and the outcome is difficult to predict.

We expect to continue to invest in the support of our patent enforcement and licensing programs.

We expect that cash flows generated from proceeds received from patent enforcement actions and/or technology licenses in 2024, after deduction of contingent payment obligations, will not be sufficient to cover our operating expenses and debt repayment obligations.

In the event we do not generate revenues, or other patent-related proceeds, sufficient to cover our operational costs and contingent repayment obligations, we will be required to raise additional working capital through the sale of debt or equity securities or other financing arrangements.

The long-term continuation of our business plan is dependent upon our ability to secure sufficient financing to support our business, and our ability to generate revenues and/or patent-related proceeds sufficient to offset expenses and meet our contingent payment obligations and other long-term debt repayment obligations. 

Failure to generate sufficient revenues, raise additional capital through debt or equity financings, and/or reduce operating costs could have a material adverse effect on our ability to meet our short and long-term liquidity needs and achieve our intended long-term business objectives.

1 unchanged sentence

Intangible Assets

We consider our intellectual property, including patents, patent applications, trademarks, copyrights, and trade secrets to be significant to our business. 

Our intangible assets are pledged as security for our secured contingent payment obligation with Brickell. 

The net book value of our intangible assets was approximately $1.4 million and $1.8 million as of December 31, 2022 and 2021, respectively. 

The cost basis for our intangible assets represents capitalized legal costs and agency filing fees for securing intellectual property protection and does not include the costs expended in developing the underlying intellectual property. 

The cost of our intangible assets is amortized using the straight-line method over their estimated period of benefit, generally fifteen to twenty years. 

The decrease in the carrying value of our intangible assets is primarily the result of $0.3 million in patent amortization expense recognized in 2022 as our portfolio matures. 

Management evaluates the recoverability of intangible assets periodically and considers events or circumstances that may warrant revised estimates of useful lives or that may indicate impairment exists. 

As part of our ongoing patent maintenance program, we may, from time to time, abandon a particular patent if we determine fees to maintain the patent exceed its expected recoverability. 

For the years ended December 31, 2022 and 2021, we incurred losses of approximately $0.1 million and $0.03 million, respectively, for the write-off of specific patent assets. 

These losses are included in operating expenses in the accompanying consolidated statements of comprehensive loss included in Item 8.

We consider our intellectual property, including patents, patent applications, trademarks, copyrights, and trade secrets to be significant to our business.

Our intangible assets are pledged as security for our secured contingent payment obligation with Brickell.

The net book value of our intangible assets was approximately $1.1 million and $1.4 million as of December 31, 2023 and 2022, respectively.

The cost of our intangible assets is amortized using the straight-line method over their estimated period of benefit, generally fifteen to twenty years.

The decrease in the carrying value of our intangible assets is primarily the result of $0.2 million in patent amortization expense recognized in 2023 as our portfolio matures.

As part of our ongoing patent maintenance program, we may, from time to time, abandon a particular patent if we determine fees to maintain the patent exceed its expected recoverability.

For the years ended December 31, 2023 and 2022, we incurred losses of approximately $0.06 million and $0.12 million, respectively, for the write-off of specific patent assets.

These losses are included in operating expenses in the accompanying consolidated statements of comprehensive income (loss) included in Item 8.

Contingent Payment Obligations

We have secured and unsecured contingent payment obligations recorded at an aggregate estimated fair value of $45.8 million and $43.1 million as of December 31, 2022 and 2021, respectively. 

These repayment obligations are contingent upon receipt of proceeds from patent enforcement and other patent monetization actions. 

As a result, we have elected to account for these contingent payment obligations at their estimated fair values which are subject to significant estimates and assumptions as discussed in “Critical Accounting Policies”

We have secured and unsecured contingent payment obligations recorded at an aggregate estimated fair value of $37.0 million and $45.8 million as of December 31, 2023 and 2022, respectively.

These repayment obligations are contingent upon receipt of proceeds from patent enforcement and other patent monetization actions.

Refer to Note 11 to our consolidated financial statements included in Item 8 for a discussion of the fair value measurement of our contingent payment obligations.

Our secured contingent payment obligation is payable to Brickell as a result of $18 million in borrowings under a 2016 funding agreement, as amended from time to time. 

As of December 31, 2022, we have repaid Brickell an aggregate of $3.3 million to date under this agreement.

The contingent payment obligation to Brickell is recorded at its estimated fair market value of $40.7 million at December 31, 2022, an increase of $3.3 million or 9% from the estimated fair market value at December 31, 2021. 

Brickell is entitled to a priority, prorated payment of up to 100% of proceeds received by us from funded patent-related actions up to a specified minimum return. 

Brickell’s minimum return is determined as a multiple of the outstanding funded amount that increases over time. 

The estimated aggregate minimum return due to Brickell if repaid in full at December 31, 2022 is approximately $56.9 million, an increase of approximately $8.1 million, or 16.6%, from the minimum return that would have been due to Brickell as of December 31, 2021.

In addition, in 2020 and 2021, we incurred unsecured contingent payment obligations in connection with various funding arrangements. 

These contingent payment obligations are payable from our share of patent-related proceeds after satisfaction of our obligation to Brickell and payment of contingent fees to legal counsel. 

These unsecured contingent payment obligations are recorded at an aggregate estimated fair value of $5.1 million at December 31, 2022, representing a decrease of $0.6 million from the estimated fair market value at December 31, 2021. 

This decrease is primarily the result of the sharp increase in the risk-free interest rate used in the calculation as a result of the Federal Reserve ending bond purchases and implementing multiple rate increases during 2022. 

Our secured contingent payment obligation is payable to Brickell as a result of $23 million in aggregate borrowings under litigation funding arrangements initiated in 2016.

As of December 31, 2023, we have repaid Brickell an aggregate of $17.3 million to date under these agreements.

The contingent payment obligation to Brickell is recorded at its estimated fair market value of $29.4 million at December 31, 2023, a decrease of $11.3 million or 28% from the estimated fair market value at December 31, 2022.

This decrease in fair value is primarily the result of $13.9 million in repayments, along with renegotiation of future repayment arrangements with Brickell in 2023, offset by $5.0 million in new borrowings and continued increases in accrued interest payable to Brickell.

Brickell is entitled to the first $5.8 million in proceeds received by us, net of contingent legal fees, from any patent-related actions.

Thereafter, Brickell is entitled to a prorated percentage of net proceeds.

The underlying carrying value of the contingent payment obligation is represented by a non recourse note with a face value of $45.5 million, plus accrued interest of approximately $5.5 million as of December 31, 2023.

The note matures on August 14, 2028.

If our repayments to Brickell are insufficient to repay the face value of the note plus accrued interest by the maturity date, our remaining repayment obligations under the note will be reduced to zero with future payment obligations, if any, being determined under a separate prepaid forward purchase agreement that entitles Brickell to a specified percentage of monetary recoveries resulting from patent-related actions to the extent not already paid to Brickell under the note or previous litigation funding agreements.

In addition, we have incurred unsecured contingent payment obligations in connection with various funding arrangements.

These contingent payment obligations are payable from our share of patent-related proceeds after satisfaction of our obligation to Brickell and payment of contingent fees to legal counsel.

These unsecured contingent payment obligations are recorded at an aggregate estimated fair value of $7.6 million at December 31, 2023, representing an increase of $2.5 million from the estimated fair market value at December 31, 2022.

This increase is primarily the result of changes in the estimated amounts and timing of projected future cash flows due to changes in probabilities and time frames based on the status of various patent infringement actions.

The maximum payment obligation for our unsecured contingent payment obligations is $10.8 million at December 31, 2023.

See “Change in Fair Value of Contingent Obligations”

included in “Results of Operations”

below for a discussion of the changes in the estimated fair values of our secured and unsecured contingent payment obligations.

As of December 31, 2022, we have a $0.6 million unsecured note payable to Sterne, Kessler, Goldstein, & Fox, PLLC (“SKGF”), a related party. 

We are obligated to make principal and interest payments totaling $0.16 million in 2023 under this note. 

The note calls for monthly payments of $12,500 through March 2027 with a final payment of approximately $0.02 million in April 2027. 

Failure to comply with the payment terms of this note constitutes an event of default which, if uncured, will result in the entire unpaid principal balance of the note and any unpaid, accrued interest to become immediately due and payable. 

In addition, an event of default results in an increase in the interest rate under the notes to a default rate of 12% per annum. 

See “Change in Fair Value of Contingent Obligations” included in “Results of Operations” below for a discussion of the changes in the estimated fair values of our secured and unsecured contingent payment obligations.

As of December 31, 2023, we have a $0.5 million unsecured note payable to Sterne, Kessler, Goldstein, & Fox, PLLC (“SKGF”), a related party.

The note calls for monthly payments of $12,500 through March 2027 with a final payment of approximately $0.02 million in April 2027.

In addition, an event of default results in an increase in the interest rate under the notes to a default rate of 12% per annum.

Notes payable are discussed more fully in Note 8 to our consolidated financial statements included in Item 8.

Convertible Notes

As of December 31, 2022, we have $4.5 million in notes that are convertible, at the holders’

option, into shares of our common stock at fixed conversion prices ranging from $0.08 to $0.57 per share. 

These notes mature at varying dates from September 2023 to August 2027. 

The majority of the notes bear interest at a stated rate of 8%, payable quarterly. 

We have the option, subject to certain conditions, to pay the quarterly interest in-kind with shares of our common stock based on market price at the interest payment date. 

As of December 31, 2023, we have $4.9 million in notes that are convertible, at the holders’ option, into shares of our common stock at fixed conversion prices ranging from $0.08 to $0.25 per share.

These notes mature at varying dates from June 2024 to January 2028.

The majority of the notes bear interest at a stated rate of 8%, payable quarterly.

We have the option, subject to certain conditions, to pay the quarterly interest in-kind with shares of our common stock based on market price at the interest payment date.

To date, all of the interest payments under these convertible notes have been paid in-kind and we anticipate that future payments of interest will also be paid in-kind.

The notes provide for events of default that include failure to pay principal or interest when due, breach of any of the representations made by us, events of liquidation or bankruptcy, and a change in control. 

In the event of default, the interest rate increases to 12% per annum and the outstanding principal balance of the notes plus all accrued interest due may be declared immediately payable by the holders of a majority of the then-outstanding notes. 

Our convertible notes payable are more fully discussed in Note 9 to our consolidated financial statements included in Item 8.

Deferred Tax Assets and Related Valuation Allowance

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. 

Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 

Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized. 

As of December 31, 2022, we had net deferred tax assets of approximately $90.5 million, primarily related to our NOL carryforwards, which were fully offset by a valuation allowance due to the uncertainty related to realization of these assets through future taxable income. 

In addition, our ability to benefit from our NOL and other tax credit carryforwards could be limited under Section 382 as more fully discussed in “Risk Factors”

and in Note 12 to our consolidated financial statements included in Item 8.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns.

Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.

As of December 31, 2023, we had net deferred tax assets of approximately $83.7 million, primarily related to our NOL carryforwards, which were fully offset by a valuation allowance due to the uncertainty related to realization of these assets through future taxable income.

In addition, our ability to benefit from our NOL and other tax credit carryforwards could be limited under Section 382 as more fully discussed in “Risk Factors” and in Note 12 to our consolidated financial statements included in Item 8.

Results of Operations for Each of the Years Ended December 31, 2023 and 2022

Revenues and Gross Margins

Licensing revenue was $0.93 million and $0.14 for the years ended December 31, 2022 and December 31, 2021, respectively. 

Our licensing revenue is from patent licensing and settlement agreements resulting from settlement of patent enforcement actions filed by us.

To date, all of our license and settlement agreements have consisted of a one-time, lump sum payment with no recurring future revenue. 

We recognized revenue from each contract when the parties’

performance obligations were met. 

Cost of sales related to the licensing revenue consists of amortization expense related to the patents covered under the license agreements. 

Our licensing revenue is expected to vary based on the market size of the licensee and the specific terms of the license and settlement agreement. 

Our licensing proceeds in both 2022 and 2021 were used fully to pay contingent out-of-pocket expenses incurred by our litigation counsel to support our patent enforcement program in the aggregate. 

As a result of the recognition of these contingent expenses in accordance with our contingent fee agreements, the proceeds did not have an impact on our cash flows. 

These contingent out-of-pocket expenses, which are recognized in the same period as the corresponding revenue, are included in selling, general and administrative expenses.

In March 2023, we received $25.0 million from a patent licensing and settlement agreement reached in February 2023. 

We anticipate additional revenue to result from our licensing and patent enforcement actions although the amount and timing is highly unpredictable and there can be no assurance that we will achieve our anticipated results.

Licensing revenue was $25.00 million and $0.93 million for the years ended December 31, 2023 and December 31, 2022, respectively.

Our licensing revenue is from patent licensing and settlement agreements resulting from patent enforcement actions filed by us.

To date, all of our license and settlement agreements have consisted of a one-time, lump sum payment with no recurring future revenue.

We recognized revenue from each contract when the parties’ performance obligations were met.

Cost of sales related to the licensing revenue consists of amortization expense related to the patents covered under the license agreements.

Our licensing revenue is expected to vary based on the market size of the licensee and the specific terms of the license and settlement agreement.

Our licensing proceeds in 2023 were used to pay contingent out-of-pocket expenses and fees incurred by our litigation counsel and to repay a portion of our secured contingent payment obligations.

Our licensing proceeds in 2022 were fully used to pay contingent out-of-pocket expenses incurred by our litigation counsel and therefore did not have an impact on our cash flows from operations.

The contingent out-of-pocket expenses, which are recognized in the same period as the corresponding revenue, are included in selling, general and administrative expenses.

Although we anticipate additional revenue to result from our licensing and patent enforcement actions, the amount and timing is highly unpredictable and there can be no assurance that we will achieve our anticipated results.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses consist primarily of executive, director, technical support, and finance and administrative personnel costs, including share-based compensation, costs incurred for insurance, shareholder relations and outside legal and professional services, including litigation expenses, and amortization and maintenance expenses related to our patent assets.

Our selling, general and administrative expenses were approximately $7.8 million for the year ended December 31, 2022, as compared to approximately $8.1 million for the year ended December 31, 2021, representing a decrease of approximately $0.3 million or 4%. 

This decrease results primarily from a decrease in share-based compensation of $0.2 million attributed to nonqualified stock options and restricted stock units becoming fully vested during the year ended December 31, 2022. 

We recognized approximately $0.93 and $0.14 million in contingent litigation expenses resulting from patent license and settlement arrangements for the years ended December 31, 2022 and December 31, 2021, respectively. 

The increase in contingent litigation expenses from 2021 to 2022 is a direct result of the increase in licensing revenue and was offset by a decrease in non-contingent litigation expenses from 2021 to 2022, primarily as a result of a decrease in non-contingent litigation expenses incurred in connection with the Qualcomm action that is currently on appeal.

Our selling, general and administrative expenses were approximately $14.7 million for the year ended December 31, 2023, as compared to approximately $7.8 million for the year ended December 31, 2022, representing an increase of approximately $7.0 million or 90%.

This increase results primarily from a $9.6 million increase in litigation fees and expenses and is partially offset by a decrease in share-based compensation of $2.6 million attributed to nonqualified stock options and restricted stock units becoming fully vested during the year ended December 31, 2022.

We recognized approximately $11.1 million and $0.9 million in contingent litigation expenses resulting from patent license and settlement arrangements for the years ended December 31, 2023 and December 31, 2022, respectively.

The contingent legal fees and expenses recognized are generally proportionate to the amount of gross proceeds received from our confidential patent license and settlement agreements.

Change in Fair Value of Contingent Payment Obligations

We have elected to measure our secured and unsecured contingent payment obligations at fair value which is based on significant unobservable inputs.  We estimated the fair value of our secured contingent payment obligations using a probability-weighted income approach based on the estimated present value of projected future cash outflows using a risk-adjusted discount rate.  Increases or decreases in the significant unobservable inputs could result in significant increases or decreases in fair value.

For the year ended December 31, 2022, we recorded an increase in the aggregate fair value of our secured and unsecured contingent payment obligations of approximately $2.7 million.  The majority of the change in fair value is attributable to the passage of time leading to increased returns due to Brickell and are partially offset by an increase in the risk-free interest rate used in the calculation as a result of the Federal Reserve ending bond purchases and implementing multiple rate increases during 2022.

We have elected to measure our secured and unsecured contingent payment obligations at fair value which is based on significant unobservable inputs.

We estimated the fair value of our secured contingent payment obligations using a probability-weighted income approach based on the estimated present value of projected future cash outflows using a risk-adjusted discount rate.

Increases or decreases in the significant unobservable inputs could result in significant increases or decreases in fair value.

Generally, changes in fair value are a result of changes in estimated amounts and timing of projected future cash flows due to increases in funded amounts, passage of time, and changes in the probabilities based on the status of the funded actions.

For the year ended December 31, 2023, we recorded a net increase in the aggregate fair value of our secured and unsecured contingent payment obligations of approximately $0.1 million.

The majority of the change in fair value is attributable to changes in the estimated amounts and timing of projected future cash flows due to changes in probabilities and time frames based on the status of various patent infringement actions, as well as the impact of revised funding agreements with Brickell.

Critical Accounting Policies

3 unchanged sentences

Our repayment obligations are contingent upon the receipt of proceeds from patent enforcement or other patent monetization actions.

We have elected to measure our contingent payment obligations at their estimated fair values based on the variable and contingent nature of the repayment provisions. 

We have determined that the fair value of our secured and unsecured contingent payment obligations falls within Level 3 in the fair value hierarchy, which involves significant estimates and assumptions including projected future patent-related proceeds and the risk-adjusted rate for discounting future cash flows. 

Actual results could differ from the estimates made. 

Changes in fair value, including the component related to imputed interest, are included in the consolidated statements of comprehensive loss under the heading “Change in fair value of contingent payment obligations.” 

Refer to Note 11 to our consolidated financial statements included in Item 8 for a discussion of the significant estimates and assumptions used in estimating the fair value of our contingent payment obligations.

We have elected to measure our contingent payment obligations at their estimated fair values based on the variable and contingent nature of the repayment provisions.

Actual results could differ from the estimates made.

Changes in fair value, including the component related to imputed interest, are included in the consolidated statements of comprehensive income (loss) under the heading “Change in fair value of contingent payment obligations.” Refer to Note 11 to our consolidated financial statements included in Item 8 for a discussion of the significant estimates and assumptions used in estimating the fair value of our contingent payment obligations.

Accounting for Share-Based Compensation

We calculate the fair value of share-based equity awards, including restricted stock, stock options and restricted stock units (“RSUs”), on the date of grant and recognize the calculated fair value as compensation expense over the requisite service periods of the related awards. 

The fair value of stock option awards is determined using the Black-Scholes option valuation model that requires the use of highly subjective assumptions and estimates including how long the holder will retain their stock options before exercising them and the volatility of our common stock price over the expected life of the equity award. 

Changes in these subjective assumptions can materially affect the estimate of fair value of share-based compensation and consequently, the related amount recognized as expense in the consolidated statements of comprehensive loss.

New Accounting Pronouncements

We adopted Accounting Standards Update (“ASU”) 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" as of January 1, 2021. 

ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S.

Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. 

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception.  The ASU also simplifies the diluted earnings per share calculation in certain areas. For smaller reporting companies, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020.

 The ASU provides for a modified retrospective method of adoption whereby the guidance is applied to transactions outstanding at the beginning of the fiscal year of adoption with the cumulative effect of the change being recorded as an adjustment to beginning retained earnings.

Adoption of ASU 2020-06 resulted in an increase to our long-term debt of approximately $0.8 million, a decrease in additional paid-in-capital of approximately $1.1 million and an adjustment to our beginning accumulated deficit of $0.3 million resulting from the elimination of the previously recognized beneficial conversion feature as a debt discount.

There have been no new accounting pronouncements that are expected to have a material impact on our financial position, results of operations or cash flows when they become effective.

Off-Balance Sheet Transactions

As of December 31, 2023, we had outstanding warrants to purchase 10.3 million shares of our common stock.

The estimated grant date fair value of these warrants of approximately $3.2 million is included in shareholders’

deficit in our consolidated balance sheet for the year ended December 31, 2022. 

The estimated grant date fair value of these warrants of approximately $3.5 million is included in shareholders’ deficit in our consolidated balance sheet for the year ended December 31, 2023.

The outstanding warrants have an average exercise price of $0.75 per share and a weighted average remaining life of approximately 1.5 years.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis