Executive Overview
We are in the business of innovating fundamental wireless technologies and
products. We have designed and developed proprietary RF technologies and
integrated circuits based on those technologies, and we license our technologies
to others for use in wireless communication products. We have expended
significant financial and other resources to research and develop our RF
technologies and to obtain patent protection for those technologies in the U.S.
and certain foreign jurisdictions. We believe certain patents protecting our
proprietary technologies have been broadly infringed by others and therefore our
business plan primarily consists of enforcement of our intellectual property
rights through patent licensing efforts and infringement litigation. We
currently have patent enforcement actions ongoing in various U.S. district
courts against mobile handset, smart television and other WiFi product
providers, as well as semiconductor suppliers for the infringement of a number
of our RF patents. 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.
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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 have expended
significant resources since 2011 and incurred significant debt for the
enforcement and defense of our intellectual property rights.
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.
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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.
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. 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 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" below.
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.
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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 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.
Financial Condition
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.
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" below.
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.
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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. The maximum payment obligation for our unsecured contingent
payment obligations is 10.8 million at December 31, 2022.
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.
Note Payable
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. 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. 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.
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Results of Operations for Each of the Years Ended December 31, 2022 and 2021
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.
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.
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.
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Critical Accounting Policies
We believe that the following are critical accounting policies and estimates
that significantly impact the preparation of our consolidated financial
statements:
Contingent Payment Obligations
We have accounted for our secured and unsecured contingent payment obligations
as long-term debt. 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.
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. GAAP. 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.
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Off-Balance Sheet Transactions
As of December 31, 2022, 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
outstanding warrants have an average exercise price of $0.75 per share and a
weighted average remaining life of approximately 2.1 years.
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