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Proceeds Investment Agreement Obligation | 6 Months Ended
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Jun. 30, 2020
Proceeds Investment Agreement Obligation |
Proceeds Investment Agreement Obligation | NOTE 4. PROCEEDS INVESTMENT AGREEMENT OBLIGATION The proceeds investment agreement obligations is comprised of the following:
|  | June 30, 2020 |  |  | December 31, 2019 |
Proceeds investment agreement, at fair value |  | $ | 3,615,000 |  |  | $ | 6,500,000 |
Less: Current portion |  |  | (3,615,000 | ) |  |  | — |
Proceeds investment agreement, at fair value - Long-term |  | $ | — |  |  | $ | 6,500,000 |
On July 31, 2018, the Company entered into a Proceeds Investment Agreement (the “PIA”) with Brickell Key Investments LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i) to fund the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA and (ii) to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA. Pursuant to the PIA, BKI was granted an option to provide the Company with an additional $9.5 million, at BKI’s sole discretion (the “Second Tranche”). On August 21, 2018, BKI exercised its option on the Second Tranche for $9.5 million which completed the $10.0 million funding. Pursuant to the PIA and in consideration for the $10.0 million in funding, the Company agreed to assign to BKI (i) 100% of all gross, pre-tax monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded in judgment in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent Assets Proceeds”), up to the minimum return (as defined in the PIA) and (ii) if BKI has not received its minimum return by the earlier of a liquidity event (as defined in the PIA) and July 31, 2020, then the Company agreed to assign to BKI 100% of the Patent Asset Proceeds until BKI has received an amount equal to the minimum return on $4.0 million. Pursuant to the PIA, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the PIA) and the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest on the patent assets, the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other assets of the Company until such time as the minimum return is paid on $4.0 million, in which case, the security interest on such other assets will be released. The security interest is enforceable by BKI if the Company is in default under the PIA which would occur if (i) the Company fails, after five (5) days’ written notice, to pay any due amount payable to BKI under the PIA, (ii) the Company fails to comply with any provision of the PIA or any other agreement or document contemplated under the PIA Agreement, (iii) the Company becomes insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to the Company, (iv) the Company’s creditors commence actions against the Company (which are not subsequently discharged) that affect material assets of the Company, (v) the Company, without BKI’s consent, incurs indebtedness other than immaterial ordinary course indebtedness up to $500,000, (vi) the Company fails, within five (5) business days following the closing of the second tranche, to fully satisfy its obligations to certain holders of the Company’s senior secured convertible promissory notes listed in the PIA and fails to obtain unconditional releases from such holders as to the Company’s obligations to such holders and the security interests in the Company held by such holders or (vii) there is an uncured non-compliance of the Company’s obligations or misrepresentations by the Company under the PIA. Under the PIA, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock (the “PIA Warrant”), at an exercise price of $2.60 per share provided that the holder of the PIA Warrant will be prohibited from exercising the PIA Warrant if, as a result of such exercise, such holder, together with its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise. However, such holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the Company. The PIA Warrant is exercisable for five years from the date of issuance and is exercisable on a cashless exercise basis if there is no effective registration statement. No contractual registration rights were given. The Company elected to account for the PIA on the fair value basis. Therefore, the Company determined the fair value of the PIA and PIA Warrants which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants as follows:
Proceeds investment agreement |  | $ | 9,067,513 |
Common stock purchase warrants |  |  | 932,487 |
Gross cash proceeds |  | $ | 10,000,000 |
The Company utilized a probability weighted present value of expected patent asset proceeds for the litigation involving both Axon Enterprises, Inc. (“Axon,” formerly known as Taser International, Inc.) and WatchGuard (see Note 9 – “Commitments and Contingencies”) which involved estimates of the amount and timing of the expected patent asset proceeds from the alleged patent infringement. The fair value of the PIA is updated for actual and estimated activity affecting the probability weighted present value of expected patent asset proceeds at each reporting date with the change charged/credited to operations. Following is a range of certain estimates and assumptions utilized as of June 30, 2020 and December 31, 2019 to probability weighted present value of expected patent asset proceeds for the litigation involving both Axon and WatchGuard:
|  | June 30, 2020 |  |  | December 31, 2019 |
Discount rate |  |  | 15.13% -15.18% |  |  |  | 3.0% -16.6% |
Expected term to patent asset proceeds payment |  |  | 0.33 years – 3.75 .06 - .29 years |  |  |  | 0.58 years - 4 years |
Probability of success |  |  | 90.0 | % |  |  | 5.9% -38.5% |
Estimated minimum return payable to BKI |  |  | $ 4 million |  |  |  | $ 21 million |
Negotiation discount |  |  | 0.0 | % |  |  | 43.3 | %
In May 2019, the Company settled its patent infringement litigation with WatchGuard whereby it received a lump-sum payment of $6.0 million as further described in Note 9 – “Commitments and Contingencies”. In accordance with the terms of the PIA, the Company remitted the $6.0 as a principal payment toward its minimum return payment obligations under the PIA. The following represents activity in the PIA during the six months ended June 30, 2020:
Beginning balance as of December 31, 2019 |  | $ | 6,500,000 |
Repayment of obligation |  |  | — |
Change in the fair value during the period |  |  | (2,885,000 | )
Ending balance as of June 30, 2020 |  | $ | 3,615,000 |
Based on the recent unfavorable decisions by the United States Court of Appeals for the Tenth Circuit (see Note 9 – “Commitments and Contingencies”) the estimated future payments to BKI pursuant to the PIA has been reduced substantially resulting in the significant change in fair value (income) during the six months ended June 30, 2020. Subsequent to June 30, 2020 the Company also entered into a settlement agreement with BKI which may further reduce its obligations under the PIA. (See Note 14 – “Subsequent Events”).

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