9. Debt

Notes Payable

Related Party Note Payable

We have an unsecured promissory note of approximately $0.8 million payable to Sterne, Kessler, Goldstein, & Fox, PLLC (“SKGF”), a related party, for outstanding unpaid fees for legal services. The SKGF note, as amended, accrues interest at a rate of 4% per annum, requires repayments of principal and interest at a rate of $10,000 per month with a final balloon payment due in April 2022. We are currently in compliance with all the terms of the note, as amended.

Secured Note Payable

We have a note payable to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (“Mintz”) for outstanding, unpaid attorney’s fees and costs associated with our patent enforcement program. The Mintz note is non-interest bearing, except in the event of a default, and is secured by certain of our U.S. and foreign patents. The note, at Mintz’s option, accelerates and becomes immediately due and payable in the case of standard events of default and/or in the event of a sale or other transfer of substantially all of our assets or a transfer of more than 50% of our capital stock in one or a series of transactions or through a merger or other similar transaction.

We have been in default on the payment terms of the note since November 17, 2019, and accordingly, have accrued interest at the default rate of 12% per annum. Currently, Mintz has not requested acceleration of unpaid principal and interest on the note, nor have they waived the outstanding default. During the six months ended June 30, 2020, we made payments to Mintz of $1.2 million, which we applied to outstanding principal and interest on the Mintz note, leaving an outstanding balance, including accrued default interest, at June 30, 2020 of approximately $0.02 million. Mintz disputes our application of payments against principal and interest on the note rather than against the $3.1 million in billed and unpaid fees and expenses payable to Mintz included in accounts payable at June 30, 2020. The unpaid fees and expenses payable to Mintz at June 30, 2020 exclude approximately $3.6 million in fees billed by Mintz that are in excess of agreed-upon fee caps. We consider the excess fees to be a loss contingency that is not probable as of the issuance date of these condensed consolidated financial statements and, accordingly, we have not recognized these excess fees in expense for the period ended June 30, 2020. We are in discussions with Mintz to resolve our outstanding fee dispute with regard to amounts billed and payable as well as any success fees payable on potential future proceeds.

Unsecured Notes Payable

Unsecured notes payable at June 30, 2020 represents the current portion of our Paycheck Protection Program loan, as described more fully below. Unsecured notes payable at December 31, 2019 represents the outstanding principal balance of unsecured short-term promissory notes with accredited investors for aggregate proceeds of approximately $0.23 million. The notes, as amended, accrued interest at a rate of 20% per annum. During the six months ended June 30, 2020, we issued an aggregate of 1,740,426 shares of our common stock as an in-kind repayment of all outstanding principal and accrued interest on these short-term notes.

Paycheck Protection Program Loan

In May 2020, we received approximately $0.2 million in proceeds from an approved loan under the Paycheck Protection Program. Interest will accrue on outstanding principal balance at a rate of 1%, computed on a simple interest basis. The loan principal and accrued interest will be eligible for forgiveness provided that (i) we use the loan proceeds exclusively for allowed costs including payroll, employee group health benefits, rent and utilities and (ii) employee and compensation levels are maintained. If the loan is not forgiven, we will be required to make monthly repayments of approximately $8,000 per month commencing November 1, 2020 and the loan will mature on May 3, 2022, at which time any unpaid principal and accrued interest will be due and payable. The current and noncurrent portions of this loan are included in the captions “Unsecured notes payable” and “Other long-term liabilities” in the condensed consolidated balance sheet as of June 30, 2020.

Convertible Notes

Our convertible notes represent five-year promissory notes that are convertible, at the holders’ option, into shares of our common stock at fixed conversion prices. The notes bear interest at a stated rate of 8% per annum, except for the July 18, 2019 notes which bear interest at a stated rate of 7.5% per annum. Interest is payable quarterly, and we may elect to pay interest in either cash, shares of our common stock, or a combination thereof, subject to certain equity conditions. To date, all interest payments on the convertible notes have been made in shares of our common stock, including payments of $0.14 million during the six months ended June 30, 2020.

We have the option to prepay the majority of the notes any time following the one-year anniversary of the issuance of the notes, subject to a premium on the outstanding principal prepayment amount of 25% prior to the two-year anniversary of the note issuance date, 20% prior to the three-year anniversary of the note issuance date, 15% prior to the four-year anniversary of the note issuance date, or 10% thereafter. We do not have a prepayment option with regard to the July 18, 2019 notes or the January 8, 2020 notes.

Notes with a principal balance of $0.13 million were converted, at the option of the holder, into shares of our common stock during the six month period ended June 30, 2020.

Convertible notes payable at June 30, 2020 and December 31, 2019 consist of the following (in thousands):



	Fixed	Effective		Principal Outstanding as of
	Conversion	Interest		June 30,		December 31,
Description	Rate	Rate	Maturity Date	2020		2019
Convertible notes dated September 10, 2018	$0.40	23.4%	September 7, 2023	$	600	$	700
Convertible note dated September 19, 2018	$0.57	10.2%	September 19, 2023		425		425
Convertible notes dated February/March 2019	$0.25	8.0%	February 28, 2024 to March 13, 2024		1,300		1,300
Convertible notes dated June/July 2019	$0.10	8.0%	June 7, 2024 to July 15, 2024		365		390
Convertible notes dated July 18, 2019	$0.08	46.1%	July 18, 2024		700		700
Convertible notes dated September 13, 2019	$0.10	25.9%	September 13, 2024		50		50
Convertible notes dated January 8, 2020	$0.13	20.3%	January 8, 2025		450		-
Total principal balance					3,890		3,565
Less Unamortized discount					911		832
				$	2,979	$	2,733

Secured Contingent Payment Obligation

The following table provides a reconciliation of our secured contingent payment obligation, measured at estimated fair market value, for the six months ended June 30, 2020 and the year ended December 31, 2019 (in thousands):



	Six Months Ended June 30, 2020		Year Ended December 31, 2019
Secured contingent payment obligation, beginning of period	$	26,651	$	25,557
Change in fair value		2,034		1,094
Secured contingent payment obligation, end of period	$	28,685	$	26,651

Our secured contingent payment obligation represents the estimated fair value of our repayment obligation to Brickell Key Investments, LP (“Brickell”) under a February 2016 funding agreement, as amended. Brickell is entitled to priority payment of 55% to 100% of proceeds received from all patent-related actions until such time that Brickell has been repaid in full. After repayment of the funded amount, which is $14.7 million as of June 30, 2020, Brickell is entitled to a portion of remaining proceeds up to a specified minimum return which is determined as a percentage of the funded amount and varies based on the timing of repayment. In addition, Brickell is entitled to a pro rata portion of proceeds from specified legal actions to the extent aggregate proceeds from those actions exceed the specified minimum return. As of June 30, 2020, we are in compliance with our obligations under this agreement.

We have elected to measure our secured contingent payment obligation at fair value based on probability-weighted estimated cash outflows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The secured contingent payment obligation is remeasured to fair value at each reporting period with changes recorded in the condensed consolidated statements of comprehensive loss until the contingency is resolved (see Note 10).

Unsecured Contingent Payment Obligations

The following table provides a reconciliation of our unsecured contingent payment obligations, measured at estimated fair market value, for the six months ended June 30, 2020 and the year ended December 31, 2019 (in thousands):


	Six Months Ended June 30, 2020		Year Ended December 31, 2019
Unsecured contingent payment obligations, beginning of period	$	-	$	-
Reclassification of other liabilities		1,003		-
Proceeds from sale of contingent payment rights		735		-
Initial fair market value of modification		436		-
Change in fair value		1,348		-
Unsecured contingent payment obligations, end of period	$	3,522	$	-

Our unsecured contingent payment obligations represent amounts payable to others from future patent-related proceeds including (i) a termination fee due to a litigation funder (“Termination Fee”) and (ii) contingent payment rights issued to accredited investors in connection with equity financings (“CPRs”). We have elected to measure these unsecured contingent payment obligations at their estimated fair value based on probability-weighted estimated cash outflows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The unsecured contingent payment obligations will be remeasured to fair value at each reporting period with changes recorded in the condensed consolidated statements of comprehensive loss until the contingency is resolved (see Note 10).

The Termination Fee is a result of $1.0 million received as advances under a letter agreement with a third-party funder. Based on the terms of the letter agreement, if a final funding arrangement was not executed by March 31, 2020, we would be obligated to pay, from future patent-related proceeds, an aggregate termination payment equal to five times the upfront payment received, or $5.0 million. We did not reach an agreement as of March 31, 2020 and formally terminated negotiations in April 2020. Advances under the letter agreement included $0.4 million as of December 31, 2019, and $0.6 million advanced in January 2020. The advances, which were initially recorded in other long-term liabilities, were reclassified to unsecured contingent payment obligations at March 31, 2020 when the Termination Fee obligation was incurred. As of June 30, 2020, the estimated fair value of unsecured contingent payment obligations related to the Termination Fee is $2.4 million.

The CPRs represent the estimated fair value of rights provided to accredited investors who purchased shares of our common stock between March and June 2020 (see Note 12). During the six months ended June 30, 2020, we received proceeds of $1.5 million from the sale of common stock with contingent payment rights, of which $0.7 million was allocated to the CPRs. In addition, on May 1, 2020, we granted CPRs to purchasers of $0.9 million of our common stock in March 2020, resulting in a charge to expense of $0.4 million for the initial estimated fair value of the CPRs. The terms of the CPRs provide that we will pay each investor an allocated portion of our net proceeds from patent-related actions, after taking into account fees and expenses payable to law firms representing us and amounts payable to Brickell. The investors’ allocated portion of net proceeds will be determined by multiplying the net proceeds recovered by us (up to $10 million) by the quotient of such investors’ subscription amount divided by $10 million, up to an amount equal to each investor’s subscription amount, or an aggregate of $2.4 million. As of June 30, 2020, the estimated fair value of unsecured contingent payment obligations related to the CPRs is $1.1 million.