NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve Months Ended December
31, 2016 and 2015
1.
Organization
Inventergy Global, Inc. (“Inventergy,”
“Company,” “we,” “us,” or “our”) is an intellectual property (“IP”)
investment and licensing company that works with technology-leading corporations in attaining greater value from their IP assets
in support of their business objectives and corporate brands. Our original monetization and licensing business was enhanced in
April 2016, when the Company formed Inventergy Innovations, LLC (“Inventergy Innovations”) as a majority-owned subsidiary
of the Company. The Company has two distinct business execution approaches to achieve monetization of IP:
|
·
|
Inventergy Innovations:
Commercialization of a broad range of intellectual assets and innovations through which Inventergy
Innovations obtains exclusive rights to IP owned by its partners, and
|
|
·
|
Patent Residual Interest Program (“PRIP”) (see Note 5):
Monetization through enforcement of the Company’s 740 telecommunications
patents (“the Patents”) being transferred to INVT SPE.
|
The Company’s two core strategies
are to (1) commercialize IP by establishing partnerships with companies that have developed or acquired IP with potential applications
in large, growing markets, and (2) assist the Managing Member as needed with its monetization efforts for the Patents that are
being transferred to INVT SPE under the PRIP, sharing in the proceeds of such efforts after monetization costs and other contractual
and priority payments are covered.
Inventergy, Inc. was initially organized as a Delaware limited
liability company under the name Silicon Turbine Systems, LLC in January 2012. It subsequently changed its name to Inventergy,
LLC in March 2012 and it was converted from a limited liability company into a Delaware corporation in February 2013. On June
6, 2014, a subsidiary of eOn Communications Corporation (“eOn”) merged with and into Inventergy, Inc. (the “Merger”).
As a result of the Merger, eOn changed its name to “Inventergy Global, Inc.” The Company is headquartered in Campbell,
California.
The Company operates in a single industry
segment.
In June 2014, in conjunction with the
Merger, the Company underwent a one-for-two reverse stock split. In December 2015, the Company effected a one-for-ten reverse
split of its common shares. All share amounts are reflective of these splits.
2. Summary of Significant Accounting
Policies
Basis of presentation
The financial statements have been prepared
on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. All
material intercompany accounts and transactions have been eliminated in consolidation.
Liquidity and Capital Resources
In accordance with ASU No. 2014-15
Presentation
of Financial Statements – Going Concern
(Subtopic 205-40),
the Company’s management evaluates whether there
are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the financial statements are issued.
At December 31, 2016, the Company has
an accumulated deficit since inception of $63,003,664 (including a net loss for the year ended December 31, 2016 of $7,730,235)
as well as negative cash flows from operations and had negative working capital of $9,983,005. As of March 27, 2017, the Company
had remaining cash of $423,221 which will not be sufficient to meet its plans in the next twelve months from issuance
of these financial statements. These factors raise substantial doubt about our ability to continue as a going concern for one
year from the issuance of the statement. Since January 1, 2015, to maintain its operations, the Company has generated cash through
sales and enforcement of its patents of approximately $7.55 million, sales and licensing revenue from its ECS subsidiary of approximately
$359,000, increased debt borrowing from the Senior Lender of $1,126,900, sale of convertible preferred stock of approximately
$1.5 million (net of issuance costs and partial redemption), and approximately $8.1 million from the sale of common stock (net
of issuance costs). Management will seek to continue operations primarily with revenue received through the Inventergy Innovations
commercialization programs and the Company’s share of net patent monetization revenue from the PRIP (see Note 5), but the
Company may need to seek additional financing through loans and/or the sale of securities. If the Company is required to raise
additional financing capital, it may not be able to obtain such additional capital on acceptable terms or at all and the Company
may not succeed in its future operations. Additionally, if the Company raises capital through the issuance of equity, current
stockholders will experience dilution. If the Company cannot successfully raise additional capital and implement its strategic
development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the
Company may have to cease operations.
The transfer of the Patents to INVT SPE
under the PRIP, which we expect to occur in April 2017, will result in the net book value of the Patents being removed from our
balance sheet. In addition, the Senior Notes and Senior Revenue Share liabilities will be extinguished. We expect the net impact
on liquidity to be a decrease in interest expense, a decrease in patent maintenance costs, and a decrease in legal fees. However,
the business will need additional capital and/or revenues to continue to execute the Company’s business plan, which will
be used to fund operating and partner acquisition expenses. Based on the Company’s internal planning for 2017, which anticipates
certain cash inflows and revenue from the Inventergy Innovations commercialization deal pipeline expected to close during 2017,
estimated cash expenditures for operating expenses will be approximately $4.1 million for the next twelve months, consisting of
approximately $2.3 million in personnel related costs (including costs related to third party consultants performing outsourced
functions), $0.5 million in facilities and infrastructure costs and $1.3 million in other operational costs. Based on the foregoing
and our existing cash balances and proactive measures to reduce expenses and defer obligations where possible, our management believes
we have funds sufficient to meet our anticipated needs for three months.
Since inception, the Company has acquired
an aggregate of approximately 740 currently active patents and patent applications for aggregate purchase payments of $12,109,118.
In December 2016, the Company entered into the Restructuring Agreement with DBD Credit Funding, LLC (“DBD”) and CF
DB EZ LLC (the "Managing Member”) (see Note 5), under which the aforementioned patents were to be assigned to INVT SPE.
The Company is required to make guaranteed payments to one of the sellers of the Patents totaling $2,200,000. Under the terms of
the Restructuring Agreement, this amount will be paid by INVT SPE from subsequent net monetization revenues pertaining to that
seller’s portfolio, so long as such net monetization revenues are sufficient.
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial
doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result
should the Company be unable to continue as a going concern.
Management estimates and related risks
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions about the reported amounts of assets and liabilities,
and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues
and expenses during the reported periods. Although these estimates reflect management's best estimates, it is at least reasonably
possible that a material change to these estimates could occur in the near term.
Cash and cash equivalents
The Company considers all highly liquid
financial instruments with original maturities of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable, net
Accounts receivable are stated net of
allowances for doubtful accounts. The Company typically grants standard credit terms to customers in good credit standing. The
Company generally reserves for estimated uncollectible accounts on a customer-by-customer basis, which requires judgment about
each individual customer’s ability and intention to fully pay account balances. The Company makes these judgments based
on knowledge of and relationships with customers and current economic trends, and updates estimates on a monthly basis. Any changes
in estimate, which can be significant, are included in earnings in the period in which the change in estimate occurs. As of December
31, 2016, the Company has not established any reserves for uncollectable accounts.
Property and equipment, net
Property and equipment are recorded at
cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the assets (or the term of the lease, if shorter), which range from three to five years. Routine
maintenance and repair costs are expensed as incurred. The costs of major additions, replacements and improvements are capitalized.
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation is removed and any resulting
gain or loss is credited or charged to operations.
Patents, net
Patents, including acquisition costs,
are stated at cost, less accumulated amortization. Amortization is computed using the straight-line method over the estimated
useful lives of the respective assets, generally 7 - 10 years. Upon retirement or sale, the cost of assets disposed and the related
accumulated amortization are removed from the accounts and any resulting gain or loss is credited or charged to operations. Patents
are utilized for the purpose of generating licensing revenue.
Intangible Assets
Intangible assets consist of certain contract
rights acquired in the Merger. Intangible assets are amortized on a straight-line basis over their estimated useful life of five
years.
Goodwill
Goodwill represents the excess of the
aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The
carrying amount of goodwill will be tested for impairment annually or more frequently if facts and circumstances warrant a review.
The Company determined that it is a single reporting unit for the purpose of goodwill impairment tests. For purposes of assessing
the impairment of goodwill, the Company estimates the value of the reporting unit using its market capitalization as the best
evidence of fair value. This fair value is then compared to the carrying value of the reporting unit.
Impairment of long-lived assets
The Company evaluates the carrying value
of long-lived assets on an annual basis, or more frequently whenever circumstances indicate a long-lived asset may be impaired.
When indicators of impairment exist, the Company estimates future undiscounted cash flows attributable to such assets. In the
event cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to
their estimated fair value.
Concentration of credit risk
Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash and cash equivalents. Cash and cash equivalents are deposited
with high quality financial institutions. Periodically, such balances are in excess of federally insured limits.
Stock-based compensation
The Company has a stock option plan under
which incentive and non-qualified stock options and restricted stock awards (“RSAs”) are granted primarily to employees.
All share-based payments to employees, including grants of employee stock options and RSAs, are recognized in the financial statements
based on their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are
reported as a financing cash flow.
The Company estimates the fair value of
share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense ratably over the requisite service periods in the Company’s statements of comprehensive
income or loss. The Company has estimated the fair value of each option award as of the date of grant using the Black-Scholes
option pricing model. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied by the number
of shares awarded. The awards issued consist of fully-vested stock awards, performance-based restricted shares, and service-based
restricted shares.
Expenses related to stock-based awards
issued to non-employees are recognized at fair value on a recurring basis over the expected service period. The Company estimates
the fair value of the awards using the Black-Scholes option pricing model.
Income taxes
The Company accounts for income taxes
using the asset and liability method whereby deferred tax asset and liability account balances are determined based on temporary
differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable income. A valuation allowance is established when it is more likely
than not that deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future pretax earnings,
the reversal of temporary differences between book and tax income, and the expected tax rates in future periods. The Company has
a full valuation allowance on all deferred tax assets.
The Company is required to evaluate the
tax positions taken in the course of preparing its tax returns to determine whether tax positions are “more-likely-than-not”
of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold
would be recorded as a tax expense in the current year. The amount recognized is subject to estimate and management judgment with
respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain
tax position or for all uncertain tax positions in the aggregate could differ from the amount that is initially recognized.
Fair value measurements
The Company defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs within the fair value hierarchy. Observable inputs are inputs that market participants would use in
pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company’s own assumptions about what market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances.
The following methods and assumptions
were used to estimate the fair value of financial instruments:
·
|
Level 1 - Valuation is based upon quoted prices for identical
instruments traded in active markets.
|
·
|
Level 2 - Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market.
|
·
|
Level 3 - Valuation is generated from model-based techniques
that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates
of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option
pricing models, discounted cash flow models and similar techniques.
|
The category within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement.
Recently Issued Accounting Standards
In May 2014, the FASB issued a new financial
accounting standard which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes current revenue recognition guidance. ASU 2014-09
Revenue from Contracts with Customers
is
effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15,
2017. Early adoption is not permitted. The new standard may be adopted retrospectively for all periods presented, or adopted using
a modified retrospective approach. Under the retrospective approach, the fiscal 2016 financial statements would be adjusted to
reflect the effects of applying the new standard on that period. Under the modified retrospective approach, the new standard would
only be applied for the period beginning January 1, 2017 to new contracts and those contracts that are not yet complete at January
1, 2017, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require
performance. We intend to implement this standard using the modified retrospective approach beginning January 1, 2017. The revenue
contracts the Company currently have are patent licensing agreements, under which all deliverables are typically provided at contract
execution or contain right to use provisions over a specified time period or, in the case of Inventergy Innovations, provide for
payments to the Company upon the completion of an IP monetization transaction. We do not believe the implementation of ASU 2014-09
will have a material effect on the Company’s financial statements and related disclosures.
In February 2016, the FASB issued ASU
No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration
of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance
sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents
the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents
the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain
characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain
provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense
and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the
life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and
interim periods within those reporting periods, beginning after December 15, 2018. The Company is currently evaluating the impact
this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements
and on its consolidated financial statements.
In November 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18,
Statement of Cash Flows
. This ASU provides guidance
on the presentation of cash, cash equivalents and restricted cash in the statement of cash flows to reduce the current diversity
in practice. The amendments in this update are effective for public business entities for fiscal year beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the
impact of this accounting standard.
In March 2016, the FASB issued Accounting
Standards Update (ASU) 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This Update is part of the FASB’s
simplification initiative. The areas of simplification involve several aspects of accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The new standard is effective for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. Early adoption is permitted. The Company has adopted this standard for its fiscal year 2017. The Company
is currently evaluating the impact of this accounting standard.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which
amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance
primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. The guidance is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of this accounting standard.
In January
2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates Step 2 from the
goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company
will adopt the standard effective October 1, 2020. The adoption is not expected to have a material impact on the consolidated
financial statements.
3.
Patents
Patent intangible assets consisted of
the following at December 31, 2016:
|
|
Weighted
Average
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
5.9
|
|
|
$
|
11,893,745
|
|
|
$
|
(4,734,804
|
)
|
|
$
|
7,158,941
|
|
Total patent intangible assets
|
|
|
|
|
|
$
|
11,893,745
|
|
|
$
|
(4,734,804
|
)
|
|
$
|
7,158,941
|
|
Patent intangible assets consisted of the following at December
31, 2015:
|
|
Weighted
Average
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
6.9
|
|
|
$
|
11,893,745
|
|
|
$
|
(3,223,824
|
)
|
|
$
|
8,669,921
|
|
Total patent intangible assets
|
|
|
|
|
|
$
|
11,893,745
|
|
|
$
|
(3,223,824
|
)
|
|
$
|
8,669,921
|
|
The Company expects amortization expense to be approximately
$1,510,977 per year for each of the next three years, $1,481,270 in 2020, then declining annual amounts through 2023. However,
following the establishment of INVT SPE for the PRIP and the related assignment of the Patents to INVT SPE (see Note 5), patent
amortization expense will be eliminated.
4. Fair Value Measurements
The following tables summarize the Company's
assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and December 31, 2015:
December 31, 2016
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Common stock warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
December 31, 2015
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Common stock warrants
|
|
$
|
4,145
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,145
|
|
Total
|
|
$
|
4,145
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,145
|
|
As discussed in Note 6, in January 2014,
the Company issued warrants to purchase 23,858 shares of common stock at an exercise price of $30.40 to a placement agent. The
exercise price is subject to adjustment and has been subsequently adjusted to $22.70 per share. The warrants may be exercised
without cash consideration in lieu of forfeiting a portion of shares. Accordingly, the Company recognized a derivative liability
at fair value upon issuance of the warrants. The Company estimated the fair value of the derivative liability using the Black-Scholes
option pricing model. The fair value of the derivative liability as of December 31, 2015 was estimated using the following assumptions:
Expected volatility
|
|
|
60
|
%
|
Risk free rate
|
|
|
1.31
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
3.0726
|
|
The assumptions utilized were derived
in a similar manner as discussed in Note 7 related to the fair value of stock options.
The Company revalues the derivative liabilities at the end of
each reporting period using the same models as at issuance, updated for new facts and circumstances, and recognizes the change
in the fair value in the statements of operations as other income (expense). The following sets forth a summary of changes in fair
value of the Company’s level 3 liabilities measured on a recurring basis for the twelve months ended December 31, 2016 and
December 31, 2015:
|
|
Convertible
Notes Payable
Derivative Liability
|
|
|
Series A-1
Preferred
Stock
Derivative Liability
|
|
|
Common
Stock
Warrants
|
|
Balance at December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,278
|
|
Fair value at issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
41,306
|
|
Change in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
(67,439
|
)
|
Balance at December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,145
|
|
Change in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,145
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
5. Borrowing Arrangements
On September 23, 2014, the Company entered
into a Share Purchase Agreement with Joseph W. Beyers, the Company’s Chairman and Chief Executive Officer, pursuant to which
the Company agreed to issue to Mr. Beyers up to 23,364 shares of our common stock, at a purchase price of $21.40 per share for
aggregate consideration to us of up to $500,000. Pursuant to the terms of such agreement and concurrently with the execution of
the agreement, Mr. Beyers made an initial payment of $300,000 to the Company towards the aggregate purchase price. The shares
were only to be issued if we did not obtain $6.0 million or more in debt financing within ten business days of the execution of
the agreement. As a result of the Senior Lending Agreement (as defined below), the Company was required to return the $300,000
in cash previously prepaid by Mr. Beyers and the Company will not issue any securities as a result of the Share Purchase Agreement.
During the year ended December 31, 2015, the Company’s Board of Directors approved the application of $100,000 of this amount
towards the purchase of shares of the Company’s common stock at price per share equal to the greater of $4.60 per share
or a 15% premium to the market price. As a result, on June 26, 2015, the Company sold 21,740 shares of previously unissued common
stock at a price of $4.60 per share to the Chief Executive Officer. During the year ended December 31, 2015, $100,000 was repaid.
During the year ended December 31, 2016, $50,000 was repaid and the remaining balance of $50,000 was canceled and credited to
additional paid-in capital.
On October 1, 2014 the Company and its
wholly-owned subsidiary, Inventergy, Inc., entered into the Revenue Sharing and Note Purchase Agreement with DBD Credit Funding,
LLC (“the “Senior Lender”), including a Note Purchaser (as defined below) who also serves as collateral agent
(the “Collateral Agent”) and a Revenue Participant (as defined below). On February 25, 2015, the Company, Inventergy,
Inc. and the Senior Lender entered into the Amended and Restated Revenue Sharing and Note Purchase Agreement (the “Senior
Debt Agreement”). Pursuant to the Senior Debt Agreement, the Company issued an aggregate of $12,199,500 in Senior Notes to
the purchasers identified in the Senior Debt Agreement (the “Note Purchasers”). As a result of the issuance of the
Senior Notes and the sale of the Senior Lender Shares (as defined below), after the payment of all purchaser-related fees and expenses
relating to the issuance of the Senior Notes and Senior Shares, the Company received net proceeds of $11,137,753 (less issuance
costs of $476,868). The Company used the net proceeds to pay off existing debt and for general working capital purposes. The unpaid
principal amount of the Senior Notes bears cash interest equal to LIBOR plus 7% (total interest rate of 8.69%). In addition, a
3% per annum paid-in-kind (“PIK”) interest will be paid by increasing the principal amount of the Senior Notes by the
amount of such interest. The PIK interest shall be treated as principal of the Senior Notes for all purposes of interest accrual
or calculation of any premium payment. In connection with the execution of the Senior Debt Agreement, the Company paid to the Note
Purchasers a structuring fee equal to $385,000, which was accounted for as a discount on notes payable.
The principal of the Senior Notes and
all unpaid interest thereon or other amounts owing hereunder shall be paid in full in cash by the Company on September 30, 2017
(the “Maturity Date”). As of December 31, 2016, the Company has repaid $3,787,016 of the Senior Notes.
Upon receipt of any revenues generated
from the monetization of the Patents (the “Monetization Revenue”) from the patents identified in the Senior Debt Agreement
(the “Patents”), the Company was required to apply, towards its obligations pursuant to the Senior Notes, 86% of the
difference between (a) any revenues generated from the Monetization Revenue less (b) any litigation or licensing related third
party expenses (including fees paid to the original patent owners) reasonably incurred by the Company to earn Monetization Revenue,
subject to certain limits (such difference defined as “Monetization Net Revenues”). If Monetization Net Revenue was
applied to outstanding principal of the Senior Notes (defined as “Mandatory Prepayments”), such Mandatory Prepayments
were not subject to the prepayment premium described above. To the extent that any obligations under the Senior Notes were past
due, including if such payments were past due as a result of an Acceleration of the Senior Notes or certain conditions of breach
or alleged breach had occurred, the percentage would have increased from 86% to 100%. The terms described in this paragraph will
be superseded by the terms of the Restructuring Agreement upon the assignment of the Patents to INVT SPE, as more fully explained
below.
In addition to the Mandatory Prepayments,
the Company shall make monthly amortization payments (the “Amortization Payments”) in an amount equal to (x) the then
outstanding principal amount divided by (y) the number of months left until the Maturity Date. Such Amortization Payments, along
with minimum liquidity requirements, were deferred until May 1, 2017 by the terms of the Restructuring Agreement (see below).
Pursuant to the Amended Senior Debt
Agreement, the Company granted to the purchasers identified in the Senior Debt Agreement (the “Revenue
Participants”) a right to receive a portion of the Company’s Monetization Revenues totaling $11,284,538 (the
“Revenue Stream”). The Revenue Participants will not receive any portion of the Revenue Stream until all
obligations under the Original Senior Notes are paid in full. Following payment in full of the Original Senior Notes, the
Company will pay to the Revenue Participants their proportionate share of the Monetization Net Revenues. The Revenue
Participant’s proportionate share is equal to 75% of Monetization Net Revenues until $5,000,000 has been paid to the
Revenue Participants, then 50% of Monetization Net Revenues until the remaining $6,284,538 has been paid to the Revenue
Participants. All Revenue Stream Payments will be payable on a monthly basis in arrears. The rights of the Revenue
Participants to the Revenue Stream are secured by all of the Company’s current patent assets and the Cash Collateral
Account, in each case junior in priority to the rights of the Note Purchasers. In connection with the
Revenue Participants’ right to receive a portion of the Company’s Monetization Revenues, the Company has recorded
a net liability of $3,948,153, which represents the amount of the expected Monetization Revenues, discounted 18% over the
expected life of the revenue share agreement. In conjunction with an amendment to the Amended Senior Debt Agreement dated
March 1, 2016, the Company determined that the change in expected cash flows was greater than 10% as compared to the previous
agreement and, therefore, a debt extinguishment was deemed to have occurred. When recording the new present value of the debt
and revenue share, which was computed using a discount rate of 18%, a gain on debt extinguishment of $2,434,661 was
recognized in the twelve-month period ended December 31, 2016. The Revenue Stream payment terms described in this
paragraph were superseded by the terms of the Restructuring Agreement, as more fully explained below.
As part of the Senior Debt Agreement, the
Company and the Collateral Agent entered into a Patent License Agreement (the “Patent License Agreement”), under which
the Company agreed to grant to the Collateral Agent a non-exclusive, royalty-free and worldwide license to certain of its Patents
(the “Licensed Patents”).
As part of the transaction, the Company
granted the Note Purchaser and Revenue Participant a first priority security interest in all of the Company’s currently
owned patent assets and all proceeds thereof, as well as a general security interest in all of the assets of the Company and its
subsidiaries.
Restructuring Agreement and Patent Residual Interest Program
In December 2016, the Company and DBD Credit
Funding, LLC (“DBD”) and CF DB EZ LLC (the "Managing Member") entered into a Restructuring Agreement (the
“Restructuring Agreement”) to amend the Senior Debt Agreement. Pursuant to the Restructuring Agreement, the Managing
Member will have the sole discretion to make any and all decisions relating to the Company’s patents and patent monetization
activities (excluding future acquired patents related to Inventergy Innovations, LLC, a subsidiary of Parent, and related monetization
activities) (such patents that are subject to the Restructuring Agreement, the “Patents”), including the right to license,
sell or sue unauthorized users of the Patents (the “Monetization Activities”).
In addition, the Restructuring Agreement
modifies the revenue share provided for in the Senior Debt Agreement such that all proceeds from the Monetization Activities will
be applied as follows: (i) first, to pay for certain third party expenses incurred by the Company, the Managing Member or third
party brokers in relation to the Monetization Activities, (ii) second, to pay up to $2.2 million of the Company’s outstanding
principal debt to a third party from whom the Company previously purchased certain Patents, in the event any Monetization Activity
is directly attributable to those certain Patents, (iii) third, if a Monetization Activity triggers a payment with respect to
a retained interest owed to a party from whom the Company originally purchased the Patents, payment will be made to such prior
owner, as required, (iv) fourth, to the Managing Member until the Managing Member has received (x) reimbursement of any amounts
advanced by the Managing Member pursuant to the Restructuring Agreement plus 20% annual interest on such advances plus (y) $30.5
million less any amounts paid to the Managing Member for the Note Obligations under the Revenue Sharing and Note Purchase Agreement
after December 22, 2016, and (v) fifth, after all of the foregoing payment obligations are satisfied, 70% to the Managing Member
and 30% to the Company.
The Restructuring Agreement requires that
the Company obtain stockholder approval and consents of third parties to the assignment of the Patents to a newly created special
purpose entity, or SPE. Stockholder approval was obtained at a special meeting of stockholders on March 8, 2017 and the Company
is in the process of obtaining third party consents. The SPE, which has been established as a Delaware LLC as INVT SPE LLC (“INVT
SPE”), will be managed by the Managing Member, and the economic arrangements provided for under the Restructuring Agreement
are reflected in the governing documents for INVT SPE. The activities to be undertaken by the Company in support of INVT SPE and
any resulting revenue distributed to the Company from INVT SPE is referred to as the Patent Residual Interest Program (“PRIP”).
Upon the date on which the Patents are
transferred to INVT SPE, the Senior Notes and the Revenue Share liabilities will be extinguished, the Company will be relieved
of any scheduled amortization (instead, payments to the Senior Lender will only be required out of Monetization Revenues), the
liquidity covenant will no longer apply, and the Company will be relieved from any further responsibility to maintain the Patents,
retroactive to December 22, 2016. See also Note 11, “Subsequent Events”.
The Restructuring Agreement is subject
to certain events of default, including, among other things, liquidation or dissolution, change of control, bankruptcy, the Company’s
failure to make payments pursuant to the terms of the Restructuring Agreement or the Company’s failure to perform or observe
certain covenants. Upon the occurrence of an event of default, the Senior Lender may proceed to protect and enforce its rights
through seeking the Company’s specific performance of any covenant or condition, as set forth in the Restructuring Agreement,
or may declare the remaining unpaid balance owed under the Revenue Sharing and Note Purchase Agreement, as amended, and any other
amounts owed pursuant to the Restructuring Agreement to be immediately due and payable.
Unregistered Sales of Equity Securities.
In connection with the execution of the
Senior Debt Agreement, the Company issued 50,000 shares of its common stock at $20.00 per share to the Revenue Participant for
an aggregate purchase price of $1,000,000. The Senior Lender Shares were issued pursuant to a subscription agreement dated October
1, 2014. The shares were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities
Act and Regulation D promulgated thereunder, as they were issued to accredited investors, without a view to distribution, and were
not issued through any general solicitation or advertisement. In addition, the Company issued to the Senior Lender seven-year warrants
for the purchase of 50,000 shares of common stock at an exercise price of $11.40 per share. As part of the Second Amendment, the
exercise price of these warrants was changed to $2.54 per share.
In connection with the closing of the transactions
contemplated by the Senior Debt Agreement, the Company paid a closing fee of $330,000. As discussed in Note 6, the Company also
issued a five-year warrant to purchase 24,750 shares of common stock at an exercise price of $20.00 to National Securities Corporation,
who acted as advisor to the Company with respect to the transaction. The warrant meets the requirements to be accounted for as
an equity warrant. The Company estimated the fair value of the warrant to be $153,759, using the Black-Scholes option pricing model.
The assumptions utilized were derived in a similar manner as discussed in Note 7 related to the fair value of stock options.
6. Stockholders’ Equity
Common stock
The Company is authorized to issue up to 110,000,000 shares,
of which 100,000,000 shares have been designated as common stock and 10,000,000 shares as preferred stock. Holders of the Company's
common stock are entitled to dividends if and when declared by the Board of Directors. The holders of each share of common stock
shall have the right to one vote for each share and are entitled, as a share class, to elect two directors of the Company.
On October 12, 2016, the Company completed
a registered public offering (the “Offering”) of shares of common stock and warrants with gross proceeds of $6.0 million.
Investors received 6,000,000 shares of the Company’s common stock at a price of $1.00 per share and warrants to purchase
up to 6,000,000 shares of common stock, exercisable for a period of five years, with an exercise price of $1.00 per share. The
warrants are exercisable immediately. Net proceeds of the Offering paid to the Company, after fees and expenses, were approximately
$5.1 million. The Company used approximately $1.3 million of the net proceeds to redeem substantially all of the remaining outstanding
Series C preferred stock, and the remaining $3.8 million is being used to fund its operations. The holders of the Company's Series
C and E Convertible Preferred Stock consented to having the first $3.8 million of net proceeds from the Offering go to the Company’s
working capital before applying any proceeds of the Offering to the redemption of such preferred stock in consideration for a reduction
in the exercise price of the July 2016 warrants to $1.43 and the May 2016 warrants to $1.86 and a 15% increase in the redemption
premium of the Series E Convertible Preferred Stock if not redeemed on or before January 25, 2017. A registration statement for
the securities sold in the Offering was previously filed on Form S-1 (File No. 333-211211), which was declared effective on September
16, 2016 by the Securities and Exchange Commission.
On May 16, 2016, the Company entered
into a securities purchase agreement (the “2016 Purchase Agreement”) with certain investors (the “2016 Purchasers”)
pursuant to which the Company sold 648,000 shares of its common stock (the “2016 Shares”) at a purchase price of $2.005
per share resulting in gross proceeds to the Company of $1.3 million (the “2016 Registered Direct Offering”). In connection
with the purchase of the 2016 Shares, each 2016 Purchaser received a warrant to purchase up to the number of shares of the Company’s
common stock equal to 100% of the shares of common stock purchased by each of the 2016 Purchasers pursuant to the 2016 Purchase
Agreement. The Warrants have an exercise price of $2.005 per share, became exercisable on the date of issuance and expire five
years from the date of issuance. The 2016 Registered Direct Offering was effected as a takedown off the Company’s shelf registration
statement on Form S-3 (File No. 333-199647), which was declared effective on November 10, 2014, and a related prospectus supplement
filed on May 16, 2016 in connection with the 2016 Registered Direct Offering. The 2016 Registered Direct Offering closed on May
18, 2016. In connection with the 2016 Registered Direct Offering, the Company entered into an engagement agreement with Chardan
Capital Markets (“Chardan”) to act as its exclusive placement agent. Pursuant to the agreement with Chardan, the Company
paid to Chardan $116,932 in cash.
On March 31, 2015, the Company entered
into a securities purchase agreement (“Purchase Agreement”) with certain investors (the “Purchasers”) pursuant
to which the Company sold 467,392 shares of its common stock (the “Shares”) at a purchase price of $4.60 per share
resulting in gross proceeds to the Company of $2.15 million (the “Registered Direct Offering”). The Registered Direct
Offering was effected as a takedown off the Company’s shelf registration statement on Form S-3 (File No. 333-199647),
which was declared effective on November 10, 2014, and a related prospectus supplement to be filed on April 2, 2015 in connection
with the Registered Direct Offering. The Registered Direct Offering closed on April 6, 2015.
In connection with the Registered Direct
Offering, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Ladenburg Thalmann
& Co. Inc. (the “Placement Agent”) to act as its exclusive placement agent. Pursuant to the Placement Agent Agreement,
the Company paid to the Placement Agent $106,000 in cash, issued to the Placement Agent 5,762 five-year warrants with an exercise
price of $5.75 per share (the “RD Warrants”) and reimbursed the Placement Agent for certain expenses. In addition,
the Company paid to Laidlaw & Company (UK) Ltd. $50,000 in cash and issued 10,870 RD Warrants in connection with certain tail
fees owed to them as a result of the Registered Direct Offering. The RD Warrants allow for cashless exercise in certain situations
and contain piggyback registration rights for the seven-year period commencing on March 31, 2015.
Shares of common stock reserved for future issuance were as
follows as of December 31, 2016:
Series C convertible preferred stock
|
|
|
3,335
|
|
Series D convertible preferred stock
|
|
|
186,367
|
|
|
|
|
|
|
Series E convertible preferred stock
|
|
|
1,496,262
|
|
Options to purchase common stock
|
|
|
514,772
|
|
Shares reserved for issuances pursuant to 2014 Stock Plan
|
|
|
175,046
|
|
Warrants
|
|
|
10,615,849
|
|
Total
|
|
|
12,991,631
|
|
Convertible preferred stock
Convertible preferred stock as of December 31, 2016 consisted
of the following:
Convertible
Preferred Stock
|
|
Original
Issue Price
|
|
|
Shares
Designated
|
|
|
Shares
Originally Issued
|
|
|
Shares
Outstanding
|
|
|
Liquidation
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
$
|
1,000.00
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
5
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D
|
|
$
|
1,000.00
|
|
|
|
750
|
|
|
|
369
|
|
|
|
369
|
|
|
$
|
369,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E
|
|
$
|
1,000.00
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
$
|
3,000,000
|
|
On January 21, 2016, the Company entered into a securities purchase
agreement (the “Series C Purchase Agreement”) with certain institutional accredited investors (the “Series C
Investors”). Pursuant to the Series C Purchase Agreement, the Company sold to the Series C Investors in a private placement
2,500 shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”), each having a stated value of $1,000,
for aggregate gross proceeds of $2.5 million. The Series C Preferred Stock was immediately convertible into 1,666,668 shares of
the Company’s common stock, subject to certain beneficial ownership limitations, at an initial conversion price equal to
$1.50 per share, subject to adjustment. Because this conversion price was below the market price of the Company’s common
stock on the date of issue, and the Series C Preferred Stock was immediately convertible, a deemed dividend on Series C Preferred
Stock was recorded as the difference between the market price on the date of issue and the conversion price. This dividend amount
of $466,667 is presented separately on the Consolidated Statement of Operations and is included in Net Loss Attributable to Common
Shareholders. In July and October, 2016, the Company redeemed an aggregate of 2,474 shares of the Series C Preferred Stock for
$3,837,400, which included a redemption premium of $1,363,400. In addition, a total of 21 shares of Series C Preferred Stock were
converted to common stock in September and October, 2016, leaving five shares of Series C Preferred Stock outstanding as of December
31, 2016.
Each Series C Investor also received a common stock purchase
warrant (the “Series C Warrants”) to purchase up to a number of shares of common stock equal to 85% of such Investor’s
subscription amount divided by $1.50, for a total of 1,416,668 shares. The Series C Warrants are exercisable for a term of five
years commencing six months after the closing of the transaction at a cash exercise price of $1.79 per share. In the event that
the shares underlying the Warrants are not subject to a registration statement at the time of exercise, the Warrants may be exercised
on a cashless basis after six months from the issuance date. The Warrants also contain provisions providing for an adjustment in
the exercise price upon the occurrence of certain events, including stock splits, stock dividends, dilutive equity issuances (so
long as the Series C Preferred Stock is outstanding) and fundamental transactions.
The Series C Purchase Agreement required
the Company to hold a special meeting of stockholders to seek the approval of the holders of its common stock for the issuance
of the number of shares of common stock issuable upon the conversion of the Series C Preferred Stock in excess of 19.99% of the
outstanding Common Stock and the removal of the adjustment floor within 120 days of the execution of the Purchase Agreement (the
“Shareholder Approval”). The Company obtained Shareholder Approval on June 28, 2016. Additionally, until the
Series C Preferred Stock is no longer outstanding, the Series C Investors may participate in future offerings for up to 50% of
the amount of such offerings.
The Company utilized a Placement Agent who received a commission
equal to 10% of the gross proceeds of the offering for an aggregate commission of $250,000. The Placement Agent will also be entitled
to receive a cash fee from the exercise of the Warrants. The Company paid for the Investors’ legal expenses of $25,000, and
paid legal fees of $50,000 to the Company’s outside counsel.
On May 13, 2016, the Company entered into,
and consummated the transactions contemplated by, a securities purchase agreement (the “Series D Purchase Agreement”)
with certain accredited investors (the “Series D Investors”). Pursuant to the Series D Purchase Agreement, the Company
sold to the Series D Investors in a private placement 369 shares of Series D Convertible Preferred Stock (“Series D Preferred
Stock”), each having a stated value of $1,000, for aggregate gross proceeds of $369,000 (the “Financing”). The
Company’s chief executive officer and each of the members of the Company’s board of directors participated in the Financing
in which they invested an aggregate of $144,000.
The Series D Preferred Stock is immediately
convertible into shares of the Company’s common stock, subject to certain beneficial ownership limitations, at an initial
conversion price equal to $1.98 per share, subject to adjustment. The shares of common stock issuable upon conversion of the Series
D Preferred Stock are subject to trading restrictions until the six-month anniversary of the issuance date of the Series D Preferred
Stock, unless they are included in a registration statement filed by the Company prior to such date. The Series D Preferred Stock
contains provisions providing for an adjustment in the conversion price upon the occurrence of certain events, including stock
splits, stock dividends and fundamental transactions. The Company may redeem some or all of the Series D Preferred Stock for cash
in an amount equal to 135% of the aggregate stated value then outstanding.
Each Investor also received a common stock
purchase warrant (the “Series D Warrants”) to purchase up to a number of shares of common stock equal to 85% of such
Investor’s subscription amount. The Series D Warrants are exercisable for a term of five years commencing six months and
one day after the closing of the Financing (the “Initial Exercise Date”) at a cash exercise price of $1.87 per share.
Fifty percent of the Warrants vested immediately and the remainder of the Warrants will vest only if a Series D Investor’s
shares of Series D Preferred Stock remain outstanding at the Initial Exercise Date. In the event the shares underlying the Series
D Warrants are not subject to a registration statement at the time of exercise, the Series D Warrants may be exercised on a cashless
basis after six months from the issuance date. The Series D Warrants also contain provisions providing for an adjustment in the
exercise price upon the occurrence of certain events, including stock splits, stock dividends and fundamental transactions. The
Series D Purchase Agreement contains customary representations, warranties, and covenants, including covenants relating to public
reporting and the use of proceeds.
On July 21, 2016, the Company entered
into an agreement (the “Series E Agreement”) to sell $3.0 million of Series E convertible preferred stock (the “Series
E Preferred Stock”) and warrants to certain institutional accredited investors (the “Series E Investors”). Pursuant
to the Series E Purchase Agreement, the Company sold to the Series E Investors in a private placement 3,000 shares of Series E
Preferred Stock, each having a stated value of $1,000, for aggregate gross proceeds of $3.0 million. The Series E Preferred Stock
was immediately convertible into 1,496,262 shares of the Company’s common stock, subject to certain beneficial ownership
limitations, at an initial conversion price equal to $2.005 per share, subject to adjustment. The Company used part of the proceeds
from the sale of Series E Preferred Stock to redeem 70% of the outstanding Series C Preferred Stock. In addition, pursuant to
the terms of the Series E Agreement, each of the Series C Investors was entitled to receive an additional premium such that the
aggregate redemption amount is 162% of the stated value of the Series C Preferred Stock for the first 60 days after the date of
the Series E Purchase Agreement and 180% thereafter. Following subsequent amendments to the Series E Agreement, the Series
E Preferred Stock is redeemable at the option of the Company at 170% of the then outstanding conversion amount, and is convertible
into common stock at a conversion price equal to the lesser of (a) $2.005 per share, or (b) 65% of the volume weighted average
price of our common stock for ten consecutive days prior to the applicable conversion date). The Series E Purchase Agreement required
the Company to hold a special meeting of stockholders to seek the approval of the holders of its common stock for the issuance
of the number of shares of common stock issuable upon the conversion of the Series E Preferred Stock in excess of 19.99% of the
outstanding Common Stock within 120 days of the execution of the Purchase Agreement (the “Shareholder Approval”).
The Company obtained Shareholder Approval on March 8, 2017.
Warrants
In January 2014, the Company issued warrants
to purchase 23,858 shares of common stock at an exercise price of $30.40 to a placement agent. The warrants expire in January
2019. The exercise price was reduced to its floor of $22.70 as a result of the sale of the Senior Lender Shares. The warrants
may be exercised without cash consideration in lieu of forfeiting a portion of shares. The fair value of the warrants at issuance
was $348,963, estimated using the Black-Scholes option pricing model. The fair value of the warrants was revalued at December
31, 2015 as discussed in Note 4.
On November 1, 2014 the Company issued 27,750 warrants to purchase
common stock with a weighted average exercise price of $20.70. The fair value of the warrants at issuance was $164,196.
Common stock warrants outstanding as of December 31, 2016 are
listed as follows:
Warrants
Outstanding
|
|
|
Remaining Contractual
Life (years)
|
|
Weighted Average
Exercise
|
|
|
6,000,000
|
|
|
4.78
|
|
$
|
1.000
|
|
|
1,000,000
|
|
|
6.64
|
|
$
|
2.005
|
|
|
1,271,826
|
|
|
4.56
|
|
$
|
2.005
|
|
|
648,000
|
|
|
4.38
|
|
$
|
2.01
|
|
|
158,416
|
|
|
4.37
|
|
$
|
1.87
|
|
|
1,416,668
|
|
|
4.06
|
|
$
|
1.79
|
|
|
50,000
|
|
|
5.16
|
|
$
|
2.54
|
|
|
10,870
|
|
|
3.27
|
|
$
|
4.60
|
|
|
5,762
|
|
|
3.27
|
|
$
|
5.75
|
|
|
27,449
|
|
|
3.12
|
|
$
|
20.00
|
|
|
23,858
|
|
|
2.08
|
|
$
|
22.70
|
|
|
3,000
|
|
|
0.83
|
|
$
|
26.60
|
|
|
10,615,849
|
|
|
4.79
|
|
$
|
1.51
|
|
7. Stock-Based Compensation
In November 2013, the Board of Directors authorized the 2013
Stock Plan (such plan has since been adopted by the stockholders of the Company in connection with the Merger and renamed the “Inventergy
Global, Inc. 2014 Stock Plan”, the “Plan” or the “2014 Plan”). Under the Plan, the Board of Directors
may grant incentive stock awards to employees and directors, and non-statutory stock options to employees, directors and consultants
as well as restricted stock. The Plan provides for the grant of stock options, restricted stock, and other stock-related and performance
awards that may be settled in cash, stock, or other property. The Board of Directors originally reserved 360,545 shares of common
stock for issuance over the term of the Plan, and in September 2015, 170,000 shares were added to the Plan, and in June 2016, 250,000
shares were added to the Plan. The exercise price of an option cannot be less than the fair value of one share of common stock
on the date of grant for incentive stock options or non-statutory stock options. The exercise price of an incentive stock option
cannot be less than 110% of the fair value of one share of common stock on the date of grant for stockholders owning more than
10% of all classes of stock. Options are exercisable over periods not to exceed ten years (five years for incentive stock options
granted to holders of 10% or more of the voting stock) from the grant date. Options may be granted with vesting terms as determined
by the Board of Directors which generally include a one to five-year period or performance conditions or both. The pre-existing
options were subsumed under the Plan.
Common stock option and restricted stock award activity under
the Plan was as follows:
|
|
|
|
|
Options and RSAs Outstanding
|
|
|
|
Shares Available
for Grant
|
|
|
Number of
Shares
|
|
|
Weighted Average Exercise
Price Per Share
|
|
Balance at December 31, 2014
|
|
|
68,953
|
|
|
|
241,792
|
|
|
$
|
25.90
|
|
Authorized
|
|
|
170,000
|
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
(530,813
|
)
|
|
|
530,813
|
|
|
$
|
5.65
|
|
Options forfeited
|
|
|
69,870
|
|
|
|
(69,870
|
)
|
|
$
|
10.59
|
|
Options expired
|
|
|
12,148
|
|
|
|
(12,148
|
)
|
|
$
|
24.72
|
|
Options canceled
|
|
|
320,700
|
|
|
|
(320,700
|
)
|
|
$
|
12.99
|
|
Restricted Stock granted
|
|
|
(39,427
|
)
|
|
|
39,427
|
|
|
$
|
3.86
|
|
Restricted Stock vested
|
|
|
-
|
|
|
|
(39,427
|
)
|
|
$
|
3.86
|
|
Balance at December 31, 2015
|
|
|
71,431
|
|
|
|
369,887
|
|
|
$
|
4.64
|
|
Authorized
|
|
|
250,000
|
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
(305,000
|
)
|
|
|
305,000
|
|
|
$
|
1.41
|
|
Options forfeited
|
|
|
153,095
|
|
|
|
(153,095
|
)
|
|
$
|
3.10
|
|
Options expired
|
|
|
5,520
|
|
|
|
(7,020
|
)
|
|
$
|
34.72
|
|
Balance at December 31, 2016
|
|
|
175,046
|
|
|
|
514,772
|
|
|
$
|
2.77
|
|
Total vested and expected to vest shares (options)
|
|
|
|
|
|
|
514,772
|
|
|
$
|
2.77
|
|
Total vested shares (options)
|
|
|
|
|
|
|
181,337
|
|
|
$
|
4.73
|
|
As of December 31, 2016, all of the restricted stock granted
under the Plan had vested. The aggregate intrinsic value of stock options outstanding, stock options vested and expected to vest,
and exercisable at December 31, 2016 was zero, since all of the options were out-of-the-money at December 31, 2016.
Prior to the Plan being established, the Company granted the
equivalent of 1,413,904 RSAs to employees and non-employees in exchange for services with vesting specific to each individual award.
As of December 31, 2016, 148,144 of these RSAs were subject to rescission by the Company, and 113,388 RSAs had been cancelled or
forfeited.
The following table summarizes information with respect to stock
options outstanding at December 31, 2016:
Options Outstanding
|
|
|
Options Vested
|
|
Exercise
Price Per
Share
|
|
|
Shares
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
Exercisable
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
$
|
1.41
|
|
|
|
305,000
|
|
|
|
9.55
|
|
|
$
|
1.41
|
|
|
|
30,210
|
|
|
$
|
1.41
|
|
$
|
3.10
|
|
|
|
182,528
|
|
|
|
8.79
|
|
|
$
|
3.10
|
|
|
|
123,883
|
|
|
$
|
3.10
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
|
0.33
|
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
$
|
5.60
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
|
0.33
|
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
$
|
11.40
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
|
0.33
|
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
$
|
30.40
|
|
|
|
|
|
|
514,772
|
|
|
|
8.80
|
|
|
$
|
2.77
|
|
|
|
181,337
|
|
|
$
|
4.73
|
|
Stock-based compensation expense
The fair value of employee stock options granted was estimated
using the following weighted-average assumptions for the twelve months ended December 31:
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
68
|
%
|
|
|
67
|
%
|
Risk free rate
|
|
|
1.18
|
%
|
|
|
1.41
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.70
|
|
|
|
5.57
|
|
The expected term of the options is based on the average period
the stock options are expected to remain outstanding based on the option’s vesting term and contractual terms. The expected
stock price volatility assumptions for the Company’s stock options were determined by examining the historical volatilities
for the Company and industry peers. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term
was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s
history and expectation of dividend payouts. Forfeitures were estimated based on the Company’s estimate of future cancellations.
Stock-based compensation for employees and non-employees related
to options and RSAs recognized:
|
|
For the twelve months ended
|
|
|
For the twelve months ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
General and administrative
|
|
$
|
566,677
|
|
|
$
|
1,147,374
|
|
No income tax benefit has been recognized related to stock-based
compensation expense and no tax benefits have been realized from exercised stock awards. As of December 31, 2016, there were total
unrecognized compensation costs of $443,362 related to these stock awards. These costs are expected to be recognized over a period
of approximately 1.63 years.
Non-employee stock-based compensation expense
For the twelve months ended December 31, 2016, the Company issued
options and restricted stock awards to non-employees in exchange for services with vesting specific to each individual award. Non-employee
stock-based compensation expense is recognized as the awards vest and totaled $248,227 and $314,505 for the twelve months ended
December 31, 2016 and December 31, 2015, respectively. The fair value of RSAs is calculated as the fair value of the underlying
stock multiplied by the number of shares awarded.
Cancellation of Options
On March 25, 2015, the Company cancelled certain unvested options
(totaling 143,266) granted to employees and directors under the Company’s 2014 Stock Plan, which had exercise prices ranging
from $20.50 to $38.50, 10 year terms and 1 to 4 year vesting terms. In addition, on March 25, 2015, the Company issued new options
to the same employees and directors under the 2014 Stock Plan. The Company granted an aggregate of 126,985 options to its employees,
the vesting schedules of which were increased by 12 months as compared to the cancelled options – an increase from an average
vesting schedule spanning 2.1 years to 3.1 years. The Company also granted an aggregate of 16,282 options to its directors, the
vesting schedules of which were left substantially unchanged as compared to the cancelled options which had been set to align with
the service time of each board member. The new options have an exercise price of $11.40 per share, which was a 48% premium to the
closing price of the Company’s common stock as of March 25, 2015.
On October 16, 2015, the Company cancelled certain unvested
options (totaling 177,446) granted to employees and directors under the Company’s 2014 Stock Plan, which had exercise prices
ranging from $6.90 to $38.50, 10-year terms and 1 to 4 year vesting terms. In addition, on October 16, 2015, the Company issued
new options to the same employees and directors under the 2014 Stock Plan. The Company granted an aggregate of 142,063 options
to its employees and an aggregate of 35,383 options to its directors. The vesting schedules were left substantially unchanged as
compared to the cancelled options. The new options have an exercise price of $3.10 per share, which was the closing price of the
Company’s common stock as of October 16, 2015.
8. Income Taxes
The Company recorded $4,872 and $(14,041) income tax provision/(benefit)
for the years ended December 31, 2016 and 2015, respectively.
Income tax provision/(benefit) was
comprised of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
4,872
|
|
|
|
(14,041
|
)
|
|
|
$
|
4,872
|
|
|
$
|
(14,041
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expense/(benefit)
|
|
$
|
4,872
|
|
|
$
|
(14,041
|
)
|
A reconciliation of the statutory federal
income tax rate to the effective tax rate for the years ended December 31 was as follows:
|
|
2016
|
|
|
2015
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
State income taxes (net of federal benefit)
|
|
|
0
|
|
|
|
0
|
|
Impact of Section 382 limitation
|
|
|
(125.43
|
)
|
|
|
0
|
|
Stock compensation
|
|
|
(2.37
|
)
|
|
|
(1.37
|
)
|
Other permanent differences
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
True ups
|
|
|
5.75
|
|
|
|
(10.20
|
)
|
Change in valuation allowance
|
|
|
88.05
|
|
|
|
(22.27
|
)
|
Total
|
|
|
0.01
|
%
|
|
|
0.12
|
%
|
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Based on the Company’s historical net losses, the Company has provided a full valuation allowance against its deferred tax
assets as of December 31, 2016 and 2015.
The components of the net deferred tax assets and liabilities
are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
$
|
941,333
|
|
|
$
|
1,361,612
|
|
Intangibles
|
|
|
2,381,431
|
|
|
|
2,476,386
|
|
Fixed Assets
|
|
|
10,821
|
|
|
|
6,686
|
|
NOL and Credit Carryforwards
|
|
|
3,585,768
|
|
|
|
10,331,722
|
|
Deferred Revenue
|
|
|
423,786
|
|
|
|
-
|
|
Allowance for Doubtful Accounts
|
|
|
-
|
|
|
|
7,599
|
|
Gross Deferred Tax Asset
|
|
|
7,343,139
|
|
|
|
14,184,005
|
|
Valuation Allowance
|
|
|
(7,250,291
|
)
|
|
|
(14,052,737
|
)
|
Net Deferred Tax Assets
|
|
|
92,848
|
|
|
|
131,268
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Acquired Contracts Intangibles
|
|
|
(92,848
|
)
|
|
|
(131,268
|
)
|
Gross Deferred Liabilities
|
|
|
(92,848
|
)
|
|
|
(131,268
|
)
|
Net Deferred Tax Assets (Liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2016, the Company had federal and California
net operating loss carryforwards, prior to any annual limitation, of approximately $55.5 million and $11.1 million, respectively,
expiring beginning in 2021 for federal and 2016 for California. The use of the Company’s net operating loss carryforwards
is subject to certain annual limitations and may be subject to further limitations as a result of changes in ownership as defined
by the Internal Revenue Code and similar state provisions. An ownership change date occurred in June 2014 at the merger with eOn
so that an annual limitation was estimated to reduce the federal net operating loss carryforward to approximately $30.4 million
with no further limitation to the CA net operating loss carryforward, and an ownership change date occurred in July 2016, resulting
in a reduction of the federal net operating loss carryforward to approximately $9.6 million and a reduction in the California net
operating loss carryforward to approximately $5.5 million. Notwithstanding, these federal and state net operating loss carryforwards
could be further reduced if there are further ownership changes.
At December 31, 2016, the gross liability for uncertain tax
positions was $0. The Company does not anticipate a significant change to unrecognized tax benefits for uncertain income tax positions
within the next 12 months.
It is the Company’s practice to recognize interest and
penalties related to income tax matters in income tax expense. As of December 31, 2016 and 2015, the Company had no interest and
penalties related to income taxes.
The Company files income tax returns in the U.S. and various
state jurisdictions including California. In the normal course of business, the Company is subject to examination by taxing authorities
including the United States and California. The Company is not currently under audit or examination by either of these jurisdictions.
The federal and California statute of limitations remains open back to 2011 for federal and 2010 for California. However,
due to the fact that the Company has net operating losses carried forward dating back to 2001, certain items attributable to technically
closed years are still subject to adjustment by the relevant taxing authority through an adjustment to the tax attributes carried
forward to open years.
9. Commitments and Contingencies
Operating lease
In March 2014, the Company entered into a non-cancelable thirty-eight
month lease agreement for offices in Campbell, California which commenced June 1, 2014 with escalating rent payments ranging from
approximately $9,200 to $9,800 per month and one option to extend the lease term for an additional three years. Included in the
lease agreement was a full rent abatement period of two months. Rent expense is recognized on a straight line basis. The future
minimum payments related to this lease are as follows:
Years ending December 31:
|
|
|
|
2017
|
|
|
68,587
|
|
Total
|
|
$
|
68,587
|
|
Rent expense was $108,623 in each of the twelve months ended
December 31, 2016 and 2015.
Guaranteed payments
The Company entered into two agreements to purchase certain
patent assets under which guaranteed payments were originally required. The first agreement originally required unconditional guaranteed
payments of $18,000,000 to be paid out of net revenues from patent licensing receipts through December 31, 2017. As of December
31, 2014, such guaranteed payments were accrued on the Company’s accompanying balance sheet at net present value using a
discount rate of 12%. Expenses related to minimum revenue sharing payments were deferred as of December 31, 2014 to be amortized
in correlation with the future payment schedule. This agreement was amended in December 2015 and eliminated all guaranteed payments
and interest payments payable on any guaranteed payments, and provided that the Company will pay the other party solely based on
net revenues earned for the licensing and/or sale of the patents sold to the Company under the original agreement. In conjunction
with the elimination of the $16.3 million liability for guaranteed payments and $1.0 million liability for accrued interest as
of December 31, 2015 in accordance with this amendment, the Company also eliminated $16.3 million of related deferred expenses
as of December 31, 2015. The original agreement with this party also stated that if the Company’s market capitalization fell
below the aggregate dollar amount that the Company owed at that relevant point in time to the other party (but only prior to full
payment), the party may exercise a limited right to repurchase the acquired patent portfolio assets at a purchase price at least
equal to the amount the Company originally paid. Due to the elimination of the guaranteed payments, the party’s right to
repurchase the patents can now only be triggered if the Company ceases to be a public company with securities listed on Nasdaq,
another stock exchange or any over-the-counter quotation service. During the year ended December 31, 2016, the Company was in compliance
with the terms of the agreement.
The second agreement originally required
a $2,000,000 guaranteed payment due on December 1, 2015. In October 2015, the Company and the other party amended the terms of
the original patent purchase agreement, with the amendment providing that the Company make a $550,000 payment on January 31, 2016
and a $1,650,000 payment on July 1, 2016. The total amount of $2,200,000 remains outstanding and accrues interest at 10% per annum,
and is expected to be repaid from net monetization revenues generated by INVT SPE under the PRIP (see Note 5).
10. Net Loss Per Share
Basic and diluted net loss per share is calculated using the
weighted average number of shares outstanding as follows (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net loss attributable to common shareholders
|
|
$
|
(8,196,902
|
)
|
|
$
|
(11,733,549
|
)
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,144,778
|
|
|
|
3,586,741
|
|
Less weighted average unvested restricted shares outstanding
|
|
|
(24,014
|
)
|
|
|
(143,372
|
)
|
Shares used in calculation of basic and diluted net loss per common share
|
|
|
6,120,764
|
|
|
|
3,443,369
|
|
Net loss per common share: Basic and diluted
|
|
$
|
(1.34
|
)
|
|
$
|
(3.41
|
)
|
Equity awards, unvested share rights, and common stock equivalent
of warrants and preferred stock, aggregating 6.8 million shares and 1.1 million shares for the year ended December 31, 2016, and
2015, respectively, prior to the application of the treasury stock method, are excluded from the calculation of diluted net loss
per share because they are anti-dilutive.
11. Subsequent Events
Amendments to Series E Preferred
Stock Purchase Agreement
On January 25, 2017, the Company entered
into an amendment (the “Amendment”) to the securities purchase agreement, dated July 21, 2016, with each of the holders
of the Series E convertible preferred stock of the Company. Pursuant to the Amendment, the Company (i) extended the date for redemption
by the Company of the Series E Preferred Stock from January 25, 2017 until March 8, 2017; (ii) increased the optional redemption
amount payable to the holders of the Series E Preferred Stock after January 25, 2017 from 165% to 170% of the aggregate conversion
amount then outstanding, and (iii) issued to the holders of the Series E Preferred Stock 5.5-year warrants (the “Warrants”)
to purchase an aggregate of 1,000,000 shares of common stock of the Company at an exercise price of $0.60 per share. The Warrants
are not exercisable for six months following the date of issuance.
On March 8, 2017, the Company entered
into a lock-up agreement with each of the holders of the Series E convertible preferred stock of the Company (the “Series
E Stockholders”) pursuant to which the Series E Stockholders agreed not to sell any common stock obtained upon conversion
of the Series E Preferred Stock, until after March 31, 2017, for less than $0.50 per share.
Restructuring Agreement
As discussed in Note
5, the Company entered into the Restructuring Agreement with DBD and the Managing Member on December 22, 2016. The Restructuring
Agreement required that the Company obtain stockholder approval and third party consent to the assignment of the Patents to a newly
created special purpose entity, or SPE. Stockholder approval was obtained at a special meeting of stockholders on March 8, 2017,
and third party consents and the transfer of the Patents to INVT SPE are expected to be completed prior to April 30, 2017. INVT
SPE will be managed and controlled by the Managing Member, and the economic arrangements provided for under the Restructuring Agreement
are reflected in the governing documents for INVT SPE.
Upon the date on
which the Patents are transferred to INVT SPE, the Company will be relieved of its obligations under its prior agreements with
the Senior Lender, including any scheduled amortization payments to the Senior Lender, the liquidity covenant will no longer apply,
and the Company will be relieved from any further responsibility to maintain the Patents, retroactive to December 22, 2016. Accordingly,
the Senior notes payable, Senior revenue share and certain other liabilities will be extinguished. In addition, the carrying value
of the Patents and goodwill will be eliminated, and the Company’s portion of the value of INVT SPE will be added to the consolidated
balance sheet. Management believes there is no impairment to its financial condition as of December 31, 2016 as a result of the
Restructuring Agreement, and because the requirements of the Restructuring Agreement will be met subsequent to December 31, 2016,
the resulting gain on debt extinguishment and assignment of the Patents to INVT SPE will be reflected in the Company’s financial
statements in the quarter in which the transfer of Patents to INVT SPE occurs (which is expected to be the quarter ended June 30,
2017).