See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31,
2017 and 2016
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”):
Monetization through enforcement of the 740 telecommunications patents previously owned by the Company (“the Patents”) which were transferred to INVT SPE LLC (“INVT SPE”) in April 2017 as more fully explained in Note 5.
|
In addition, the Company has an access control and security
product/service business which provides royalty revenue based on the sale of such products under a licensing agreement (“ECS”
or “the ECS business”).
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 defined below) as needed with the monetization efforts for the
Patents 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.
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. The accompanying interim financial statements are condensed and should
be read in conjunction with the Company’s latest annual financial statements. It is management’s opinion that all adjustments
necessary for a fair presentation of the results for the interim periods have been made, and all such adjustments were of a normal
recurring nature.
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 March 31, 2017, the Company has an
accumulated deficit since inception of $65,563,783 (including a net loss for the quarter ended March 31, 2017 of $2,560,119)
as well as negative cash flows from operations and had negative working capital of $12,151,136. As of May 11, 2017, the
Company had remaining cash of $276,090 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. 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 subsidiary in the ECS business of approximately $363,000,
increased debt borrowing from the Senior Lender (as defined below) 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 anticipates it will 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 was completed in April 2017, will result in the net book value of the Patents being removed from
our balance sheet as of April 30, 2017. In addition, the Senior Notes (as defined below) and 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 from the filing date of this quarterly report on Form 10-Q.
The Company previously acquired an aggregate
of approximately 740 currently active patents and patent applications (the “Patents”) for aggregate purchase payments
of $12,109,118. In December 2016, the Company entered into the Restructuring Agreement with DBD Credit Funding, LLC (“DBD”
or “Senior Lender”) and CF DB EZ LLC (the "Managing Member”) (see Note 5), under which the Patents were
assigned to INVT SPE in April 2017. 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 March 31, 2017, 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 in a business combination. 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 an operating 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 Adopted Accounting Standards
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 years beginning after December
15, 2017, and interim periods within those fiscal years. The Company has adopted this standard for its fiscal year 2017. The adoption
did not have a material impact on the Company’s consolidated financial statements.
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. The Company has adopted this standard for its fiscal year 2017. The adoption did not have a material impact on
the Company’s consolidated financial statements.
3.
Patents
Patent intangible assets consisted of the
following at March 31, 2017:
|
|
Weighted
Average
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
5.65
|
|
|
$
|
11,893,745
|
|
|
$
|
(5,112,549
|
)
|
|
$
|
6,781,196
|
|
Total patent intangible assets
|
|
|
|
|
|
$
|
11,893,745
|
|
|
$
|
(5.112.549
|
)
|
|
$
|
6,781,196
|
|
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
|
|
Following the establishment of INVT SPE for the PRIP and
the related assignment of the Patents to INVT SPE which occurred in April 2017 (see Note 5), minimal patent amortization
expenses are expected in future periods.
4. Fair Value Measurements
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 a widely-accepted equity
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 three months ended March 31, 2016
and 2017:
|
|
Common
Stock
Warrants
|
|
Balance at December 31, 2015
|
|
$
|
4,145
|
|
Change in fair value
|
|
|
2,795
|
|
Balance at March 31, 2016
|
|
$
|
6,940
|
|
5. Borrowing Arrangements
On September 23, 2014, the Company entered
into a Share Purchase Agreement (“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 its common stock, at
a purchase price of $21.40 per share for aggregate consideration to the Company of up to $500,000. Pursuant to the terms of the
Share Purchase Agreement and concurrently with the execution of the Share Purchase 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 the Company did not obtain
$6.0 million or more in debt financing within ten business days of the execution of the Share Purchase Agreement. As a result of
the Senior Debt Agreement (as defined below), the Company was required to return the $300,000 in cash previously prepaid by Mr.
Beyers and the Company did 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, 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 (“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 50,000 shares of
the Company’s common stock (the “Senior Lender Shares”) to the Revenue Participant, after the payment of all
purchaser-related fees and expenses relating to the issuance of the Senior Notes and Senior Lender 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 thereunder when originally due, shall be paid in full in cash by the Company on
September 30, 2017 (the “Maturity Date”). As of March 31, 2017, the Company has repaid $3,787,016 of the Senior Notes.
Upon receipt of any revenues generated
from the monetization of the patents identified in the Senior Debt Agreement (the “Monetization Revenue”), 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 a prepayment premium. 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 have been superseded by the terms of the Restructuring Agreement upon the assignment
of the Patents to INVT SPE in April 2017, as more fully explained below.
In addition to the Mandatory Prepayments,
the Company was also required to 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 Senior Debt Agreement,
as amended, the Company granted to the purchasers identified in the Senior Debt Agreement (the “Revenue Participants”)
a right to receive a portion of the Monetization Revenues totaling $11,284,538 (the “Revenue Stream”). The Revenue
Participants were not to receive any portion of the Revenue Stream until all obligations under the Original Senior Notes were paid
in full. Following payment in full of the Original Senior Notes, the Company was to 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 were to be payable on a monthly basis in arrears.
The rights of the Revenue Participants to the Revenue Stream were 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 Senior Debt Agreement, as amended, dated March 1, 2016, the Company
determined that the change in expected cash flows was greater than 10% as compared to the Senior Debt Agreement prior to such amendment
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 have been superseded by the terms
of the Restructuring Agreement upon the assignment of the Patents to INVT SPE in April 2017, as more fully explained below.
As part of the Senior Debt Agreement, the
Company and the Collateral Agent entered into a 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.
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.
In connection with the execution of
the Senior Debt Agreement, the Company issued the Senior Lender Shares 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. In addition, the Company issued to the Senior Lender seven-year warrants to purchase 50,000 shares of
common stock at an exercise price of $11.40 per share. The exercise price of these warrants was subsequently changed to $2.54
per share as part of the second amendment to the Senior Debt Agreement.
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.
Restructuring Agreement and Patent Residual Interest Program
In December 2016, the Company and the Senior
Lender and the Managing Member entered into a Restructuring Agreement (the “Restructuring Agreement”) to further 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), 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 Senior Debt 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 in April 2017
the Company completed all requirements under the Restructuring Agreement and the Patents were transferred to the SPE. The SPE,
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.
Upon the transfer of the Patents to INVT
SPE, the Senior Notes and the revenue share liabilities were extinguished, the Company was relieved of any scheduled amortization
(instead, payments to the Senior Lender will only be required out of Monetization Revenues), the liquidity covenant no longer applies,
and the Company has been relieved from any further responsibility to maintain the Patents, retroactive to December 22, 2016. See
also Note 10, “Subsequent Event”.
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 Senior Debt Agreement, as amended, and any other amounts owed pursuant
to the Restructuring Agreement to be immediately due and payable.
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 Convertible Preferred Stock (“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 Preferred Stock and Series E Convertible
Preferred Stock (“Series E 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 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 2016 Shares 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 at a purchase price of $4.60 per share resulting in gross
proceeds to the Company of $2.15 million (the “2015 Registered Direct Offering”). The 2015 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
2015 Registered Direct Offering. The 2015 Registered Direct Offering closed on April 6, 2015.
In
connection with the 2015 Registered Direct Offering, the Company entered into a placement agent agreement (the
“Placement Agent Agreement”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg”) to act as its
exclusive placement agent. Pursuant to the Placement Agent Agreement, the Company paid Ladenburg $106,000 in cash, issued to
Ladenburg 5,762 five-year warrants with an exercise price of $5.75 per share (the “RD Warrants”) and reimbursed
Ladenburg 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 2015 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 March 31, 2017:
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 Plan (as defined below)
|
|
|
175,046
|
|
Warrants
|
|
|
11,615,849
|
|
Total
|
|
|
13,991,631
|
|
Convertible preferred stock
Convertible preferred stock as of March 31, 2017 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 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 March 31, 2017.
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 Series C Warrants are not subject to a registration statement at the time
of exercise, the Series C Warrants may be exercised on a cashless basis after six months from the issuance date. The Series C 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 Series
C Purchase Agreement. The Company obtained the requisite 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 Series C Warrants. The Company paid for the Series C
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 Series D 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 Series D 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 Series D Warrants vested immediately and the remainder of the Series D 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 Purchase Agreement”) to sell $3.0 million of 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 Purchase 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 Purchase 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 Series E Purchase Agreement. The Company obtained the requisite shareholder approval on March 8, 2017.
On January 25, 2017,
the Company entered into an amendment (the “Series E Amendment”) to the Series E Purchase Agreement, with each of the
holders of the Series E Preferred Stock. Pursuant to the Series E 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 “Series E 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 Series
E 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 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.
Warrants
Common stock warrants outstanding as of March 31, 2017 are listed
as follows:
Warrants
Outstanding
|
|
|
|
Remaining Contractual
Life (years)
|
|
|
Weighted Average
Exercise
|
|
|
1,000,000
|
|
|
|
6.39
|
|
|
$
|
0.600
|
|
|
6,000,000
|
|
|
|
4.53
|
|
|
$
|
1.000
|
|
|
1,000,000
|
|
|
|
6.39
|
|
|
$
|
2.005
|
|
|
1,271,826
|
|
|
|
4.31
|
|
|
$
|
2.005
|
|
|
648,000
|
|
|
|
4.13
|
|
|
$
|
2.01
|
|
|
158,416
|
|
|
|
4.12
|
|
|
$
|
1.87
|
|
|
1,416,668
|
|
|
|
3.81
|
|
|
$
|
1.79
|
|
|
50,000
|
|
|
|
4.92
|
|
|
$
|
2.54
|
|
|
10,870
|
|
|
|
3.02
|
|
|
$
|
4.60
|
|
|
5,762
|
|
|
|
3.02
|
|
|
$
|
5.75
|
|
|
27,449
|
|
|
|
2.87
|
|
|
$
|
20.00
|
|
|
23,858
|
|
|
|
1.83
|
|
|
$
|
22.70
|
|
|
3,000
|
|
|
|
0.59
|
|
|
$
|
26.60
|
|
|
11,615,849
|
|
|
|
4.70
|
|
|
$
|
1.43
|
|
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, 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
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Balance at March 31, 2017
|
|
|
175,046
|
|
|
|
514,772
|
|
|
$
|
2.77
|
|
Total vested and expected to vest shares (options)
|
|
|
|
|
|
|
514,772
|
|
|
$
|
2.77
|
|
Total vested shares (options)
|
|
|
|
|
|
|
229,279
|
|
|
$
|
4.16
|
|
As of March 31, 2017, 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 March 31, 2017 was zero, since all of the options were out-of-the-money at March 31, 2017.
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 March 31, 2017, 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 March 31, 2017:
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
|
|
|
|
9.31
|
|
|
$
|
1.41
|
|
|
|
60,420
|
|
|
$
|
1.41
|
|
$
|
3.10
|
|
|
|
182,528
|
|
|
|
8.55
|
|
|
$
|
3.10
|
|
|
|
141,615
|
|
|
$
|
3.10
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
|
0.08
|
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
$
|
5.60
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
|
0.08
|
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
$
|
11.40
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
|
0.08
|
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
$
|
30.40
|
|
|
|
|
|
|
514,772
|
|
|
|
8.55
|
|
|
$
|
2.77
|
|
|
|
229,279
|
|
|
$
|
4.16
|
|
Stock-based compensation expense
There were no stock options granted during the three months
ended March 31, 2017 or March 31, 2016.
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 three months ended
|
|
|
For the three months ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
General and administrative
|
|
$
|
91,234
|
|
|
$
|
130,358
|
|
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 March 31,
2017, there were total unrecognized compensation costs of $332,847 related to these stock awards. These costs are expected to be
recognized over a period of approximately 1.41 years.
Non-employee stock-based compensation expense
The Company previously 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 $20,264 and $58,552 for the three months ended March
31, 2017 and March 31, 2016, respectively. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied
by the number of shares awarded.
8. Income Taxes
On a quarterly basis, the Company records income tax expense
or benefit based on year-to-date results and expected results for the remainder of the year. The Company recorded no provision
for income taxes for the three-month periods ended March 31, 2017 and 2016.
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 during its development stage, the Company has provided a full valuation allowance
against its deferred tax assets as of March 31, 2017 and 2016.
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.
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
|
|
|
39,192
|
|
Total
|
|
$
|
39,192
|
|
Rent expense was $27,152 in each of the three months ended March
31, 2017 and 2016.
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. 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. As of March 31, 2017, 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. Subsequent Events
On April 7, 2017, the Company received notice from Nasdaq that its stockholders’ equity of $1,540,194
as reported on its Annual Report on Form 10-K for the year ended December 31, 2016, was below Nasdaq’s minimum stockholders’
equity requirement for continued listing of $2,500,000. The Company requested a hearing to appeal this determination and, by letter
dated April 17, 2017, Nasdaq granted the appeal to be heard on June 1, 2017. Management is unable to predict the outcome of this hearing or that the Company will be able to regain compliance with the
Nasdaq requirement.
On April 27, 2017, the Company
completed its requirements under the Restructuring Agreement and the Patents were transferred to INVT SPE. As of this date,
the Company was relieved of its obligations under its prior agreements with the Senior Lender, including any scheduled
amortization payments to the Senior Lender, the liquidity covenant no longer applies, and the Company was relieved from any
further responsibility to maintain the Patents, retroactive to December 22, 2016. The accounting effect of
these events, as well as the resulting accounting for debt extinguishment and assignment of the Patents to INVT SPE, will
be reflected in the Company’s financial statements in the quarter ended June 30, 2017.