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 and Nine Months Ended September
30, 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 3.
|
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 of INVT SPE 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 Cupertino, 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 condensed 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 as of December 31, 2016 included in the
Company’s Annual Report on Form 10-K filed on March 31, 2017. 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 September 30, 2017, the Company has
an accumulated deficit since inception of $26,677,465 as well as negative cash flows from operations and had negative working capital
of $4,686,026. As of November 8, 2017, the Company had remaining cash of $7,870 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 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 3), 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, resulted 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 were
extinguished as of that date. The net impact on liquidity from these transactions was 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 expenses and
Inventergy Innovations partner acquisition expenses. Based on the Company’s internal planning for 2017 and 2018, which
anticipates certain cash inflows and revenue from the Inventergy Innovations commercialization deal pipeline expected to
close during 2018 and beyond, estimated cash expenditures for operating expenses will be approximately $3.2 million for the next
twelve months, consisting of approximately $1.9 million in personnel related costs (including costs related to third party
consultants performing outsourced functions), $0.2 million in facilities and infrastructure costs and $1.1 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 less than two
months from the filing date of this quarterly report on Form 10-Q.
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
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 September 30, 2017 and December 31, 2016,
the Company has not established any reserves for uncollectable accounts.
Property and equipment
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, sale or disposal, 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.
Intangible Assets
As of December 31, 2016, intangible assets
consisted of certain contract rights acquired in the Merger, and were being amortized on a straight-line basis over their estimated
useful life of five years. As of June 30, 2017, the remaining balance of intangible assets was written off due to declining revenue
from these contract rights.
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. As mentioned in the previous paragraph, intangible assets were written off in the three-month period ended
June 30, 2017. Also, as explained more fully in Note 3, goodwill and the remaining net book value of patent assets were written
off in the three-month period ended June 30, 2017 as part of a debt extinguishment.
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. The Company has
not experienced any losses due to concentration of credit risk.
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 operations.
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.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (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 standards,
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 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 Company’s consolidated financial statements.
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 implemented
this standard using the modified retrospective approach beginning January 1, 2017. The revenue contract the Company had at that
time was a patent licensing agreement, which contained a right to use provisions over a specified time period. In the case of
Inventergy Innovations, customer agreements provide for payments to the Company upon the completion of IP monetization transactions,
none of which have occurred to date. The implementation of ASU 2014-09 did not have a material effect on the Company’s financial
statements and related disclosures.
In November 2016, the 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. Prior Borrowing Arrangements and Restructuring Agreement
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”). 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 Senior Lender, 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 (which were net of 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 required monthly cash interest payments
equal to LIBOR plus 7% (total interest rate of approximately 8.7% while the loan was outstanding). In addition, a 3% per annum
paid-in-kind (“PIK”) interest was accrued increasing the principal amount of the Senior Notes by the amount of such
interest. The PIK interest was 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 Senior Lender a structuring
fee equal to $385,000, which was accounted for as a discount on notes payable.
In December 2016, the Company and the Senior
Lender and CF DB EZ LLC (the “Managing Member”) entered into a Restructuring Agreement (the “Restructuring Agreement”)
to further amend the Senior Debt Agreement. Among other terms, the Restructuring Agreement required the Company to transfer 740
telecommunications patents to a special purpose entity, as discussed in detail below. Pursuant to the Restructuring Agreement,
the Managing Member has the sole discretion to make any and all decisions relating to the transferred 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 required that
the Company obtain stockholder approval and consents of third parties to the assignment of the Patents to INVT SPE, the newly created
special purpose entity. 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 INVT SPE. INVT SPE
is 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. Based
on these terms and the consideration exchanged, this transaction was accounted for as an extinguishment of debt, and as of the
effective date of the Restructuring Agreement (April 30, 2017), the Company recorded a gain on debt extinguishment of $40,802,730,
computed as follows:
Elimination of Senior Notes
|
|
$
|
9,405,462
|
|
Elimination of Senior Revenue Share
|
|
|
3,948,153
|
|
Elimination of carrying value of Patents
|
|
|
(6,665,280
|
)
|
Elimination of goodwill
|
|
|
(8,858,504
|
)
|
Establishment of Investment in INVT SPE
|
|
|
42,962,899
|
|
Gain on debt extinguishment
|
|
$
|
40,802,730
|
|
The initial carrying value of investment in INVT SPE was established
by an independent, third-party valuation firm, using the income approach and modeling the net discounted future licensing revenue
opportunity in the three primary market segments currently targeted by INVT SPE. The valuation also employed the market approach
in the derivation of royalty rates used to arrive at projected revenues. Also, as part of the accounting for the debt extinguishment,
the Company wrote-off goodwill in the amount of $8,858,504, as the underlying value of the goodwill was related to the initial
purchase of the patents transferred to INVT SPE as of April 30, 2017.
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.
4. 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
common stock 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 were 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 was used to fund 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.
Shares of common stock reserved for future issuance were as
follows as of September 30, 2017:
Series C Convertible Preferred Stock
|
|
|
3,335
|
|
Series D Convertible Preferred Stock
|
|
|
186,367
|
|
Series E Convertible Preferred Stock
|
|
|
24,364,518
|
|
Options to purchase common stock
|
|
|
487,528
|
|
Shares reserved for issuances pursuant to 2014 Plan (as defined below)
|
|
|
202,290
|
|
Warrants
|
|
|
11,615,849
|
|
Total
|
|
|
36,859,887
|
|
Convertible preferred stock
Convertible preferred stock as of September 30, 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
|
|
|
|
2,076
|
|
|
$
|
2,076,000
|
|
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 September 30, 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.
On July 26, 2017,
the Company entered into an Exchange Right and Leak-Out Agreement with holders of the Series E Preferred Stock. Pursuant to the
agreement, in lieu of the conversion right as provided in the Certificate of Designation of Preferences, Rights and Limitations
of the Series E Preferred Stock, each holder has the right to exchange its shares (the “Shares”) of Series E Preferred
Stock for shares (the “Exchange Shares”) of the Company’s common stock at an exchange rate so that for each Share,
the holder will receive a number of Exchange Shares that would yield net proceeds of $1,350 upon resale of such Exchange Share.
Additionally, the holders consented to any Company non-equity linked financing or financing of its interest in INVT SPE subject
to certain limitations as provided in the agreement. The holders also agreed to not sell the Exchange Shares in an amount that
would exceed the greater of (a) a percentage of the total trading volume on any given day and (b) $500, with an aggregate limit
of 25% of total trading volume among all holders. Any sale of Exchange Shares at a price of more than $0.20 per share (the “Break-out
Price”) is not subject to the agreement. The Break-out Price may be further reduced if the Company does not meet certain
requirements under the agreement.
During the three
months ended September 30, 2017, a total of 182 shares of Series E Preferred Stock were converted into an aggregate of 3,470,762
shares of common stock.
Warrants
Common stock warrants outstanding as of September 30, 2017 are
as follows:
Warrants
Outstanding
|
|
|
Remaining Contractual
Life (years)
|
|
|
Weighted Average
Exercise
|
|
|
1,000,000
|
|
|
|
5.89
|
|
|
$
|
0.600
|
|
|
6,000,000
|
|
|
|
4.03
|
|
|
$
|
1.000
|
|
|
1,000,000
|
|
|
|
5.89
|
|
|
$
|
2.005
|
|
|
1,271,826
|
|
|
|
3.81
|
|
|
$
|
2.005
|
|
|
648,000
|
|
|
|
3.63
|
|
|
$
|
2.01
|
|
|
158,416
|
|
|
|
3.62
|
|
|
$
|
1.87
|
|
|
1,416,668
|
|
|
|
3.31
|
|
|
$
|
1.79
|
|
|
50,000
|
|
|
|
4.41
|
|
|
$
|
2.54
|
|
|
10,870
|
|
|
|
2.52
|
|
|
$
|
4.60
|
|
|
5,762
|
|
|
|
2.52
|
|
|
$
|
5.75
|
|
|
27,449
|
|
|
|
2.37
|
|
|
$
|
20.00
|
|
|
23,858
|
|
|
|
1.33
|
|
|
$
|
22.70
|
|
|
3,000
|
|
|
|
0.08
|
|
|
$
|
26.60
|
|
|
11,615,849
|
|
|
|
4.20
|
|
|
$
|
1.43
|
|
5. 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. 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, 2016
|
|
|
175,046
|
|
|
|
514,772
|
|
|
$
|
2.77
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options expired
|
|
|
27,244
|
|
|
|
(27,244
|
)
|
|
$
|
15.80
|
|
Balance at September 30, 2017
|
|
|
202,290
|
|
|
|
487,528
|
|
|
$
|
2.04
|
|
Total vested and expected to vest shares (options)
|
|
|
|
|
|
|
487,528
|
|
|
$
|
2.04
|
|
Total vested shares (options)
|
|
|
|
|
|
|
280,742
|
|
|
$
|
2.37
|
|
As of September 30, 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 September 30, 2017 was zero, since all of the options were out-of-the-money at September 30, 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 September 30, 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 September 30, 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
|
|
|
|
8.81
|
|
|
$
|
1.41
|
|
|
|
120,840
|
|
|
$
|
1.41
|
|
$
|
3.10
|
|
|
|
182,528
|
|
|
|
7.48
|
|
|
$
|
3.10
|
|
|
|
159,902
|
|
|
$
|
3.10
|
|
|
|
|
|
|
487,528
|
|
|
|
8.31
|
|
|
$
|
2.04
|
|
|
|
280,742
|
|
|
$
|
2.37
|
|
Stock-based compensation expense
There were no stock options granted during the nine months ended
September 30, 2017. For the nine months ended September 30, 2016, the fair value of employee stock options granted was estimated
using the following weighted-average assumptions:
Expected volatility
|
|
|
68
|
%
|
Risk free rate
|
|
|
1.18
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.70
|
|
The expected term of the options was 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 was 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 was 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 Sept. 30
|
|
|
For the nine months ended Sept. 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General and administrative
|
|
$
|
85,776
|
|
|
$
|
152,170
|
|
|
$
|
334,797
|
|
|
$
|
545,626
|
|
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 September
30, 2017, there were total unrecognized compensation costs of $166,562 related to these stock awards. These costs are expected
to be recognized over a period of approximately 1.15 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 $21,638 and $77,672 for the three months ended September
30, 2017 and September 30, 2016, respectively, and $133,935 and $297,693 for the nine months ended September 30, 2017 and September
30, 2016, respectively. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied by the number
of shares awarded.
6. 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- and nine-month periods ended September 30, 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 September 30, 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.
7. Commitments and Contingencies
Operating lease
In July 2017, the Company vacated its offices in Campbell, California
and signed a six-month lease for office space in Cupertino, California effective August 1, 2017 which requires lease payments of
$1,767 per month.
Rent expense was $11,691 in the three months ended September
30, 2017 and $27,152 in the three months ended September 30, 2016. Rent expense was $65,994 in the nine months ended September
30, 2017 and $81,455 in the nine months ended September 30, 2016.
Guaranteed payments
The Company entered into an agreement to
purchase certain patent assets under which guaranteed payments were required. This 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 3).
Nasdaq Listing
Previously, on
November
21, 2016 and on
April 7, 2017
, the Company received notice from The NASDAQ Stock Market
(“Nasdaq”) indicating that, because the closing bid price for the Company’s common stock had fallen below $1.00
per share for 30 consecutive business days, the Company no longer complied with the minimum bid price requirement (the “
Minimum
Bid Price Requirement”) and
the minimum $2,500,000 stockholders’ equity
requirement (the “Stockholders’ Equity Requirement”)
for continued listing
on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) and
Rule 5550(b)(1), respectively
.
The Company subsequently submitted a notice
of appeal to Nasdaq appealing its determination that the Company no longer complied with the Stockholders’ Equity Requirement,
which appeal was heard before a hearings panel (the “Panel”) on June 1, 2017.
On May 23, 2017, the Company received notice
from Nasdaq that the Company had not regained compliance with
the Minimum Bid Price
Requirement, which serves as an additional basis for delisting the Company’s common stock from the Nasdaq Capital Market
.
Nasdaq further advised the Company that the Panel will consider this matter in rendering a determination regarding the Company’s
continued listing on the Nasdaq Capital Market.
On June 5, 2017, the Company received notice from Nasdaq that
the Panel has determined to delist the shares of the Company from the Nasdaq Stock Market and will suspend trading in the Company’s
shares effective at the open of business on June 7, 2017. The Company submitted a request to the Office of Appeals and Review on
June 20, 2017, requesting that the Nasdaq Listing and Hearing Review Council (the “Council”) review the Panel’s
decision. On July 28, 2017, the Company updated the Council regarding the third party independent valuation that was undertaken
to establish the value of INVT SPE and the resulting positive impact on the Company’s stockholders’ equity.
On August 29, 2017, the Company received a notice from Nasdaq
stating that it had determined that the Company had failed to comply with Nasdaq’s shareholder approval requirement set forth
in Listing Rule 5635(d), which requires shareholder approval of any issuance of shares of common stock greater than 20% of a company’s
outstanding shares, as a result of the Exchange Right and Leak-Out Agreement, dated July 26, 2017, entered into between the Company
and the holders of its Series E Preferred Stock. The notice provided that this matter would serve as an additional basis for delisting
the Company’s common stock from Nasdaq. Subsequent to receipt of the notice, the Company withdrew its appeal of the Panel
decision.