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 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Six Months
Ended June 30, 2014 and 2013
1. Organization
Inventergy Global, Inc. (“Inventergy”
or “Company”) is an intellectual property (IP) investment and licensing company that helps technology-leading corporations
attain greater value from their IP assets in support of their business objectives and corporate brands. 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 (“Merger Sub”) of eOn Communications Corporation (“eOn”)
merged with and into Inventergy, Inc (the “Merger”). As a result of the Merger, eOn Communications Corporation 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”).
Liquidity
The Company’s financial statements have been prepared
on a going-concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company’s liquidity and capital needs relate primarily to working capital and other general
corporate requirements. The Company’s operations do not currently provide cash flow. To date, the Company has funded its
operations with the issuance of notes and convertible notes, by the sale of preferred and common stock and through private placement
offerings. The business will require significant amounts of capital in the near term to sustain operations and make the investments
it needs to continue operations and execute its longer term business plan. The Company had cash and cash equivalents of $484,175
and net working capital of $340,066 as of June 30, 2014. The total current assets included restricted cash of $3,500,000 in a segregated
account which is pledged to collateralize the Secured Convertible Notes and cannot be used in support of on-going operations. The
Company’s net loss for the six months ended June 30, 2014 was $9,397,627 and our accumulated deficit amount was $32,071,341
as of June 30, 2014. The Company will be able to conduct its planned operations using currently available capital resources for
less than six months. Our ability to sustain our operations is dependent upon our ability to obtain financing in the near term
to meet the needs of our on-going operations, generate future revenue from operations and/or to obtain the necessary financing
to meet our obligations and repay our liabilities arising from normal business operations when they come due.
In order to implement its business plan and become cash
flow positive, management’s plan includes raising capital by equity and/or debt financing. However, management cannot
provide any assurances that the Company will be successful in accomplishing any of its plans. Management also cannot provide
any assurance that unforeseen circumstances will not increase the need for the Company to raise additional capital on an
immediate basis. There can be no assurance that we will be able to continue to raise funds if at all, or on terms acceptable
to the Company in which case the Company may be unable to continue its operations or to meet its obligations.
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.
Restricted cash
At June 30, 2014, the Company held restricted cash of $3,500,000
pledged to collateralize the Secured Convertible Notes (as defined below).
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 June
30, 2014, the Company has not establish any reserves for uncollectable accounts.
Inventories
Inventories consist of phones, systems,
system cards and component parts for final assembly of our systems and are valued at the lower of cost or market with cost determined
utilizing standard cost which approximates the first-in, first-out (FIFO) method. The Company performs an analysis of slow-moving
or obsolete inventory on a quarterly basis and any changes in valuation reserves, which could potentially be significant, are
included in earnings in the period in which the evaluations are completed.
Property and equipment
Property and equipment are recorded at cost. 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 and the related
accumulated depreciation is removed and any resulting gain or loss is credited or charged to operations.
Patents
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 with eOn Communications. Intangible assets are amortized on a straight-line basis over their estimated useful life
of five years.
Goodwill
Goodwill represents the excess of the aggregate purchase price
over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill
will be tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company determined
that it is a single reporting unit for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill,
the Company estimates the value of the reporting unit using its market capitalization as the best evidence of fair value. This
fair value is then compared to the carrying value of the reporting unit.
Impairment of long-lived assets
The Company evaluates the carrying value of long-lived assets
on an annual basis, or more frequently whenever circumstances indicate a long-lived asset may be impaired. When indicators of
impairment exist, the Company estimates future undiscounted cash flows attributable to such assets. In the event cash flows are
not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair
value. There were no asset impairments for the three months and six months ended June 30, 2014.
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 from time to time 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 is
reported as a financing cash flow.
The Company estimates the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense ratably over the requisite service periods in the Company's statements of comprehensive income or
loss. The Company has estimated the fair value of each 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 in the periods those awards are expected to vest. 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 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.
It is the Company’s practice to recognize interest and
penalties related to income tax matters in income tax expense. As of June 30, 2014 and 2013, the Company had no interest and penalties
related to income taxes.
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 minimizes 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 June 2014, the FASB issued Accounting Standards Update ("ASU")
ASU 2014-10 Development Stage Entities. The amendments in ASU 2014-10 remove the definition of a development stage entity from
Topic 915 Development Stage Entities, thereby removing the distinction between development stage entities and other reporting entities
from US GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date
information in the statements of operations, cash flows, and shareholder's equity, (2) label the financial statements as those
of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and
(4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the
development stage. The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities
that have not commenced planned principal operations. ASU 2014-10 is effective for annual reporting periods beginning after December
15, 2014, and interim periods therein. The Company could early adopt ASU 2014-10 for any annual reporting period or interim period
for which the entity's financial statements have not yet been issued. The Company has elected to adopt this ASU effective with
this Quarterly Report on Form 10-Q and its adoption resulted in the removal of inception-to-date information in the Company's statements
of operations and cash flows.
3. Business
Combination
The Merger was consummated on June 6,
2014, as a result of which Inventergy, Inc. merged with and into Merger Sub and holders of Inventergy, Inc. securities were issued
securities of the Company. Upon the consummation of the Merger, the Company changed its name from “eOn Communications Corporation”
to “Inventergy Global, Inc.” and effected a one-for-two reverse stock split of the Company’s common stock (the
“Reverse Split”).
In connection with the consummation
of the Merger:
(i) each share of the pre-Merger Inventergy,
Inc. common stock was exchanged for 1.4139 shares of Company common stock on a post-Reverse Split basis (the “Exchange Ratio”);
(ii) the pre-Merger Inventergy, Inc.
Series A Preferred Stock was exchanged for a like number of newly-created Company Series A Preferred Stock;
(iii) options and restricted
shares of pre-Merger Inventergy, Inc. common stock awarded pursuant to the Inventergy 2013 Stock Plan (such stock plan being
adopted by the stockholders of the Company in connection with the Merger) and outstanding immediately prior to the
consummation of the Merger were converted into awards of options to purchase Company common stock and restricted shares of
Company common stock with terms and conditions identical to the terms and conditions of the corresponding options to
purchase Inventergy, Inc. common stock and awards of restricted shares of Inventergy, Inc. common stock (as adjusted for the
Exchange Ratio); and
(iv) outstanding warrants to purchase
pre-Merger Inventergy, Inc. common stock were exchanged for warrants to acquire Company common stock with terms and conditions
identical to the terms and conditions of the corresponding warrants to purchase Inventergy, Inc. common stock (as adjusted for
the Exchange Ratio).
Immediately following the consummation of the Merger, the Company had 20,018,028 shares of common stock,
6,176,748 shares of Series A Preferred Stock and 2,231 shares of Series B Preferred Stock issued and outstanding. In addition,
it had warrants to purchase 700,937 shares of common stock outstanding and 238,412 placement agent warrants outstanding.
The Transition Transactions
In connection with the Merger, on
December 17, 2013, eOn, Cortelco Systems Holding Corp., a Delaware corporation and wholly-owned subsidiary of eOn (“Cortelco
Holding”), eOn Communications Systems, Inc., a Delaware corporation and wholly-owned subsidiary of eOn (“eOn Subsidiary”),
and Cortelco, Inc., a Delaware corporation and wholly-owned subsidiary of Cortelco Holding (“Cortelco”) entered into
a transition agreement (the “Transition Agreement”). The Transition Agreement provided for several transactions among
eOn and its subsidiaries in connection with, and subject to the completion of, the Merger. Each of these transactions were consummated
at the time the Merger became effective (the “Effective Time”), including the following (collectively, the “Transition
Transactions”):
(1) eOn and Cortelco each transferred
certain contracts and other assets to eOn Subsidiary, and eOn Subsidiary assumed the liabilities associated with such contracts
on and after the date of assumption;
(2) eOn Subsidiary purchased from
Cortelco certain inventory for a purchase price equal to Cortelco’s book value of such inventory;
(3) eOn and Cortelco Holding redeemed
in full those certain contingent notes in the maximum initial amount of $11 million (collectively, the “Contingent Note”)
in consideration of paying the holders of the Contingent Note either cash in the aggregate amount of $300,000 or shares of Cortelco
Holding owned by eOn;
(4) Cortelco entered into a fulfillment
services agreement with eOn Subsidiary providing for certain services to be conducted on behalf of eOn Subsidiary after the Merger;
(5) the Company transferred to Cortelco
Holding (i) all of its ownership in Cortelco Systems Puerto Rico, Inc., and Symbio Investment Corp., and (ii) eOn’s right
to require David S. Lee, former Chairman of eOn, to purchase its investment in Symbio Investment Corp.; and
(6) the Company and Cortelco Holding
entered into an indemnity agreement providing that Cortelco will indemnify the Company from and against any future losses arising
from the Contingent Note and certain other matters.
Upon completion of the Merger and the
Transition Transactions, the Company owns all of the outstanding stock of Inventergy,Inc and eOn Subsidiary and has transferred
certain assets held prior to the Merger and no longer owns an interest in Cortelco Holding, Cortelco, Cortelco Systems Puerto Rico,
Inc., or Symbio Investment Corp.
As of June 30, 2014, the
total purchase consideration and the purchase price allocation were as follows:
Fair value of assumed equity allocated to purchase consideration
|
|
$
|
10,985,867
|
|
Total purchase consideration
|
|
$
|
10,985,867
|
|
|
|
|
|
|
Goodwill
|
|
$
|
8,858,504
|
|
Intangible asset contract rights
|
|
|
1,342,000
|
|
Other assets acquired
|
|
|
816,045
|
|
Liabilities assumed
|
|
|
(30,682
|
)
|
Total purchase allocation
|
|
$
|
10,985,867
|
|
Goodwill of $8,858,504, which is not deductible for tax purposes,
was recognized as a result of the Merger. Intangible assets of $1,342,000, 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.
Acquisition-related costs directly attributable to the business
combination totaling $1,237,641 for the six months ended June 30, 2014 were expensed as incurred in the consolidated statements
of operations.
This is a reverse merger. The consideration was based on fair
value of equity retained by eOn Communication Corporation shareholders on June 6, 2014, the date of the Merger close. The historical
financial information are those of Inventergy, Inc.
Supplemental Pro Forma Information
. The financial information
in the table below summarizes the results of operations of the Company following the consummation of the Merger, on a pro forma
basis, as though the companies had been combined as of the beginning of fiscal 2013. The pro forma financial information is presented
for informational purposes only for the purpose of comparing the six months ended June 30, 2014 with the six months ended June
30, 2013 and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on
January 1, 2013 or of results that may occur in the future.
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue (1)
|
|
$
|
231,000
|
|
|
$
|
186,000
|
|
|
$
|
462,000
|
|
|
$
|
372,000
|
|
Net loss (2)
|
|
$
|
3,437,640
|
|
|
$
|
1,141,245
|
|
|
$
|
8,797,819
|
|
|
$
|
1,633,447
|
|
|
(1)
|
Revenue for the three months ended June 30, 2014 of $47,043 (from Merger close to June 30, 2014) is from our telephony product
line acquired in the Merger.
|
|
(2)
|
Pro forma net
loss was adjusted to exclude Merger related expenses of $802,407 and $0 for the three
months ended June 30, 2014 and 2013, respectively, and $1,237,641 and $0 for the six
months ended June 30, 2014 and 2013, respectively. Additional expense for the amortization
of acquired intangible assets of $44,733 and $67,100 for the three months ended June
30, 2014 and 2013, respectively, and $111,833 and $134,200 for the six months ended June
30, 2014 and 2013, respectively, was included in the net loss.
|
4. Patents
Patent intangible assets consist of the following at June 30,
2014:
|
|
Weighted
Average
Useful Life
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
8.0
|
|
|
$
|
12,109,118
|
|
|
$
|
(918,547
|
)
|
|
$
|
11,190,571
|
|
Total patent intangible assets
|
|
|
|
|
|
$
|
12,109,118
|
|
|
$
|
(918,547
|
)
|
|
$
|
11,190,571
|
|
The Company expects amortization expense to be approximately $1,550,334 per year for each of the next
seven years and a pro rata portion in the eighth year.
5. Fair
Value Measurements
The following table summarizes the Company's
assets and liabilities measured at fair value on a recurring basis at June 30, 2014:
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Convertible promissory notes payable derivative liability
|
|
$
|
385,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
385,000
|
|
Common stock warrants
|
|
|
348,963
|
|
|
|
-
|
|
|
|
-
|
|
|
|
348,963
|
|
Total
|
|
$
|
733,963
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
733,963
|
|
As discussed in Note 6, prior to the Merger, the Company
issued
secured promissory notes (the ꞌꞌSenior Secured Notesꞌꞌ) which were redeemable upon an event of default.
The Senior Secured Notes were later exchanged in favor of new convertible notes (the “Amended Secured Convertible Notes”)
, resulting in an extinguishment of the related derivative liability for the prior Senior Secured Notes. Also discussed in Note
6, the Company also then issued certain additional new convertible notes (the “New Secured Convertible Notes”) which
may be redeemed upon an event of default (together with the Amended Secured Convertible Notes, the "Secured Convertible Notes").
Since the Secured Convertible Notes were issued at a substantial discount and the event of default clause may require accelerated
repayment, the Secured Convertible Notes include an embedded derivative that is not clearly and closely related to the host contract.
Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative liability at fair
value upon issuance of the Secured Convertible Notes. The Company estimated the fair value of the derivative liability using a
valuation model which included the weighted probability of the amount of redemption and the time until redemption occurs over the
note term.
In May 2013, the Company sold Series A-1 redeemable convertible
preferred stock which contained provisions for anti-dilution protection in the event the Company issues common stock at a price
below a price per share formula, as defined. At June 30, 2014, the threshold price was $1.14 per share. The anti-dilution protection
requires the Company to issue the holders of Series A-1 shares of common stock or in the event of unavailable authorized shares
of common stock, cash. The anti-dilution provision represents an embedded derivative as it is not clearly and closely related to
the host contract. Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative
liability at fair value upon issuance of the Series A-1 redeemable convertible preferred stock. The Company estimated the fair
value of the derivative liability using the Monte Carlo option pricing valuation model which included a probability weighted present
value calculation. Post Merger, the Series A redeemable convertible preferred stock are no longer redeemable. Therefore, these
were transferred to Series A preferred stock within the Stockholders' equity.
As discussed in Note 7, in January 2014, the Company issued
warrants to purchase 238,412 shares common stock at an exercise price of $3.04 to a placement agent. The exercise price is subject
to adjustment and the warrants may be exercised without cash consideration in lieu of forfeiting a portion of shares. Accordingly,
the Company recognized a derivative liability at fair value upon issuance of the warrants. The Company estimated the fair value
of the derivative liability using the Black-Scholes option pricing model. The fair value of the derivative liability as of June
30, 2014 was estimated using the following assumptions:
Expected volatility
|
|
|
65
|
%
|
Risk free rate
|
|
|
1.46
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
4.58
|
|
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 six months ended June 30, 2014:
|
|
Convertible
Notes Payable
Derivative
Liability
|
|
|
Series A-1
Preferred
Stock
Derivative
Liability
|
|
|
Common
Stock
Warrants
|
|
Balance at December 31, 2013
|
|
$
|
534,975
|
|
|
$
|
56,926
|
|
|
$
|
-
|
|
Extinguishment
|
|
|
(118,300
|
)
|
|
|
-
|
|
|
|
-
|
|
Fair value at issuance
|
|
|
189,300
|
|
|
|
-
|
|
|
|
466,706
|
|
Change in fair value
|
|
|
(220,975
|
)
|
|
|
(56,926
|
)
|
|
|
(117,743
|
)
|
Balance at June 30, 2014
|
|
$
|
385,000
|
|
|
$
|
-
|
|
|
$
|
348,963
|
|
6. Borrowing
Arrangements
On May 10, 2013, the Company issued senior
secured promissory notes (the ꞌꞌSenior Secured Notesꞌꞌ) with an aggregate principal of $5,000,000 for
proceeds of $4,950,000. In conjunction with the issuance of the Senior Secured Notes, proceeds of $50,000 were received in exchange
for 5,000,000 shares of Series A-1 Preferred Stock. Also, on May 17, 2013, proceeds of $1,498,526 were received in exchange for
shares of Series A-2 Preferred Stock to substantially the same investors. Total proceeds from the Senior Secured Notes, Series
A-1 Preferred Stock, and Series A-2 Preferred Stock were allocated to each instrument using the relative fair value method. The
fair value allocated to the Notes was $2,557,111. Further discussion regarding the allocation of proceeds is included in Note 7.
On March 26, 2014, the Senior Secured Notes were amended and restated to allow for conversion to common stock and to amend the
interest rate (“Amended Secured Convertible Notes”). In conjunction with the amendment, the Company recorded a loss
on extinguishment of the Senior Secured Notes of $2,403,193 in the accompanying statements of operations.
On March 26, 2014, the Company issued
additional convertible promissory notes (the “New Secured Convertible Notes”) with an aggregate
principal of $3,000,000 with similar terms and conditions as the Amended Secured Convertible Notes.
The Amended Secured Convertible Notes
and New Secured Convertible Notes (collectively, the ꞌꞌSecured Convertible Notesꞌꞌ) are payable in
quarterly installments beginning in October 2014 through July 2018 and bear interest at 4% per annum. If and when the Secured Convertible
Notes are fully collateralized by the restricted cash amount equaling the remaining balance of the principal and any interest due,
the interest rate will be reduced to 2%. The Secured Convertible Notes are secured by certain patents and other assets of the Company
and all principal and accrued but unpaid interest is due upon maturity. The Secured Convertible Notes may be converted to a number
of shares of common stock at the option of the holder by dividing the principal amount the holder desires to convert by $5.30.
The maturity date of the Secured Convertible Notes may be accelerated upon certain events of default or change in control. Upon
such events, the Secured Convertible Notes may be redeemed for 125% of the principal to be redeemed plus accrued but unpaid interest
and late charges, if any. Further discussion regarding the fair value measurement of the redemption provision is included in Note
4. The outstanding principal and accrued interest on the Secured Convertible Notes as of June 30, 2014 was $8,080,000, net of an
unamortized discount of $267,122.
On December 19, 2013 and December 31,
2013, the Company issued promissory notes (the ꞌꞌDecember 2013 Notesꞌꞌ) to the Company’s Chief
Executive Officer, a related party, for $3,000,000 and $100,000 totaling an aggregate principal of $3,100,000. The Company also
incurred a loan origination fee of $60,000 upon issuance of the December 2013 Notes. The December 2013 Notes, originally scheduled
to mature in February 2014, were extended to August 31, 2014 and bore interest at 2% per annum. The Company fully repaid the $100,000
unsecured related party note as part of the December 2013 Notes. The $3,000,000 note was secured by certain patent assets of the
Company and all principal and accrued but unpaid interest on the December 2013 Notes were due upon maturity.
On February 10, 2014, the Company obtained
an unsecured promissory note receivable (the ꞌꞌNote Receivableꞌꞌ) from the Company’s Chief Executive
Officer, a related party, with an aggregate principal of $3,000,000. The Note Receivable which matures on August 31, 2014 bore
interest at 2% per annum. All principal and accrued but unpaid interest was receivable upon maturity. The Note Receivable included
a full right of offset with the December 2013 Notes. The Company’s board of directors, excluding the Chief Executive Officer’s
vote, approved the Note Receivable prior to issuance. Effective February 11, 2014, the December 2013 Notes and Note Receivable
were fully offset and deemed paid.
Total Secured Convertible Notes payable
at June 30, 2014 are comprised of the following:
Total Secured Convertible Notes payable outstanding
|
|
$
|
8,000,000
|
|
Less: unamortized discount
|
|
|
(267,122
|
)
|
Convertible notes payable, net of discount
|
|
$
|
7,732,878
|
|
Amortization of the discount on Secured Convertible Notes payable
is computed using the straight line method over the note term and is included in interest expense in the accompanying statements
of operations. The straight line method of amortization is not materially different than the effective interest method. Amortization
of the discount was $151,289 for the three months ended March 31, 2014 and $168,423 for the six months ended June 30, 2014.
7. Stockholders'
Equity
Conversion from LLC
In January 2013, the Inventegy, Inc.’s
sole member converted all then outstanding liabilities, to the member, to member contributions. In February 2013, a plan of conversion
was entered into, pursuant to which the membership interest in the former LLC held by the sole member was exchanged for 5,000,000
shares of the Company’s common stock, par value $0.0001.
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.
Shares of common stock reserved for future issuance were as
follows as of June 30, 2014:
Series A convertible preferred stock
|
|
|
5,821,699
|
|
Series B convertible preferred stock
|
|
|
556,876
|
|
Convertible notes payable
|
|
|
1,508,162
|
|
Options to purchase common stock
|
|
|
2,211,018
|
|
Options available for future issuance
|
|
|
1,057,211
|
|
Warrants
|
|
|
824,648
|
|
Total
|
|
|
11,979,614
|
|
Convertible preferred stock
Convertible preferred stock as of June 30, 2014 consists of
the following:
Convertible
Preferred Stock
|
|
|
Original
Issue Price
|
|
|
|
Shares
Designated
|
|
|
|
Shares
Issued
|
|
|
|
Shares
Outstanding
|
|
|
|
Liquidation
Preference
|
|
Series A-1
|
|
$
|
0.0100
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
3,720,240
|
|
|
$
|
5,208,337
|
|
Series A-2
|
|
$
|
1.6996
|
|
|
|
1,176,748
|
|
|
|
1,176,748
|
|
|
|
397,234
|
|
|
$
|
556,128
|
|
Series B
|
|
$
|
1,000.00
|
|
|
|
2,750
|
|
|
|
2,750
|
|
|
|
1,192
|
|
|
$
|
1,192,000
|
|
As discussed in Note 5, in conjunction with
the issuance of Series A-1 and Series A-2 redeemable convertible preferred stock, proceeds of $4,950,000 were received in exchange
for the issuance of promissory notes payable. Total proceeds from this transaction were allocated to each instrument using the
relative fair value method. Proceeds allocated to Series A-1 and Series A-2 redeemable convertible preferred stock were $3,308,874
and $1,134,016, respectively. Following the allocation of fair value, the effective conversion prices per share upon issuance
of Series A-1 and Series A-2 redeemable convertible preferred stock were $0.55 and $0.96, respectively.
On December 17, 2013, in contemplation
of the Merger, the Company issued 2,750 shares of its Series B Preferred Stock (the “redeemable convertible preferred stock”)
at a price of $1,000 per share, subject to the terms of its Certificate of Designations for the Series B Preferred Stock (the “Certificate
of Designations”), and warrants to purchase an aggregate of 700,935 shares of the Company’s common stock (the “warrants”)
to certain accredited investors in a private offering transaction for proceeds of $2,750,000. The warrants have an exercise price
of $2.66 per common share.
The preferred stock was fair valued in
conjunction with the Merger. Consequently, the revaluation did not impact earnings per share.
A complete description of the rights, preferences,
privileges and restrictions of the redeemable convertible preferred stock are included in the Amended Articles of Incorporation.
The following is a summary of certain rights, privileges, preferences and restrictions:
Liquidation preference
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Series A Preferred Stock are entitled to receive an amount equal to the sum of (i)
the greater of (x) the product of (I) $0.01 in the event of Series A-1 or $1.6996 in the event of Series A-2 and (II) the number
of shares of Preferred stock then held by each holder and (y) the product of (I) the fair market value of one share of Common
Stock, as mutually determined by the Company and the Preferred Stock holders and (II) the number of shares of Common Stock issuable
upon conversion of such Preferred Stock, and (ii) any declared accrued and unpaid dividends, prior and in preference to any distributions
made to the holders of Common Stock.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Series B Preferred Stock are entitled to receive an amount equal $1,000 per share.
After full payment to the holders of Series A and Series B preferred stock preferences, holders of Series B shall be entitled
to participate in the distribution of any remaining assets of the Company on an as converted basis pari passu with the holders
of common stock.
If the assets and funds distributed among the holders of the
Preferred Stock are insufficient to permit payment to such holders of the full preferential amount, then the entire assets and
funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A and Series
B Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive.
Conversion
All Series A preferred shares are convertible,
into common stock at the option of the holder, at any time after the date of issuance, by dividing the stated value of such preferred
shares ($0.007073 in the event of Series A-1 or $1.202065 in the event of Series A-2) by the conversion amount, each subject to
adjustment. All Series B preferred shares are convertible, into common stock at the option of the holder, at any time after the
date of issuance, by multiplying the conversion amount by the quotient of (x) $1,000 divided by (y) 2.14, each subject to adjustment.
Each share of the Series A and Series B Preferred Stock will automatically be converted into common stock, at the then-effective
applicable conversion price, upon the occurence of both i) the full collateralization of the Secured Convertible Notes, and ii)
upon the closing of the sale of the Company’s common stock in a firm-commitment, underwritten public offering registered
under the Securities Act of 1933 (as amended), which results in aggregate proceeds to the Company of at least $20,000,000 at a
price per share exceeding such threshold as defined in the Company’s certificate of designation.
Anti-dilution
Holders of Series A-1 redeemable convertible preferred stock
are entitled to receive certain shares of common stock if and when the Company issues or sells any shares of common stock for
a consideration per share less than a certain threshold price.
Voting rights
Holders of redeemable convertible preferred stock are entitled
to one vote for each share of common stock into which their shares can be converted. Holders of Series A redeemable convertible
preferred stock together are entitled to appoint one director of the Company.
Restriction on Sale of Securities
On June 9, 2014, the Company’s
shareholders representing approximately 78% of issued common stock and preferred stock (the “Restricted Securities”)
in the Company, agreed to limitations on sale of those securities through November 30, 2014. Each such stockholder agreed (a)
to sell no Restricted Securities until July 1, 2014 unless the Company’s common stock price is above $6.00 per share; (b)
from July 1 to August 30, to only sell a maximum of approximately 6% per month of that shareholder's beneficially held Restricted
Securities if the Successor Company’s stock price is above $4.00 per share; (c) from September 1 through November 30, to
only sell a maximum of approximately 6% per month of that shareholder's beneficially held Restricted Securities; and (d) remain
able to sell any number of Restricted Securities if the Company’s stock price is above $6.00 per share. In addition, these
shareholders have agreed to not engage in any short selling during the restriction period.
Warrants
In January 2014, the Company issued warrants
to purchase 238,412 shares common stock at an exercise price of $3.04 to a placement agent. The warrants expire in January 2019.
The exercise price is subject to adjustment and the warrants may be exercised without cash consideration in lieu of forfeiting
a portion of shares. The fair value of the warrants at issuance was $348,963, estimated using the Black-Scholes option pricing
model. The fair value of the warrants was revalued at June 30, 2014 as discussed in Note 4.
8. Stock-Based
Compensation
Stock Plan
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"). 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 has reserved 3,605,495 shares of common stock for issuance over
the term of 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 new 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 June 30, 2013 (1)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Authorized
|
|
|
2,898,495
|
|
|
|
-
|
|
|
$
|
-
|
|
Options Granted
|
|
|
(1,293,720
|
)
|
|
|
1,293,720
|
|
|
$
|
2.27
|
|
Restricted Awards Granted
|
|
|
(318,128
|
)
|
|
|
318,128
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
1,286,647
|
|
|
|
1,611,848
|
|
|
|
|
|
Authorized
|
|
|
706,950
|
|
|
|
-
|
|
|
$
|
-
|
|
Options Granted
|
|
|
(902,298
|
)
|
|
|
902,298
|
|
|
$
|
3.37
|
|
Options assumed in Merger
|
|
|
(15,000
|
)
|
|
|
15,000
|
|
|
$
|
14.30
|
|
Restricted Awards Granted
|
|
|
(19,088
|
)
|
|
|
19,088
|
|
|
|
|
|
Restricted Awards Vested
|
|
|
-
|
|
|
|
(19,088
|
)
|
|
$
|
3.04
|
|
Balance at June 30, 2014
|
|
|
1,057,211
|
|
|
|
2,529,146
|
|
|
|
|
|
Total vested and expected to vest shares (options)
|
|
|
|
|
|
|
2,211,018
|
|
|
$
|
2.73
|
|
(1) Options and RSAs granted prior to the adoption of the plan were subsumed under the plan once it was
adopted.
The aggregate intrinsic value of stock options and RSAs outstanding,
vested and expected to vest, and exercisable at June 30, 2014 was $1,576,042, $685,284, and $113,187, respectively.
Prior to the plan being established, the Company granted the
equivalent of 7,167,585 RSAs to employees and non-employees in exchange for services with vesting specific to each individual
award. As of June 30, 2014, 2,730,198 shares were vested, and 424,170 shares were cancelled or forfeited (unvested).
The following table summarizes information with respect to
stock options outstanding at June 30, 2014:
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price Per
Share
|
|
|
Shares
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Share
Exercisable
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
$
|
|
|
|
1,293,720
|
|
|
|
9.45
|
|
|
|
2.27
|
|
|
|
241,960
|
|
|
$
|
2.27
|
|
|
$
|
|
|
|
742,298
|
|
|
|
9.83
|
|
|
|
3.04
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
|
160,000
|
|
|
|
9.95
|
|
|
|
3.85
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
2,196,018
|
|
|
|
9.61
|
|
|
|
2.65
|
|
|
|
241,960
|
|
|
$
|
2.27
|
|
Stock-based compensation expense
The fair value of employee stock options granted was estimated
using the following weighted-average assumptions for the six months ended June 30, 2014:
|
|
For the six months ended
June 30, 2014
|
|
Expected volatility
|
|
|
76
|
%
|
Risk free rate
|
|
|
1.72
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.75
|
|
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
industry peers, as the Company did not have any trading history for the Company's common stock. 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 and six months ended June 30, 2014 was as follows:
|
|
For the three months
ended June 30, 2014
|
|
|
For the six months ended
June 30, 2014
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
865,922
|
|
|
$
|
1,861,654
|
|
There was no stock based compensation in 2013.
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 June 30, 2014, there were total
unrecognized compensation costs of $4,678,804 related to these stock awards. These costs are expected to be recognized over a
period of approximately 1.6 years.
Non-employee stock-based compensation expense
For the six months ended June 30, 2014, the Company issued
options and restricted stock awards to non-employees in exchange for services with vesting specific to each individual award.
The Company did not issue options and restricted stock awards to non-employees for the six months ended June 30, 2013. Non-employee
stock-based compensation expense is recognized as the awards vest and totaled $594,103 and $1,380,903 for the three and six months
ended June 30, 2014, respectively. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied by
the number of shares awarded.
9. 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 six months ended June 30, 2014 and 2013.
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 June 30, 2014 and 2013.
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. Such limitations could result in the expiration
of net operating loss carryforwards prior to utilization.
The Company files U.S. Federal and
state tax returns. As of June 30, 2014 and 2013, all tax years remain open in most jurisdictions. The Company is not currently
under examination by income tax authorities in federal or state jurisdictions.
10. Commitments
and Contingencies
Operating lease
The Company previously leased offices in Cupertino,
California under a cancelable month-to-month operating lease. The Company sublet an office on a month-to-month basis to a related
party entity for approximately $551 per month during 2013. The majority stockholder of the related party is a stockholder of the
Company. The Company terminated its sublease agreement effective December 31, 2013.
In March 2014, the Company entered into
a non-cancelable thirty-eight month lease agreement for offices in Campbell, California commencing 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 Company paid a security deposit of $18,993 during the six months ended June 30, 2014. The future minimum payments
related to this lease are as follows for the years ending December 31:
Remainder of Year Ended 2014
|
|
$
|
46,236
|
|
2015
|
|
|
112,895
|
|
2016
|
|
|
116,201
|
|
2017
|
|
|
68,587
|
|
Total
|
|
$
|
343,919
|
|
Rent expense was approximately $20,286, and
$17,127 for the three months ended June 30, 2014 and 2013, respectively, and approximately $45,019, and $31,539 for the six months
ended June 30, 2014 and 2013, respectively.
Guaranteed payments
The Company has entered into agreements to purchase certain
patent assets. The agreements include future unconditional guaranteed payments of $21,000,000 representing purchase of patents
and minimum revenue sharing from the Company’s ability to license the purchased patents to other parties. The guaranteed
payments are accrued on the Company’s accompanying balance sheet as of June 30, 2014 at net present value using a discount
rate of 12%. The associated discount is being amortized using the effective interest method. Expenses related to minimum revenue
sharing payments are deferred as of June 30, 2014 and will be amortized in correlation with the future payment schedule. Minimum
revenue sharing payments are generally due sixty days after fully earned. Future guaranteed payments associated with these agreements
are payable as follows:
Years ending December 31:
|
|
|
|
|
2014
|
|
$
|
1,000,000
|
|
2015
|
|
|
4,000,000
|
|
2016
|
|
|
6,000,000
|
|
2017
|
|
|
10,000,000
|
|
Less: discount to present value
|
|
|
(4,017,528
|
)
|
Guaranteed payments, net of discount
|
|
$
|
16,982,472
|
|
11. Subsequent
Events
On July 14, 2014, Inventergy, Inc. filed
a complaint (Inventergy, Inc. v. GENBAND, Inc.) alleging patent infringement of 5 patents owned by Inventergy, Inc. against GENBAND,
Inc., in the Eastern District of Texas, Tyler Division (where GENBAND is headquartered). The lawsuit seeks damages and costs,
pre- and post-judgment interest, attorneys’ fees and the award of a post-judgment royalty. Inventergy, Inc. has not yet
served the complaint, in favor of newly expanded discussions with GENBAND.
On August 8, 2014, Inventergy, Inc.,
a wholly-owned subsidiary of the Company closed on an unsecured loan of $500,000 (with an effective date of August 1, 2014)
from First Republic Bank (the “Unsecured Loan”). The Unsecured Loan accrues interest at a rate of 1.3% per annum
and such interest is due and payable on a monthly basis with the first such payment due on September 1, 2014. The Company
will pay to First Republic Bank the principal amount of the Unsecured Loan plus all accrued but unpaid interest on or before
November 1, 2014. The Company may prepay the principal of the Unsecured Loan at any time prior to expiration of the term of
such Unsecured Loan. If the Company does not make timely payment of any amount due and payable to the lender, the Company
will be charged 10% interest on the unpaid portion of the regularly scheduled payment. Our Chief Executive Officer and
Chairman of our Board of Directors, Joseph W. Beyers, has individually guaranteed payment of the Unsecured Loan. Such
guarantee has also been secured by assets owned individually by Mr. Beyers. Upon an event of default (which includes failure
to make any payment under the Unsecured Loan) the interest rate due and payable on the Unsecured Loan will increase by 8% and
First Republic Bank may declare the entire unpaid principal and interest under the Unsecured Note and all accrued but unpaid
interest immediately due.