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
For the Three Months Ended March 31,
2016 and 2015
1. Organization
Inventergy Global, Inc. (“we”,
“us”, “our” “Inventergy” or the “Company”) is an intellectual property (IP)
investment and licensing company that helps leading technology 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 changed its name to
“Inventergy Global, Inc.” The Company is headquartered in Campbell, California.
The Company operates in a single industry segment.
In June 2014, in conjunction with the Merger, the Company effected
a one-for-two reverse split of its common stock. In December 2015, the Company effected a one-for-ten reverse split of its common
stock. All share and per share amounts are reflective of these splits.
2. Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements have been prepared on
the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. The accompanying interim financial statements are condensed and
should be read in conjunction with the Company’s latest annual financial statements. It is management’s opinion that
all adjustments necessary for a fair presentation of the results for the interim periods have been made, and all such adjustments
were of a normal recurring nature.
Liquidity and Capital Resources
At March 31, 2016, the Company had an accumulated deficit since
inception of $55,765,266 (including a net loss for the quarter ended March 31, 2016 of $491,837) and had a negative working capital
of $9,442,447. As of May 9, 2016, we had remaining cash of $723,940 (which includes $200,000 of minimum cash reserves (see discussion,
Note 5), which is intended to serve as additional collateral pursuant to our agreement (the “Fortress Agreement”) with
Fortress Investment Group, LLC and its affiliates ("Fortress"). These factors raise substantial doubt about our ability
to continue as a going concern. Toward that end, the Company entered into its first license agreement in February 2015 (under which
we expect to receive an aggregate of $2,000,000 over the period of the license), received net proceeds from an additional drawdown
from the Fortress Agreement of $1,126,900, received net proceeds of $1,835,000 from the sale of common stock in April 2015, and
received gross proceeds of $4,000,000 from the sale of two patent families in June 2015. In addition, the Company received gross
payments for patent licensing of $1,500,000 during 2015 and received net proceeds of approximately $2,175,000 in January 2016 from
the sale of Series C preferred stock. We will seek to continue our operations primarily with income received through our patent
monetization efforts, including licensing revenues and patent sales, but we will likely need to seek additional financing through
loans, which will be subject to the restrictions of the Fortress Agreement, and/or the sale of securities. If we are required to
raise additional capital financing, we cannot assure you that we will be able to obtain such additional capital on terms acceptable
to us or at all. Additionally, if we raise capital through the issuance of equity, our current stockholders will experience dilution.
The business will need significant additional capital
and/or patent monetization revenues to continue to monetize current patent portfolios and will need significant additional
capital to purchase any new patent portfolios and execute the Company’s longer term business plan. Based on the
Company’s internal planning for the year ending December 31, 2016, which anticipates certain cash inflows and revenue
from our patent sales and licensing pipeline which are expected to close during 2016, estimated cash expenditures for
operating expenses will be approximately $6.2 million for the next twelve months, consisting of approximately $1.9 million in
employee related costs, $0.8 million in patent maintenance and prosecution fees and $3.5 million in other operational costs.
In addition, we anticipate making $7.5 million of payments relating to the acquisition of our patent portfolios, $2.2 million
of which are fixed payments and $5.3 million are variable payments based on assumed patent monetization revenues. Also, debt
servicing fees payable to Fortress will be approximately $5.8 million. 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 three months.
To date, the Company has acquired an aggregate of approximately
755 currently active patents and patent applications for aggregate purchase payments of $12,109,118. We are required to make guaranteed
payments to one of the sellers of the patents totaling $2,200,000 in 2016. See Note 9 herein for further information regarding
these guaranteed payments.
The Company will also require additional financing for the purchase
of additional patent portfolios and to fund its monetization efforts if new attractive opportunities are found. If the Company
acquires additional large patent portfolios, in addition to the cost of the upfront purchase fee (if any) it is likely that additional
resources (business, technical or legal) may need to be hired to effectively monetize the portfolio. Resources to analyze new portfolios
are already part of the current staffing of the Company. Litigation costs are based primarily on a contingent fee structure (expected
to average less than 20% of license revenue for a portfolio) and as such do not scale significantly with the acquisition of new
portfolios. Acquisitions or investments may be consummated through the use of cash, equity, seller financing, third party debt,
earn-out obligations, revenue sharing, profit sharing, or some combination of two or more of these types of consideration. Due
to the current state of the credit markets, the Company is not able to predict with any certainty whether it could obtain debt
or equity financing to provide additional sources of liquidity, should the need arise, at favorable rates.
Management estimates and related risks
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures
of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses
during the reported periods. Although these estimates reflect management's best estimates, it is at least reasonably possible that
a material change to these estimates could occur in the near term.
Cash and cash equivalents
The Company considers all highly liquid financial instruments
with original maturities of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable, net
Accounts receivable are stated net of allowances for doubtful
accounts. The Company typically grants standard credit terms to customers in good credit standing. The Company generally reserves
for estimated uncollectible accounts on a customer-by-customer basis, which requires the Company to judge 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 these estimates on a monthly basis. Any changes in estimate, which can
be significant, are included in earnings in the period in which the change in estimate occurs. As of March 31, 2016, the Company
has established a reserve of $22,350 for uncollectable accounts.
Property and equipment, net
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets (or the term of the lease, if shorter), which range from three to five years. Routine maintenance and repair
costs are expensed as incurred. The costs of major additions, replacements and improvements are capitalized. Upon retirement or
sale, the cost of assets disposed of and the related accumulated depreciation is removed and any resulting gain or loss is credited
or charged to operations.
Patents, net
Patents, including acquisition costs, are stated at cost, less
accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective
assets, generally 7 - 10 years. Upon retirement or sale, the cost of assets disposed and the related accumulated amortization are
removed from the accounts and any resulting gain or loss is credited or charged to operations. Patents are utilized for the purpose
of generating licensing revenue.
Intangible Assets
Intangible assets consist of certain contract rights acquired
in the Merger. Intangible assets are amortized on a straight-line basis over their estimated useful life of five years.
Goodwill
Goodwill represents the excess of the aggregate purchase price
over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill
will be tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company determined that
it is a single reporting unit for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill,
the Company estimates the value of the reporting unit using independent valuation and/or other market validation of certain asset
values as the best evidence of fair value. This fair value is then compared to the carrying value of the reporting unit.
Impairment of long-lived assets
The Company evaluates the carrying value of long-lived assets
on an annual basis, or more frequently whenever circumstances indicate a long-lived asset may be impaired. When indicators of impairment
exist, the Company estimates future undiscounted cash flows attributable to such assets. In the event cash flows are not expected
to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair value.
Concentration of credit risk
Financial instruments that potentially subject the Company to
a concentration of credit risk consist of cash and cash equivalents. Cash and cash equivalents are deposited with high quality
financial institutions. Periodically, such balances are in excess of federally insured limits.
Stock-based compensation
The Company has a stock option plan under which incentive and
non-qualified stock options and restricted stock awards (“RSAs”) are granted primarily to employees. All share-based
payments to employees, including grants of employee stock options and RSAs, are recognized in the financial statements based on
their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are reported
as a financing cash flow.
The Company estimates the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense ratably over the requisite service periods in the Company’s statements of comprehensive income
or loss. The Company has estimated the fair value of each option award as of the date of grant using the Black-Scholes option pricing
model. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied by the number of shares awarded.
The awards issued consist of fully-vested stock awards, performance-based restricted shares, and service-based restricted shares.
Expenses related to stock-based awards issued to non-employees
are recognized at fair value on a recurring basis over the expected service period. The Company estimates the fair value of the
awards using the Black-Scholes option pricing model.
Income taxes
The Company accounts for income taxes using the asset and liability
method whereby deferred tax asset and liability account balances are determined based on temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. A valuation allowance is established when it is more likely than not that deferred tax assets will not
be realized. Realization of deferred tax assets is dependent upon future pretax earnings, the reversal of temporary differences
between book and tax income, and the expected tax rates in future periods. The Company has a full valuation allowance on all deferred
tax assets.
The Company is required to evaluate the tax positions taken
in the course of preparing its tax returns to determine whether tax positions are “more-likely-than-not” of being sustained
by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded
as a tax expense in the current year. The amount recognized is subject to estimate and management judgment with respect to the
likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position
or for all uncertain tax positions in the aggregate could differ from the amount that is initially recognized.
Fair value measurements
The Company defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs
within the fair value hierarchy. Observable inputs are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s own assumptions about what market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances.
The following methods and assumptions were used to estimate
the fair value of financial instruments:
|
·
|
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
|
|
·
|
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
|
|
·
|
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
The category within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
Recently Issued Accounting Standards
In May 2014, the FASB issued a new financial accounting standard
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes current revenue recognition guidance. ASU 2014-09 Revenue from Contracts with Customers is effective for annual
reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption
is not permitted. We are currently evaluating the impact of this accounting standard.
In August 2014, the FASB issued a new accounting standard which
requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern
for each annual and interim reporting period and to provide related footnote disclosures in certain circumstances. ASU 2014-15
Presentation of Financial Statements - Going Concern is effective for annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of
this accounting standard.
In April 2015, the FASB issued a new accounting
standard which changes the presentation of debt issuance costs in financial statements. Under the new standard, an entity
presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.
Amortization of the costs is reported as interest expense. The accounting standard is effective for reporting periods
beginning after December 15, 2015. The Company adopted this standard for the three months ended March 31, 2016, and its
adoption did not have a material impact on our financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842).” The amendments under this pronouncement will change the way all leases with a duration of one year of more
are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use
asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s
right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s
obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases
are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized
leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement
of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in
the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting
periods, beginning after December 15, 2018. The Company is currently evaluating the impact this standard will have on its policies
and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on its consolidated financial
statements.
3. Patents
Patent intangible assets consisted of the following at March
31, 2016:
|
|
Weighted
Average
Useful Life
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
6.65 years
|
|
$
|
11,893,745
|
|
|
$
|
(3,601,569
|
)
|
|
$
|
8,292,176
|
|
Total patent intangible assets
|
|
|
|
$
|
11,893,745
|
|
|
$
|
(3,601,569
|
)
|
|
$
|
8,292,176
|
|
The Company expects its amortization expenses to be approximately
$1,510,977 per year for each of the next four years, $1,481,270 in 2020, then in declining annual amounts through 2023.
4. Fair Value Measurements
The following tables summarize the Company's assets and liabilities
measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015:
March 31, 2016
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Common stock warrants
|
|
$
|
6,940
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,940
|
|
Total
|
|
$
|
6,940
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,940
|
|
December 31, 2015
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Common stock warrants
|
|
$
|
4,145
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,145
|
|
Total
|
|
$
|
4,145
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,145
|
|
As discussed in Note 6, in January 2014, the Company issued
warrants to purchase 23,858 shares of common stock at an exercise price per share of $30.40 to a placement agent. The exercise
price is subject to adjustment and has been subsequently adjusted to $22.70 per share. The warrants may be exercised without cash
consideration in lieu of forfeiting a portion of shares. Accordingly, the Company recognized a derivative liability at fair value
upon issuance of the warrants. The Company estimated the fair value of the derivative liability using the Black-Scholes option
pricing model. The fair value of the derivative liability as of March 31, 2016 was estimated using the following assumptions:
Expected volatility
|
|
|
65
|
%
|
Risk free rate
|
|
|
0.86
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
2.8226
|
|
The assumptions utilized were derived in a similar manner as
discussed in Note 7 related to the fair value of stock options.
The Company revalues the derivative liabilities at the end of
each reporting period using the same models as at issuance, updated for new facts and circumstances, and recognizes the change
in the fair value in the statements of operations as other income (expense). The following sets forth a summary of changes in fair
value of the Company’s Level 3 liabilities measured on a recurring basis for the three months ended March 31, 2016 and March
31, 2015:
|
|
Common
Stock
Warrants
|
|
Balance at December 31, 2014
|
|
$
|
30,278
|
|
Change in fair value
|
|
|
(6,886
|
)
|
Balance at March 31, 2015
|
|
$
|
23,392
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
4,145
|
|
Change in fair value
|
|
|
2,795
|
|
Balance at March 31, 2016
|
|
$
|
6,940
|
|
|
|
|
|
|
5. Borrowing Arrangements
On September 23, 2014, the Company entered into a Share Purchase
Agreement with Joseph W. Beyers, the Company’s Chairman and Chief Executive Officer, pursuant to which the Company agreed
to issue Mr. Beyers up to 23,364 shares of our common stock, at a purchase price of $21.40 per share for aggregate consideration
to us of up to $500,000. Pursuant to the terms of such agreement and concurrently with the execution of the agreement, Mr. Beyers
made an initial payment of $300,000 to the Company towards the aggregate purchase price. The shares were only to be issued if we
did not obtain $6 million or more in debt financing within 10 business days of the execution of the agreement. As a result of the
Fortress Agreement the Company is required to return the $300,000 in cash previously prepaid by Mr. Beyers and the Company will
not issue any securities as a result of the Share Purchase Agreement. During the year ended December 31, 2015, the Company’s
Board of Directors approved the application of $100,000 of this amount towards the purchase of shares of the Company’s common
stock at a price per share equal to the greater of $4.60 per share or a 15% premium to the market price. As a result, on June 26,
2015, the Company sold 21,740 shares of previously unissued common stock at a price of $4.60 per share to the Chief Executive Officer.
As of March 31, 2016, repayments of $125,000 have been made to the Chief Executive Officer and the remaining balance of $75,000
has been recorded as a related party loan payable.
On October 1, 2014 the Company and its wholly-owned subsidiary,
Inventergy, Inc., entered into the Revenue Sharing and Note Purchase Agreement with entities affiliated with Fortress Investment
Group, LLC, including a Note Purchaser (as defined below) who also serves as collateral agent (the “Collateral Agent”)
and a Revenue Participant (as defined below). On February 25, 2015, the Company, Inventergy, Inc. and Fortress entered into the
Amended and Restated Revenue Sharing and Note Purchase Agreement (the “Amended Fortress Agreement”). Pursuant to the
Fortress Agreement, the Company issued an aggregate of $12,199,500 in notes (the “Original Fortress Notes”) to the
purchasers identified in the Fortress Agreement (the “Note Purchasers”). As a result of the issuance of the Original
Fortress Notes and the sale of the Fortress Shares (as defined below), after the payment of all purchaser-related fees and expenses
relating to the issuance of the Original Fortress Notes and Fortress Shares, the Company received net proceeds of $11,137,753 (less
issuance costs of $476,868). The Company used the net proceeds to pay off the Secured Convertible Notes and other indebtedness
and for general working capital purposes. The unpaid principal amount of the Fortress Notes bears cash interest equal to LIBOR
plus 7%. In addition, a 3% per annum paid-in-kind (“PIK”) interest will be paid by increasing the principal amount
of the Fortress Notes by the amount of such interest. The PIK interest shall be treated as principal of the Fortress Notes for
all purposes of interest accrual or calculation of any premium payment.
The principal of the Fortress Notes and all unpaid interest
thereon or other amounts owing hereunder are due in full in cash by the Company on September 30, 2017 (the “Maturity Date”).
The Company may prepay the Fortress Notes in whole or in part. In addition, upon the earlier of the date on which the all obligations
of the Fortress Notes are paid in full, or become due the Company will pay to the Note Purchasers a termination fee equal to $853,965.
This was accounted for as a discount on notes payable. As of March 31, 2016, the Company has repaid $2,805,757 of the Fortress
Notes.
Upon receipt of any revenues generated from the monetization
of the Patents (the “Monetization Revenue”) from the patents identified in the Fortress Agreement (the “Patents”),
the Company is required to apply, towards its obligations pursuant to the Fortress Notes, 100% of the difference between (a) any
revenues generated from the Monetization Revenue less (b) any litigation or licensing related third party expenses (including fees
paid to the original patent owners) reasonably incurred by the Company to earn Monetization Revenue, subject to certain limits
(such difference defined as “Monetization Net Revenues”).
The Company shall make monthly amortization payments (the “Amortization
Payments”) in an amount equal to (x) the then outstanding principal amount divided by (y) the number of months left until
the Maturity Date. Such Amortization Payments were originally due to commence on the last business day of October 2015, but were
deferred to the last business day of June 2016 by amendments to the Fortress Agreement.
In connection with the execution of the Fortress Agreement,
on October 1, 2014, the Company paid to the Note Purchasers a structuring fee equal to $385,000. This was accounted for as a discount
on notes payable.
Pursuant to the Amended Fortress Agreement, the Company
granted to the purchasers identified in the Fortress Agreement (the “Revenue Participants”) a right to receive a
portion of the Company’s Monetization Revenues totaling $11,284,538 (the “Revenue Stream”). The Revenue
Participants will not receive any portion of the Revenue Stream until all obligations under the Original Fortress Notes are
paid in full. Following payment in full of the Original Fortress Notes, the Company will pay to the Revenue Participants
their proportionate share of the Monetization Net Revenues. The Revenue Participant’s proportionate share is equal to
75% of Monetization Net Revenues until $5,000,000 has been paid to the Revenue Participants, then 50% of Monetization Net
Revenues until the remaining $6,284,538 has been paid to the Revenue Participants. All Revenue Stream Payments will be
payable on a monthly basis in arrears. The rights of the Revenue Participants to the Revenue Stream are secured by all of the
Company’s current patent assets and the Cash Collateral Account, in each case junior in priority to the rights of the
Note Purchasers. In connection with the Revenue Participants’ right to receive a portion of the Company’s
Monetization Revenues, the Company has recorded a net liability of $3,807,979, which represents the amount of the expected
Monetization Revenues, discounted 18% over the expected life of the revenue share agreement. In conjunction with the most
recent amendment to the Amended Fortress Agreement dated March 1, 2016, the Company determined that the change in expected
cash flows was greater than 10% as compared to the previous agreement and, therefore, a debt extinguishment was deemed to
have occurred. When recording the new present value of the debt and revenue share, which was computed using a discount rate
of 18%, a gain on debt extinguishment of $2,434,661 was recognized.
As part of the Fortress Agreement, the Company and the Collateral
Agent entered into a Patent License Agreement (the “Patent License Agreement”) under which the Company agreed to grant
to the Collateral Agent a non-exclusive, royalty-free, worldwide license to certain of its Patents (the “Licensed Patents”),
which can only be used by the Collateral Agent following an occurrence and during the continuance of an event of default of the
Fortress Agreement. When the Original Fortress Notes and Revenue Stream are paid in full, the Patent License Agreement will terminate.
As part of the transaction, the Company granted the Note Purchasers
and Revenue Participants a first priority security interest in all of the Company’s currently owned patent assets and all
proceeds thereof, as well as a general security interest in all of the assets of the Company and its subsidiaries. The Note Purchasers
and Revenue Participants do not have a security interest in any future patent purchases by the Company.
Under the Fortress Agreement, the Company is required to maintain
a minimum $1,000,000 in cash reserves. Failure to maintain that minimum cash balance can constitute an event of default under the
Fortress Agreement. If we were to default under the Fortress Agreement and were unable to obtain a waiver for such a default, interest
on the obligations would accrue at an increased rate. In the case of a default, Fortress could accelerate our obligations under
the Fortress Agreement. On March 29, 2016, the Company and Fortress entered into an additional amendment to the Fortress Agreement
(the “Third Amendment”), under which, among other terms, Amortization Payments are not required for a four-month period
and will re-commence on the last business day of June 2016, and the requirement to maintain a minimum in cash reserves is reduced
from $1,000,000 to $200,000 for the same four-month period, increasing to $1,000,000 effective July 1, 2016.
Future debt payments owed under the Fortress Agreement are as
follows:
Years ending December 31:
|
|
|
|
2016
|
|
$
|
4,396,502
|
|
2017
|
|
|
5,768,163
|
|
Total
|
|
$
|
10,164,665
|
|
Unregistered Sales of Equity Securities.
In connection with the execution of the Fortress Agreement,
the Company issued 50,000 shares of its common stock at $20.00 per share to the Revenue Participants (the “Fortress Shares”)
for an aggregate purchase price of $1,000,000. The Fortress Shares were issued pursuant to a subscription agreement dated October
1, 2014. The shares were issued by the Company under the exemption from registration afforded by Section 4(a)(2) of the Securities
Act and Regulation D promulgated thereunder, as they were issued to accredited investors, without a view to distribution, and were
not issued through any general solicitation or advertisement. In addition, the Company issued to Fortress seven-year warrants for
the purchase of 50,000 shares of common stock at an exercise price of $11.40 per share. As part of an amendment to the Fortress
Agreement dated November 30, 2015, the exercise price of these warrants was changed to $2.54 per share.
In connection with the closing of the transactions contemplated
by the Fortress Agreement, the Company paid a closing fee of $330,000. As discussed in Note 6, the Company also issued a five-year
warrant to purchase 24,750 shares of common stock at an exercise price of $20.00 to National Securities Corporation, who acted
as advisor to the Company with respect to the transaction. The warrant meets the requirements to be accounted for as an equity
warrant. The Company estimated the fair value of the warrant to be $153,759, using the Black-Scholes option pricing model. The
fair value of the warrant as of November 1, 2014 was estimated using the following assumptions:
Expected volatility
|
|
|
60
|
%
|
Risk free rate
|
|
|
1.62
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.00
|
|
The assumptions utilized were derived in a similar manner as
discussed in Note 7 related to the fair value of stock options.
6. Stockholders’ Equity
Common stock
The Company is authorized to issue up to 110,000,000 shares,
of which 100,000,000 shares have been designated as common stock and 10,000,000 shares have been designated 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 they own.
On March 31, 2015, the Company entered
into a securities purchase agreement (“Purchase Agreement”) with certain investors (the “Purchasers”) pursuant
to which the Company sold 467,392 shares of its common stock (the “Shares”) at a purchase price of $4.60 per share
resulting in gross proceeds to the Company of $2.15 million (the “Registered Direct Offering”). The Registered Direct
Offering was effected as a takedown off the Company’s shelf registration statement on Form S-3 (File No. 333-199647),
which was declared effective on November 10, 2014, and a related prospectus supplement filed on April 2, 2015 in connection with
the Registered Direct Offering. The Registered Direct Offering closed on April 6, 2015.
In connection with the Registered Direct
Offering, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Ladenburg Thalmann
& Co. Inc. (the “Placement Agent”) to act as its exclusive placement agent. Pursuant to the Placement Agent Agreement,
the Company paid to the Placement Agent $106,000 in cash, issued to the Placement Agent 5,762 five-year warrants with an exercise
price of $5.75 per share (the “RD Warrants”) and reimbursed the Placement Agent for certain expenses. In addition,
the Company paid to Laidlaw & Company (UK) Ltd. $50,000 in cash and issued 10,870 RD Warrants in connection with certain tail
fees owed to them as a result of the Registered Direct Offering. The RD Warrants allow for cashless exercise in certain situations
and contain piggyback registration rights for the seven year period commencing on March 31, 2015.
In
connection with the Registered Direct Offering, the Company entered into a separate waiver agreement with one of its current stockholders
pursuant to which the holder waived its right to participate in the Registered Direct Offering (the “Right
of Participation”). In consideration for such waiver, the Company paid to the holder $35,000 in cash and waived any trading
volume limitations or other lock-up provisions or restrictions imposed on the holder pursuant to an existing securities purchase
agreement and an existing lock-up agreement the holder entered into with the Company. The Company also agreed that in the event
that the Company obtains a consent, release amendment, settlement or waiver of the Right of Participation from any other
stockholder holding such right in connection with the Registered Direct Offering on more favorable terms than in the
waiver agreement prior to expiration of the Right of Participation of the holder, the holder will be entitled to the benefit of
the more favorable terms. The holder’s Right of Participation terminated on September 8, 2015.
Shares of common stock reserved for future issuance were as
follows as of March 31, 2016:
Series C convertible preferred stock
|
|
|
1,666,668
|
|
Options to purchase common stock
|
|
|
245,595
|
|
Shares reserved for issuances pursuant to 2014 Stock Plan
|
|
|
195,723
|
|
Warrants
|
|
|
1,596,235
|
|
Total
|
|
|
3,704,221
|
|
Convertible preferred stock
Convertible preferred stock as of March 31, 2016 consisted of
the following:
Convertible
Preferred Stock
|
|
Original
Issue Price
|
|
|
Shares
Designated
|
|
|
Shares
Originally
Issued
|
|
|
Shares
Outstanding
|
|
|
Liquidation
Preference
|
|
Series A-1
|
|
$
|
0.0100
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
0
|
|
|
$
|
-
|
|
Series A-2
|
|
$
|
1.6996
|
|
|
|
1,176,748
|
|
|
|
1,176,748
|
|
|
|
0
|
|
|
$
|
-
|
|
Series B
|
|
$
|
1,000.00
|
|
|
|
2,750
|
|
|
|
2,750
|
|
|
|
0
|
|
|
$
|
-
|
|
Series C
|
|
$
|
1,000.00
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
$
|
2,500,000
|
|
On January 21, 2016, the Company entered into a
securities purchase agreement (the “Purchase Agreement”) with certain institutional accredited investors (the
“Investors”). Pursuant to the Purchase Agreement, the Company sold to the Investors in a private placement 2,500
shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”), each having a stated value of
$1,000, for aggregate gross proceeds of $2.5 million. The Series C Preferred Stock is 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 is 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
not included in Net Loss Attributable to Common Shareholders. After July 26, 2016, the conversion price will be equal to the
lesser of (a) the conversion price then in effect or (b) 65% of the volume weighted average price of the Company’s
common stock for ten consecutive days prior to the applicable conversion date. The Series C Preferred Stock contains
provisions providing for an adjustment in the conversion price upon the occurrence of certain events, including stock splits,
stock dividends, dilutive equity issuances and fundamental transactions. The Company may redeem some or all of the Series C
Preferred Stock for cash as follows: (i) on or prior to March 26, 2016, in an amount equal to 126% of the aggregate stated
value then outstanding, (ii) after March 26, 2016 and on or prior to July 26, 2016, in an amount equal to 144% of the
aggregate stated value then outstanding and (iii) after July 26, 2016, in an amount equal to 150% of the aggregate stated
value then outstanding.
Each Investor also received a common stock purchase
warrant (the “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 Warrants are exercisable for a
term of five years commencing six months after the closing of the transaction at a cash exercise price of $1.79 per share. In
the event that the shares underlying the Warrants are not subject to a registration statement at the time of exercise,
the Warrants may be exercised on a cashless basis after six months from the issuance date. The Warrants also contain
provisions providing for an adjustment in the exercise price upon the occurrence of certain events, including stock splits,
stock dividends, dilutive equity issuances (so long as the Series C Preferred Stock is outstanding) and
fundamental transactions. Notwithstanding the forgoing, until the Company obtains Shareholder Approval (as defined below),
the exercise price may not be reduced as a result of a dilutive equity issuance below $1.79 per share, subject to adjustment
for stock splits, stock dividends and similar events (the “Adjustment Floor”).
The Purchase Agreement requires the
Company to hold a special meeting of stockholders to seek the approval of the holders of its common stock for the issuance of the
number of shares of common stock issuable upon the conversion of the Series C Preferred Stock in excess of 19.99% of the outstanding
Common Stock and the removal of the Adjustment Floor within 120 days of the execution of the Purchase Agreement (the “Shareholder
Approval”). Until the Company obtains the Shareholder Approval, the conversion of the Series C Preferred Stock is limited
to 19.99% of the currently outstanding common stock. Additionally, until the Series C Preferred Stock is no longer outstanding,
the Investors may participate in future offerings for up to 50% of the amount of such offerings.
The Company utilized a Placement Agent who received a commission
equal to 10% of the gross proceeds of the offering for an aggregate commission of $250,000. The Placement Agent will also be entitled
to receive a cash fee from the exercise of the Warrants. The Company paid for the Investors’ legal expenses of $25,000, and
paid legal fees of $50,000 to the Company’s outside counsel. The securities offered have not been registered under the Securities
Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from
registration requirements.
In October 2015, the Company entered into agreements with holders
of all of the outstanding Series A and Series B Preferred Stock pursuant to which the holders agreed to exchange all of their outstanding
shares of Series A and Series B Preferred Stock for common stock. As a result, as of March 31, 2016, there were no remaining shares
of Series A or Series B Preferred Stock outstanding. The previously-outstanding Preferred Stock amounts, along with the newly-issued
common stock amounts, are as follows:
|
|
Outstanding as of Sept.
30, 2015
|
|
|
Newly-Issued Common Stock
|
|
Series A-1
|
|
|
212,466
|
|
|
|
141,262
|
|
Series A-2
|
|
|
161,355
|
|
|
|
28,518
|
|
Series B
|
|
|
1,102
|
|
|
|
420,956
|
|
Warrants
In January 2014, the Company issued warrants to purchase 23,842
shares of common stock at an exercise price of $30.40 to a placement agent. The warrants expire in January 2019. The exercise price
was reduced to its floor of $22.70 as a result of the sale of the Fortress Shares. The warrants may be exercised without cash consideration
in lieu of forfeiting a portion of its 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 March 31, 2016 as discussed in Note 4.
On November 1, 2014 the Company issued 27,750 warrants to purchase
common stock with a weighted average exercise price of $20.70. The fair value of the warrants at issuance was $164,196.
Common stock warrants outstanding as of March 31, 2016 are listed
as follows:
Warrants
Outstanding
|
|
|
Remaining Contractual
Life (years)
|
|
|
Weighted Average
Exercise
|
|
|
1,416,668
|
|
|
|
4.81
|
|
|
$
|
1.79
|
|
|
50,000
|
|
|
|
5.92
|
|
|
$
|
2.54
|
|
|
10,870
|
|
|
|
4.02
|
|
|
$
|
4.60
|
|
|
5,762
|
|
|
|
4.02
|
|
|
$
|
5.75
|
|
|
2,699
|
|
|
|
3.91
|
|
|
$
|
20.00
|
|
|
24,750
|
|
|
|
3.59
|
|
|
$
|
20.00
|
|
|
23,858
|
|
|
|
2.83
|
|
|
$
|
22.70
|
|
|
58,628
|
|
|
|
0.25
|
|
|
$
|
26.60
|
|
|
3,000
|
|
|
|
1.59
|
|
|
$
|
26.60
|
|
|
1,596,235
|
|
|
|
4.62
|
|
|
$
|
3.43
|
|
7. Stock-Based Compensation
In November 2013, the Board of Directors authorized the 2013
Stock Plan (such plan has since been adopted by the stockholders of the Company in connection with the Merger and renamed the “Inventergy
Global, Inc. 2014 Stock Plan,” the “Plan” or the “2014 Plan”). Under the Plan, the Board of Directors
may grant incentive stock awards to employees and directors, and non-statutory stock options to employees, directors and consultants,
as well as restricted stock. The Plan provides for the grant of stock options, restricted stock, and other stock-related and performance
awards that may be settled in cash, stock or other property. The Board of Directors originally reserved 360,545 shares of common
stock for issuance over the term of the Plan and, in September 2015, 170,000 shares were added to the plan. The exercise price
of an option cannot be less than the fair value of one share of common stock on the date of grant for incentive stock options or
non-statutory stock options. The exercise price of an incentive stock option cannot be less than 110% of the fair value of one
share of common stock on the date of grant for stockholders owning more than 10% of all classes of stock. Options are exercisable
over periods not to exceed ten years (five years for incentive stock options granted to holders of 10% or more of the voting stock)
from the grant date. Options may be granted with vesting terms as determined by the Board of Directors which generally include
a one to five year period or performance conditions or both. The pre-existing options were subsumed under the Plan.
Common stock option and restricted stock award activity under
the Plan was as follows:
|
|
|
|
|
Options and RSAs Outstanding
|
|
|
|
Shares Available
for Grant
|
|
|
Number of
Shares
|
|
|
Weighted Average Exercise
Price Per Share
|
|
Balance at December 31, 2015
|
|
|
71,431
|
|
|
|
369,887
|
|
|
$
|
4.64
|
|
Options forfeited
|
|
|
123,096
|
|
|
|
(123,096
|
)
|
|
$
|
3.10
|
|
Options expired
|
|
|
1,196
|
|
|
|
(1,196
|
)
|
|
$
|
13.22
|
|
Balance at March 31, 2016
|
|
|
195,723
|
|
|
|
245,595
|
|
|
$
|
5.36
|
|
Total vested and expected to vest shares (options)
|
|
|
|
|
|
|
245,595
|
|
|
$
|
5.36
|
|
Total vested shares (options)
|
|
|
|
|
|
|
75,385
|
|
|
$
|
10.47
|
|
As of March 31, 2016, all of the restricted stock granted under
the Plan had vested. The aggregate intrinsic value of stock options outstanding, stock options vested and expected to vest, and
exercisable at March 31, 2016 was zero, since all of the options were out-of-the-money at March 31, 2016.
Prior to the Plan being established, the Company granted the
equivalent of 1,413,904 RSAs to employees and non-employees in exchange for services with vesting specific to each individual award.
As of March 31, 2016, 187,684 of these RSAs were subject to rescission by the Company, and 73,849 RSAs had been cancelled or forfeited.
As part of the Merger, 1,500 fully vested options with an exercise
price of $143.00, were assumed by Inventergy Global, Inc., and remained outstanding as of March 31, 2016.
The following table summarizes information with respect to stock
options outstanding at March 31, 2016:
Options Outstanding
|
|
|
Options Vested
|
|
Exercise
Price Per
Share
|
|
|
Shares
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
Exercisable
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
$
|
3.10
|
|
|
|
216,851
|
|
|
|
9.36
|
|
|
$
|
3.10
|
|
|
|
46,641
|
|
|
$
|
3.10
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
|
1.08
|
|
|
$
|
5.60
|
|
|
|
2,500
|
|
|
$
|
5.60
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
|
1.08
|
|
|
$
|
11.40
|
|
|
|
17,674
|
|
|
$
|
11.40
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
|
1.08
|
|
|
$
|
30.40
|
|
|
|
7,070
|
|
|
$
|
30.40
|
|
$
|
143.00
|
|
|
|
1,500
|
|
|
|
0.21
|
|
|
$
|
143.00
|
|
|
|
1,500
|
|
|
$
|
143.00
|
|
|
|
|
|
|
245,595
|
|
|
|
8.39
|
|
|
$
|
5.36
|
|
|
|
75,385
|
|
|
$
|
10.47
|
|
Stock-based compensation expense
The fair value of employee stock options granted was estimated
using the following weighted-average assumptions for the three months ended March 31, 2016 and 2015:
|
|
2016
|
|
2015
|
|
Expected volatility
|
|
n/a
|
|
|
64.00
|
%
|
Risk free rate
|
|
n/a
|
|
|
1.48
|
%
|
Dividend yield
|
|
n/a
|
|
|
0.00
|
%
|
Expected term (in years)
|
|
n/a
|
|
|
6.06
|
|
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 months ended
|
|
|
For the three months ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
General and administrative
|
|
$
|
130,358
|
|
|
$
|
472,274
|
|
|
|
|
|
|
|
|
|
|
No income tax benefit has been recognized related to stock-based
compensation expense and no tax benefits have been realized from the exercise of stock awards. As of March 31, 2016, there were
total unrecognized compensation costs of $701,406 related to these stock awards. These costs are expected to be recognized over
a period of approximately 1.57 years.
Non-employee stock-based compensation expense
The Company has 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 $58,552 and $94,013 for the three months ended March 31, 2016 and March 31, 2015,
respectively. The fair value of RSAs is calculated as the fair value of the underlying stock multiplied by the number of shares
awarded.
Cancellation of Options
On March 25, 2015, the Company cancelled certain unvested options
(totaling 143,266) previously granted to employees and directors under the Company’s 2014 Stock Plan, which had exercise
prices ranging from $20.50 to $38.50, 10 year terms and 1 to 4 year vesting periods. In addition, on March 25, 2015, the Company
issued new options to the same employees and directors under the 2014 Stock Plan. The Company granted an aggregate of 126,985 options
to its employees, the vesting schedules of which were increased by 12 months as compared to the cancelled options – an increase
from an average vesting schedule spanning 2.1 years to 3.1 years. The Company also granted an aggregate of 16,282 options to its
directors, the vesting schedules of which were left substantially unchanged as compared to the cancelled options which had been
set to align with the service time of each board member. The new options have an exercise price of $11.40 per share, which was
a 48% premium to the closing price of the Company’s common stock as of March 25, 2015.
On October 16, 2015, the Company cancelled certain unvested
options (totaling 177,446) granted to employees and directors under the Company’s 2014 Stock Plan, which had exercise prices
ranging from $6.90 to $38.50, 10-year terms and 1 to 4 year vesting terms. In addition, on October 16, 2015, the Company issued
new options to the same employees and directors under the 2014 Stock Plan. The Company granted an aggregate of 142,063 options
to its employees and an aggregate of 35,383 options to its directors. The vesting schedules were left substantially unchanged as
compared to the cancelled options. The new options have an exercise price of $3.10 per share, which was the closing price of the
Company’s common stock as of October 16, 2015.
8. Income Taxes
On a quarterly basis, the Company records income tax expense
or benefit based on year-to-date results and expected results for the remainder of the year. The Company recorded no provision
for income taxes for the three-month periods ended March 31, 2016 and 2015.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Based on the Company’s historical net losses during its development stage, the Company has provided a full valuation allowance
against its deferred tax assets as of March 31, 2016 and 2015.
At December 31, 2015, the Company had federal and California
net operating loss carryforwards, prior to any annual limitation, of approximately $48.8 million and $11.3 million, respectively,
expiring beginning in 2021 for federal and 2015 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 did occur 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 California net operating loss carryforward . Notwithstanding, these federal and state net operating
loss carryforwards could be further reduced if there are further ownership changes either prior to or after the merger.
The Company files income tax returns in the U.S. and various
state jurisdictions including California. In the normal course of business, the Company is subject to examination by taxing authorities
including the United States and California. The Company is not currently under audit or examination by either of these jurisdictions.
The federal and California statute of limitations remains open back to 2011 for federal and 2010 for California. However,
due to the fact that the Company has net operating losses carried forward dating back to 2001, certain items attributable to technically
closed years are still subject to adjustment by the relevant taxing authority through an adjustment to the tax attributes carried
forward to open years.
9. Commitments and Contingencies
Operating lease
In March 2014, the Company entered into a non-cancelable thirty-eight
month lease agreement for offices in Campbell, California 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 twelve months ended December 31, 2014. The future minimum payments related to this lease are as follows:
Years ending December 31:
|
|
|
|
2016
|
|
|
87,633
|
|
2017
|
|
|
68,587
|
|
Total
|
|
$
|
156,220
|
|
Rent expense was $27,152 for the three months ended March 31,
2016 and 2015.
Guaranteed payments
The Company entered into two agreements to purchase certain
patent assets under which guaranteed payments were originally required. The first agreement originally required unconditional guaranteed
payments of $18,000,000 to be paid out of net revenues from patent licensing receipts through December 31, 2017. As of December
31, 2014, such guaranteed payments were accrued on the Company’s accompanying balance sheet at net present value using a
discount rate of 12%. Expenses related to minimum revenue sharing payments were deferred as of December 31, 2014 to be amortized
in correlation with the future payment schedule. This agreement was amended in December 2015, at which time all guaranteed payments
and interest payments payable on any guaranteed payments were eliminated, and provided that the Company will pay the other party
solely based on net revenues earned for the licensing and/or sale of the patents sold to the Company under the original agreement.
In conjunction with the elimination of the $16.3 million liability for guaranteed payments and $1.0 million liability for accrued
interest as of December 31, 2015, in accordance with this amendment, the Company also eliminated $16.3 million of related deferred
expenses as of December 31, 2015. The original agreement provided that if the Company’s market capitalization fell below
the aggregate dollar amount that the Company owed at that relevant point in time to the other party (but only prior to full payment),
the party may exercise a limited right to repurchase the acquired patent portfolio assets at a purchase price at least equal to
the amount the Company originally paid. Due to the elimination of the guaranteed payments, the party’s right to repurchase
the patents can now only be triggered if the Company ceases to be a public company with securities listed on Nasdaq, another stock
exchange or any over-the-counter quotation service. As of March 31, 2016, the Company was in compliance with the terms of the agreement.
The second agreement originally required a $2,000,000 guaranteed
payment due on December 1, 2015. In October 2015, the Company and the other party amended the terms of the original patent purchase
agreement, with the amendment providing that the Company will make a $550,000 payment on January 31, 2016 and a $1,650,000 payment
on July 1, 2016, which amounts include $95,000 in additional interest. These amounts accrue interest at 1% per month if not paid
by their respective due dates, and may be paid at a 10% discount if paid 45 days or more in advance of their respective due dates.
Minimum revenue sharing payments are generally due sixty days after fully earned. Future guaranteed payments associated with this
agreement are payable as follows:
Years ending December 31:
|
|
|
|
2016
|
|
|
2,200,000
|
|
Less: discount to present value
|
|
|
(71,166
|
)
|
Guaranteed payments, net of discount
|
|
$
|
2,128,834
|
|