Prior Borrowing Arrangements and Restructuring Agreement
|9 Months Ended|
Sep. 30, 2017
|Prior Borrowing Arrangements and Restructuring Agreement [Abstract]|
|Prior Borrowing Arrangements and Restructuring Agreement||
3. Prior Borrowing Arrangements and Restructuring Agreement
On October 1, 2014, the Company and its wholly-owned subsidiary, Inventergy, Inc., entered into the Revenue Sharing and Note Purchase Agreement with DBD Credit Funding, LLC (the “Senior Lender”). On February 25, 2015, the Company, Inventergy, Inc. and the Senior Lender entered into the Amended and Restated Revenue Sharing and Note Purchase Agreement (the “Senior Debt Agreement”). Pursuant to the Senior Debt Agreement, the Company issued an aggregate of $12,199,500 in Senior Notes (“Senior Notes”) to the purchasers identified in the Senior Debt Agreement (the “Note Purchasers”). As a result of the issuance of the Senior Notes and the sale of 50,000 shares of the Company’s common stock (the “Senior Lender Shares”) to the Senior Lender, after the payment of all purchaser-related fees and expenses relating to the issuance of the Senior Notes and Senior Lender Shares, the Company received net proceeds of $11,137,753 (which were net of issuance costs of $476,868). The Company used the net proceeds to pay off existing debt and for general working capital purposes. The unpaid principal amount of the Senior Notes required monthly cash interest payments equal to LIBOR plus 7% (total interest rate of approximately 8.7% while the loan was outstanding). In addition, a 3% per annum paid-in-kind (“PIK”) interest was accrued increasing the principal amount of the Senior Notes by the amount of such interest. The PIK interest was treated as principal of the Senior Notes for all purposes of interest accrual or calculation of any premium payment. In connection with the execution of the Senior Debt Agreement, the Company paid to the Senior Lender a structuring fee equal to $385,000, which was accounted for as a discount on notes payable.
In December 2016, the Company and the Senior Lender and CF DB EZ LLC (the “Managing Member”) entered into a Restructuring Agreement (the “Restructuring Agreement”) to further amend the Senior Debt Agreement. Among other terms, the Restructuring Agreement required the Company to transfer 740 telecommunications patents to a special purpose entity, as discussed in detail below. Pursuant to the Restructuring Agreement, the Managing Member has the sole discretion to make any and all decisions relating to the transferred patents and patent monetization activities (excluding future acquired patents related to Inventergy Innovations, LLC, a subsidiary of Parent, and related monetization activities), including the right to license, sell or sue unauthorized users of the Patents (the “Monetization Activities”).
In addition, the Restructuring Agreement modifies the revenue share provided for in the Senior Debt Agreement such that all proceeds from the Monetization Activities will be applied as follows: (i) first, to pay for certain third party expenses incurred by the Company, the Managing Member or third party brokers in relation to the Monetization Activities, (ii) second, to pay up to $2.2 million of the Company’s outstanding principal debt to a third party from whom the Company previously purchased certain Patents, in the event any Monetization Activity is directly attributable to those certain Patents, (iii) third, if a Monetization Activity triggers a payment with respect to a retained interest owed to a party from whom the Company originally purchased the Patents, payment will be made to such prior owner, as required, (iv) fourth, to the Managing Member until the Managing Member has received (x) reimbursement of any amounts advanced by the Managing Member pursuant to the Restructuring Agreement plus 20% annual interest on such advances plus (y) $30.5 million less any amounts paid to the Managing Member for the note obligations under the Senior Debt Agreement after December 22, 2016, and (v) fifth, after all of the foregoing payment obligations are satisfied, 70% to the Managing Member and 30% to the Company.
The Restructuring Agreement required that the Company obtain stockholder approval and consents of third parties to the assignment of the Patents to INVT SPE, the newly created special purpose entity. Stockholder approval was obtained at a special meeting of stockholders on March 8, 2017 and in April 2017 the Company completed all requirements under the Restructuring Agreement and the Patents were transferred to INVT SPE. INVT SPE is managed by the Managing Member, and the economic arrangements provided for under the Restructuring Agreement are reflected in the governing documents for INVT SPE.
Upon the transfer of the Patents to INVT SPE, the Senior Notes and the revenue share liabilities were extinguished, the Company was relieved of any scheduled amortization (instead, payments to the Senior Lender will only be required out of Monetization Revenues), the liquidity covenant no longer applies, and the Company has been relieved from any further responsibility to maintain the Patents, retroactive to December 22, 2016. Based on these terms and the consideration exchanged, this transaction was accounted for as an extinguishment of debt, and as of the effective date of the Restructuring Agreement (April 30, 2017), the Company recorded a gain on debt extinguishment of $40,802,730, computed as follows:
The initial carrying value of investment in INVT SPE was established by an independent, third-party valuation firm, using the income approach and modeling the net discounted future licensing revenue opportunity in the three primary market segments currently targeted by INVT SPE. The valuation also employed the market approach in the derivation of royalty rates used to arrive at projected revenues. Also, as part of the accounting for the debt extinguishment, the Company wrote-off goodwill in the amount of $8,858,504, as the underlying value of the goodwill was related to the initial purchase of the patents transferred to INVT SPE as of April 30, 2017.
The Restructuring Agreement is subject to certain events of default, including, among other things, liquidation or dissolution, change of control, bankruptcy, the Company’s failure to make payments pursuant to the terms of the Restructuring Agreement or the Company’s failure to perform or observe certain covenants. Upon the occurrence of an event of default, the Senior Lender may proceed to protect and enforce its rights through seeking the Company’s specific performance of any covenant or condition, as set forth in the Restructuring Agreement, or may declare the remaining unpaid balance owed under the Senior Debt Agreement, as amended, and any other amounts owed pursuant to the Restructuring Agreement to be immediately due and payable.
The entire disclosure of prior borrowing arrangements and restructuring agreement.
No definition available.