Inventergy Global's (INVT) CEO Joe Beyers on Q4 2015 Results - Earnings Call Transcript

| About: Inventergy Global, (INVT)

Inventergy Global Inc. (NASDAQ:INVT)

Q4 2015 Earnings Conference Call

April 04, 2016 04:30 PM ET

Executives

Debra Chen - IRTH Communications

Joe Beyers - CEO

John Niedermaier - CFO

Analysts

Jim McIlree - Chardan Capital

Harry Venezia - Healthcare Capital Advisors

Operator

Greetings and welcome to Inventergy’s 2015 Fourth Quarter and Full Year Conference Call. At this time all participants are in a listen-only mode, a brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Debra Chen, Director of Client Communications at IRTH Communications. Ms. Chen, you may begin.

Debra Chen

Good afternoon everyone. I would like to welcome all of you to Inventergy’s fourth quarter and full year 2015 conference call. With us today are Inventergy’s Chief Executive Officer, Joe Beyers and Chief Financial Officer, John Niedermaier. Before I turn the call (inaudible), I’ll take a moment to read the Safe Harbor statement regarding today’s conference call.

This conference call will contain forward-looking statements within the meaning of the US Federal Securities Law concerning Inventergy. The forward-looking statements are subject to a number of significant risk and uncertainties and our actual results may differ materially. Please refer to the company’s filings with the SEC which contain and identify important risks and other factors that may cause Inventergy’s actual results to differ from those contained in the forward-looking statements. All forward-looking statements are made as of today April 4, 2016 and Inventergy expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call. In addition, other risk are more fully described in Inventergy’s public filing with the US Securities and Exchange Commission, which can be reviewed at sec.gov.

Earlier today the company filed its Annual Report on Form 10-K with the SEC and afterwards issued a press release announcing its financial results. The participants in the call, who may not have already done so, may wish to look at these documents as we provide a summary of the results on this call. I would like to now turn the call over to Inventergy’s CEO, Joe Beyers, who will give an overview of the company’s business activities and development for the fourth quarter and full year 2015, as well as an overview of the company’s operating and financial metrics. We will then open the call for Q&A. Joe?

Joe Beyers

Thanks Debra. Hello everyone and thank you all for joining our call today. As many of you know, Inventergy is an intellectual property company focused on identifying and acquiring and then licensing or selling patent technologies of market significant technology leaders. We currently have approximately 740 world-wide patent assets which we acquired from Panasonic, Nokia, and Huawei.

The technologies covered by these assets represent several very large product segments in the telecommunications industry. These include mobile handsets and other end-user devices, mobile infrastructure such as base stations, IP multimedia systems, which you’ll hear me refer to as IMS, Voice over IP protocol, as well as cellular service providers. These patents are a combination of assets that are essential to a number of telecommunications standards as well as the ones that cover implementations outside the standards.

Our business model is one in which we pay the modest amount upfront for these patents, and we provide a portion of our net revenue for the licensing or sales of these patents back to the original patent owners. Our initial funding model was to use debt financing to fund the cash purchase component of our patent acquisitions and equity financing for operations until we generate enough cash from our monetization efforts to be self-funding. This is our first teleconference for communicating our financial results since we became a public company in June of 2014.

I will give an over view of our operational results and then John Niedermaier, Inventergy’s CFO, will review our financial performance for 2015. I will then give a brief context for 2016 followed by an open Q&A. So let me start, first of all and let me summarize our IP monetization efforts. In 2015, we completed three transactions valued at over $6 million. The first of these transactions was completed during the first quarter of 2015 and consisted of a 2 million, five-year license to our Huawei and Nokia IMS patent portfolios. The license was granted to a mid-tier IMS telecommunications equipment supplier at essentially the same effective royalty rate being offered in discussions with other IMS related supplier companies.

At the end of the license term, renewal discussions will be based upon the current level of product revenue of the licensee at the time of the renewal discussions. Our second transaction was completed in the second quarter of 2015 and consisted of $4 million sale of two patent families from our Panasonic mobile portfolio. We own over a total of 112 patent families with 740 worldwide patents that are applicable to various telecommunication market segments. The patents that we sold represented only a small portion of the overall value of our patent holdings. As we’ve noted, we acquired significant rich patent portfolios in areas where we see opportunity and our business plan is to monetize these portfolios in various ways including licensing as well as through further target sales to third parties at attractive prices.

Our third transaction was completed in the fourth quarter of 2015, and consistent of a patent infringement litigation settlement with Genband, a mid-tier telecommunications equipment company regarding the Huawei and Nokia IMS patent portfolios. Under the terms of the settlement agreement, Genband agreed to pay us an undisclosed fee. While not as large as the other transactions, the fee does maintain the value that we established in our prior license agreement and our current new license discussions.

Now besides our IP monetization program, we continue to have a small business that we obtained as a result of our reverse merger with eOn Communications in June 2014. This business contained in our ECS or eOn Communication System Subsidiary and at that time consisted of a license agreement for our prior PBX phone system and a reseller business of Door Entry Security Systems.

In 2015, their security product business was restructured into a marketing sales consulting model. As a result, the ECS subsidiary has now been transformed from a significant cash negative to a small cash positive business. On the financing side, in the second quarter of 2015, we completed a 2.15 million common stock financing from three current investors at 420 [ph] a share. This is on post reversal basis.

In January of 2016, we completed a 2.5 million redeemable Series C preferred stock and warrants financing from five institutional investors; four new investors and one that had been a long time holder of INVT stock. The preferred stock has a conversion price of $1.50 and the warrants have an exercise price of $1.79. The preferred stock can be redeemed at $2.16 a share if prior to July 26, 2016. After that point, the preferred stock can be redeemed at a 35% discount to market, I’m sorry can be converted at a 35% discount to market or redeemed by Inventergy for $2.25 a share if not converted.

As I will discuss later, we are viewing this transaction as more of a bridge financing and [indiscernible] financing only in the worst case. Regard debt obligations, significant progress was made in 2015 as follows: the $2 million in payments that were originally scheduled to be paid to Nokia in 2015 and early 2016 as a final payment for the purchase of the patent assets from Nokia were restructured to be an interest-only payment in 2016.

Next, nearly $17 million in guarantee payments due to Panasonic were eliminated as well as a reversal of 1 million and accrued interest and elimination of future accruals that were $120,000 per month. We are grateful to support and confidence that’s provided by Panasonic in this new negotiated agreement.

Thirdly, adjustments to the Fortress debt in 2015 were made as follows; in the first quarter of 2015, an additional 1.2 million was advanced by Fortress secured by future royalty payments of our first IP licensing transaction. During 2015, a total of 2.1 million was paid on the principal from proceeds from our patent sale and license royalty payments, plus an additional 500,000 was paid in early 2016. Overall, the Fortress debt balance had been decreased from 12.2 million to its current 9.7 million.

Lastly, agreements were reached with Fortress to defer a certain debt amortization payments until July 1, 2016 that were previously scheduled to begin October 1, 2015. In addition, the company’s minimum cash balance was reduced from $1 million to 200,000 until July 1, 2016. Fortress is a very knowledgeable IP investor, and I thank them for their ongoing support.

Another major event in 2015 was the conversion of the Series A and B preferred stock to common and elimination of the special rights of this stock. Inventergy had a set of investors who helped fund the formation of the company in 2013, as well as provide the funding to be able to reverse merger that launched Inventergy in to the public markets. In exchange for this funding, they received preferred stock Series A1, A2 and B as well as secured in the form of debt.

The debt was refinanced by Fortress in 2014. The preferred stock and other related agreements had a set of terms such as extreme anti-dilution right, redemption rights, right for first refusal and other controlled rights that severely limited our operational flexibility. In the fourth quarter 2015, we concluded an agreement with all of the preferred shareholders to convert the preferred stock to common stock, eliminating these limitations.

We believe that the majority of the common stock that was received as part of this conversion was subsequently sold to other investors on the open market. We also believe that in preferred stock had historically been a continuous source of downward pressure on our common stock since the reverse merger was completed in 2014.

Another major even in 2015 was the completed of 1 to 10 reverse split of the INVT common stock. In December 2014, Inventergy was notified that it no longer met the minimum $1 closing bid price for continued listing on NASDAQ. In December 2015, we completed this reverse split of our common stock and we were subsequently notified by NASDAQ in late December of 2015 that we had redeemed compliance with the minimum bid price. For record, our closing price on December 31, 2015 was $1. 65.

Now we were also notified in November 2015 that based upon our third quarter financial report, we did not meet the minimum NASDAQ requirement for stockholders equity of 2.5 million. NASDAQ has granted us until May 15, 2016 plus in addition of time that may be a part of an appeal process if needed to regain compliance with this requirement. I will discuss our plans to address this issue later on this call after John Niedermaier reveals our 2015 end of year financial results.

Lastly, we made a number of operational staffing changes, because the staffing costs that were 50% including going to a more outsourced staffing model where greater cost efficiencies were possible. One key example of this change is the [engagement] of a highly qualified Chief Financial Officer, John Niedermaier. Under John’s leadership, the material weakness in our financial control that was stated in our last year’s audit has been eliminated.

Speaking of which, I would now like to turn the call over to John, who will provide a more detailed overview of our 2015 financial results.

John Niedermaier

Thank you Joe. As Joe mentioned 2015 featured the first patent monetization revenues for the company, and I would now like to present the specific financial results that these commercial milestone yielded. Total revenue in 2015 was just under 4.9 million, 4,888,302, that’s a 580% increase compared to the same period in 2014. This increase was due to the aforementioned sale of two patent families for 4 million that was executed in the second quarter. Patent licensing and litigation settlement contracts which totaled over 600,000, as well as access control, security product and service lines that generated about 285,000 of revenue was required from the eOn subsidiary in the merger in 2014.

Gross profit that this revenue generated was approximately $3.7 million for the 12 months ended December 31, 2015 compared to negative gross profit of about $13,000 for the same period last year. This gross profit margin was 77% for the full year in 2015 as compared to a negative gross margin of 2% in the full year of 2014. And in terms of the net loss, we had a 42% decrease in the net loss in 2015 compared to last year. Our net loss this year was approximately 11.7 million compared to a net loss of over 20 million in the same period last year.

Operating expenses offered a sizeable decrease in 2014. General and administrative expenses for the 2015 year were approximately 7.5 million which is a 36% decrease from the 11.7 million that we incurred in the same period in 2014. This decrease was primarily a result of staffing reductions and other cost containment in the areas of patent cost, consulting fees, legal fees, business travel and other general expense savings.

As Joe mentioned, we have embraced and outsourced model in many areas including finance, HR, legal, investor relations and even expanded market coverage and commercial activities relating to our patent monetization efforts. We strive to enter in to company friendly success based agreements that provide cost effective, best-in-class service with a maximum flexibility to the company.

In terms of other highlights, the combination of substantial revenue improvement in 2015 and a reduction of expenses helped us achieve an 81% decrease in net cash used in operating activities. In 2015, net cash used in operations was approximately 1.6 million compared to 8.4 million last year.

On financing side, as Joe previously mentioned, the company raised gross proceeds of 2.5 million on January 26, 2016 to the sale of Series C convertible preferred stock and warrants. I will now turn the call back to Joe to provide some comments on the company’s outlook for 2016.

Joe Beyers

Thank you John. Let me shift direction and look more towards the future. First of all in December 2015 we outlined in more detail four of the larger market segments that are addressed by our patent portfolio. Based upon Inventergy reports and our IP analysis, we believe that the addressable market or the product and services covered by our patent portfolio are over $200 billion a year across these market segments. We are engaged in potential licensing discussion with a number of companies across these segments.

In addition, over the past few quarters, we’ve aggressively added a sales dimension to our monetization efforts. Our intent in the short term is to sell some aspects in a few of our market segments, use the proceeds to pay down or eliminate the debt on our balance sheet and then double down on the remaining assets as well as potentially launch some new monetization initiatives.

Many of these sales discussions are well advanced and several of them have the potential to individually be larger than all of 2015 revenue. We hope to update you further in the coming months.

Another potential source of revenue centers around our patent infringement litigation with Sonus Networks, a mid-tier telecommunications equipment company regarding Huawei and Nokia unmet patent portfolio. We continue to be very active in some of the discussions with them and are optimistic an agreement may be reached soon. Otherwise the litigation is likely to expand in to other geographic region with an expected larger but later settlement target.

Given the nature of these opportunities, we are optimistic that we will address the NASDAQ’s stockholders equity deficiency and properly manage the July Fortress debt amortization requirements if they stuck with us till that time.

In summary, 2015 has been a very transformative. We achieved our first significant IP revenue; we cleaned up our preferred stock in our cap table, at least the prior ones that were somewhat classic. The newer ones, our newer investors are a good model for everyone; I want to point that out. We dressed our NASDAQ minimum bid compliance issue. We were successful in completing a significant restructuring of our debt and guarantee payments. We created a robust monetization funnel which we believe will lead to significant results in a reasonable period of time.

As a management team, we are fully committed to drive, to catch these opportunities and create value for our shareholders. We would now like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Jim McIlree with Chardan Capital. Please state your question.

Jim McIlree

Can you tell us after the cuts that you’ve made what your cash OpEx is on a quarterly basis or monthly basis and both with and without litigation expenses?

John Niedermaier

Our burn rate without litigation expenses is just under $300,000 per month.

Jim McIlree

And litigation is going to be obviously dependent upon how much litigation you do. Is there a way to kind of ballpark a range of how that might shake out?

John Niedermaier

Our current litigation is in a hybrid contingency model, and so some of the fees are deferred. That’s the only litigation we have underway at this point. What you will likely see from us is once we’ve completed this wave of these very interesting potential patent sales and do our -- what I call my double down process, that’s when you might likely see a wave of litigation and we have various partners lined up to engage with us at that time, but we’re not giving any estimates of what those costs would be. It depends on which hybrid model, which contingency model we end up with these various partners.

Jim McIlree

In the 10-K, it says that the Fortress payments I believe are 6 million in 2016 and 4.6 million in 2017. Are there interest payments also due on those notes both this year and next?

John Niedermaier

Yes, there is monthly interest, and the amount currently is approximately 70,000 per month and that was included in the number I quoted as our current monthly burn.

Joe Beyers

That number will go down as we pay the debt down.

Jim McIlree - Chardan Capital

Are there any claims on the sale of the patent assets, that is if you -- just to make up number, but if you sell a patent asset for $1 million, you owe X percent to somebody first and then you would retain the remaining 1 minus X percent, or is it more of whatever proceeds you get has to go towards debt repayment or a little bit of both in that .

John Niedermaier

I believe we’ve disclosed in the past that our financial model with our companies we’ve acquired the patent assets from is that we provide them 20% of our net revenue back to them, and that’s where we take the gross revenue, subtract our cost of monetization, the third party fees like legal fees etcetera and then we provide them 20% of the net. The rest is available for us for debt servicing and payout with Fortress and other operational cash needs.

Jim McIlree - Chardan Capital

And then you talked about the patent sales and double-down strategy, and you suggested that that would be soon. Are you willing to go out and say as soon as Q2 or its Q3 or is there a reasonable timeframe we can think of for when soon would be.

John Niedermaier

We really can’t give you exact, precise forward projections, but I can say our status is that we are in active dialog on specific assets and dollar numbers. So these aren’t just theoretical next year discussions.

Jim McIlree - Chardan Capital

And I’m assuming that the reason that you’re making this shift is because it’s just gotten a little bit more harder or time consuming to do the negotiations for the license deals, is that a fair assumption.

Joe Beyers

Anyone who is familiar with the IT industry knows that the industry model has shifted to where there’s a longer time to money for licensing, there’s a greater need for litigation, and so our strategy is to remove our debt burden, get operating cash, then move forward on more aggressive monetization efforts, more consistent with what the industry expects now, as well as you’ll see other new things we’ll be adding to our strategy that will add new dimensions to our work.

John Niedermaier

I think licensing discussions will still have a play, will still have a purpose in there. But as Joe said, I think litigation once we move past the debt burden would need to be emphasized more given the market trends.

Jim McIlree - Chardan Capital

And then my last one, there’ve been a couple of companies who tried to - were attempting to move towards more an operating model as well Singen [ph] for example, do you have any thoughts on doing something like that.

Joe Beyers

Our business strategy is [indiscernible] minded. Well, how we might evolve our model in the future is yet to be determined. The key thing is that, we are about creating IP value through the natural property and using our IP expertise to create that value in a multitude of ways.

Operator

Our next question comes from Harry Venezia with Healthcare Capital Advisors. Please state your question.

Harry Venezia - Healthcare Capital Advisors

Thanks for your nice summary of events that have occurred last year and the momentum you have with this new strategy. I just want to confirm that our heard it correctly, that with the asset sales and the doubling down strategy, is the goal that you are intending to pay-off most or all of your debt somewhere in the $17 million to $20 million range and I don’t know if Joe, John could answer that or you best.

John Niedermaier

Well the total debt is under 10 million. There is a revenue share component to that which adds another amount of money which is accrued to approximately 6 million, and we have, based on the pipeline that we are looking at right now and the dollars associated with that, we believe that we can be in a position to pay that down through a successful execution of that pipeline.

Harry Venezia - Healthcare Capital Advisors

That will give the company a little bit more financial flexibility and a runway.

John Niedermaier

Absolutely.

Harry Venezia - Healthcare Capital Advisors

And my only other question unfortunately I’m going to qualify it by saying I’m not an expert here I’m looking at your Board’s background. But from what I saw on the proxy, I think all your outside Board members own a 100 shares that they weren’t given. And correct me, I’m probably wrong, but the point I want to make is I’d like to have shareholders - I mean Board members have much more shares that I do and other shareholders and being sanitized properly. So can you comment as to whether or not you’re looking for any outside directors to replace your existing ones or if you’re confident in those that you have. And if I’ve misinterpreted that all those shares have come from grants except for a 100.

Joe Beyers

First of all, as Chairman of the Board and founder of the company, what I see is most important in a Board is a Board that can provide critical advice and guidance in oversight. So you go down to the resumes, you have Marshall Phelps, who like I and (inaudible). Marshall Phelps who is world famous in the IT industry and has incredible credentials, and the role I had at HP, he had the same role at Microsoft and IBM. So he brings incredible expertise to this field. Frank King, who was an executive at IBM, great operational experience, and Francis Barton who is the head of the audit committee and the independent director, has a lot of experience of being CFOs of large publicly traded companies.

So they were chosen because of their expertise, first and foremost. They do have a lot of stock options that they are holding on to, and that’s converted. But none of them are highly wealthy where they can forward to pay a lot of money for stock, but they are extremely supportive of the company, heavily invested, at times they’ve gone months and quarters at a time for no pay, because they are so excited by the company. So I feel we have a very strong Board, particularly one that helps meet what I view as the most important requirement for our success.

Harry Venezia - Healthcare Capital Advisors

Thanks Joe. I knew there was more behind your selection of the Board members. So I appreciate that insight. I am disappointed they haven’t purchased more, but that doesn’t mean they are not the best for the company right now.

Operator

[Operator Instructions] our next question is a follow-up from the line of Jim McIlree with Chardan Capital. Please state your question.

Jim McIlree - Chardan Capital

On a hypothetical sale of patents, the first cut on that would be - you would have to pay part to the sellers of those patents when you originally purchased it, and then a second part would be a debt repayment with Fortress and then a revenue share with Fortress and then the third. Is that kind of the order of how those payments would be structured on a hypothetical sale?

John Niedermaier

This is John Niedermaier. The first thing that comes off the top are allowed transactional expenses. So if there were legal expenses to pay for the deal and may be a consultant that was involved perhaps to provide some patent claim charts or similar type things, those type of expenses are typically allowed and that’s the difference between, call it, gross monetization or patent sale proceed and net. Then of off the net would go to the percentage to the former patent owner and then the remainder would be the - the first cut of the remainder goes to debt service, and once certain amounts of debt service are repaid then it goes to revenue sharing also with Fortress and then to Inventergy to the company.

Jim McIlree - Chardan Capital

So after the revenue share with Fortress then you would have the cash available to redeem the preferred, is that correct?

John Niedermaier

Yes, except that there is actually some sharing that occurs before the full payment of the revenue sharing. So we see $1 along the way ahead of the full payment of the revenue sharing portion.

Operator

There are no further questions at this time. I would like to turn the call back over to Debra Chen for closing remarks.

Debra Chen

With that, I would like to thank all of Inventergy stockholders for their participation on today’s call and their support for their company. This concludes our fourth quarter and 2015 full year conference call. Thank you.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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