5. Borrowing Arrangements

On September 23, 2014, the Company entered into a Share Purchase Agreement (“Share Purchase Agreement”) with Joseph W. Beyers, the Company’s Chairman and Chief Executive Officer, pursuant to which the Company agreed to issue to Mr. Beyers up to 23,364 shares of its common stock, at a purchase price of $21.40 per share for aggregate consideration to the Company of up to $500,000. Pursuant to the terms of the Share Purchase Agreement and concurrently with the execution of the Share Purchase 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 the Company did not obtain $6.0 million or more in debt financing within ten business days of the execution of the Share Purchase Agreement. As a result of the Senior Debt Agreement (as defined below), the Company was required to return the $300,000 in cash previously prepaid by Mr. Beyers and the Company did 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 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. During the year ended December 31, 2015, $100,000 was repaid. During the year ended December 31, 2016, $50,000 was repaid and the remaining balance of $50,000 was canceled and credited to additional paid-in capital.

On October 1, 2014, the Company and its wholly-owned subsidiary, Inventergy, Inc., entered into the Revenue Sharing and Note Purchase Agreement with DBD, 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 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 Revenue Participant, 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 (less 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 bears cash interest equal to LIBOR plus 7% (total interest rate of 8.69%). In addition, a 3% per annum paid-in-kind (“PIK”) interest will be paid by increasing the principal amount of the Senior Notes by the amount of such interest. The PIK interest shall be 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 Note Purchasers a structuring fee equal to $385,000, which was accounted for as a discount on notes payable.

The principal of the Senior Notes and all unpaid interest thereon or other amounts owing thereunder when originally due, shall be paid in full in cash by the Company on September 30, 2017 (the “Maturity Date”). As of March 31, 2017, the Company has repaid $3,787,016 of the Senior Notes.

Upon receipt of any revenues generated from the monetization of the patents identified in the Senior Debt Agreement (the “Monetization Revenue”), the Company was required to apply, towards its obligations pursuant to the Senior Notes, 86% 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”). If Monetization Net Revenue was applied to outstanding principal of the Senior Notes (defined as “Mandatory Prepayments”), such Mandatory Prepayments were not subject to a prepayment premium. To the extent that any obligations under the Senior Notes were past due, including if such payments were past due as a result of an acceleration of the Senior Notes or certain conditions of breach or alleged breach had occurred, the percentage would have increased from 86% to 100%. The terms described in this paragraph have been superseded by the terms of the Restructuring Agreement upon the assignment of the Patents to INVT SPE in April 2017, as more fully explained below.

In addition to the Mandatory Prepayments, the Company was also required to 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, along with minimum liquidity requirements, were deferred until May 1, 2017 by the terms of the Restructuring Agreement (see below).

Pursuant to the Senior Debt Agreement, as amended, the Company granted to the purchasers identified in the Senior Debt Agreement (the “Revenue Participants”) a right to receive a portion of the Monetization Revenues totaling $11,284,538 (the “Revenue Stream”). The Revenue Participants were not to receive any portion of the Revenue Stream until all obligations under the Original Senior Notes were paid in full. Following payment in full of the Original Senior Notes, the Company was to 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 were to be payable on a monthly basis in arrears. The rights of the Revenue Participants to the Revenue Stream were 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 $3,948,153, which represents the amount of the expected Monetization Revenues, discounted 18% over the expected life of the revenue share agreement. In conjunction with an amendment to the Senior Debt Agreement, as amended, dated March 1, 2016, the Company determined that the change in expected cash flows was greater than 10% as compared to the Senior Debt Agreement prior to such amendment 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 in the twelve-month period ended December 31, 2016. The Revenue Stream payment terms described in this paragraph have been superseded by the terms of the Restructuring Agreement upon the assignment of the Patents to INVT SPE in April 2017, as more fully explained below.

As part of the Senior Debt Agreement, the Company and the Collateral Agent entered into a Patent License Agreement, under which the Company agreed to grant to the Collateral Agent a non-exclusive, royalty-free and worldwide license to certain of its Patents.

As part of the transaction, the Company granted the Note Purchaser and Revenue Participant 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.

In connection with the execution of the Senior Debt Agreement, the Company issued the Senior Lender Shares at $20.00 per share to the Revenue Participant for an aggregate purchase price of $1,000,000. The Senior Lender Shares were issued pursuant to a subscription agreement dated October 1, 2014. In addition, the Company issued to the Senior Lender seven-year warrants to purchase 50,000 shares of common stock at an exercise price of $11.40 per share. The exercise price of these warrants was subsequently changed to $2.54 per share as part of the second amendment to the Senior Debt Agreement.

In connection with the closing of the transactions contemplated by the Senior Debt 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 assumptions utilized were derived in a similar manner as discussed in Note 7 related to the fair value of stock options.

Restructuring Agreement and Patent Residual Interest Program

In December 2016, the Company and the Senior Lender and the Managing Member entered into a Restructuring Agreement (the “Restructuring Agreement”) to further amend the Senior Debt Agreement. Pursuant to the Restructuring Agreement, the Managing Member will have the sole discretion to make any and all decisions relating to the Company’s 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 requires that the Company obtain stockholder approval and consents of third parties to the assignment of the Patents to a newly created special purpose entity, or SPE. 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 the SPE. The SPE, INVT SPE, will be 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. See also Note 10, “Subsequent Event”.

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.