Inventergy: Blue Chip Management, Micro-cap Stock

Comments On Risks

Before getting into the article I first want to make very clear that the subject company in this case is a very young and carries with it a number of significant risks which include:

- No underlying cash generating ability to finance near term operations which ensures capital raises will be required

- A very small market capitalization which means that the stock price is likely to be very volatile

- A lack of clarity on when the business might generate positive cash flow

I would also say at this point that in no way am I recommending a purchase of shares at this point in time.

Instead what I am recommending is that this company is a good choice for a stock watch list. The reason for that is that the leadership group involved here carries a track record that I thought was unusually strong for a company of this size.

That is my opinion only, and certainly no guarantee of future success.

Inventergy Global Inc. (INVT, Financial)

Inventergy Global is a Silicon Valley based intellectual property company that is in the business of identifying, acquiring and licensing patented technologies that are currently collecting dust inside leading technology companies.

Helping companies get full value out of their intellectual property is a business opportunity that seems to have significant potential.

According to the Harvard Business Review “Corporate America is wasting a staggering $1 trillion in underutilized patent assets.”

A company like Inventergy will knock on the door of a corporation that owns intellectual property that is not being fully monetized and offer to buy those patents at a reasonable price. After securing the rights to the intellectual property Inventergy will go out and try and generate income by enforcing those patents with a share of that income going back to the original IP holder.

It is a win-win for both the original IP holder and Inventergy. Inventergy gets to try and generate some significant shareholder value by exploiting underutilized intellectual property, and the original IP holder gets income out of an ignored asset.

To be successful, a company like Inventergy needs to first identify intellectual property that is greatly untapped, second, convince the owner of that intellectual property to believe Inventergy can successfully monetize the patent, and third, actually have success in doing just that.

Therefore success in this business is fully dependent on the skills (and credibility) of the people running the company.

Inventergy CEO – Joe Beyers

When I was doing some reading on the IP business, I came across an article that described how successful IBM was at getting more value out of its intellectual property in the 90’s.

Starting in 1990 when IBM’s IP portfolio generated $30 million in patent licensing royalties, the company made an aggressive push to monetize more value out of that portfolio. By 2000, that royalty stream had grown by 3,300% to $1 billion.

Inventergy’s CEO Joe Beyers had nothing to do with that. But he did do something similar at another tech giant Hewlett Packard (HP).

Beyers worked at HP for 34 years and that time was culminated by the six years where he was fully in charge of IP income. Over those six years he boosted IP income by 20 times.

According to the bio provided on Beyers during this six year period he didn’t just drive the IP strategy for HP, he approved every IP transaction which included patent licensing, technology licensing, brand licensing, standards based licensing and patent & sales acquisitions.

Beyers designed Inventergy from scratch starting in 2012 and brought it public through a reverse-merger in the summer of 2014. According to Beyers being publicly traded is a key part of his business plan.

The reason for that is that the companies that Inventergy will partner with are going to want complete transparency. Because Inventergy is public, the partner company can dig into public filings and see exactly what its partner is doing in order to monetize the IP that has been transferred.

Beyers owns 6.7 million shares out of the 35.77 million shares that are outstanding after Inventergy’s last capital raise. That is 18.7% of the company so he will be very motivated to get this business generating cash flow so he can avoid more dilution going forward.

Beyers track record isn’t just important as an indicator that he knows how to be successful in this business, it also opens all kinds of doors. Having a big position like he did at HP means that he can get time with key personnel at all of the major technology companies. It also greatly enhances the likelihood that potential partners will buy into the idea that partnering with Inventergy is a good idea.

Inventergy - The Rest of The Team

As you might expect, Beyers was able to attract a strong team to join him at Inventergy. Collectively (according to the Beyers interview linked earlier) his management and Board of Directors have created in their careers $5 billion of IP income.

Marshall Phelps is on Inventergy’s Board of Director’s and has been since before it became public. I think it is worth reading the key points of his bio as presented on the Inventergy website:

Marshall Phelps was appointed to Inventergy, Inc.'s Board of Directors on May 17, 2013. Mr. Phelps is a leading figure in the field of intellectual property management and performance, pioneering many of its leading strategies, generating unprecedented results and heading IP business and related activities at IBM (IBM) and Microsoft (MSFT).

As CEO and Board Member of Article One Partners, he is actively engaged in helping businesses and governments improve patent quality and improve the Patent System.

Mr. Phelps served as Corporate Vice President at IBM in the 1990s, responsible for overseeing standards, telecommunications policy, industry relations, licensing, intellectual property law and management of a worldwide intellectual property portfolio of more than 35,000 patents and 8,500 trademarks. By actively licensing these and other IP rights, such as trade secrets and copyrights, he transformed a function that had previously been costly overhead to a $2 Billion annual profit center.

From 2002-2010 Mr. Phelps served as Corporate Vice President and Deputy General Counsel for Intellectual Property and Licensing, Microsoft Corporation. At Microsoft, his duties entailed worldwide management of the company's intellectual property portfolio, patent prosecution, licensing, standards and business development. He facilitated Microsoft's emergence as one of the world's largest IP companies with over 60,000 patents and applications, extensive copyright holdings and numerous trademarks.

In 2006, Mr. Phelps was elected to the initial class of the Intellectual Property Hall of Fame. In 2001 he was founding partner with Nathan Myhrvold of Intellectual Ventures, now the largest acquirer of patents worldwide

With Beyers and Phelps together, Inventergy has men who were in charge of the IP portfolios for Hewlett Packard, IBM and Microsoft.

In the previously mentioned interview, Beyers also noted that his head legal counsel Wayne Sobon is a person of note in the IP world. Sobon is President of the American Intellectual Property Law Association and was Chief IP Counsel for Rambus (RMBS). From 2000 to 2011 he was Director of Intellectual Property for Accenture’s Global IP programs.

On its surface, Inventergy looks like a tiny company with a small balance sheet to work with. In my opinion when you dig into the people involved, people who have run IP portfolio businesses worth billions a different view of the company emerges.

Inventergy Intellectual Property Acquisitions To Date

Inventergy does not yet generate cash flow, a fact which can be attributed to having only having acquired its IP portfolio in recent months.

The Company acquired an aggregate of approximately 755 currently active patents and patent applications from Huawei, Nokia, and Panasonic outright, including the general right to recover damages for past infringement.

The initial three patent portfolios the Company has acquired are portfolios in the telecommunications industry that can be broken into two categories:

1)The IMS (IP Multimedia Subsystems) and VOIP (Voice Over) Segment – The primary focus of the portfolios acquired from Huawei and Nokia

IP Multimedia Subsystem (IMS) is an architectural framework for delivering IP multimedia services and voice applications from wireless and wireline devices. It was originally designed by 3GPP. IMS is intended to aid the access of multimedia and voice applications from wireless and wire line terminals, to help establish fixed-mobile convergence.

The technology is already deployed by more than 100 service providers around the world as well as through cable companies to offer services such as the popular “bundles” of voice, TV and Internet. A driving force behind the deployment of LTE (Long-Term Evolution) among service providers is the ability to offer Voice over LTE (VoLTE). Inventergy estimates based on data from Infonetics and internal analysis that the overall size of this market related to the service provider segment, which could benefit from the Company’s patented technologies, is $25-$30 billion cumulative over the next five years.

VOIP solutions are also extensively deployed in the corporate sector as companies are addressing the needs of an increasingly mobile workforce through so-called “unified communications” offerings that packet data networks help enable.

Source of image: INVT’s 10k

2) The Mobile Broadband Infrastructure Segment – The primary focus of the Panasonic portfolio

Mobile broadband is a term that encompasses 2G, 3G and 4G cellular technologies based on standards that are developed and managed by the 3GPP organization and covers the radio, core network and service architectures that enable broadband communication between base stations and devices (such as cell phones and tablets, wireless enabled computers).

In the document “Ericsson Mobility Report” from November 2014 , Ericsson estimates the 3G and 4G mobile broadband subscription market will grow 20% annually from 2014-2020 for 3G and 45% for 4G (LTE). By the end of 2020, Ericsson estimates there will be 9.5 billion mobile subscriptions, with 3.5 billion being LTE and 4.9 billion being 3G.

In North America 3G/LTE share of mobile subscriptions is already at 100% . In Western Europe the share is 75%, growing to 100% by 2020 according to Ericsson. In Asia Pacific the 3G/LTE share is at 35%, growing to 85% by 2020 according to the same report. Recent GSA data shows that 1,275 new LTE devices were released in 2014 bringing the number of LTE user devices to 2,646 from 275 different manufacturers. Of this, 52.7% are smartphones, with 98.3% of the smartphones handling both 3G and LTE.

Source of image: INVT’s 10k

Inventergy – The Finances (Not Cash Rich)

Inventergy recently completed a share offering that raised $2 million. Subsequent to that cash raise the balance sheet would become the Pro Forma numbers below:

Source of table: SEC.gov

When I see a balance sheet that looks like that, I have a strong urge to run the other way. And the balance sheet is why I won’t be a buyer of shares of this company today.

I believe the people running this company have a very well thought out business plan and are probably pretty comfortable with the idea that significant cash flows may be coming sooner than the rest of us think.

The $27 million of debt that is on the balance sheet is broken down as follows:

Guaranteed payments - $13.1 million

Fortress Notes Payable - $6.3 million

Fortress Revenue Share - $2.5 million

Current Liabilities - $5.1 million

More cash is going to be need during this year. I think it is important to note that the financer of most of the cash so far is Fortress Investment Group which is acting more as a partner to the company rather than an arm’s length lender.

Credibility of management and the Board are obviously what has attracted Fortress.

Final Thoughts

Here is my take: Investing in a company like Inventergy is just like turning your money over to a mutual fund manager. You are betting on the jockey (brains of management) in this case and not the horse (a cash flowing business with a moat around it).

There are two differences though.

One, a mutual fund is not going to run out of cash and go bankrupt. A company like this can.

Two, a mutual fund that performs well might get you a 10% return on average. Inventergy has a management group that has created billions in IP income in their careers and have the potential to turn this into a big winner.

I’m not saying it is likely, but I am impressed by management and the Board’s qualifications.

The bottom line though is that this is not a well-financed company at this point and that creates a tremendous amount of risk. I’ll be an interested watcher, but not a buyer.