UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2011

 

Commission File Number 0-20734

e.Digital Corporation

(Exact name of registrant as specified in its charter)

 

Delaware	33-0591385
(State or other jurisdiction of	(I.R.S. Empl. Ident. No.)
incorporation or organization)
16770 West Bernardo Drive, San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

 

(858) 304-3016

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o	Accelerated filer o
Non-accelerated filer £ (Do not check if a smaller reporting company)	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No S

 

As of February 1, 2012 a total of 293,003,158 shares of the Registrant’s Common Stock, par value $0.001, were issued and outstanding.

 

 

e.DIGITAL CORPORATION

 

INDEX

 

Page

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited):
		Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011	3
		Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2011 and 2010	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2011 and 2010	5
		Notes to Interim Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 4.	Controls and Procedures	19
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.	Defaults Upon Senior Securities	20
	Item 4.	(Removed and Reserved)	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21
SIGNATURES			21

 

Part I. Financial Information
Item 1. Financial Statements:
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
			December 31,
			2011				March 31,
			(Unaudited)				2011
			$				$
ASSETS
Current
Cash and cash equivalents			3,511,982				1,805,894
Accounts receivable			105,838				98,152
Inventory			213,077				256,458
Deposits and prepaid expenses			33,940				30,327
Total current assets			3,864,837				2,190,831
Property, equipment and intangibles, net of accumulated depreciation
and amortization of $196,418 and $194,461, respectively			3,316				6,506
Total assets			3,868,153				2,197,337
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable, trade			62,732				24,466
Accrued and other liabilities			210,965				153,013
Total current liabilities			273,697				177,479
Commitments and Contingencies
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000 shares authorized
None issued and outstanding			—				—
Common stock, $0.001 par value, authorized 350,000,000,
293,003,158  shares issued and outstanding each period			293,003				293,003
Additional paid-in capital			82,775,602				82,767,088
Accumulated deficit			(79,474,149	)			(81,040,233	)
Total stockholders' equity			3,594,456				2,019,858
Total liabilities and stockholders' equity			3,868,153				2,197,337
See notes to interim consolidated financial statements

 

 

e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		For the three months ended								For the nine months ended
		December 31,								December 31,
		2011				2010				2011				2010
Revenues:			$				$				$				$
Products			1,902				8,253				62,159				361,080
Services			124,943				126,639				359,654				499,041
Patent license			1,155,000				5,778				4,084,338				31,042
			1,281,845				140,670				4,506,151				891,163
Cost of revenues:
Products			11,807				14,764				73,483				291,445
Services			67,960				74,820				209,382				259,752
Patent license			62,032				5,778				1,314,906				31,042
			141,799				95,362				1,597,771				582,239
Gross profit			1,140,046				45,308				2,908,380				308,924
Operating expenses:
Selling and administrative			219,091				280,582				698,712				920,495
Research and related expenditures			218,538				81,653				511,559				327,737
Total operating expenses			437,629				362,235				1,210,271				1,248,232
Operating income (loss) before provision for income taxes			702,417				(316,927	)			1,698,109				(939,308	)
Income tax provision			(31,000	)			3,479				(132,025	)			3,479
Income (loss) for the period			671,417				(313,448	)			1,566,084				(935,829	)
Accrued and deemed dividends on preferred stock			—				—				—				(31,396	)
Income (loss) attributable to common stockholders			671,417				(313,448	)			1,566,084				(967,225	)
Income (loss) per common share - basic and diluted			0.00				(0.00	)			0.01				(0.00	)
Weighted average common shares outstanding
Basic and diluted			293,003,158				293,003,158				293,003,158				291,000,411
See notes to interim consolidated financial statements

 

 

e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		For the nine months ended
		December 31,
		2011				2010
OPERATING ACTIVITIES			$				$
Income (loss) for period			1,566,084				(935,829	)
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			3,190				7,482
Warranty provision			(3,781	)			13,731
Stock-based compensation			8,514				104,760
Changes in assets and liabilities:
Accounts receivable			(7,686	)			15,547
Inventory			43,381				57,109
Deposits and prepaid expenses			(3,613	)			11,309
Accounts payable, trade			38,266				47,111
Accrued and other liabilities			61,733				(205,347	)
Cash provided by (used in) operating activities			1,706,088				(884,127	)
INVESTING ACTIVITIES
Purchase of equipment			—				(2,776	)
Cash used in investing activities			—				(2,776	)
Net increase (decrease) in cash and cash equivalents			1,706,088				(886,903	)
Cash and cash equivalents, beginning of period			1,805,894				2,818,727
Cash and cash equivalents, end of period			3,511,982				1,931,824
Supplemental schedule of noncash investing and financing activities:
Common stock issued on conversion of preferred stock			—				605,226
Accrued and deemed dividends on preferred stock			—				31,396
See notes to interim consolidated financial statements

  

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

e.Digital Corporation is a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company markets the eVU™ mobile entertainment system for the travel industry and licenses and enforces its Flash-R™ portfolio of patents related to the use of flash memory in portable devices.

 

Unaudited Interim Financial Statements

These unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. These interim consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company's financial position at December 31, 2011, and the results of its operations and cash flows for the periods presented, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended March 31, 2011 filed on Form 10-K.

 

Going Concern

The Company has incurred significant historical losses and negative cash flow from operations and has an accumulated deficit of $79,474,149 at December 31, 2011. Although the Company reported a profit in the first nine months of the current fiscal year it could incur additional losses in the future until product, service and/or licensing revenues are sufficient to sustain continued profitability. Until the Company can demonstrate sustained profitability its ability to continue as a going concern is in doubt and may be dependent upon obtaining additional financing in the future. These consolidated financial statements do not give effect to any adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.

 

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended December 31, 2011 that are of significance, or potential significance to the Company’s financial statements.

 

3. INCOME (LOSS) PER SHARE

Basic income (loss) per common share is computed by dividing income (loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income (loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities included outstanding stock options and warrants. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. These securities were not included in the computation of diluted loss per share for the periods because they are antidilutive, but they could potentially dilute earnings per share in future periods. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

 

 

 The following table sets forth the computation of basic and diluted earnings per share:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
Basic and diluted (1)
Income (loss) attributable to common stockholders		$	671,417			$	(313,448	)		$	1,566,084			$	(967,225	)
Weighted average common shares outstanding (basic and diluted)			293,003,158				293,003,158				293,003,158				291,000,411
Basic and diluted income (loss) per common share		$	0.00			$	(0.00	)		$	0.01			$	(0.00	)
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive			5,984,087				13,675,500				6,773,200				13,675,500

 

 

(1) There was no difference in basic and diluted income (loss) or in basic and diluted weighted-average shares outstanding for the respective periods. Options and warrants are not included as the effect would be anti-dilutive.

 

4. INVENTORIES

Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the weighted average cost method.

 

Inventories consisted of the following:

 

		December 31,				March 31,
		2011				2011
		$				$
Raw materials			61,500				70,835
Work in process			15,557				19,027
Finished goods			136,020				166,596
			213,077				256,458

 

5. STOCK-BASED COMPENSATION COSTS

The Company accounts for stock-based compensation under the provisions of ASC 718, Share-Based Payment and ASC 505-50, Equity-Based Payments to Non-Employees. ASC 718 requires measurement of all employee stock-based awards using a fair-value method and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further, as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
		$				$				$				$
Research and development			425				4,330				6,290				26,694
Selling and administrative			1,865				266				2,224				78,066
Total stock-based compensation expense			2,290				4,596				8,514				104,760

 

 

As of December 31, 2011 total estimated compensation cost of stock options granted but not yet vested was $23,988 and is expected to be recognized over the weighted average period of 1.4 years.

 

The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the nine-month period ended December 31, 2011 and 2010 (annualized percentages).

 

		Nine months ended
		December 31,
		2011				2010
Volatility			114	%			76	%
Risk-free interest rate			0.28	%			0.47	%
Forfeiture rate			0.0	%			0.0	%
Dividend yield			0.0	%			0.0	%
Expected life in years			2.4				2.1
Weighted-average fair value of options granted		$	.014			$	0.04

 

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the common stock over the period commensurate with the expected life of the options. The Company has a small number of option grants and limited exercise history and accordingly has for all new option grants applied the simplified method prescribed by SEC Staff Accounting Bulletin 110, Share-Based Payment: Certain Assumptions Used in Valuation Methods - Expected Term, to estimate expected life (computed as vesting term plus contractual term divided by two). The expected forfeiture rate is estimated based on historical and expected experience for determined option groups and is zero for options vesting on grant. Additional expense is recorded when the actual forfeiture rates are lower than estimated and a recovery of prior expense will be recorded if the actual forfeitures are higher than estimated.

 

See Note 7 for further information on outstanding stock options.

 

 

6. WARRANTY RESERVE

 

Details of the estimated warranty liability included in accrued and other liabilities are as follows:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
		$				$				$				$
Beginning balance			1,934				10,123				4,589				5,262
Warranty provision			(1,177	)			2,404				(3,781	)			13,731
Warranty deductions			—				(7,187	)			(51	)			(13,653	)
Ending balance			757				5,340				757				5,340

 

7. STOCKHOLDERS’ EQUITY

The following table summarizes stockholders’ equity transactions during the nine-month period ended December 31, 2011:

 

		Common stock								Additional				Accumulated				Total stockholders'
		Shares				Amount				paid-in capital				deficit				equity
						$				$				$				$
Balance, April 1, 2011			293,003,158				293,003				82,767,088				(81,040,233	)			2,019,858
Stock-based compensation			—				—				8,514				—				8,514
Income for the period			—				—				—				1,566,084				1,566,084
Balance, December 31, 2011			293,003,158				293,003				82,775,602				(79,474,149	)			3,594,456

 

 

Options

The following table summarizes stock option activity for the period:

 

						Weighted average				Aggregate
		Shares				exercise price				Intrinsic Value
		#				$				$
Outstanding April 1, 2011			6,022,500				0.15
Granted			1,845,000				0.02
Exercised			—
Canceled/expired			(512,500	)			0.18
Outstanding December 31, 2011			7,355,000				0.09			$	5,115
Exercisable at December 31, 2011			5,668,750				0.11			$	1,279

(1)

Options outstanding are exercisable at prices ranging from $0.022 to $0.155 and expire over the period from 2013 to 2015.

(2)

Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2011 of $0.025 and excludes the impact of options that were not in-the-money.

 

Share warrants

A total of 7,500,000 share warrants exercisable at $0.10 per share expired on June 30, 2011 and no warrants were outstanding at December 31, 2011.

 

8. FAIR VALUE MEASUREMENTS

Cash and cash equivalents are measured at fair value in the Company’s financial statements. Accounts receivable are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable, deferred revenue, financial instruments and accrued and other liabilities are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities. Effective April 1, 2008 the Company adopted and follows ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) which established a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The Company’s cash and cash equivalents are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820).

 

9. SEGMENT INFORMATION

ASC 280 Segment Reporting provides annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographical areas and major customers. The Company has two operating segments: (1) products and services and (2) patent licensing. Products and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content services and patent licensing consists of intellectual property revenues from the Flash-R patent portfolio.

 

Accounting policies for each of the operating segments are the same as on a consolidated basis.

 

 

Reportable segment information for the three and nine months ended December 31, 2011 and 2010 is as follows:

 

		For the three months ended								For the nine months ended
		December 31,								December 31,
		2011				2010				2011				2010
		$				$				$				$
REVENUES:
Products and services			126,845				134,892				421,813				860,121
Patent licensing			1,155,000				5,778				4,084,338				31,042
Total revenue			1,281,845				140,670				4,506,151				891,163
GROSS PROFIT:
Products and services			47,078				45,308				138,948				308,924
Patent licensing			1,092,968				—				2,769,432				—
Total gross profit			1,140,046				45,308				2,908,380				308,924
RECONCILIATION:
Total segment gross profit			1,140,046				45,308				2,908,380				308,924
Operating expenses			(437,629	)			(362,235	)			(1,210,271	)			(1,248,232	)
Other income (expense)			—				—				—				—
Income (loss) before income taxes			702,417				(316,927	)			1,698,109				(939,308	)

 

The Company does not have significant assets employed in the patent license segment and does not track capital expenditures or assets by reportable segment. Consequently it is not practical to show this information.

 

Revenue by geographic region is determined based on the location of the Company’s direct customers or distributors for product sales and services. Patent license revenue is considered United States revenue as payments are for licenses for United States operations irrespective of the location of the licensee’s home domicile.

 

		For the three months ended								For the nine months ended
		December 31,								December 31,
		2011				2010				2011				2010
		$				$				$				$
United States			1,155,000				5,778				4,084,338				31,042
International			126,845				134,892				421,813				860,121
Total revenue			1,281,845				140,670				4,506,151				891,163

 

Revenues from four licensees comprised 23%, 22%, 22% and 11% of revenue for the nine months ended December 31, 2011, with no other licensee or customer accounting for more than 10% of revenues. Revenues from three customers comprised 27%, 16% and 12% of revenue for the nine months ended December 31, 2010, with no other customer accounting for more than 10% of revenues. Accounts receivable from three customers comprised 28%, 23% and 17% of net accounts receivable at December 31, 2011. Accounts receivable from three customers comprised 40%, 25% and 10% of net accounts receivable at December 31, 2010.

 

10. COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

Intellectual Property Litigation

In September 2007 through March 2008, the Company filed complaints against eight electronic product manufacturers in the U.S. District Court for the Eastern District of Texas asserting that products made by the companies infringe four of the Company's U.S. patents covering the use of flash memory technology. These patents are part of the Company’s Flash-R patent portfolio. By September 30, 2009 the Company had licensed and settled the litigation with seven of the manufacturers and suspended the complaint against one defendant in bankruptcy.

 

 

In November 2009 the Company filed an additional patent infringement complaint in the United States District Court for the District of Colorado against nineteen companies that manufacture devices using flash memory. By December 31, 2011 the Company had licensed and settled the litigation with 12 of the defendants, suspended the complaint against one defendant, and dismissed with prejudice the remaining six defendants, thereby ending the Colorado patent litigation case.

 

Although most fees, costs and expenses of intellectual property litigation are covered under the Company’s arrangement with Duane Morris LLP as described below, the Company may incur support and related expenses for future litigation that may become material.

 

Commitment Related to Intellectual Property Legal Services

On March 23, 2007, the Company entered into an agreement for legal services and a contingent fee arrangement with Duane Morris LLP. The agreement provides that Duane Morris is the Company’s legal counsel in connection with the assertion of the Company’s flash memory related patents against infringers (“Patent Enforcement Matters”).

 

Duane Morris has agreed to handle the Company’s Patent Enforcement Matters and certain related appeals on a contingent fee basis. Duane Morris also has agreed to advance certain costs and expenses including travel expenses, court costs and expert fees. The Company has agreed to pay Duane Morris a fee equal to 40% of any license or litigation recovery related to Patent Enforcement Matters, after recovery of expenses, and 50% of recovery if appeal is necessary.

 

In the event the Company is acquired or sold or elects to sell the covered patents or upon certain other corporate events or in the event the Company terminates the agreement for any reason, then Duane Morris shall be entitled to collect accrued costs and a fee equal to three times overall time and expenses accrued in connection with the agreement and a fee of 15% of a good faith estimate of the overall value of the covered patents. Any such corporate event or termination fee will only be recorded if and when such applicable event becomes probable. The Company has provided Duane Morris a lien and a security interest in the covered patents to secure its obligations under the agreement.

 

Facility Lease

In March 2006 the Company entered into a sixty-two month lease, commencing June 1, 2006 and expiring July 31, 2011, for approximately 4,800 square feet. In May 2011 the Company entered into a lease extension through April 2012 at the same monthly rate of $6,534 excluding utilities and costs. In January 2012, the Company entered into a new sixty-two month lease, commencing May 1, 2012, for approximately 3,253 square feet with an aggregate payment of $4,879.50 per month excluding utilities and costs. The aggregate payments adjust annually with maximum payments totaling $7,156.60 per month in the forty-ninth through sixty-second months. Future lease commitments aggregated $394,215 at December 31, 2011.

 

Concentration of Credit Risk and Sources of Supply

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company at December 31, 2011 had substantially all of its cash and cash equivalents at one financial institution in a non-interest bearing account, which pursuant to current rules is insured in full by the Federal Deposit Insurance Corporation through December 31, 2012. The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not experienced any significant losses on its cash equivalents.

 

Concentrations of credit risk with respect to trade accounts receivable are limited due to the number and nature of customers comprising the Company’s customer base and their geographic dispersion. The Company has not incurred any significant credit related losses.

 

The Company relies on one third-party contract manufacturer to produce its eVU mobile entertainment product and generally relies on single suppliers for batteries, charging stations and other components. The Company also relies on one legal firm to represent it in patent licensing and enforcement matters.

 

Guarantees and Indemnifications

The Company enters into standard indemnification agreements in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450, Contingencies. The indemnification is generally limited to the amount paid by the customer. To date, there have been no claims under such indemnification provisions.

 

 

The Company provides a one-year limited warranty for most of its products.

 

11. INCOME TAXES

The provision for income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is made.  For the nine months ended December 31, 2011, the provision for income taxes included $57,025 of foreign withholding taxes on payments in connection with a patent license agreement. Excluding the impact of foreign withholding taxes, the 2012 annual effective tax rate is estimated to be lower than the 35% U.S. federal statutory rate due primarily to the anticipated utilization of available net operating loss (“NOL”) carryforwards to reduce U.S. taxable income.  For the nine months ended December 31, 2011, the provision for income taxes related primarily to a California state tax liability due to a California extension of the suspension of the net operating loss (“NOL”) carryforwards to the Company’s 2011 tax year.

 

At December 31, 2011, the Company had deferred tax assets associated with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal and California research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2011.

 

Cautionary Note on Forward Looking Statements

In addition to the other information in this report, the factors listed below should be considered in evaluating our business and prospects. This report contains a number of forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that may arise after the date hereof.

 

General

We are a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. We market our eVU mobile entertainment system for the travel industry and license and enforce our Flash-R portfolio of flash memory patents for use in portable devices produced by electronic product manufacturers. We also seek to expand our licensable intellectual property portfolio and in fiscal 2011 filed seven new U.S. patent applications for technologies related to communication networks and digital data distribution.

 

We have two operating segments: (1) products and services and (2) patent licensing and enforcement. Our products and services revenue is derived from the sale of eVU products and accessories to customers, warranty and technical support services and content integration fees and related services. Our patent licensing and enforcement revenue consists of intellectual property revenues from our Flash-R patent portfolio.

 

Our strategy is to market our eVU products and services to a growing base of U.S. and international companies for use in the airline and other travel industries. We employ direct sales and sales through value added resellers (VARs) that provide marketing, logistic and/or content services to corporate customers.

 

We are commercializing our Flash-R patent portfolio through licensing and aggressively pursue enforcement by litigating against targeted parties that we believe are infringing our patents. The international law firm of Duane Morris LLP is handling our patent enforcement matters on a contingent fee basis. During the period commencing September 2007 through March 2008, we filed complaints against eight electronic product manufacturers and subsequently licensed and settled the litigation with seven of the manufacturers and suspended the complaint against one defendant that filed for bankruptcy. In November 2009 we filed an additional patent infringement complaint in the United States District Court for the District of Colorado (the “Court”) against nineteen companies that manufacture devices using flash memory. On June 28, 2011, the Court issued an Opinion and Order Regarding Claim Construction following a January 28, 2011 Markman hearing (a proceeding under U.S. patent law where both sides present to the Court their arguments on how they believe patent terms should be construed). The Opinion construed claim terms in United States Patent 5,491,774, one of the Company’s Flash-R patents, more narrowly than we had proposed. On July 28, 2011 the parties to the litigation filed a Joint Statement in Response to June 28, 2011 Order Regarding Claim Construction (the “Statement”) as required by the Opinion. The Statement proposed a plan to take future discovery and requested that the Court construe a claim term from a second Flash-R patent in the litigation.

 

As of December 31, 2011 we had licensed and settled with 12 defendants, realizing gross license fees aggregating approximately $3.6 million, suspended the complaint against one defendant, and dismissed with prejudice the remaining six defendants, thereby ending the Colorado patent litigation case.

 

 

Additionally, in October 2011 we entered into a Flash-R licensing agreement with a manufacturing company outside of the above litigation rounds. While we continue to evaluate future licensing and enforcement actions, the Order and the Statement, described above, could negatively affect future licensing prospects.

 

Two of our patents are in the process of being reexamined by the United States Patent and Trademark Office (USPTO). Favorable determinations from the reexamination could bolster our licensing and unfavorable determination could adversely affect our ability to monetize our patent portfolio. We expect the reexamination process to be complete within approximately three months.

 

While we expect to file future complaints against additional companies and license additional companies there can be no assurance of the timing or amounts of any related license revenue. We also are developing new intellectual property for possible licensing in the areas of communication networks and digital data distribution.

 

Our business is high risk in nature. There can be no assurance we can achieve sufficient eVU or patent license revenues to sustain profitability. We continue to be subject to the risks normally associated with introducing new products, services and technologies, including unforeseeable expenses, delays and complications. Accordingly, there is no guarantee that we can or will report operating profits in future periods.

 

Overall Performance and Trends

We focused significant efforts on developing, licensing and enforcing our patent portfolio during the first nine months of fiscal 2012 and during the fiscal years ended March 31, 2011 and 2010. While we have completed two rounds of litigation to date, there is a reluctance of patent infringers to negotiate and ultimately take a patent license without at least the threat of legal action. However, the majority of patent infringement contentions settle out of court, based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed. Although we believe we have been successful in early licensing by demonstrating the strength, validity and clarity of our patent claims, future events including court rulings and patent reexamination results could have a significant positive or negative impact on future licensing activity. The recent Markman ruling in particular could negatively affect future licensing prospects.

 

Our eVU IFE business remained slow during the first nine months primarily due to airline economics. We are unable to predict future sales levels in this market as eVU player orders have been and are expected to continue to be sporadic from both existing and new customers. We continue to pursue business in the airline and other travel markets for our eVU product line.

 

While we reported a profit for the nine months ended December 31, 2011 (fiscal 2012), in the two years just completed (fiscal 2011 and 2010) we have incurred losses and negative cash flow from operations. We expect to incur losses in the future until product, service and/or licensing revenues are sufficient to sustain continued profitability. Our ability to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary obtaining additional financing.

 

Management faces challenges for the remainder of fiscal 2012 to execute its plan to grow product and service revenues, license new intellectual property currently in development, and realize additional Flash-R patent portfolio license fees. The recent Markman ruling could negatively affect future licensing prospects and future rulings from reexamination of certain Flash-R patent claims by the USPTO could have a significant positive or negative impact on future licensing activity in 2012 and beyond. The failure to obtain additional patent license revenues or eVU orders or delays of orders or production delays could have a material adverse impact on our operations. Our patent licensing business is subject to significant uncertainties as to the timing and amount of future license revenues, if any. We may also face unanticipated technical or manufacturing obstacles and face warranty and other risks in our business.

 

For the nine months ended December 31, 2011 we recognized net income before income taxes of $1,698,109 compared to a loss before income taxes of $939,308 for the comparable period of the prior fiscal year. Our revenues were $4,506,151 for the first nine months of fiscal 2012 including $4,084,338 of patent license revenue. This compares to $891,163 for the prior year’s first nine months with $31,042 of patent license revenue reported. We reported reduced operating expenses totaling $1,210,271 in the nine months ended December 31, 2011 compared to $1,248,232 in the comparable period prior primarily due to reduced staffing costs and non-cash stock compensation expenses.

 

 

Our base recurring monthly cash operating costs average approximately $135,000. However, during the current fiscal year we have incurred and may continue to incur increased non-recurring advanced product and technology research and development costs, patent re-examination related costs and other legal costs. We may also increase expenditure levels in future periods to support and expand our revenue opportunities. Our quarterly results are highly dependent on the timing and amount of licensing fees and elections regarding non-recurring expenditures and accordingly quarterly results can vary dramatically from period to period. As a result of this and other factors, past results and expenditure levels may not be indicative of future quarters. We expect to incur losses in the future until product, service and/or licensing revenues are sufficient to sustain continued profitability. Our ability to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary, obtaining additional financing.

 

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements located in Item 1 of Part I, “Financial Statements,” and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report of Form 10-K for the year ended March 31, 2011. The preparation of these financial statements prepared in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including but not limited to those related to revenue recognition, bad debts, inventory valuation, intangible assets, financing operations, stock-based compensation, fair values, income taxes, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that, of the significant accounting policies discussed in our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:

 

·

revenue recognition;

·

stock-based compensation expense; and

·

income taxes.

 

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. There were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the nine months ended December 31, 2011. For further information on our critical accounting policies, refer to Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended March 31, 2011.

 

 

Results of Operations

Three months ended December 31, 2011 compared to the three months ended December 31, 2010

 

		Three Months Ended December 31,
		2011								2010
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Products			1,902				0	%			8,253				6	%			(6,351	)			(77	%)
Services			124,943				10	%			126,639				90	%			(1,696	)			(1	%)
Patent license			1,155,000				90	%			5,778				4	%			1,149,222				19890	%
			1,281,845				100	%			140,670				100	%			1,141,175				811	%
Gross Profit:
Product gross profit (loss)			(9,905	)			0	%			(6,511	)			(5	%)			(3,394	)			52	%
Service gross profit			56,983				4	%			51,819				37	%			5,164				10	%
Patent license			1,092,968				85	%			—				0	%			1,092,968				—
			1,140,046				89	%			45,308				32	%			1,094,738				2416	%
Operating Expenses:
Selling and administrative			219,091				17	%			280,582				199	%			(61,491	)			(22	%)
Research and related			218,538				17	%			81,653				58	%			136,885				168	%
			437,629				34	%			362,235				258	%			75,394				21	%
Income (loss) before income taxes			702,417				55	%			(316,927	)			(225	%)			1,019,344				(322	%)

 

 

Income (Loss) Before Income Taxes

The income before income taxes in the third quarter of fiscal 2012 resulted primarily from three new license arrangements and related margins.

 

Revenues

Revenues increased during the most recent fiscal quarter (Q3 of fiscal 2012) compared to the same quarter of the prior fiscal year due to three new license arrangements. We experienced reduced product and service revenues due to no significant new customers or product sales and reduced service revenues from ongoing customers. Our product revenues have been sporadic in part as a result of the introduction of the iPad and other tablet-style devices, as well as an abundance of portable entertainment content, resulting in reduced IFE activity. Our service revenues declined and vary depending on repair and content services provided to a changing customer mix.

 

License fee revenues recognized fluctuate significantly from period to period primarily based on the following factors:

 

·

the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee;

·

the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and

·

fluctuations in the number of agreements executed.

  

In the future the following additional factors could also impact revenue variability:

·

the effect of court and USPTO rulings and decisions;

·

fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;

·

the timing of the receipt of periodic license fee payments and/or reports from licensees.

 

We are pursuing new eVU business and targeting new patent licensees but our results will continue to be dependent on the timing and quantity of eVU orders and the timing and amount of future patent licensing arrangements, if any.

 

Gross Profit

Gross profit for the third quarter of fiscal 2012 was $1,140,046 or 89% of revenues. The gross profit on product and service revenues was 37% of related revenues and the gross profit on patent licensing fees was 95% of license revenues. The gross profit on licensing was higher than prior periods as we incurred no contingency legal fees on one license during the quarter. The gross profit for the prior year’s third quarter was $45,308 or 32% of product and service revenues. There were no license revenues in the prior year’s third quarter. Gross profit margins are highly dependent on revenue mix, prices charged, volume of orders, and for periods with patent licensing revenues the amounts of contingency legal fees and costs.

 

  

Operating Expenses

Selling and administrative costs for the three months ended December 31, 2011 declined by $61,491 compared to the same period in the year prior. The reduced current period selling and administrative expenses is due primarily to $74,000 of reduced staffing costs offset by increased professional fees.

 

Research and related expenses increased by $137,000 due primarily to $114,000 of increased patent related costs. Research and related expenses can vary significantly from quarter to quarter based on the allocation of time spent by personnel who work on both revenue producing service and repair projects, on patent related costs and on internal research projects. Such expenses also vary based on decisions made regarding outside engineering and consulting.

 

Income Taxes

Income tax expense for the three months ended December 31, 2011 was $31,000, consisting of a provision for California state taxes. There was an income tax benefit of $3,479 for the same period in the prior year.

 

Income (Loss) Attributable to Common Stockholders

The net income attributable to common stockholders was $671,417. The net loss attributable to common stockholders for the prior comparable third quarter was $313,448.

 

Nine months ended December 31, 2011 compared to the nine months ended December 31, 2010

 

		Nine Months Ended December 31,
		2011								2010
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Product revenues			62,159				1	%			361,080				41	%			(298,921	)			(83	%)
Service revenues			359,654				8	%			499,041				56	%			(139,387	)			(28	%)
Patent license			4,084,338				91	%			31,042				3	%			4,053,296				13057	%
			4,506,151				100	%			891,163				100	%			3,614,988				406	%
Gross Profit:
Product gross profit (loss)			(11,324	)			0	%			69,635				8	%			(80,959	)			(116	%)
Service gross profit			150,272				3	%			239,289				27	%			(89,017	)			(37	%)
Patent license gross profit			2,769,432				62	%			—				0	%			2,769,432				—
			2,908,380				65	%			308,924				35	%			2,599,456				841	%
Operating Expenses:
Selling and administrative			698,712				16	%			920,495				103	%			(221,783	)			(24	%)
Research and related			511,559				11	%			327,737				37	%			183,822				56	%
			1,210,271				27	%			1,248,232				140	%			(37,961	)			(3	%)
Income (loss) before income taxes			1,698,109				38	%			(939,308	)			(105	%)			2,637,417				(281	%)

 

Income (Loss) Before Income Taxes

The income before income taxes of $1,698,109 for the nine months ended December 31, 2011 resulted primarily from three new license arrangements and related margins.

 

Revenues

Revenues increased during the most recent nine months compared to the same period of the prior fiscal year due to the increase in patent license revenue from $31,042 to $4,084,338. We currently have one licensee reporting periodic royalties. One such payment was recognized in Q2 of the current year and one each in Q3 and Q1 of the prior year. All other royalties have been one-time fully paid up royalties. Service revenues vary depending on repair and content services provided to a changing customer mix. Since the introduction of the iPad and other tablet-style devices, as well as an abundance of portable entertainment content, eVU product sales activity has been slow and sporadic Our product sales for the first nine months are not necessarily indicative of future orders. We had a product order backlog at December 31, 2011 of $83,000. Our service agreements and terms vary with each customer and there is no assurance that our service revenues will continue at comparable levels for the balance of the fiscal year or in future periods.

 

 

While we expect additional patent licenses in future periods, there can be no assurance of the timing or amounts of future license revenues. We are pursuing new eVU and other technology business but our results will continue to be dependent on the timing and quantity of eVU orders and timing and amount of any patent licensing arrangements.

 

Gross Profit

Gross profit for the nine months ended December 31, 2011 was $2,908,380 or 65% of revenues. The gross profit on product and service revenues was 33% of related revenues and the gross profit on patent licensing fees was 68% of license revenues. The gross profit on licensing was higher than prior periods as we incurred no contingency legal fees on one license during the third quarter. The gross profit for the prior year’s first nine months was $308,924 or 35% of revenues. Gross profit margins are highly dependent on revenue mix, prices charged, volume of orders, and for periods with patent licensing revenues the amounts of contingency legal fees and costs.

 

Operating Expenses

Selling and administrative costs for the nine months ended December 31, 2011 declined by $221,783 compared to the same period in the year prior. The current period included a $2,224 expense for noncash stock-based compensation expense compared to $78,066 for the prior year’s first nine months. Reduced current period selling and administrative expenses were due primarily to a $302,000 reduction in staffing costs offset by annual shareholder meeting costs of $63,000 and consulting fees of $24,000.

 

Research and related expenses in the most recent nine months included $6,290 of noncash stock-based compensation costs compared to $26,694 for the same period in the prior year. Research and related expenses increased by $184,000 due primarily to $223,000 of increased patent related costs offset by reduced salaries expense of $39,000. Research and related expenses can vary significantly from quarter to quarter based on the allocation of time spent by personnel who work on both revenue producing service and repair projects, on patent related costs and on internal research projects. Such expenses also vary based on decisions made regarding outside engineering and consulting.

 

Income Taxes

Income tax expense for the nine months ended December 31, 2011 was $132,025 consisting of $57,025 foreign tax expense and $75,000 as a provision for California state taxes. There was an income tax benefit of $3,749 for the same period in the prior year.

 

Income (Loss) Attributable to Common Stockholders

The net income attributable to common stockholders was $1,566,084 for the nine months ended December 31, 2011. The net loss attributable to common stockholders for the prior comparable nine month period was $967,225.

 

Liquidity and Capital Resources

At December 31, 2011, we had working capital of $3,591,140 compared to working capital of $2,013,352 at March 31, 2011. At December 31, 2011 we had cash on hand of $3,511,982.

 

Operating Activities

Cash provided by operating activities was $1,706,088 for the nine months ended December 31, 2011. Cash provided by operating activities included the net income of $1,566,084 increased by net non-cash expenses of $140,004. Major components also providing operating cash was a decrease of $43,381 in inventory and an increase of $38,266 in accounts payable and $61,733 of accrued and other liabilities. Major components reducing operating cash included a $7,686 increase in accounts receivable and a $3,613 increase in deposits and prepaid expenses.

 

Cash used in operating activities was $884,127 for the nine months ended December 31, 2010. The usage was primarily the result of the net loss and a reduction in accrued and other liabilities and increases in accounts receivable.

 

Our terms to customers vary but we often require payment prior to shipment of product and any such payments are recorded as deposits. Patent license payments are normally due at signing of the license or within 30-45 days of settlement or end of royalty reporting period.

 

 

Individual working capital components can change dramatically from period to period due to timing of licensing, sales and shipments and corresponding receivable, inventory and payable balances. Accordingly operating cash requirements vary significantly from period to period.

 

Investing Activities

The Company’s efforts are primarily on operations and currently we have no significant investing capital needs. We have no commitments requiring investment capital.

 

Financing Activities

There were no cash financing activities during the nine months ended December 31, 2011.

 

Debt and Other Commitments

We currently have no debt outstanding other than trade payables and accruals. At December 31, 2011 we had no significant purchase commitments for product and components.

 

We have future lease commitments on our current facility and the facility lease commencing May 1, 2012 of $394,215, as more fully described in our interim consolidated financial statements.

 

Our legal firm Duane Morris is handling patent enforcement matters and certain related appeals on our Flash-R patent portfolio on a contingent fee basis. Duane Morris also has agreed to advance certain costs and expenses including travel expenses, court costs and expert fees. We have agreed to pay Duane Morris a fee equal to 40% of any license or litigation recovery related to patent enforcement matters, after recovery of expenses, and 50% of recovery if appeal is necessary.

 

In the event we are acquired or sold or elect to sell the covered patents or upon certain other corporate events or in the event we terminate the agreement for any reason, then Duane Morris shall be entitled to collect accrued costs and a fee equal to three times overall time and expenses accrued in connection with the agreement and a fee of 15% of a good faith estimate of the overall value of the covered patents. Duane Morris has a lien and a security interest in the covered patents to secure its obligations under the agreement.

 

The costs of the USPTO reexamination of certain claims of the Flash-R patents is not covered under our arrangement with Duane Morris and we have engaged separate counsel and will be required to pay such patent related costs which could continue to be significant.

 

Cash Requirements

Other than cash on hand and accounts receivable, we have no material unused sources of liquidity at this time.  Based on our cash position at December 31, 2011 and current planned expenditures and level of operation, we believe we have sufficient capital resources for the next twelve months. Actual results could differ significantly from management plans. We believe we may be able to obtain additional funds from future patent licensing and eVU product sales and services but the timing of licenses and shipments and the amount and quantities of shipments, orders and reorders are subject to many factors and risks, many outside our control.

 

Since we have not demonstrated sustainable profitability, our company’s ability to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary obtaining additional financing. We currently have no plans, arrangements or understandings regarding any acquisitions.

 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

 

 

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting during our fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Intellectual Property Litigation

In September 2007 through March 2008, we filed complaints against eight electronic product manufacturers in the U.S. District Court for the Eastern District of Texas asserting that products made by the companies infringe four of our U.S. patents covering the use of flash memory technology. These patents are part of our Flash-R patent portfolio. By September 30, 2009 we had licensed and settled the litigation with seven of the manufacturers and suspended the complaint against one defendant in bankruptcy.

 

In November 2009 we filed an additional patent infringement complaint in the United States District Court for the District of Colorado (the “Court”) against nineteen companies that manufacture devices using flash memory. On June 28, 2011, the Court issued an Opinion and Order Regarding Claim Construction (the “Opinion”) following a January 28, 2011 Markman hearing (a proceeding under U.S. patent law where both sides present to the Court their arguments on how they believe patent terms should be construed). The Opinion construed claim terms in United States Patent 5,491,774, one of the Company’s Flash-R patents, more narrowly than proposed by the Company. On July 28, 2011 the parties to the litigation filed a Joint Statement in Response to June 28, 2011 Order Regarding Claim Construction (the “Statement”) as required by the Opinion. The Statement proposed a plan to take future discovery and requested that the Court construe a claim term from a second Flash-R patent in the litigation. By December 31, 2011 we had licensed and settled the litigation with 12 of the defendants, suspended the complaint against one defendant and dismissed with prejudice, the remaining six defendants, thereby ending the Colorado patent litigation case.

 

While the Company continues to evaluate future licensing and enforcement actions, the Order and the Statement could negatively affect future licensing prospects.

 

Although most fees, costs and expenses of intellectual property litigation are covered under our arrangement with Duane Morris LLP, we may incur support and related expenses for this litigation that may become material. In particular, the costs of the USPTO reexamination of certain claims of the Flash-R patents is not covered under our arrangement with Duane Morris LLP and we have engaged separate counsel and will be required to pay such patent related costs which could continue to be significant.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

NONE

(b)

NONE

(c)

NONE

 

Item 3. Defaults Upon Senior Securities

NONE

 

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

(a) NONE

(b) NONE

 

Item 6. Exhibits

 

Exhibit 31.1 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, President and CEO (Principal Executive Officer).

 

Exhibit 31.2 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer).

 

Exhibit 32.1 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, President and CEO (Principal Executive Officer) and MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer).

 

	Extensible Business Reporting Language (XBRL) Exhibits*
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

 

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	e.DIGITAL CORPORATION
	By:	/s/ ALFRED H. FALK
		Alfred H. Falk, President and Chief Executive Officer
	By:	/s/ MARDEE HARING-LAYTON
		MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer)

 

Date: February 9, 2012