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, 2015

 

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)
16870 West Bernardo Drive, Suite 120, 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 [_]

 

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   [_] 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 [_]		Accelerated filer [_]
	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 [_] No [X]

 

As of February 5, 2016 a total of 293,678,330 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, 2015 and March 31, 2015		3
Condensed Consolidated Statements of Operations for the three and nine  months ended December 31, 2015 and 2014		4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2015 and 2014		5
Notes to Interim Condensed Consolidated Financial Statements		6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		14
Item 4. Controls and Procedures		21

 

PART II. OTHER INFORMATION      

 

Item 1.	Legal Proceedings		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Mine Safety Disclosures		22
Item 5.	Other Information		22
Item 6.	Exhibits		22
SIGNATURES			23

 

 

 

Part I. Financial Information

Item 1. Financial Statements:

e.Digital Corporation and subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		(Unaudited)				(Audited)
		December 31,				March 31,
		2015				2015
		$				$
ASSETS
Current
Cash and cash equivalents			1,083,156				1,952,981
Accounts receivable			462				11,218
Inventory - net			–				–
Deposits and prepaid expenses			41,029				42,538
Total current assets			1,124,647				2,006,737
Property, equipment and intangibles, net of accumulated depreciation and amortization of $162,835 and $166,529, respectively			29,322				7,215
Total assets			1,153,969				2,013,952
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable, trade			101,904				140,293
Accrued and other liabilities			99,130				156,759
Total current liabilities			201,034				297,052
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, 293,678,330 and 293,378,330 issued and outstanding, respectively			293,678				293,378
Additional paid-in capital			83,005,309				82,931,048
Accumulated deficit			(82,346,052	)			(81,507,526	)
Total stockholders' equity			952,935				1,716,900
Total liabilities and stockholders' equity			1,153,969				2,013,952

 

See notes to interim condensed 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,
		2015				2014				2015				2014
Revenues:		$				$				$				$
Products and services			–				42,995				16,031				147,711
Patent licensing			–				1,078,500				693,500				2,051,034
			–				1,121,495				709,531				2,198,745
Operating costs and expenses:
Cost of revenues:
Products and services			–				79,322				8,256				238,729
Patent licensing and litigation costs			112,500				117,185				337,500				342,774
Contingent legal fees and expenses			5,261				338,630				292,156				642,006
Selling and administrative			176,366				185,481				657,549				548,968
Research and related expenditures			70,542				93,786				253,396				261,594
Total operating costs and expenses			364,669				814,404				1,548,857				2,034,071
Operating income (loss) before other income and provision for income taxes			(364,669	)			307,091				(839,326	)			164,674
Other income:
Other income			800				–				800				–
Other income			800				–				800				–
Income (loss) before provision for income taxes			(363,869	)			307,091				(838,526	)			164,674
Income tax expense			–				(31,350	)			–				(31,350	)
Income (loss) for the period			(363,869	)			275,741				(838,526	)			133,324
Income (loss) per common share - basic			(0.00	)			0.00				(0.00	)			0.00
Income (loss) per common share - diluted			(0.00	)			0.00				(0.00	)			0.00
Weighted average common shares outstanding
Basic			293,678,330				293,328,330				293,564,512				293,328,330
Diluted			293,678,330				294,164,274				293,564,512				294,135,318

 

See notes to interim condensed consolidated financial statements

 

 

 

 

e.Digital Corporation and subsidiary

 

CONDENSED CONSOLIDATED (UNAUDITED) STATEMENTS OF CASH FLOWS

 

 

		For the nine months ended
		December 31,
		2015				2014
OPERATING ACTIVITIES		$				$
Income (loss) for period			(838,526	)			133,324
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			3,050				3,876
Inventory market and reserve adjustment			–				50,278
Stock-based compensation			67,961				37,587
Changes in assets and liabilities:
Accounts receivable			10,756				163,072
Inventory			–				3,641
Deposits and prepaid expenses			1,509				20,623
Accounts payable, trade			(38,389	)			139,845
Accrued and other liabilities			(57,629	)			(95,964	)
Cash provided by (used in) operating activities			(851,268	)			456,282
INVESTING ACTIVITIES
Purchase of equipment and intangibles			(25,157	)			–
Cash used in investing activities			(25,157	)			–
FINANCING ACTIVITIES
Proceeds from exercise of stock options			6,600				–
Cash provided by financing activities			6,600				–
Net increase (decrease) in cash and cash equivalents			(869,825	)			456,282
Cash and cash equivalents, beginning of period			1,952,981				1,787,863
Cash and cash equivalents, end of period			1,083,156				2,244,145

 

See notes to interim condensed 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 is developing and marketing an intellectual property portfolio consisting of context and interpersonal awareness systems (“Nunchi®” technology), advanced data security technologies (“microSignet™” technology), secure communication technologies (“Synap™” technology) and other technologies.

 

Unaudited Interim Financial Statements

These unaudited condensed 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. These interim condensed 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, 2015, 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended March 31, 2015 filed on Form 10-K.

 

Liquidity / Going Concern

The Company has incurred significant historical losses and negative cash flow from operations and has an accumulated deficit of $82,346,052 at December 31, 2015. Other than cash on hand, the Company has no other sources of financing currently available as of December 31, 2015. The Company may incur additional losses in the future until licensing or other 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. There is no assurance that the Company will be successful in generating or raising funds, if necessary, to sustain its operations for twelve months or beyond. Should the Company be unable to generate funds or obtain required financing, it may have to curtail operations, which may have a material adverse effect on its financial position and results of operations. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern. 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

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The new standard applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The amendment is effective for annual reporting periods beginning after December 15, 2014 and interim periods within those annual periods. The Company adopted this guidance effective April 1, 2015 and expects, as a result, that the discontinuation of eVU entertainment services is not a major strategic shift and does not have a significant impact on the Company's consolidated financial statements.

 

 

 

 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendment is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. In response to stakeholders’ requests to defer the effective date, the Board issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public entities should apply guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the new standard.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period. The guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. The guidance will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, if any, on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. Since this guidance primarily addresses certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statement disclosures.

 

In January 2015, the FASB issued ASU 2015-01, “Extraordinary and Unusual Items,” eliminating the concept of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the presentation of amounts in the income statements. The Company plans to adopt ASU 2015-01 effective April 1, 2016.

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is currently evaluating this guidance, including the period to adopt and the impact, if any, on its consolidated financial statements.

 

Other Accounting Standards Updates not effective until after December 31, 2015 are not expected to have a material effect on the Company’s financial position or results of operations.

 

 

 

 

3. INCOME (LOSS) PER SHARE

Basic income (loss) per common share is computed by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per common share is computed by dividing net income (loss) 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. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. 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:

 

		For the three months ended								For the nine months ended
		December 31,								December 31,
		2015				2014				2015				2014
		$				$				$				$
Net income (loss)		$	(363,869	)		$	275,741			$	(838,526	)		$	133,324
Weighted average common shares - basic			293,678,330				293,328,330				293,564,512				293,328,330
Basic income (loss) per common share		$	(0.00	)		$	0.00			$	(0.00	)		$	0.00
Diluted
Net income (loss)		$	(363,869	)		$	275,741			$	(838,526	)		$	133,324
Weighted average common shares - basic			293,678,330				293,328,330				293,564,512				293,328,330
Effect of dilutive common shares			–				835,944				–				806,988
Weighted average common shares - diluted			293,678,330				294,164,274				293,564,512				294,135,318
Net income (loss) per common share - basic		$	(0.00	)		$	0.00			$	(0.00	)		$	0.00
Net income (loss) per common share - diluted		$	(0.00	)		$	0.00			$	(0.00	)		$	0.00
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive			4,500,000				–				4,500,000				–

 

4. LIQUIDITY

The Company has not identified any trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease in liquidity. During the third quarter of fiscal 2015, the Company ceased marketing eVU products and accessories, but continued providing service to one customer through September 30, 2015. The termination of eVU operations and the loss of eVU revenues did not have a material impact on liquidity, results of operations or financial condition of the Company.

 

5. 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. The Company reserves for inventory that is obsolete or determined to be slow-moving and classifies the slow moving portion of inventory as a long-term asset. The Company has ceased offering new eVU systems and accordingly has fully reserved inventory at December 31, 2015.

 

 

 

 

Inventories consisted of the following:

 

		December 31,				March 31,
		2015				2015
		$				$
Raw materials			18,794				37,559
Work in process			–				12,842
Finished goods			26,401				29,512
			45,195				79,913
Reserve for obsolescence			(45,195	)			(79,913	)
			–				–

 

The foregoing is net of an aggregate lower-of-cost-or-market inventory adjustment of $64,409 at December 31, 2015 and $81,609 at March 31, 2015. The Company has ceased offering new eVU systems and accordingly has fully reserved inventory at December 31, 2015.

 

6. 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,
		2015				2014				2015				2014
		$				$				$				$
Research and development			2,782				2,547				13,270				7,641
Selling and administrative			4,358				9,982				54,691				29,946
Total stock-based compensation expense			7,140				12,529				67,961				37,587

 

 

As of December 31, 2015 total estimated compensation cost of stock options granted but not yet vested was $39,598 and is expected to be recognized over the weighted average period of approximately nine months.

 

No stock options were granted during the three or nine-month periods ended December 31, 2015 and 2014.

 

See Note 7 for further information on outstanding stock options.

 

7. STOCKHOLDERS’ EQUITY

The following table summarizes stockholders’ equity transactions during the nine-month period ended December 31, 2015:

 

		Common stock								Additional paid-in				Accumulated				total stockholders’
		Shares				Amount				capital				deficit				equity
						$				$				$				$
Balance, April 1, 2015			293,378,330				293,378				82,931,048				(81,507,526	)			1,716,900
Stock-based compensation			–				–				67,961				–				67,961
Shares issued on exercise of stock options			300,000				300				6,300				–				6,600
Net income for the period			–				–				–				(838,526	)			(838,526	)
Balance, December 31, 2015			293,678,330				293,678				83,005,309				(82,346,052	)			952,935

 

 

 

 

 

Options

The following table summarizes stock option activity for the period:

 

								Weighted average				Aggregate
				Shares				exercise price				Intrinsic Value
				#				$				$
	Outstanding April 1, 2015				5,948,578				0.0670
	Granted				–				–
	Exercised				(300,000	)			0.0220
	Canceled/expired				(1,148,578	)			0.027
	Outstanding December 31, 2015				4,500,000				0.0799			$	–
	Exercisable at December 31, 2015				3,480,000				0.0711			$	–

 

(1)

Options outstanding are exercisable at prices ranging from $0.055 to $0.11 and expire over the period from 2018 to 2019.

(2)

Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2015 of $0.0371 and excludes impact of options that were not in the money.

 

Share warrants

No warrants were outstanding at December 31, 2015 and December 31, 2014.

 

Since the Company has a net operating loss carryforward as of December 31, 2015, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the quarter ended December 31, 2015. Additionally, no incremental tax benefits were recognized from stock options exercised during the quarter ended December 31, 2015 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

 

8. FAIR VALUE MEASUREMENTS

Cash and cash equivalents are measured at fair value in the Company’s consolidated 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 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. Through September 30, 2015 the Company had two operating segments: (1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from patent portfolios and products and services consisted of sales of the Company’s electronic eVU mobile entertainment device and related content services. The Company terminated providing eVU services in September 2015.

 

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, 2015 and 2014 is as follows:

 

			For the three months ended				For the nine months ended
			December 31,				December 31,
			2015		2014		2015		2014
			$		$		$		$
SEGMENT REVENUES:
Products and services			–		42,995		16,031		147,711
Patent licensing			–		1,078,500		693,500		2,051,034
	Total revenue		–		1,121,495		709,531		2,198,745
SEGMENT COST OF REVENUES:
Products and services			–		79,322		8,256		238,729
Patent licensing and litigation costs			112,500		117,185		337,500		342,774
Contingent legal fees and expenses			5,261		338,630		292,156		642,006
	Total cost of revenues		117,761		535,137		637,912		1,223,509
RECONCILIATION:
Segment income (loss) before corporate costs			(117,761)		586,358		71,619		975,236
Other corporate operating costs			246,908		279,267		910,945		810,562
Other income (expense)			800		–		800		–
	Operating income (loss) before provision for income taxes		(363,869)		307,091		(838,526)		164,674

 

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,
		2015				2014				2015				2014
		$				$				$				$
United States			–				1,078,500				693,500				2,051,034
International			–				42,995				16,031				147,711
Total revenue			–				1,121,495				709,531				2,198,745

 

Revenues from three licensees comprised 25%, 21% and 14% of revenues for the nine months ended December 31, 2015, with no other licensee or customer accounting for more than 10% of revenues. Revenues from one licensee comprised 16% of revenue for the nine months ended December 31, 2014, with no other licensee or customer accounting for more than 10% of revenues. Accounts receivable from one customer comprised 100% of net accounts receivable at December 31, 2015. Accounts receivable from three customers comprised 66%, 14%, and 11% of net accounts receivable at December 31, 2014.

 

 

 

 

10. COMMITMENTS AND CONTINGENCIES

 

Legal Matters

Intellectual Property Litigation

As of September 30, 2015, the Company had settled or dismissed all complaints with respect to its Flash-R patent portfolio.

 

The Company commenced legal action with regard to its Nunchi portfolio of patents in July 2014 and currently has seven active complaints in the U.S. District Court for the Northern District of California and one in the U.S. District Court for the Southern District of California. In December 2015, the United States Patent Trial and Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO).

 

Commitment Related to Intellectual Property Legal Services

In September 2012 the Company engaged Handal and Associates (“Handal”) to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s flash memory patent portfolio. Pursuant to a partial contingent fee arrangement, the Company is paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art search firms. The Company has agreed to pay Handal a fee ranging from 33-40% of any license fee or settlement related to patent enforcement matters, less prior retainers and expenses. The Company may terminate the representation at any time but would be obligated to pay fees and advances.

 

The Company remains obligated to pay contingency fees on certain future Flash-R™ royalty payments from previous matters handled by Duane Morris LLP.

 

Facility Lease

In January 2012, the Company entered into a sixty-two month facility lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive, Suite 120, San Diego, California. The aggregate monthly payment is $6,831 excluding utilities and costs. The aggregate payments adjust annually with maximum payments increasing to $7,157 in the forty-ninth through sixty-second months. Future lease commitments at December 31, 2015 total $127,518. The Company recognizes rent expense by the straight-line method over the lease term. As of December 31, 2015, deferred rent totaled $20,656.

 

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 maintains cash and cash equivalent accounts with Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Certain of the Company’s accounts are each insured up to $250,000 by the FDIC. The Company’s exposure for amounts in excess of FDIC insured limits at December 31, 2015 was approximately $851,000. The Company has not experienced any losses in such accounts. 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 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.

 

 

 

 

Employee Benefit – 401K Plan

In September 2012, the Company adopted a defined contribution plan (401(k)) covering its employees. Matching contributions are made on behalf of all participants, according to the Safe Harbor provision. The Company matches 100% (dollar for dollar) on deferrals of up to 4% of employee compensation deferred. As of December 31, 2015, the Company made matching contributions totaling $7,522.

 

11. INCOME TAXES

There is no provision for income taxes for the nine months ended December 31, 2015 as the Company currently estimates its effective tax rate to be zero due to uncertainty of income in future interim quarters of the current year and due to net operating loss carryforwards.

 

For the nine months ended December 31, 2014, the provision for income taxes consisted of $31,350 of foreign withholding taxes on payments in connection with a patent license agreement. Excluding the impact of foreign withholding taxes, the current year annual effective tax rate is estimated to be zero due to the anticipated utilization of available net operating loss (“NOL”) carryforwards to reduce U.S. taxable income.

 

At December 31, 2015 and 2014, 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.

 

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. At December 31, 2015, the Company has no liabilities for uncertain tax positions. 

 

 

 

 

 

 

 

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, 2015.

 

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 are developing and marketing intellectual property consisting of context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies (“microSignet” technology), secure communications technologies (“Synap” technology), and other technologies. We ceased providing eVU® mobile entertainment services to our travel industry customers in the third quarter of fiscal 2015 (December 31, 2014), with related contract eVU services ending as of September 30, 2015.

 

Through September 30, 2015 we had two operating segments: (1) patent licensing and enforcement and (2) products and services. Our patent licensing and enforcement revenue consists of intellectual property revenues from our patent portfolio. Our products and services revenue consisted of the sale of eVU products and accessories to customers, warranty and technical support services, and content integration fees and related services. At September 30, 2015 we terminated providing eVU services, effectively ending this segment’s operations.

 

Licensing and Patent Enforcement Activities

We are commercializing our patent portfolios through licensing and we are aggressively pursuing enforcement by litigating against targeted parties that we believe are infringing our patents. We commenced legal enforcement actions in 2007 and since September 2012, the law firm of Handal and Associates has been handling our Patent Enforcement Matters on a partial contingent fee basis.

 

Our licensing and enforcement activity for each patent portfolio is summarized as follows:

 

Flash-R Technology Licensing – Flash-R litigation created awareness of the Company’s intellectual property among household named companies. The Company sought licenses through patent enforcement actions from 109 companies and related distributors, with 81 agreeing to license terms through September 30, 2015. Three of the patents in the Flash-R portfolio expired in 2014, and the remaining two patents expire in March 2016. As of November 1, 2015, we are not pursuing additional enforcement and no open cases remain.

 

Nunchi Technology Enforcement - We commenced legal action with regards to our Nunchi portfolio of patents in July 2014. We currently have seven active complaints in the U.S. District Court for the Northern District of California and one active complaint in the U.S. District for the Southern District of California. We expect to file future complaints against additional companies. In December 2015, the United States Patent Trial and Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO). If the patents are upheld, we believe the patents will be stronger against other future defendants considering IPR challenges. We are in early negotiations with other defendants, and are confident regarding license and settlement prospects for the Nunchi portfolio.

 

MicroSignet Technology - We are seeking to license our MicroSignet technology and to date have not commenced any legal actions but may do so in the future.

 

Synap Technology –We are seeking to license our Synap technology and to date have not commenced any legal actions, but may do so in the future.

 

 

 

 

We have relied upon our Flash-R patent portfolio for 100% of our licensing and enforcement revenue to date and such Flash-R licensing and enforcement activities have ceased due to the expiration of three patents in 2014 and the remaining two Flash-R patents in March 2016. We believe that our licensing and/or enforcement activities with respect to our Nunchi, MicroSignet, and Synap patent portfolios will result in licensing revenue, and continue to develop additional intellectual property in the areas of context and interpersonal awareness systems and explore new technologies for possible development or licensing. However, our legal action to enforce our Nunchi portfolio of patents has resulted in no revenue to date and there can be no assurance that such legal action or future action against additional companies will be successful or result in licensing revenue. For further information on our technologies and our patent portfolio and related licensing activities, refer to “Item 1 – Business” of our Annual Report on Form 10-K for the year ended March 31, 2015.

 

Our business is high risk in nature. There can be no assurance we can achieve sufficient patent license or other revenues to achieve future profitability. We continue to be subject to the risks normally associated with introducing new 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 last two fiscal years and during the current fiscal year.

 

We have successfully completed three rounds of enforcement litigation on our Flash-R patent portfolios and are in the process of additional enforcement actions on our Nunchi patent portfolio. 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. We believe we are building a track record of demonstrating the strength, validity and clarity of our patent claims that can result in significant future revenues from our patent portfolios.

 

During the nine months ended December 31, 2015 we recognized $16,031 of eVU services from one customer contract that terminated September 30, 2015.

 

We reported a loss for the nine months ended December 31, 2015. Revenues and profits have been sporadic in prior periods and we have incurred historical losses and negative cash flow from operations. We may incur losses in the future unless or until licensing revenues are sufficient to achieve profitability.

 

For the nine months ended December 31, 2015:

 

·

We recognized net loss before income taxes of $839,326 compared to a net income before income taxes of $164,674 for the comparable period of the prior fiscal year.

·

Our revenues from products and services were $16,031 for the first nine months of fiscal 2016 with $693,500 of patent license revenue. This compares to $147,711 of product and service revenue for the prior year’s first nine months with $2,051,034 of patent license revenue.

·

Operating costs and expenses totaling $1,548,857 for the nine months ended December 31, 2015 compared to $2,034,071 for the comparable prior period primarily due to decreased patent-related legal costs.

 

Management faces challenges and risks for the remainder of fiscal 2016 to execute our plan to monetize our technologies. These challenges include, but are not limited to, successful execution of our legal and licensing enforcement strategy in an uncertain and changing legal and regulatory environment related to patent infringement. The failure to obtain additional patent license revenues could have a material adverse impact on our operations. Our patent licensing business is subject to significant risks discussed herein and in our Annual Report on Form 10-K and is subject to uncertainties as to the timing and amount of future license revenues, if any.

 

 

 

 

Our monthly cash operating costs average approximately $116,000 per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue advanced technology research and development. Our quarterly results are highly dependent on the timing and amount of licensing fees 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. Our ability to continue as a going concern is in doubt and is dependent upon achieving a profitable level of operations 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 on Form 10-K for the year ended March 31, 2015. 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;

·

income taxes; and

·

inventory reserve

 

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, 2015. 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, 2015.

 

 

 

 

 

 

 

 

Results of Operations

 

Three months ended December 31, 2015 compared to the three months ended December 31, 2014

 

		Three Months Ended December 31,
		2015								2014
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Products and services			–				–				42,995				4%				(42,995	)			(100%	)
Patent licensing			–				–				1,078,500				96%				(1,078,500	)			(100%	)
			–				–				1,121,495				100%				(1,121,495	)			(100%	)
Operating costs and expenses:
Cost of revenues:
Products and services			–				–				79,322				7%				(79,322	)			(100%	)
Patent licensing and litigation costs			112,500				–				117,185				11%				(4,685	)			(4%	)
Contingent legal fees and expenses			5,261				–				338,630				30%				(333,369	)			(98%	)
Selling and administrative			176,366				–				185,481				17%				(9,115	)			(5%	)
Research and development			70,542				–				93,786				8%				(23,244	)			(25%	)
			364,669				–				814,404				73%				(449,735	)			(55%	)
Operating income (loss) before other income and provision for income taxes			(364,669	)			–				307,091				27%				(671,760	)			(219%	)

 

 

Income (Loss) Before Income Taxes

We reported a net loss before other income and provision for income taxes of $364,669 for the three months ended December 31, 2015 compared to a net income before income taxes of $307,091 for the comparable period of the prior year due to no new patent license settlements in the current period.

 

Revenues

Revenues decreased during the third fiscal quarter of 2016 compared to the same quarter of the prior fiscal year due to no new license arrangements as we transition enforcement efforts from the Flash-R patent portfolio to the Nunchi patent portfolio and other technologies and the termination of eVU products and services.

 

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:

·

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 targeting new patent licensees but our results will continue to be dependent on the timing and amount of future patent licensing arrangements, if any.

 

Operating Costs and Expenses

Operating costs and expenses include cost of revenues associated with our recently terminated products and services segment and costs associated with our patent licensing and enforcement activities including contingent and non-contingent litigation costs and related enforcement support costs. For the three months ended December 31, 2015, operating costs and expenses decreased by $449,735 compared to the same period in the prior year primarily due to reduced contingent legal costs resulting from no settlements in the most recent quarter.

 

 

 

 

 

Patent licensing and litigation costs related to patent enforcement were $112,500 at December 31, 2015 compared to $117,185 in the prior year’s third quarter. Non-contingent licensing and litigation costs and related enforcement support costs may be incurred without any directly related revenues in a respective period. Generally contingent costs relate to revenues during a respective period but can vary depending on our share of certain costs and expenses. Contingent legal fees and expenses related to patent enforcement were $5,261 for the three months ended December 31, 2015 compared to $338,630 for the prior year’s third quarter. The decrease is due to reduced costs associated with no patent related revenues in the current period.

 

There were no cost of revenues associated with products and services at December 31, 2015 due to the termination of the eVU business as of September 30, 2015. The prior year’s third quarter included $79,322 of cost of revenues associated with products and services.

 

Selling and administrative costs for the three months ended December 31, 2015 were $176,366 comparable to $185,481 in the prior year period.

Research and related expenses decreased by $23,244 primarily due reduced salaries and related benefits expenses in the current year of $40,571 as compared $64,827 for the same period in the prior year. The current year’s third quarter includes $2,782 for noncash stock-based compensation expense as compared to $2,547 in the same period of the prior year. 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

During the three months ended December 31, 2015, the Company had no income tax expense. During the same period of the prior year, the Company recorded income tax expense of $31,350 for foreign taxes on patent licensing revenues.

 

Income (Loss)

The net loss for the three months ended December 31, 2015 was $363,869. The net income for the prior comparable third quarter was $275,741 which included the foreign tax expense of $31,350.

 

 

 

 

 

 

 

Nine months ended December 31, 2015 compared to the nine months ended December 31, 2014

 

 

		Nine Months Ended December 31,
		2015								2014
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Product and services			16,031				2%				147,711				7%				(131,680	)			(89%	)
Patent licensing			693,500				98%				2,051,034				93%				(1,357,534	)			(66%	)
			709,531				100%				2,198,745				100%				(1,489,214	)			(68%	)
Operating costs and expenses:
Products and services			8,256				1%				238,729				11%				(230,473	)			(97%	)
Patent licensing and litigation costs			337,500				48%				342,774				16%				(5,274	)			(2%	)
Contingent legal fees and expenses			292,156				41%				642,006				29%				(349,850	)			(54%	)
Selling and administrative			657,549				93%				548,968				25%				108,581				20%
Research and related			253,396				36%				261,594				12%				(8,198	)			(3%	)
			1,548,857				218%				2,034,071				93%				(485,214	)			(24%	)
Operating income (loss) before other income and provision for income taxes			(839,326	)			(118%	)			164,674				7%				(1,004,000	)			(610%	)

 

Income (Loss) Before Other Income and Provision for Income Taxes

We reported a loss before other income and provision for income taxes of $839,326 for the nine months ended December 31, 2015 as compared to a net income before income taxes of $164,674 for the comparable nine month period of the prior year due to reduced patent license settlements in the current period.

 

Revenues

Revenues decreased during the most recent nine months compared to the same period of the prior fiscal year due to the decrease in patent license revenue from $2,051,034 to $693,500. Product and service revenues decreased due to exiting the eVU business.

 

While we expect additional patent licenses in future periods, there can be no assurance of the timing or amounts of future license revenues.

 

Operating Costs and Expenses

Operating costs and expenses include cost of revenues associated with products and services, and costs associated with our patent licensing and enforcement activities including contingent and non-contingent litigation costs and related enforcement support costs. For the nine months ended December 31, 2015, operating costs and expenses decreased by $485,214 compared to the same period in the prior year.

 

Cost of revenues associated with our recently terminated products and services segment were $16,031 for the nine months ended December 31, 2015 compared to $147,711 for the same period in the prior year. The decrease of $131,680 is due to the termination of eVU operations as of September 30, 2015.

 

Patent licensing and litigation costs related to patent enforcement were $337,500 for the nine months ended December 31, 2015 comparable to $342,774 for the same period in the prior year. Contingent legal fees and expenses related to patent enforcement were $292,156 for the nine months ended December 31, 2015 compared to $642,006 for the same period in the prior year. The decrease of $349,850 reflects the reduced number of new patent license agreements. Generally contingent costs relate to revenues during a respective period but can vary depending on accumulated retainers paid and our share of certain costs and expenses.

 

 

 

 

Selling and administrative costs for the nine months ended December 31, 2015 increased by $108,581 compared to the same period in the prior year, primarily due to annual meeting costs of $54,687 in the current year with no comparable expense in the prior year, a $14,533 increase in legal fees, a $18,046 increase in salaries and related expenses, and increased stock-based compensation expense of $54,691 in the current year as compared to $29,946 for the same period of the prior year.

 

Research and related expenses decreased by $8,198 for the nine months ended December 31, 2015 due primarily to reduced salaries and related costs. Research and related expenses can vary significantly based on patent related costs and on timing of internal research projects. Such expenses also vary based on decisions made regarding outside engineering and consulting. Research and related expenses for the period ended December 31, 2015 included $13,270 of noncash stock-based compensation expense as compared to $7,641 in the same period of the prior year.

 

Income (loss)

The net loss was $838,526 for the nine months ended December 31, 2015. The net income for the prior comparable nine month period was $133,324 which included the foreign income tax expense of $31,350.

 

Liquidity and Capital Resources

At December 31, 2015, we had working capital of $923,613 compared to working capital of $1,709,685 at March 31, 2015. At December 31, 2015 we had cash on hand of $1,083,156.

 

Operating Activities

Cash used in operating activities was $851,268 for the nine months ended December 31, 2015. Cash used in operating activities included the net loss of $838,526 decreased by net non-cash expenses of $71,011. Major components reducing operating cash were a $38,389 decrease in accounts payable and a $57,629 decrease in accrued and other liabilities. A major component providing operating cash was a decrease of $10,756 in accounts receivable.

 

Cash provided by operating activities was $456,282 for the nine months ended December 31, 2014. Cash provided by operating activities included the net income of $133,324 increased by net non-cash expenses of $91,741. Major components also providing operating cash were an increase of $139,845 in accounts payable, a decrease of $20,623 in deposits and prepaid expenses and a decrease of $163,072 in accounts receivable. A major component reducing operating cash was a $95,964 decrease in accrued and other liabilities.

 

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

We invested $25,157 in computer equipment and website costs during the nine months ended December 31, 2015. Our efforts are focused primarily on operations and we currently have no significant investing capital needs. We have no commitments requiring investment capital. There were no cash investing activities during the nine months ended December 31, 2014.

 

Financing Activities

We received $6,600 of proceeds from stock option exercises during the nine months ended December 31, 2015. There were no cash financing activities during the nine months ended December 31, 2014.

 

Debt and Other Commitments

We currently have no debt outstanding other than trade payables and accruals. At December 31, 2015 we had no significant purchase commitments for product and components.

 

We have future lease commitments on our current facility as more fully described in our interim condensed consolidated financial statements.

 

 

 

 

 

Our legal firm, Handal and Associates, provides IP legal services in connection with licensing and prosecuting claims of infringement of our flash memory patent portfolio. Pursuant to a partial contingent fee arrangement, we are paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art search firms. We have agreed to pay Handal a fee ranging from 33% to 40% of any license fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses. We may terminate the representation at any time but would be obligated to pay fees and advances.

 

The Company remains obligated to pay contingency fees on certain future Flash-R™ royalty payments from previous matters handled by Duane Morris LLP.

 

Cash Requirements

Other than cash on hand and accounts receivable, we have no material unused sources of liquidity at this time.  Our monthly cash operating costs average approximately $116,000 per month. Assuming no new license revenues and current expenditure levels we would require approximately $310,000 of additional resources to fund operations for the next twelve months. We believe we may be able to obtain additional funds from future patent licensing but the timing of licenses are subject to many factors and risks, many outside our control. We may also increase expenditure levels in future periods to support and expand our revenue opportunities and continue advanced technology research and development. Actual results could differ significantly from past results and management plans. 

 

Since we have not demonstrated sustainable 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. 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, 2015, 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, 2015 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

 

The Company engages in litigation from time to time as part of our patent portfolio licensing and enforcement activities. We have completed enforcement actions with respect to our Flash-R patent portfolio; all cases have been settled or dismissed.

 

We commenced legal action with regard to our Nunchi portfolio of patents in July 2014 and we currently have seven active complaints in the U.S. District Court for the Northern District of California and one active complaint in the U.S. District Court for the Southern District of California. In December 2015, the United States Patent Trial and Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO).

 

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. Mine Safety Disclosures

NONE

 

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 (Principal Executive Officer)

	By:	/s/ MARDEE HARING-LAYTON
		MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer)

 

Date:     February 11, 2016