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, 2016

 

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. Employer
incorporation or organization)	Identification Number)

 

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 6, 2017 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, 2016 and March 31, 2016			3
Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2016 and 2015			4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2016 and 2015			5
Notes to Interim Condensed 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.	Mine Safety Disclosures		20
Item 5.	Other Information		20
Item 6.	Exhibits		20
SIGNATURES			21

 

 

 

 

Part I. Financial Information

Item 1. Financial Statements:

e.Digital Corporation and subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				March 31,
		2016				2016
		(Unaudited)				(Audited)
		$				$
ASSETS
Current
Cash and cash equivalents			232,048				701,481
Accounts receivable, net			68,000				–
Deposits and prepaid expenses			42,142				31,189
Total current assets			342,190				732,670
Property, equipment and intangibles, net of accumulated depreciation and amortization of $114,151 and $128,950, respectively			20,114				26,772
Total assets			362,304				759,442
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable, trade			59,260				120,744
Accrued and other liabilities			76,256				109,072
Total current liabilities			135,516				229,816
Commitments and contingencies  (Note 8)
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 issued and outstanding each period			293,678				293,678
Additional paid-in capital			83,055,470				83,018,638
Accumulated deficit			(83,122,360	)			(82,782,690	)
Total stockholders' equity			226,788				529,626
Total liabilities and stockholders' equity			362,304				759,442

 

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,
		2016				2015				2016				2015
Revenues:		$				$				$				$
Products and services			–				–				–				16,031
Patent licensing			151,000				–				744,366				693,500
			151,000				–				744,366				709,531
Operating costs and expenses:
Cost of revenues:
Products and services			–				–				–				8,256
Patent licensing and litigation costs			65,000				112,500				282,500				337,500
Contingent legal fees expenses and recaptures			(263,552	)			5,261				(41,050	)			292,156
Contingent royalties			1,139				–				16,164				–
Selling and administrative			189,561				176,366				570,064				657,549
Research and related expenditures			85,487				70,542				256,358				253,396
Total operating costs and expenses			77,635				364,669				1,084,036				1,548,857
Income (loss) before other income and provision for income taxes			73,365				(364,669	)			(339,670	)			(839,326	)
Other income:
Other income			–				800				–				800
Other income			–				800				–				800
Income (loss) before provision for income taxes			73,365				(363,869	)			(339,670	)			(838,526	)
Income tax benefit (expense)			–				–				–				–
Net income (loss) for the period			73,365				(363,869	)			(339,670	)			(838,526	)
Income (loss) per common share - basic and diluted			0.00				(0.00	)			(0.00	)			(0.00	)
Weighted average common shares outstanding
Basic and Diluted			293,678,330				293,678,330				293,678,330				293,564,512

 

See notes to interim condensed consolidated financial statements  

 

 

 

 

 

 

 

 

 

 

 

 

 

e.Digital Corporation and subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the nine months ended
		December 31,
		2016				2015
OPERATING ACTIVITIES		$				$
Net loss for period			(339,670	)			(838,526	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			9,610				3,050
Stock-based compensation			36,832				67,961
Changes in assets and liabilities:
Accounts receivable			(68,000	)			10,756
Deposits and prepaid expenses			(10,953	)			1,509
Accounts payable, trade			(61,484	)			(38,389	)
Accrued and other liabilities			(32,816	)			(57,629	)
Cash used in operating activities			(466,481	)			(851,268	)
INVESTING ACTIVITIES
Purchase of equipment and intangibles			(2,952	)			(25,157	)
Cash used in investing activities			(2,952	)			(25,157	)
FINANCING ACTIVITIES
Proceeds from sale of common stock			–				6,600
Cash provided by financing activities			–				6,600
Net decrease in cash and cash equivalents			(469,433	)			(869,825	)
Cash and cash equivalents, beginning of period			701,481				1,952,981
Cash and cash equivalents, end of period			232,048				1,083,156

 

 

 

See notes to interim condensed consolidated financial statements      

 

 

  

 

 

 

 

 

 

 

 

 

 

e.Digital Corporation and subsidiary

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, 2016, 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 nine months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended March 31, 2016 filed on Form 10-K.

 

Going Concern/ Liquidity/Correction of Error

The Company has incurred significant losses and negative cash flow from operations and has an accumulated deficit of $83,122,360 at December 31, 2016. Other than cash on hand, the Company has no other sources of financing currently available as of December 31, 2016. 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.

 

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. The termination of eVU operations in the second quarter of fiscal 2016 and the loss of eVU revenues did not have a material impact on liquidity, results of operations or financial condition of the Company.

 

During the three months ended December 31, 2016 the Company determined that it had overstated accounts payable related to contingent legal fees expenses and recaptures. The Company assessed the materiality of this error on previously issued financial statements in accordance with the ASC 250, Presentation of Financial Statements, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality. The Company concluded, based on a review of the quantitative and qualitative factors of the materiality of the amount, that the error was not material to any previously issued financial statements and correction of the error in the three months ended December 31, 2016 was not material to that period’s financial statements. The Company recorded the cumulative effect of the error as of October 1, 2016 by decreasing accounts payable by $265,139. The correction of the error decreased contingent legal fees expenses and recaptures by $265,139 for the nine months ended December 31, 2016.

  

Estimates

The preparation of consolidated 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 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, 2017 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have 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. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This new guidance requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is effective for fiscal periods beginning after December 15, 2016 and may be adopted either prospectively or retrospectively. Early adoption is permitted. The Company has not yet selected a transition method and is currently evaluating the impact that ASU 2015-17 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, which amends ASC Topic 718, Compensation — Stock Compensation. The new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the potential impact that ASU 2016-09 may have on the Company’s financial position or results of operations.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented. The Company is currently evaluating the impact that ASU 2016-15 will have on its consolidated financial statements.

 

Other Accounting Standards Updates not effective until after December 31, 2016 are not expected to have a material effect on the Company’s financial position or results of operations.

 

 

 

3. LOSS PER SHARE

Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share is computed by dividing net 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 consist of 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. At December 31, 2016 and 2015, stock options exercisable into 5,000,000 and 4,500,000 shares of common stock were outstanding, respectively. These securities were not included in the computation of diluted loss per share because they had no effect or were antidilutive, but they could potentially dilute earnings per share in future periods. There was no difference in basic and diluted loss per share or basic and diluted weighted average shares outstanding for the periods presented.

 

4. 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,
		2016				2015				2016				2015
		$				$				$				$
Research and development			–				2,782				5,534				13,270
Selling and administrative			5,085				4,358				31,298				54,691
Total stock-based compensation expense			5,085				7,140				36,832				67,961

 

As of December 31, 2016 total estimated compensation cost of stock options granted but not yet vested was $14,517 and is expected to be recognized over the weighted average period of 1.3 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, 2016 (annualized percentages). No options were granted during the nine months ended December 31, 2015.

 

	December 31,
	2016
Volatility	107%
Risk-free interest rate	0.90%
Forfeiture rate	0.0%
Dividend yield	0.0%
Expected life in years	3.0
Weighted-average fair value of options granted	$0.046

 

 

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 experience and is assumed at 0.0% for nonemployees/directors and certain long-term employees and 5.0% for other employees. 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 5 for further information on outstanding stock options.

 

 

 

 

5. STOCKHOLDERS’ EQUITY

The following table summarizes stockholders’ equity transactions during the nine-month period ended December 31, 2016:

 

		Common stock								Additional paid-in				Accumulated				Total stockholders'
		Shares				Amount				capital				deficit				equity
						$				$				$				$
Balance, April 1, 2016			293,678,330				293,678				83,018,638				(82,782,690	)			529,626
Stock-based compensation			–				–				36,832				–				36,832
Loss for the period			–				–				–				(339,670	)			(339,670	)
Balance, December 31, 2016			293,678,330				293,678				83,055,470				(83,122,360	)			226,788

  

Options

The following table summarizes stock option activity for the period:

 

						Weighted average				Aggregate
		Shares				exercise price				Intrinsic Value
		#				$				$
Outstanding April 1, 2016			4,500,000				0.0799
Granted			500,000				0.071
Exercised			–				–
Canceled/expired			–				–
Outstanding December 31, 2016			5,000,000				0.079			$	–
Exercisable at December 31, 2016			4,625,000				0.0797			$	–

 

(1)

Options outstanding are exercisable at prices ranging from $0.055 to $0.11 and expire over the period from 2018 to 2020.

(2)

Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2016 of $0.040 and all options outstanding were not in-the-money.

 

Since the Company has a net operating loss carryforward as of December 31, 2016, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the nine months ended December 31, 2016.

 

6. 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).

 

 

 

 

 

7. SEGMENT INFORMATION

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 the Company’s patent portfolio. Products and services consisted of sales of the Company’s eVU products and related services. The Company ceased providing eVU services at September 30, 2015, effectively ending this segment’s operations.

 

Reportable segment information for the three and nine months ended December 31, 2016 and 2015 is as follows:

 

		For the three months ended December 31, (unaudited)								For the nine months ended December 31, (unaudited)
		2016				2015				2016				2015
		$				$				$				$
SEGMENT REVENUES:
Products and services			–				–				–				16,031
Patent licensing			151,000				–				744,366				693,500
Total revenue			151,000				–				744,366				709,531
SEGMENT COST OF REVENUES:
Products and services			–				–				–				8,256
Patent licensing and litigation costs			65,000				112,500				282,500				337,500
Contingent legal fees expenses and recaptures			(263,552	)			5,261				(41,050	)			292,156
Contingent royalties			1,139				–				16,164				–
Total cost of revenues			(197,413	)			117,761				257,614				637,912
RECONCILIATION:
Segment income (loss) before corporate costs			348,413				(117,761	)			486,752				71,619
Other corporate operating costs			275,048				246,908				826,422				910,945
Operating income (loss) before other income and provision for income taxes			73,365				(364,669	)			(339,670	)			(839,326	)

 

 

The Company did not have significant assets employed in the product and services segment during the periods and does not track capital expenditures or assets by reportable segment. Consequently it is not practicable 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,
		2016				2015				2016				2015
		$				$				$				$
United States			151,000				–				744,366				693,500
International			–				–				–				16,031
Total revenue			151,000				–				744,366				709,531

 

Revenues from three licensees comprised 67%, 14% and 12% of revenue for the nine months ended December 31, 2016, with no other licensee or customer accounting for more than 10% of revenues. Revenues from three licensees comprised 25%, 21% and 14% of revenue for the nine months ended December 31, 2015, with no other licensee accounting for more than 10% of revenues. Accounts receivable from one licensee comprised 100% of net accounts receivable at December 31, 2016. Accounts receivable from one licensee comprised 100% of net accounts receivable at December 31, 2015.

 

 

 

 

8. COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

Intellectual Property Litigation

As of December 31, 2015, the Company had settled or dismissed all complaints with respect to its Flash-R patent portfolio.

 

The Company commenced legal action with regards to its Nunchi portfolio of patents in July 2014 and currently has two active complaints in the U.S. District Court for the Northern District of California and four in the U.S. District Court for the Southern District of California.

 

The Company entered into two new Nunchi license agreements during the third quarter of fiscal 2017, and during the first quarter of fiscal 2017, the Company entered into two new license agreements covering three defendants.

 

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 patent portfolio. From September 2012 through August 2016, pursuant to a partial contingent fee arrangement, the Company paid a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries and a fee ranging from 33% to 40% of license fees. A new agreement, which supersedes and replaces all previous agreements, was executed effective September 1, 2016, reducing the monthly retainer fee to $22,500 so long as Handal is simultaneously litigating ten or fewer cases. Parties agreed to meet and discuss an increase in the amount of the monthly retainer should the number of cases exceed ten. Monthly retainers paid are creditable against future contingency recoveries. The Company has agreed to reimburse Handal for pre-approved expenditures advanced on behalf of the Company and to pay Handal a fee of 40% of any net license fee or settlement.

 

Commitment Related to Intellectual Property Royalties

The Company is obligated for inventor royalties of 4% of net Nunchi license revenues for the term of related patents, currently 2030.

 

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 $7,157 excluding utilities and costs. Future minimum lease commitments at December 31, 2016 total $42,940. The Company recognizes rent expense by the straight-line method over the lease term. As of December 31, 2016, deferred rent totaled $7,319. The Company is negotiating with the landlord an early exit from this lease.

 

In December 2016, the Company entered into a twelve-month sub lease agreement for an executive suite in the same building as its corporate office location, commencing January 2, 2017. The monthly payment is $1,100 excluding utilities and costs. Future minimum lease commitments at December 31, 2016 total $13,156.

 

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 had exposure in excess of FDIC insured limits of $17,269 at December 31, 2016. 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.

 

 

 

 

 

 

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. During the nine months ended December 31, 2016, the Company made matching contributions totaling $7,343.

 

9. INCOME TAXES

There is no provision for income taxes for the nine months ended December 31, 2016 and 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.

 

At December 31, 2016 and 2015, 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, 2016, 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, 2016.

 

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 commenced legal enforcement actions in 2007 related to our Flash-R flash memory patent portfolio, now expired. We successfully obtained license terms from 83 companies and related distributors through September 30, 2015. We believe our success created both awareness and recognition of our intellectual property among household named companies and their counsel. Since September 2012, the law firm of Handal and Associates has been handling our patent enforcement matters on a partial contingent fee basis.

 

Our current licensing and enforcement activity consists of the following:

 

Nunchi Technology Enforcement - We commenced legal action with regards to our Nunchi portfolio of patents in July 2014. To date we have filed patent infringement litigation and sought licenses from twelve companies and related distributors, resulting in one royalty bearing license and settlement agreement with one defendant, and four license and settlement agreements covering five defendants. We currently have two active complaints in the U.S. District Court for the Northern District of California and four active complaints in the U.S. District for the Southern District of California. We expect to file future complaints against additional companies. We are in early negotiations with other defendants, and are confident regarding the prospects for future license revenues from 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 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. Our legal action to enforce our Nunchi portfolio of patents has resulted in $744,366 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, 2016.

 

Our business is high risk in nature. There can be no assurance we can achieve sufficient patent license or other revenues to sustain 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 our current fiscal year.

 

We have successfully completed enforcement litigation and are in the process of additional enforcement actions. 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 portfolio.

We reported losses for the first nine months of fiscal 2017. Revenues and profits have been sporadic in prior periods and we have incurred significant historical losses and negative cash flow from operations. We expect to incur losses in the future until licensing or other revenues are sufficient to sustain continued profitability. 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.

 

For the nine months ended December 31, 2016:

 

·

We recognized a net loss of $339,670 compared to a net loss before income taxes of $838,526 for the comparable nine month period of the prior fiscal year.

·

We recognized patent license revenues of $744,366 as compared to $693,500 for the comparable period of the prior fiscal year.

·

Operating costs and expenses decreased to $1,084,036 in the nine months ended December 31, 2016 compared to $1,548,857 in the comparable period prior.

 

Management faces challenges for the remainder of fiscal 2017 to generate license revenues from 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 $70,000 per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue advanced product and 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.

 

 

 

 

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, 2016. 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, 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, 2016. 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, 2016.

 

Results of Operations

 

Three months ended December 31, 2016 compared to the three months ended December 31, 2015 (Unaudited)

 

 

		Three Months Ended December 31,
		2016								2015
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Patent licensing			151,000				–				–				–				151,000				–
			151,000				–				–				–				151,000				–
Operating costs and expenses:
Cost of revenues:
Patent licensing and litigation costs			65,000				43%				112,500				–				(47,500	)			(42%	)
Contingent legal fees expenses and recaptures			(263,552	)			-175%				5,261				–				(268,813	)			(5110%	)
Contingent royalties			1,139				1%				–				–				1,139				–
Selling and administrative			189,561				125%				176,366				–				13,195				7%
Research and development			85,487				57%				70,542				–				14,945				21%
			77,635				51%				364,669				–				(287,034	)			(79%	)
Operating income (loss) before other income and provision for income taxes			73,365				49%				(364,669	)			–				438,034				(120%	)

 

 

Income (Loss) Before Other Income and Income Taxes

We reported a net income before income taxes of $73,365 for the three months ended December 31, 2016. The net loss for the same period of the prior year was $364,669.

 

 

 

 

Revenues

Revenues increased during the third fiscal quarter of 2017 compared to the same quarter of the prior fiscal year due to due to the timing and amount of individual license agreements.

 

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 and 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 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, 2016, operating costs and expenses decreased by $287,034 compared to the same period in the prior year.

 

Patent licensing and litigation costs related to patent enforcement were $65,000 for the three months ended December 31, 2016 as compared to $112,500 for the prior year’s third quarter. The difference is attributed to the reduced monthly legal retainer fee effective September 1, 2016. Refer to Note 8 above. 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 and accumulated retainers previously paid. Contingent legal fees expenses and recaptures related to patent enforcement was a credit of $263,552 for the three months ended December 31, 2016 as compared to $5,261 for the prior year’s third quarter. The credit resulted from the correction in the current period of a cumulative accounting error of $265,139 related to the accruing of contingent legal fees expenses and recaptures.

 

Contingent royalties for the three months ended December 31, 2016 were $1,139 with no comparable expense in the same period of the prior year.

 

Selling and administrative costs for the three months ended December 31, 2016 increased by $13,195 primarily due to increased professional fees of $38,175 as compared to $32,637 for the same period of the prior year. The current year’s third quarter included $5,085 for noncash stock-based compensation expense as compared to $4,358 in the same period of the prior year.

 

Research and related expenses increased by $14,945 primarily due to increased consulting fees of $40,091 in the current year as compared to $26,673 for the same period in the prior year. The prior year’s third quarter included $2,782 for noncash stock-based compensation expense with no comparable expense in the current period. Research and related expenses can vary significantly from quarter to quarter based on the allocation of time spent by personnel who work on patent related costs and on internal research projects. Such expenses also vary based on decisions made regarding outside engineering and consulting.

 

 

 

 

 

 

 

 

 

Net Income (Loss)

Net income for the three months ended December 31, 2016 was $73,365. The net loss for the prior comparable third quarter was $363,869.

 

Nine months ended December 31, 2016 compared to the nine months ended December 31, 2015 (Unaudited)

 

		Nine Months Ended December 31,
		2016								2015
						% of								% of				Change
		Dollars				Revenue				Dollars				Revenue				Dollars				%
Revenues:
Product and services			–				–				16,031				2%				(16,031	)			(100%	)
Patent licensing			744,366				100%				693,500				98%				50,866				7%
			744,366				100%				709,531				100%				34,835				5%
Operating costs and expenses:
Products and services			–				–				8,256				1%				(8,256	)			(100%	)
Patent licensing and litigation costs			282,500				38%				337,500				47%				(55,000	)			(16%	)
Contingent legal fees expenses and recaptures			(41,050	)			(6%	)			292,156				41%				(333,206	)			(114%	)
Contingent royalties			16,164				2%				–				–				16,164				–
Selling and administrative			570,064				77%				657,549				93%				(87,485	)			(13%	)
Research and related			256,358				34%				253,396				36%				2,962				1%
			1,084,036				146%				1,548,857				218%				(464,821	)			(30%	)
Operating loss before other income and provision for income taxes			(339,670	)			(46%	)			(839,326	)			(118%	)			499,656				(60%	)

 

 

Loss Before Other Income and Income Taxes

We reported a net loss before income taxes of $339,670 for the nine months ended December 31, 2016 compared to a net loss before income taxes of $839,326 for the comparable period of the prior year primarily due to the reduced operating costs and expenses in the current year.

 

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 $693,500 to $744,366. There were no product and service revenues in the current year due to exiting the eVU business in September 2015.

 

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, 2016, operating costs and expenses decreased by $464,821 compared to the same period in the prior year including the $265,139 adjustment to contingent legal fees expenses and recaptures from the cumulative correction recorded during the three months ended December 31, 2016.

 

Patent licensing and litigation costs related to patent enforcement were $282,500 for the nine months ended December 31, 2016 and $337,500 for the same period in the prior year. The difference is attributed to the reduced monthly legal retainer fee effective September 1, 2016. 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 and accumulated retainers previously paid. Contingent legal fees expenses and recaptures related to patent enforcement was a credit of $41,050 for the nine months ended December 31, 2016 as compared to $292,156 for the same period of the prior year. The decrease included the effect from the correction in the current period of a cumulative accounting error of $265,139 related to the accruing of contingent legal fees expenses and recaptures.

 

 

 

 

Contingent royalties for the nine months ended December 31, 2016 were $16,164 with no comparable expense in the same period of the prior year.

 

Selling and administrative costs for the nine months ended December 31, 2016 decreased by $87,485 compared to the same period in the year prior. The prior period includes $54,687 for annual meeting costs with no comparable expense in the same period of the current year. The current period includes $31,298 in noncash stock-based compensation expense, compared to $54,691 in the same period of the prior year.

 

Research and related expenses for the nine months ended December 31, 2016 increased by $2,962 compared to the same period in the prior year. The current period includes $5,534 in noncash stock-based compensation expense, compared to $13,270 for 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.

 

Liquidity and Capital Resources

At December 31, 2016, we had working capital of $206,674 as compared to working capital of $502,854 at March 31, 2016. At December 31, 2016 we had cash on hand of $232,048.

 

Operating Activities

Cash used in operating activities was $466,481 for the nine months ended December 31, 2016. Cash used in operating activities included the net loss of $339,670 decreased by net non-cash expenses of $46,442 primarily consisting of stock based compensation of $36,832. A major components reducing operating cash was a decrease in accounts payable of $61,484, an increase of $68,000 of accounts receivable and a decrease of $32,816 in accrued and other liabilities.

 

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 primarily consisting of stock based compensation of $67,961. A major component reducing operating cash was a decrease of $57,629 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 and services and corresponding receivable, and payable balances. Accordingly operating cash requirements vary significantly from period to period.

 

Investing Activities

We invested $2,952 and $25,157 in computer and equipment and website costs for the nine months ended December 31, 2016 and 2015, respectively. 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

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, 2016.

 

Debt and Other Commitments

We currently have no debt outstanding other than trade payables and accruals. At December 31, 2016 we had no significant purchase commitments for product and components.

 

We have future lease commitments on our current facilities as more fully described in our accompanying 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 patent portfolio. From September 2012 through August 2016, pursuant to a partial contingent fee arrangement, the Company paid a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries and a fee ranging from 33% to 40% of license fees. A new agreement, which supersedes and replaces all previous agreements, was executed effective September 1, 2016, reducing the monthly retainer fee to $22,500 so long as Handal is simultaneously litigating ten or fewer cases. Parties agreed to meet and discuss an increase in the amount of the monthly retainer should the number of cases exceed ten. Monthly retainers paid are creditable against future contingency recoveries. The Company has agreed to reimburse Handal for pre-approved expenditures advanced on behalf of the Company and to pay Handal a fee of 40% of any net license fee or settlement. Net Recovery is defined as the gross amount paid by a licensee/defendant less the amount of expenses paid and or advanced by e.Digital to Handal or third parties. We may terminate the representation at any time but would be obligated to pay fees and advances.

 

We are obligated for inventor royalties of 4% of net Nunchi license revenues for the term of related patents, currently 2030.

 

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 $70,000 per month. Assuming no new license revenues and current expenditure levels we would require approximately $840,000 of additional resources to fund operations for the next twelve months.  We believe we may be able to obtain additional funds from future licensing arrangements or other financing sources but the timing thereof is subject to many factors and risks, many outside our control. Our operating plans may require additional funds in future periods and should additional funds not be available, we may be required to curtail or scale back operations. Potential sources of such funds include exercise of outstanding options, or debt financing or new equity offerings. However, there is no assurance that options will be exercised or that debt or equity financing will be available if and when needed. Any future financing may be dilutive to existing stockholders.

 

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, 2016, 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, 2016 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 its patent portfolio licensing and enforcement activities. The Company commenced legal action with regards to its Nunchi portfolio of patents in July 2014 and currently has two active complaints in the U.S. District Court for the Northern District of California and four in the U.S. District Court for the Southern District of California

 

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 10.3.4 – Nonstatutory Stock Option Agreement dated September 15, 2016 between e.Digital Corporation and Donald Springer.*

 

Exhibit 10.12 – Sub Lease Agreement between the Company and First Choice Executive Suites executed on December 23, 2016.*

 

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).*

 

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).*

 

			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*

 

* Filed concurrently herewith

 

 

 

 

 

 

 

 

 

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

 

Date:       February 14, 2017