Item 1. Financial Statements:
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
|
|
|
|
2013
|
|
|
March 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,355,698
|
|
|
|
1,741,439
|
|
Accounts receivable
|
|
|
59,125
|
|
|
|
175,930
|
|
Inventory
|
|
|
13,044
|
|
|
|
21,199
|
|
Deposits and prepaid expenses
|
|
|
67,537
|
|
|
|
60,325
|
|
Total current assets
|
|
|
1,495,404
|
|
|
|
1,998,893
|
|
Inventory, long-term
|
|
|
63,319
|
|
|
|
104,031
|
|
Property, equipment and intangibles, net of accumulated depreciation and amortization of $170,957 and $168,768, respectively
|
|
|
10,740
|
|
|
|
12,929
|
|
Total assets
|
|
|
1,569,463
|
|
|
|
2,115,853
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
78,596
|
|
|
|
67,297
|
|
Accrued and other liabilities
|
|
|
194,052
|
|
|
|
272,837
|
|
Total current liabilities
|
|
|
272,648
|
|
|
|
340,134
|
|
|
|
|
|
|
|
|
|
|
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, 293,186,908 shares issued and outstanding each period
|
|
|
293,187
|
|
|
|
293,187
|
|
Additional paid-in capital
|
|
|
82,813,635
|
|
|
|
82,810,989
|
|
Accumulated deficit
|
|
|
(81,810,007
|
)
|
|
|
(81,328,457
|
)
|
Total stockholders' equity
|
|
|
1,296,815
|
|
|
|
1,775,719
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
1,569,463
|
|
|
|
2,115,853
|
|
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 six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
67,004
|
|
|
|
122,949
|
|
|
|
124,462
|
|
|
|
255,495
|
|
Patent license
|
|
|
34,725
|
|
|
|
2,000
|
|
|
|
426,725
|
|
|
|
2,000
|
|
|
|
|
101,729
|
|
|
|
124,949
|
|
|
|
551,187
|
|
|
|
257,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
62,587
|
|
|
|
99,348
|
|
|
|
170,597
|
|
|
|
193,125
|
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
52,500
|
|
|
|
225,000
|
|
|
|
75,000
|
|
Contingent legal fees and expenses
|
|
|
14,765
|
|
|
|
800
|
|
|
|
29,893
|
|
|
|
3,490
|
|
Selling and administrative
|
|
|
243,840
|
|
|
|
179,442
|
|
|
|
446,227
|
|
|
|
379,901
|
|
Research and related expenditures
|
|
|
78,150
|
|
|
|
168,864
|
|
|
|
161,020
|
|
|
|
314,967
|
|
Total operating
costs and expenses
|
|
|
511,842
|
|
|
|
500,954
|
|
|
|
1,032,737
|
|
|
|
966,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before provision for income taxes
|
|
|
(410,113
|
)
|
|
|
(376,005
|
)
|
|
|
(481,550
|
)
|
|
|
(708,988
|
)
|
Income tax benefit (expense)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Loss for the period
|
|
|
(410,113
|
)
|
|
|
(376,005
|
)
|
|
|
(481,550
|
)
|
|
|
(708,988
|
)
|
Loss per common share - basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
Basic and diluted
|
|
|
293,186,908
|
|
|
|
293,003,158
|
|
|
|
293,186,908
|
|
|
|
293,003,158
|
|
See notes to interim condensed consolidated financial statements
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
For the six months ended
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
OPERATING ACTIVITIES
|
|
$
|
|
|
$
|
|
Loss for period
|
|
|
(481,550
|
)
|
|
|
(708,988
|
)
|
Adjustments to reconcile loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,189
|
|
|
|
2,741
|
|
Inventory market and reserve adjustment
|
|
|
48,552
|
|
|
|
22,731
|
|
Warranty provision
|
|
|
353
|
|
|
|
1,378
|
|
Stock-based compensation
|
|
|
2,646
|
|
|
|
10,546
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
116,805
|
|
|
|
46,239
|
|
Inventory
|
|
|
315
|
|
|
|
16,140
|
|
Deposits and prepaid expenses
|
|
|
(7,212
|
)
|
|
|
21,674
|
|
Accounts payable, trade
|
|
|
11,300
|
|
|
|
31,690
|
|
Accrued and other liabilities
|
|
|
(79,139
|
)
|
|
|
(23,108
|
)
|
Cash used in operating activities
|
|
|
(385,741
|
)
|
|
|
(578,957
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(385,741
|
)
|
|
|
(578,957
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,741,439
|
|
|
|
3,125,349
|
|
Cash and cash equivalents, end of period
|
|
|
1,355,698
|
|
|
|
2,546,392
|
|
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 including licensing and enforcing its Flash-R™ portfolio of patents related
to the use of flash memory in portable devices. We are also developing new licenseable intellectual property related to context
and interpersonal awareness systems (“Nunchi” technology), data distribution and other technologies. The Company also
markets the eVU® mobile entertainment system for the travel industry.
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 September 30, 2013, 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 six months ended September 30, 2013 are not necessarily indicative
of the results that may be expected for the fiscal year ending March 31, 2014. For further information, refer to the Company's
consolidated financial statements and footnotes thereto for the year ended March 31, 2013 filed on Form 10-K.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes
in accounting pronouncements during the six months ended September 30, 2013 that are of significance, or potential significance
to the Company’s financial statements.
3. LOSS PER SHARE
Basic loss per common share is computed by dividing loss for
the period by the weighted-average number of shares of common stock outstanding during the period.
Diluted
earnings per common share is computed by dividing loss attributable to common shareholders by the weighted-average number of shares
of common stock outstanding during the period increased to include the number of additional shares of common stock that would have
been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities included outstanding stock
options and warrants.
The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share
by application of the treasury stock method.
The
se securities were not included in the computation
of diluted loss per share for the periods because they are antidilutive, but they could potentially dilute earnings per share in
future periods. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result
in a greater dilutive effect from potentially dilutive securities. For the periods presented
potential
dilutive
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. 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. We also
have finished goods that we have determined to be slow-moving and have classified this portion of inventory as a long-term asset.
Inventories consisted of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2013
|
|
|
|
$
|
|
|
$
|
|
Raw materials
|
|
|
35,890
|
|
|
|
39,249
|
|
Work in process
|
|
|
13,669
|
|
|
|
13,669
|
|
Finished goods
|
|
|
38,067
|
|
|
|
79,635
|
|
|
|
|
87,626
|
|
|
|
132,553
|
|
Reserve for obsolescence
|
|
|
(11,263
|
)
|
|
|
(7,323
|
)
|
|
|
|
76,363
|
|
|
|
125,230
|
|
Less current portion
|
|
|
13,044
|
|
|
|
21,199
|
|
Inventory, long term
|
|
|
63,319
|
|
|
|
104,031
|
|
The foregoing is net of an aggregate lower-of-cost-or-market
inventory adjustment of $128,762 at September 30, 2013 and $84,150 at March 31, 2013, respectively. The Company made a lower of
cost or market adjustment during the six months ended September 30, 2013 of $44,612 to reflect decreased product demand.
5. STOCK-BASED COMPENSATION COSTS
The Company
accounts for stock-based compensation under the provisions of ASC 718,
Share-Based Payment
and ASC 505-50,
Equity-Based
Payments to Non-Employees.
ASC 718
requires measurement of all employee stock-based awards using a fair-value method
and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further,
as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company
recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Research and development
|
|
|
–
|
|
|
|
1,196
|
|
|
|
849
|
|
|
|
2,392
|
|
Selling and administrative
|
|
|
–
|
|
|
|
4,265
|
|
|
|
1,797
|
|
|
|
8,154
|
|
Total stock-based compensation expense
|
|
|
–
|
|
|
|
5,461
|
|
|
|
2,646
|
|
|
|
10,546
|
|
As of September 30, 2013 all stock options granted were fully
vested.
No stock options were granted during the three or six-month
periods ended September 30, 2013 and 2012.
See Note 7 for further information on outstanding stock options.
6. WARRANTY RESERVE
Details of the estimated warranty liability
included in accrued and other liabilities are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Beginning balance
|
|
|
448
|
|
|
|
633
|
|
|
|
657
|
|
|
|
1,093
|
|
Warranty provision
|
|
|
(30
|
)
|
|
|
1,064
|
|
|
|
353
|
|
|
|
1,378
|
|
Warranty usage
|
|
|
(180
|
)
|
|
|
(1,329
|
)
|
|
|
(772
|
)
|
|
|
(2,103
|
)
|
Ending balance
|
|
|
238
|
|
|
|
368
|
|
|
|
238
|
|
|
|
368
|
|
7. STOCKHOLDERS’ EQUITY
The following table summarizes stockholders’ equity transactions
during the six-month period ended September 30, 2013:
|
|
Common stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
deficit
|
|
|
equity
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, April 1, 2013
|
|
|
293,186,908
|
|
|
|
293,187
|
|
|
|
82,810,989
|
|
|
|
(81,328,457
|
)
|
|
|
1,775,719
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
2,646
|
|
|
|
|
|
|
|
2,646
|
|
Loss for the period
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(481,550
|
)
|
|
|
(481,550
|
)
|
Balance, September 30, 2013
|
|
|
293,186,908
|
|
|
|
293,187
|
|
|
|
82,813,635
|
|
|
|
(81,810,007
|
)
|
|
|
1,296,815
|
|
Options
The following table summarizes stock option
activity for the period:
|
|
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
exercise price
|
|
|
Intrinsic Value
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
Outstanding April 1, 2013
|
|
|
7,145,000
|
|
|
|
0.09
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Canceled/expired
|
|
|
(1,300,000
|
)
|
|
|
–
|
|
|
|
|
|
Outstanding September 30, 2013
|
|
|
5,845,000
|
|
|
|
0.09
|
|
|
$
|
70,694
|
|
Exercisable at September 30, 2013
|
|
|
5,845,000
|
|
|
|
0.09
|
|
|
$
|
70,694
|
|
|
(1)
|
Options outstanding are exercisable at prices ranging from $0.02 to $0.155 and expire over the period
from 2013 to 2015.
|
|
(2)
|
Aggregate intrinsic value is based on the closing price of our common stock on September 30, 2013
of $0.0631 and excludes the impact of options that were not in-the-money.
|
Share
warrants
No warrants were outstanding at September
30, 2013 and September 30, 2012.
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. The Company has two operating segments: (1) products and services and (2) patent licensing. Products
and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content and support
services and patent licensing consists of intellectual property revenues from the Flash-R™ patent portfolio.
Accounting policies for each of the operating segments are the
same as on a consolidated basis.
Reportable segment information for the three and six months
ended September 30, 2013 and 2012 is as follows:
|
|
|
For
the three months ended
September 30,
|
|
|
|
For
the six months ended
September 30,
|
|
|
|
|
2013
$
|
|
|
|
2012
$
|
|
|
|
2013
$
|
|
|
|
2012
$
|
|
SEGMENT REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
67,004
|
|
|
|
122,949
|
|
|
|
124,462
|
|
|
|
255,495
|
|
Patent licensing
|
|
|
34,725
|
|
|
|
2,000
|
|
|
|
426,725
|
|
|
|
2,000
|
|
Total revenue
|
|
|
101,729
|
|
|
|
124,949
|
|
|
|
551,187
|
|
|
|
257,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
62,587
|
|
|
|
99,348
|
|
|
|
170,597
|
|
|
|
193,125
|
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
52,500
|
|
|
|
225,000
|
|
|
|
75,000
|
|
Contingent legal fees
|
|
|
14,765
|
|
|
|
800
|
|
|
|
29,893
|
|
|
|
3,490
|
|
Total cost of revenues
|
|
|
189,852
|
|
|
|
152,648
|
|
|
|
425,490
|
|
|
|
271,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) before corporate costs
|
|
|
(88,123
|
)
|
|
|
(27,699
|
)
|
|
|
125,697
|
|
|
|
(14,120
|
)
|
Other corporate operating costs
|
|
|
321,990
|
|
|
|
348,306
|
|
|
|
607,247
|
|
|
|
694,868
|
|
Operating (loss) before provision for income taxes
|
|
|
(410,113
|
)
|
|
|
(376,005
|
)
|
|
|
(481,550
|
)
|
|
|
(708,988
|
)
|
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 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 six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
United States
|
|
|
34,725
|
|
|
|
2,000
|
|
|
|
426,725
|
|
|
|
2,000
|
|
International
|
|
|
67,004
|
|
|
|
122,949
|
|
|
|
124,462
|
|
|
|
255,495
|
|
Total revenue
|
|
|
101,729
|
|
|
|
124,949
|
|
|
|
551,187
|
|
|
|
257,495
|
|
Revenues from five licensees comprised 18%, 15%, 15%, 10% and
10% of revenue for the six months ended September 30, 2013, with no other licensee or customer accounting for more than 10% of
revenues. Revenues from five licensees comprised 33%, 22%, 12%, 10% and 10% of revenue for the six months ended September 30, 2012,
with no other customer accounting for more than 10% of revenues. Accounts receivable from three customers comprised 44%, 40% and
12% of net accounts receivable at September 30, 2013. Accounts receivable from two customers comprised 48%, 22% of net accounts
receivable at September 30, 2012.
10. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company engages in litigation from time to time as part
of its Flash-R™ portfolio licensing and enforcement activities.
In September 2012 the Company terminated the legal representation
of Duane Morris LLP related to Flash-R™ patent enforcement activities. The Company remains obligated to pay contingency fees
up to 40% on certain future royalty payments from previous matters.
In September 2012 the Company engaged Handal and Associates
(“Handal”) to provide intellectual property (“IP”) legal services in connection with licensing and prosecuting
claims of infringement of the Company’s flash memory patent portfolio (“Patent Enforcement Matters”). 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 equal to 33% of any license fee or settlement related to Patent Enforcement Matters, less prior
retainers and expenses, and 40% if litigation is required and successful. The Company may terminate the representation at any time
but would be obligated to pay fees and advances.
The Company is required in the normal course of business to
engage in litigation to enforce its patents and patent rights. In October 2012 the Company commenced enforcement action with respect
to its patent portfolio and currently has multiple complaints filed in the U.S. District Court for the Southern District of California,
asserting that products made and sold by defendant companies infringe the Company’s U.S. patents covering the use of flash
memory technologies. As a result of its enforcement actions, it is possible that the Company could become subject to claims, counterclaims,
legal actions or court sanctions in the future. No material such actions or matters are currently pending against the Company.
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 $5,693 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 September 30, 2013 total $298,137. The Company recognizes rent expense by the straight-line method over the lease term. As of
September 30, 2013, deferred rent totaled $30,983.
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 September 30, 2013 was approximately $1.1 million. 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 third-party contract manufacturer
to produce its eVU mobile entertainment product and generally relies on single suppliers for batteries, charging stations and other
components. The Company also relies on one legal firm to represent it in patent licensing and enforcement matters.
Guarantees and Indemnifications
The Company enters into standard indemnification agreements
in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification
provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions
are accounted for in accordance with ASC 450,
Contingencies
. The indemnification is generally limited to the amount paid
by the customer. To date, there have been no claims under such indemnification provisions.
The Company provides a one-year limited warranty for most of
its products.
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 September
30, 2013, the Company made matching contributions totaling $7,869.
11. INCOME TAXES
There is no provision for income taxes for the six months ended
September 30, 2013 and 2012 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 September 30, 2013, 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 September 30, 2013,
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, 2013.
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 an intellectual property
portfolio including licensing and enforcing our Flash-R™ portfolio of patents related to the use of flash memory in portable
devices. We also market our eVU® mobile entertainment system for the travel industry.
With the inception of patent license revenue in September 2008,
we determined that we have two operating segments: (1) products and services and (2) patent licensing and enforcement. Our products
and services revenue is derived from the sale of eVU products and accessories to customers, warranty and technical support services
and content integration fees and related services. Our patent licensing and enforcement revenue consists of intellectual property
revenues from our Flash-R™ patent portfolio.
We are commercializing our Flash-R patent portfolio through
licensing and we are aggressively pursuing enforcement by litigating against targeted parties that we believe are infringing our
patents. Since September 2012, the law firm of Handal and Associates has been handling our patent enforcement matters on a partial
contingent fee basis.
Currently, we have active lawsuits filed against parties believed
to infringe patents covering the use of our flash memory technologies. In October and November 2012 we commenced enforcement action
with respect to our patent portfolio by filing complaints in the U.S. District Court for the Southern District of California, asserting
that products made and sold by the defendant companies infringe our U.S. patents. We filed additional complaints from December
2012 through April 2013, and subsequently entered into license and settlement agreements with multiple defendants, won a stipulated
judgment against one defendant, and dismissed one defendant without prejudice.
On June 28, 2011, the United States District Court for the District
of Colorado issued an Opinion and Order Regarding Claim Construction following a January 28, 2011 Markman hearing (a proceeding
under U.S. patent law where both sides present to the Court their arguments on how they believe patent terms should be construed).
The Opinion construed claim terms in United States Patent 5,491,774 (the ‘774 patent”) one of the Company’s Flash-R
patents, more narrowly than we had proposed. This Markman ruling could negatively affect future licensing prospects with respect
to the ‘774 patent.
In September 2012 we announced that the United States Patent
and Trademark Office (USPTO) had completed the reexamination of the ‘774 and our. U.S. Patent No. 5,742,737 (the ‘737).
While we were required to supplement one claim of the ‘737 patent and modify certain claims of the ‘774 patent, we
believe the reexam process reaffirmed important patent claims as we continue our Flash-R™ patent portfolio monetization activities.
In June 2013, the defendants of the current string of Flash-R™
enforcement litigation filed a joint motion asking the U.S. District Court for the Southern District of California to prevent the
Company from relitigating the meaning of certain terms of the Company’s U.S. Patent No. ‘774 and U.S. Patent No. 5,839,108
(“the ‘108 patent”). In August 2013, a judge ruled in favor of the defendants for application of the collateral
estoppels doctrine, resulting in the adoption of the meaning of certain terms of the ‘774 as defined by the judge in the
Company’s 2010 Colorado litigation. In October 2013, the Company filed an appeal to the Federal Circuit Court of Appeals,
formally challenging the ruling. The ruling could adversely impact the Company’s efforts to establish patent infringement
of certain claims by certain defendants of the ‘774 patent and the ‘108 patent. We believe the ruling has no impact
on the Company’s assertions of patent infringement against the defendants under the ‘737 and U.S. Patent No. 5,842,170.
While we expect to file future complaints against additional
companies and license additional companies, there can be no assurance of the timing or amounts of any related license revenue.
We also are developing new intellectual property for possible licensing in the areas of context and interpersonal awareness technologies.
Our business is high risk in nature. There can be no assurance
we can achieve sufficient eVU or patent license revenues to attain profitability. We continue to be subject to the risks normally
associated with introducing new products, services and technologies, including unforeseeable expenses, delays and complications.
Accordingly, there is no guarantee that we can or will report operating profits in future periods.
Overall Performance and Trends
We focused significant efforts
on developing, licensing and enforcing our patent portfolio during the first six months of fiscal 2014 and during the fiscal years
ended March 31, 2013 and 2012. While we have settled and licensed with more than 25 defendants to date, there is a reluctance of
patent infringers to negotiate and ultimately take a patent license without at least the threat of legal action. However, the majority
of patent infringement contentions settle out of court, with such settlements to date being based, we believe, on the strength
of our patent claims and the validity and persuasive evidence and clarity that our patents are being infringed. Although we believe
we have been successful in early licensing by demonstrating the strength, validity and clarity of our patent claims, future events
including court rulings and patent reexamination results could
have a significant positive or negative impact on future
licensing activity.
The 2011
Markman ruling and the 2013 collateral estoppel ruling could
negatively affect licensing efforts and future licensing prospects.
Our eVU in flight entertainment (“IFE”) business
remained slow during the first six months. We are unable to predict future sales levels in this market as orders have been and
are expected to continue to be sporadic from both existing and new customers because of increased competition from personal devices
and airline economics
Management faces challenges
for the remainder of fiscal 2014 to execute
our plan to increase Flash-R patent portfolio license fees and monetize our
Nunchi technology. The failure to obtain additional patent license revenues or eVU orders or delays of orders or production delays
could have a material adverse impact on our operations. Our patent licensing business is subject to significant uncertainties as
to the timing and amount of future license revenues, if any. We may also face unanticipated technical or manufacturing obstacles
and face warranty and other risks in our business.
For the six months ended September 30, 2013 we recognized a
net loss of $481,550 compared to a net loss of $708,988 for the comparable period of the prior fiscal year. Our revenues were $551,187
for the first six months of fiscal 2014 including $426,725 of patent license revenue. This compares to revenues of $257,495 for
the prior year’s first six months including $2,000 of patent license revenue. We reported increased operating expenses totaling
$1,032,737 in the six months ended September 30, 2013 compared to $966,483 for the same period of the prior year. The increase
of $66,254 is attributed primarily to annual meeting costs of $55,349 in the current period with no comparable expense in the same
period of the prior year.
Our cash operating costs average approximately $135,000 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. We expect to incur losses in the future until product,
service and/or licensing revenues are sufficient to sustain continued profitability.
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, 2013. 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 six
months ended September 30, 2013. 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, 2013.
Results of Operations
Three months ended September
30, 2013 compared to the three months ended September 30, 2012
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
% of
|
|
|
2012
|
|
|
% of
|
|
|
Change
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
67,004
|
|
|
|
66%
|
|
|
|
122,949
|
|
|
|
98%
|
|
|
|
(55,945
|
)
|
|
|
(46%
|
)
|
Patent licensing
|
|
|
34,725
|
|
|
|
34%
|
|
|
|
2,000
|
|
|
|
2%
|
|
|
|
32,725
|
|
|
|
1636%
|
|
|
|
|
101,729
|
|
|
|
100%
|
|
|
|
124,949
|
|
|
|
100%
|
|
|
|
(23,220
|
)
|
|
|
(19%
|
)
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
62,587
|
|
|
|
61%
|
|
|
|
99,348
|
|
|
|
80%
|
|
|
|
(36,761
|
)
|
|
|
(37%
|
)
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
111%
|
|
|
|
52,500
|
|
|
|
42%
|
|
|
|
60,000
|
|
|
|
114%
|
|
Contingent legal fees and expenses
|
|
|
14,765
|
|
|
|
14%
|
|
|
|
800
|
|
|
|
1%
|
|
|
|
13,965
|
|
|
|
1746%
|
|
Selling and administrative
|
|
|
243,840
|
|
|
|
240%
|
|
|
|
179,442
|
|
|
|
144%
|
|
|
|
64,398
|
|
|
|
36%
|
|
Research and development
|
|
|
78,150
|
|
|
|
77%
|
|
|
|
168,864
|
|
|
|
135%
|
|
|
|
(90,714
|
)
|
|
|
(54%
|
)
|
|
|
|
511,842
|
|
|
|
503%
|
|
|
|
500,954
|
|
|
|
401%
|
|
|
|
10,888
|
|
|
|
2%
|
|
Operating (loss) before provision for income taxes
|
|
|
(410,113
|
)
|
|
|
(403%
|
)
|
|
|
(376,005
|
)
|
|
|
(301%
|
)
|
|
|
(34,108
|
)
|
|
|
9%
|
|
Loss Before Income Taxes
We reported
a net loss before income taxes of $410,113 for the three months ended September 30, 2013 compared to a net loss before income
taxes of $376,005 for the comparable period of the prior year due primarily to reduced product and services revenue in the current
year.
Revenues
Revenues decreased during the most recent fiscal quarter (second
quarter of fiscal 2014) compared to the same quarter of the prior fiscal year as the result of reduced product and service sales
activity due to no significant new customers or product sales and reduced service revenues from ongoing customers. Our product
revenues have been sporadic in part as a result of industry economics including the rapid consumer adoption of portable devices
resulting in reduced IFE activity. Our service revenues declined and vary depending on repair and content services provided to
a changing customer mix. We expect product and service revenues to decline in future quarters due to no significant new customers
or product sales and reduced service revenues from ongoing customers.
License fee revenues recognized fluctuate significantly from
period to period primarily based on the following factors:
|
·
|
the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee;
|
|
·
|
the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and
|
|
·
|
fluctuations in the number of agreements executed.
|
In the future the following additional factors could also impact
revenue variability:
|
·
|
the effect of court and USPTO rulings and decisions;
|
|
·
|
fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;
|
|
·
|
the timing of the receipt of periodic license fee payments and/or reports from licensees.
|
We are pursuing new eVU business and targeting new patent licensees
but our results will continue to be dependent on the timing and quantity of eVU orders and the timing and amount of future patent
licensing arrangements, if any.
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 three months ended September 30, 2013, operating costs and expenses increased by $10,888 compared to the same period in
the prior year.
Patent
licensing legal costs related to Flash-R portfolio enforcement were $112,500 at September 30, 2013 compared to $52,500 in the prior
year’s second quarter. The $60,000 increase is the result of non-contingent legal fees of $90,000 in the current period as
compared to $30,000 in the same period in the prior year due to a change in legal representation.
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.
Prior to fiscal 2013 substantially all patent licensing
cost of revenues consisted of contingent legal fees and costs. We reclassified $52,500 of operating expenses for the period ended
September 30, 2012 to patent licensing and litigation costs to conform to the current year presentation. This reclassification
had no effect on previously reported operating income, results of operations or accumulated deficit.
Cost of revenues associated with products
and services decreased from $99,348 in the prior year’s second quarter to $62,587 in the current year. The $36,761 decrease
is primarily due to a lower-of-cost-or-market adjustment to inventory in the prior period of $18,691 with no comparable expense
in the current year, and a decrease of salaries expense in the current year of $10,965 as compared to the same period of the prior
year.
Selling and administrative costs for the three months ended
September 30, 2013 increased by $64,398 compared to the same period in the year prior.
The current
period included $55,349 for annual meeting costs with no comparable expense in the same period of the prior year comparable period.
The prior year’s second quarter included $4,265 for noncash stock-based compensation expense with no comparable expense
in the current period.
Research and related expenses decreased by $90,714 primarily
due to $53,209 reduction in legal fees related to the patent reexamination completed in the prior year, $17,345 reduction in other
patent related legal fees, and a decrease of salaries and related benefits expenses in the current year of $19,738 as compared
to the same period in the prior year. The prior year’s second quarter included $1,196 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 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.
Six months ended September
30, 2013 compared to the six months ended September 30, 2012
|
|
Six Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
% of
|
|
|
2012
|
|
|
% of
|
|
|
Change
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and services
|
|
|
124,462
|
|
|
|
23%
|
|
|
|
255,495
|
|
|
|
99%
|
|
|
|
(131,033
|
)
|
|
|
(51%
|
)
|
Patent licensing
|
|
|
426,725
|
|
|
|
77%
|
|
|
|
2,000
|
|
|
|
1%
|
|
|
|
424,725
|
|
|
|
21236%
|
|
|
|
|
551,187
|
|
|
|
100%
|
|
|
|
257,495
|
|
|
|
100%
|
|
|
|
293,692
|
|
|
|
114%
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
170,597
|
|
|
|
31%
|
|
|
|
193,125
|
|
|
|
75%
|
|
|
|
(22,528
|
)
|
|
|
(12%
|
)
|
Patent licensing and litigation costs
|
|
|
225,000
|
|
|
|
41%
|
|
|
|
75,000
|
|
|
|
29%
|
|
|
|
150,000
|
|
|
|
200%
|
|
Contingent legal fees and expenses
|
|
|
29,893
|
|
|
|
5%
|
|
|
|
3,490
|
|
|
|
1%
|
|
|
|
26,403
|
|
|
|
757%
|
|
Selling and administrative
|
|
|
446,227
|
|
|
|
81%
|
|
|
|
379,901
|
|
|
|
148%
|
|
|
|
66,326
|
|
|
|
17%
|
|
Research and related
|
|
|
161,020
|
|
|
|
29%
|
|
|
|
314,967
|
|
|
|
122%
|
|
|
|
(153,947
|
)
|
|
|
(49%
|
)
|
|
|
|
1,032,737
|
|
|
|
187%
|
|
|
|
966,483
|
|
|
|
375%
|
|
|
|
66,254
|
|
|
|
7%
|
|
Operating (loss) before provision for income taxes
|
|
|
(481,550
|
)
|
|
|
(87%
|
)
|
|
|
(708,988
|
)
|
|
|
(275%
|
)
|
|
|
227,438
|
|
|
|
(32%
|
)
|
Loss Before Income Taxes
The loss before income taxes of $481,550 for the six months
ended September 30, 2013 resulted primarily from increased patent licensing and litigation costs and reduced revenue from products
and services.
Revenues
Revenues increased during the most recent six months compared
to the same period of the prior fiscal year due to the increase in patent license revenue from $2,000 to $426,725. We currently
have one licensee reporting periodic royalties. One such payment was recognized in the quarter ended September 30, 2013 and one
in the same period of the prior year. All other royalties have been one-time fully paid up royalties. Service revenues vary depending
on repair and content services provided to a changing customer mix. eVU product sales activity have been slow and sporadic due
to airline industry economics including rapid consumer adoption of portable devices, with airlines curtailing expansion and new
projects. Our product sales for the first six months are not necessarily indicative of future orders and we had no significant
product backlog at September 30, 2013. Our service agreements and terms vary with each customer and there is no assurance in the
current airline environment that our service revenues will continue at comparable levels for the balance of the fiscal year or
in future periods.
While we expect additional patent licenses in future periods,
there can be no assurance of the timing or amounts of future license revenues. We are pursuing new eVU and other technology business
but our results will continue to be dependent on the timing and quantity of eVU orders and timing and amount of any patent licensing
arrangements.
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 six months ended September 30, 2013, operating costs and expenses increased by $66,254 compared to the same period in the
prior year.
Patent
licensing legal costs related to the Flash-R portfolio enforcement were $225,000 for the six months ended September 30, 2013 compared
to $75,000 for the same period in the prior year. The $150,000 increase is primarily due to a change in legal representation in
September 2012.
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.
Prior
to fiscal 2013 substantially all patent licensing cost of revenues consisted of contingent legal fees and costs. We reclassified
$75,000 of operating expenses for the six months ended September 30, 2012 to patent licensing and litigation costs to conform to
the current year presentation. This reclassification had no effect on previously reported operating income, results of operations
or accumulated deficit.
Selling and administrative costs for the six months ended September
30, 2013 increased by $66,326 compared to the same period in the year prior. The current period included $55,349 for annual meeting
costs with no comparable expense in the same period of the prior year.
Research and related expenses decreased by $153,947 due primarily
to $118,924 of decreased patent related costs and $33,165 of decreased salaries and related benefits expense. 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 September 30, 2013, we had
working capital of $1,222,756 compared to working capital of
$1,658,759
at March 31, 2013.
At September 30, 2013 we had cash on hand of $1,355,698.
Operating Activities
Cash used by operating activities was $385,741 for the six months
ended September 30, 2013. Cash used by operating activities included the net loss of $481,550 decreased by net non-cash expenses
of $53,740. Major components providing operating cash were a decrease of $116,805 in accounts receivable, a decrease of $48,867
in inventory including lower-of-cost or market and reserve adjustments of $48,552, and an increase of $11,300 in accounts payable.
A major component reducing operating cash was a decrease of $79,139 in accrued and other liabilities.
Cash used by operating activities was $578,957 for the six months
ended September 30, 2012. Cash used by operating activities included the net loss of $708,988 decreased by net non-cash expenses
of $14,665. Major components providing operating cash were a decrease of $46,239 in accounts receivable, a decrease of $38,871
in inventory including a lower-of cost or market adjustment of $18,691, and an increase of $31,690 in accounts payable. A major
component reducing operating cash was a decrease of $23,108 in accrued and other liabilities.
Our terms to customers vary but we often require payment prior
to shipment of product and any such payments are recorded as deposits. Patent license payments are normally due at signing of the
license or within 30-45 days of settlement or end of royalty reporting period.
Individual working capital components can change dramatically
from period to period due to timing of licensing, sales and shipments and corresponding receivable, inventory and payable balances.
Accordingly operating cash requirements vary significantly from period to period.
Investing Activities
The Company’s efforts are primarily on operations and
currently we have no significant investing capital needs. We have no commitments requiring investment capital.
Financing Activities
There were no cash financing activities during the six months
ended September 30, 2013 and 2012.
Debt and Other Commitments
We
currently have no debt outstanding other than trade payables and accruals.
At
September 30, 2013 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 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 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 equal to 33% of any license fee or settlement related to Patent
Enforcement Matters, less prior retainers and expenses, and 40% if litigation is required and successful. We may terminate the
representation at any time but would be obligated to pay fees and advances.
Cash Requirements
Other than cash on hand and accounts receivable, we have no
material unused sources of liquidity at this time. Based on our cash position at September 30, 2013 and current planned
expenditures and level of operation, we believe we have sufficient capital resources for the next twelve months. Actual results
could differ significantly from management plans. We believe we may be able to obtain additional funds from future patent licensing
and eVU product sales and services but the timing of licenses and shipments and the amount and quantities of shipments, orders
and reorders are subject to many factors and risks, many outside our control.