UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 1 to
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2014
Commission File Number 0-20734
e.Digital Corporation
(Exact name of registrant as specified in its
charter)
Delaware |
33-0591385 |
(State or other jurisdiction of |
(I.R.S. Empl. Ident. No.) |
incorporation or organization) |
|
16870 West Bernardo Drive, Suite 120, San Diego, California |
92127 |
(Address of principal executive offices) |
(Zip Code) |
(858) 304-3016
(Registrant’s telephone number, including
area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). [ X ] Yes [_] No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [_] |
Accelerated filer [_] |
Non-accelerated filer [_] (Do not check if a smaller reporting company) |
Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
As of November 1, 2014 a total of 293,328,330 shares of the Registrant’s
Common Stock, par value $0.001, were issued and outstanding.
EXPLANATORY NOTE
This Amendment No. 1 to the Company’s Form 10-Q
for the period ended September 30, 2014 is being filed solely to correct typographical errors in page numbering and that
appear in the Results of Operations, specifically in each of the tables for the Three months ended September 30, 2014
compared to the three months ended September 30, 2013 and Six months ended September 30, 2014 compared to the six months
ended September 30, 2013. No other changes have been made to the Form 10-Q, as originally filed on November 12, 2014.
e.DIGITAL CORPORATION
INDEX
|
|
Page |
PART I. FINANCIAL INFORMATION |
|
|
|
|
Item 1. |
Financial Statements (unaudited): |
3 |
|
|
|
|
Condensed Consolidated Balance Sheets as of September 30, 2014 and March 31, 2014 |
3 |
|
|
|
|
Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2014 and 2013 |
4 |
|
|
|
|
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013 |
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 |
19 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
19 |
Item 3. |
Defaults Upon Senior Securities |
19 |
Item 4. |
Mine Safety Disclosures |
19 |
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
| |
September 30, | | |
| |
| |
2014 | | |
March 31, | |
| |
(Unaudited) | | |
2014 | |
| |
$ | | |
$ | |
ASSETS | |
| | |
| |
Current | |
| | |
| |
Cash and cash equivalents | |
| 1,845,753 | | |
| 1,787,863 | |
Accounts receivable | |
| 61,731 | | |
| 238,623 | |
Inventory | |
| – | | |
| 14,208 | |
Deposits and prepaid expenses | |
| 48,754 | | |
| 65,264 | |
Total current assets | |
| 1,956,238 | | |
| 2,105,958 | |
Inventory, long-term | |
| – | | |
| 39,711 | |
Property, equipment and intangibles, net of accumulated
depreciation and amortization of $137,860 and $135,276,
respectively |
|
|
11,475 |
|
|
|
14,059 |
|
Total assets | |
| 1,967,713 | | |
| 2,159,728 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current | |
| | | |
| | |
Accounts payable, trade | |
| 102,742 | | |
| 65,705 | |
Accrued and other liabilities | |
| 118,876 | | |
| 230,569 | |
Total current liabilities | |
| 221,618 | | |
| 296,274 | |
| |
| | | |
| | |
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, 293,328,330 shares issued and
outstanding each period |
|
|
293,328 |
|
|
|
293,328 |
|
Additional paid-in capital | |
| 82,867,557 | | |
| 82,842,499 | |
Accumulated deficit | |
| (81,414,790 | ) | |
| (81,272,373 | ) |
Total stockholders' equity | |
| 1,746,095 | | |
| 1,863,454 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
| 1,967,713 | | |
| 2,159,728 | |
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, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Revenues: | |
$ | | |
$ | | |
$ | | |
$ | |
Products and services | |
| 54,468 | | |
| 67,004 | | |
| 104,716 | | |
| 124,462 | |
Patent license | |
| 340,034 | | |
| 34,725 | | |
| 972,534 | | |
| 426,725 | |
| |
| 394,502 | | |
| 101,729 | | |
| 1,077,250 | | |
| 551,187 | |
| |
| | | |
| | | |
| | | |
| | |
Operating costs and expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Products and services | |
| 105,616 | | |
| 62,587 | | |
| 159,407 | | |
| 170,597 | |
Patent licensing and litigation costs | |
| 113,089 | | |
| 112,500 | | |
| 225,589 | | |
| 225,000 | |
Contingent legal fees and expenses | |
| 96,712 | | |
| 14,765 | | |
| 303,376 | | |
| 29,893 | |
Selling and administrative | |
| 176,717 | | |
| 243,840 | | |
| 363,487 | | |
| 446,227 | |
Research and related expenditures | |
| 75,224 | | |
| 78,150 | | |
| 167,808 | | |
| 161,020 | |
Total operating costs and expenses | |
| 567,358 | | |
| 511,842 | | |
| 1,219,667 | | |
| 1,032,737 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss before provision for income taxes | |
| (172,856 | ) | |
| (410,113 | ) | |
| (142,417 | ) | |
| (481,550 | ) |
Income tax benefit (expense) | |
| – | | |
| – | | |
| – | | |
| – | |
Net loss for the period | |
| (172,856 | ) | |
| (410,113 | ) | |
| (142,417 | ) | |
| (481,550 | ) |
Loss per common share - basic and diluted | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding Basic and diluted | |
| 293,328,330 | | |
| 293,186,908 | | |
| 293,328,330 | | |
| 293,186,908 | |
See notes to interim condensed consolidated financial statements
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
For the six months ended | |
| |
September 30, | |
| |
2014 | | |
2013 | |
OPERATING ACTIVITIES | |
| $ | | |
| $ | |
Loss for period | |
| (142,417 | ) | |
| (481,550 | ) |
Adjustments to reconcile loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 2,584 | | |
| 2,189 | |
Inventory market and reserve adjustment | |
| 51,956 | | |
| 48,552 | |
Warranty provision | |
| – | | |
| 353 | |
Stock-based compensation | |
| 25,058 | | |
| 2,646 | |
Changes in assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 176,892 | | |
| 116,805 | |
Inventory | |
| 1,963 | | |
| 315 | |
Deposits and prepaid expenses | |
| 16,510 | | |
| (7,212 | ) |
Accounts payable, trade | |
| 37,037 | | |
| 11,300 | |
Accrued and other liabilities | |
| (111,693 | ) | |
| (79,139 | ) |
Cash provided by (used in) operating activities | |
| 57,890 | | |
| (385,741 | ) |
Net increase (decrease) in cash and cash equivalents | |
| 57,890 | | |
| (385,741 | ) |
Cash and cash equivalents, beginning of period | |
| 1,787,863 | | |
| 1,741,439 | |
Cash and cash equivalents, end of period | |
| 1,845,753 | | |
| 1,355,698 | |
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 including (a) licensing and enforcing its Flash-R™ portfolio of patents related to the
use of flash memory in portable devices, and (b) developing new licenseable intellectual property related to context and interpersonal
awareness systems (“Nunchi” technology), advanced data security technologies (“microSignet” technology)
and other technologies. The Company also provides eVU® mobile entertainment services to its travel industry customers.
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, 2014, 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, 2014 are not necessarily indicative
of the results that may be expected for the fiscal year ending March 31, 2015. For further information, refer to the Company's
consolidated financial statements and footnotes thereto for the year ended March 31, 2014 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
In April 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued
operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a
disposal of a component or group of components that is disposed of or is classified as held for sale and “represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The
new standard applies prospectively to new disposals and new classifications of disposal groups as held for sale after the
effective date. The amendment is effective for annual reporting periods beginning after December 15, 2014 and interim periods
within those annual periods. The Company is currently evaluating the new standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods
or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. The amendment is effective for annual reporting periods beginning after December
15, 2016 and interim periods within those annual periods. The Company is currently evaluating the new standard.
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.
Other Accounting Standards Updates not effective until after September
30, 2014 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 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 included outstanding stock options. The dilutive effect of potentially dilutive
securities is reflected in diluted earnings per share by application of the treasury stock method. These securities were not included
in the computation of diluted loss per share for the periods because they are antidilutive or of no effect, 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 There was no difference in basic and
diluted loss per share or basic and diluted weighted average shares outstanding for the periods presented.
4. LIQUIDITY
The Company has not identified any trends or any known demands,
commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease
of liquidity. During the second quarter of fiscal 2015 the Company ceased marketing eVU products and accessories, but continues
to service existing customers through the term of existing contracts in September 2015. The Company does not expect the termination
of eVU operations and the loss of eVU revenues to have a material impact on liquidity, results of operations or financial condition.
5. INVENTORIES
Inventory
is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined
by the weighted average cost method. The Company reserves for inventory that is obsolete or determined to be slow-moving
and classifies the slow moving portion of inventory as a long-term asset. The Company has ceased offering new eVU systems and
accordingly has fully reserved inventory at September 30, 2014. The Company expects to provide eVU services to existing customers
through the terms of existing contracts.
Inventories consisted of the following:
| |
September 30, | | |
March 31, | |
| |
2014 | | |
2014 | |
| |
$ | | |
$ | |
Raw materials | |
| 37,719 | | |
| 38,303 | |
Work in process | |
| 12,842 | | |
| 13,393 | |
Finished goods | |
| 31,030 | | |
| 31,858 | |
| |
| 81,591 | | |
| 83,554 | |
Reserve for obsolescence | |
| (81,591 | ) | |
| (29,635 | ) |
| |
| – | | |
| 53,919 | |
Less current portion | |
| – | | |
| 14,208 | |
Inventory, long term | |
| – | | |
| 39,711 | |
The foregoing is net of an aggregate lower-of-cost-or-market inventory
adjustment of $81,609 at March 31, 2014.
6. STOCK-BASED COMPENSATION COSTS
The Company
accounts for stock-based compensation under the provisions of ASC 718, Share-Based Payment and ASC 505-50, Equity-Based
Payments to Non-Employees. ASC 718 requires measurement of all employee stock-based awards using a fair-value method
and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further,
as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company
recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:
| |
Three Months Ended | | |
Six Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
$ | | |
$ | | |
$ | | |
$ | |
Research and development | |
| 2,547 | | |
| – | | |
| 5,094 | | |
| 849 | |
Selling and administrative | |
| 9,982 | | |
| – | | |
| 19,964 | | |
| 1,797 | |
Total stock-based compensation expense | |
| 12,529 | | |
| – | | |
| 25,058 | | |
| 2,646 | |
As of September 30, 2014 total estimated compensation cost of stock
options granted but not yet vested was $49,282 and is expected to be recognized over the weighted average period of 1.0 year.
No stock options were granted during the three or six-month periods
ended September 30, 2014 and 2013.
See Note 8 for further information on outstanding stock options.
7. 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, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
$ | | |
$ | | |
$ | | |
$ | |
Beginning balance | |
| – | | |
| 448 | | |
| – | | |
| 657 | |
Warranty provision | |
| – | | |
| (30 | ) | |
| – | | |
| 353 | |
Warranty usage | |
| – | | |
| (180 | ) | |
| – | | |
| (772 | ) |
Ending balance | |
| – | | |
| 238 | | |
| – | | |
| 238 | |
8.
STOCKHOLDERS’ EQUITY
The following table summarizes stockholders’ equity transactions
during the six-month period ended September 30, 2014:
| |
Common stock
| | |
Additional paid-in | | |
Accumulated | | |
Total stockholders' | |
| |
Shares | | |
Amount | | |
capital | | |
deficit | | |
equity | |
| |
| | |
$ | | |
$ | | |
$ | | |
$ | |
Balance, April 1, 2014 | |
| 293,328,330 | | |
| 293,328 | | |
| 82,842,499 | | |
| (81,272,373 | ) | |
| 1,863,454 | |
Stock-based compensation | |
| – | | |
| – | | |
| 25,058 | | |
| – | | |
| 25,058 | |
Loss for the period | |
| – | | |
| – | | |
| – | | |
| (142,417 | ) | |
| (142,417 | ) |
Balance, September 30, 2014 | |
| 293,328,330 | | |
| 293,328 | | |
| 82,867,557 | | |
| (81,414,790 | ) | |
| 1,746,095 | |
Options
The following table summarizes stock option activity
for the period:
| |
| | |
Weighted average | | |
Aggregate | |
| |
Shares | | |
exercise price | | |
Intrinsic Value | |
| |
# | | |
$ | | |
$ | |
Outstanding April 1, 2014 | |
| 6,613,578 | | |
| 0.0624 | | |
| | |
Granted | |
| – | | |
| | | |
| | |
Exercised | |
| – | | |
| | | |
| | |
Canceled/expired | |
| (1,890,000 | ) | |
| 0.09 | | |
| | |
Outstanding September 30, 2014 | |
| 4,723,578 | | |
| 0.05 | | |
$ | 30,192 | |
Exercisable at September 30, 2014 | |
| 3,493,578 | | |
| 0.05 | | |
$ | 30,192 | |
| (1) | Options outstanding are exercisable at prices ranging from $0.022 to $0.11 and expire over the period
from 2014 to 2018. |
| (2) | Aggregate intrinsic value is based on the closing price of our common stock on September 30, 2014
of $0.0414 and excludes the impact of options that were not in-the-money. |
Share
warrants
No warrants were outstanding at September 30,
2014 and September 30, 2013.
9. 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).
10. 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) patent licensing and (2) products and services. Patent licensing
consists of intellectual property revenues from the Flash-R patent portfolio and products and services consist of sales of the
Company’s electronic eVU mobile entertainment device and related content services. During the second quarter of fiscal 2015
we ceased marketing eVU products and accessories but continue to provide services to our existing customers under existing contracts.
We intend to terminate providing eVU services after existing contract terms are complete by September 2015.
Accounting policies for each of the operating segments are the same
as on a consolidated basis.
Reportable segment information for the three and six months ended
September 30, 2014 and 2013 is as follows:
|
|
|
For the three months ended |
|
For the six months ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
2013 |
2014 |
2013 |
|
|
|
$ |
$ |
$ |
$ |
SEGMENT REVENUES: |
|
|
|
|
|
|
|
|
Products and services |
|
54,468 |
|
67,004 |
|
104,716 |
|
124,462 |
Patent license |
|
340,034 |
|
34,725 |
|
972,534 |
|
426,725 |
|
Total revenue |
|
394,502 |
|
101,729 |
|
1,077,250 |
|
551,187 |
|
|
|
|
|
|
|
|
|
|
SEGMENT COST OF REVENUES: |
|
|
|
|
|
|
|
|
Products and services |
|
105,616 |
|
62,587 |
|
159,407 |
|
170,597 |
Patent licensing and litigation costs |
|
113,089 |
|
112,500 |
|
225,589 |
|
225,000 |
Contingent legal fees and expenses |
|
96,712 |
|
14,765 |
|
303,376 |
|
29,893 |
|
Total cost of revenues |
|
315,417 |
|
189,852 |
|
688,372 |
|
425,490 |
|
|
|
|
|
|
|
|
|
|
RECONCILIATION: |
|
|
|
|
|
|
|
|
Segment income (loss) before corporate costs |
79,085 |
|
(88,123) |
|
388,878 |
|
125,697 |
Other corporate operating costs |
|
251,941 |
|
321,990 |
|
531,295 |
|
607,247 |
|
Operating (loss) before provision for income taxes |
|
(172,856) |
|
(410,113) |
|
(142,417) |
|
(481,550) |
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, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
$ | | |
$ | | |
$ | | |
$ | |
United States | |
| 340,034 | | |
| 34,725 | | |
| 972,534 | | |
| 426,725 | |
International | |
| 54,468 | | |
| 67,004 | | |
| 104,716 | | |
| 124,462 | |
Total revenue | |
| 394,502 | | |
| 101,729 | | |
| 1,077,250 | | |
| 551,187 | |
Revenues from two licensees comprised 13% and 12% of revenue for
the six months ended September 30, 2014, with no other licensee or customer accounting for more than 10% of revenues. Revenues
from five licensees comprised 18%, 15%, 15%, 10% and 10% of revenue for the six months ended September 30, 2013, with no other
customer accounting for more than 10% of revenues. Accounts receivable from three customers comprised 56%, 30% and 10% of net accounts
receivable at September 30, 2014. Accounts receivable from three customers comprised 44%, 40% and 12% of net accounts receivable
at September 30, 2013.
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
Intellectual Property Litigation
In fiscal 2013 and fiscal 2014 the Company commenced new rounds
of enforcement action with respect to its patent portfolio and as of November 1, 2014, has active a total of 17 complaints in the
U.S. District Court for the Southern District of California, asserting that products made and sold by the defendant companies infringe
the Company’s U.S. patent portfolio.
Commitment Related to Intellectual Property Legal Services
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
on certain future royalty payments from previous matters.
In September 2012 the Company engaged Handal and Associates (“Handal”)
to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s flash memory
patent portfolio (“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 ranging from 33-40% of any license
fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses. The Company may terminate the representation
at any time but would be obligated to pay fees and advances.
Facility Lease
In January 2012, the Company entered into a sixty-two month facility
lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive,
Suite 120, San Diego, California. The aggregate monthly payment is $6,343 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, 2014 total $226,571. The Company recognizes rent expense by the straight-line method over the lease term. As of
September 30, 2014, deferred rent totaled $30,658.
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, 2014 was approximately $1.6 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 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, 2014,
the Company made matching contributions totaling $7,316.
12. INCOME TAXES
There is no provision for income taxes for the six months ended
September 30, 2014 and 2013 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, 2014, the Company had deferred tax assets associated
with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal and California
research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company records a liability for uncertain tax positions when
it is probable that a loss has been incurred and the amount can be reasonably estimated. At September 30, 2014, 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, 2014.
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 (a) licensing and enforcing our Flash-R™ portfolio of patents related to the use of flash memory in portable
devices, and (b) developing and licensing new intellectual property related to context and interpersonal awareness systems (“Nunchi”
technology), advanced data security technologies (“microSignet” technology) and other technologies. We also provide
eVU® mobile entertainment services to our travel industry customers.
With the inception of patent license revenue in fiscal 2009, we
determined that we have 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 has been derived from the sale of eVU products and accessories to customers, warranty and technical support services and
content integration fees and related services. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories
but continue to provide services to our existing customers under existing contracts. We intend to terminate providing eVU services
after existing contract terms are complete by September 2015.
We are commercializing our patent portfolios through licensing and
we are aggressively pursuing enforcement by litigating against targeted parties that we believe are infringing our patents. We
commenced legal enforcement actions in 2007 and since September 2012, the law firm of Handal and Associates has been handling our
Patent Enforcement Matters on a partial contingent fee basis.
Currently, we have active lawsuits filed against parties believed
to infringe patents covering the use of our technologies. In fiscal 2013 and 2014 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 subsequently entered into license and settlement
agreements with multiple defendants, won a stipulated judgment against three defendants, and dismissed seven defendants without
prejudice.
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 systems.
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 two rounds of 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.
Our eVU in-flight entertainment (“IFE”) business continued
to decline in the fiscal year ended March 31, 2014 (fiscal 2014) and thereafter primarily due to increased competition from personal
devices. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continue to provide services
to our existing customers through the term of existing contracts.
While we reported a profit for the first quarter of fiscal 2015,
revenues and profits have been sporadic in prior periods and we have incurred significant historical losses and negative cash flow
from operations. We incurred a second quarter loss and may incur losses in the future unless or until licensing revenues are sufficient
to sustain continued profitability.
For the six months ended September 30, 2014:
| · | We recognized a net loss of $142,417 compared to a net loss before
income taxes of $481,550 for the comparable six month period of the prior fiscal year. The difference in results was attributable
to increased license revenues due to the timing and amount of individual license agreements. |
| · | Our revenues from products and services were $104,716 for the first
half of fiscal 2015 with $972,534 patent license revenue. This compares to $124,462 product and service revenue for the prior year’s
first half and $426,725 patent license revenue. |
| · | Operating costs and expenses increased to $1,219,667 in the six months
ended September 30, 2014 compared to $1,032,737 in the comparable period prior primarily due to increased patent license and litigation
costs. |
Management faces challenges and risks for the remainder of fiscal
2015 to execute our plan to increase Flash-R patent portfolio license fees and monetize our Nunchi and microSignet 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 $135,000
per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue
advanced technology research and development. Our quarterly results are highly dependent on the timing and amount of licensing
fees and accordingly quarterly results can vary dramatically from period to period. As a result of this and other factors, past
results and expenditure levels may not be indicative of future quarters.
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, 2014. 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, 2014. 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, 2014.
Results of Operations
Three months ended September
30, 2014 compared to the three months ended September 30, 2013
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
% of |
2013 |
% of |
Change |
|
|
Dollars |
Revenue |
Dollars |
Revenue |
Dollars |
% |
Revenues: |
|
|
|
|
|
|
|
Products and services |
|
54,468 |
14% |
67,004 |
66% |
(12,536) |
(19%) |
Patent licensing |
|
340,034 |
86% |
34,725 |
34% |
305,309 |
879% |
|
|
394,502 |
100% |
101,729 |
100% |
292,773 |
288% |
Operating costs and expenses: |
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
Products and services |
|
105,616 |
27% |
62,587 |
62% |
43,029 |
69% |
Patent licensing and litigation costs |
|
113,089 |
29% |
112,500 |
111% |
589 |
1% |
Contingent legal fees and expenses |
|
96,712 |
25% |
14,765 |
15% |
81,947 |
555% |
Selling and administrative |
|
176,717 |
45% |
243,840 |
240% |
(67,123) |
(28%) |
Research and development |
|
75,224 |
19% |
78,150 |
77% |
(2,926) |
(4%) |
|
|
567,358 |
144% |
511,842 |
503% |
55,516 |
11% |
Operating (loss) before provision for income taxes |
|
(172,856) |
(44%) |
(410,113) |
(403%) |
237,257 |
(58%) |
Loss Before Income Taxes
We reported a reduced net loss before income taxes of $172,856 for
the three months ended September 30, 2014 compared to a net loss before income taxes of $410,113 for the comparable period of the
prior year due primarily to increased patent license revenue in the current year.
Revenues
Revenues increased during the second fiscal quarter of 2015 compared
to the same quarter of the prior fiscal year due to new license arrangements. We currently have one licensee reporting periodic
royalties. One such payment was recognized in the quarter ended September 30, 2014 and one in the same period of the prior year.
All other royalties have been one-time fully paid up royalties.
We experienced reduced product and service revenues due to no significant
new customers or product sales and reduced service revenues from ongoing customers. Our product revenues have been sporadic in
part as a result of 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 declining customer base. During the
second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continue to provide services to our existing
customers under existing contracts. We intend to terminate providing eVU services after existing contract terms are complete by
September 2015.
License fee revenues recognized fluctuate significantly from period
to period primarily based on the following factors:
|
· |
the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee; |
|
· |
the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and |
|
· |
fluctuations in the number of agreements executed. |
In the future the following additional factors could also impact
revenue variability:
| · | fluctuations in the sales results or other royalty per unit activities
of our licensees that impact the calculation of license fees due; |
| · | the timing of the receipt of periodic license fee payments and/or
reports from licensees. |
We are targeting new patent licensees but our results will continue
to be dependent on the timing and amount of future patent licensing arrangements, if any.
Operating Costs and Expenses
Operating
costs and expenses include cost of revenues associated with 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, 2014, operating costs and expenses increased by $55,516 compared to the same period in
the prior year.
Patent
licensing legal costs related to Flash-R portfolio enforcement were $113,089 for the three months ended September 30, 2014 compared
to $112,500 in the prior year’s second quarter. Non-contingent licensing and litigation costs and related enforcement
support costs may be incurred without any directly related revenues in a respective period. Generally contingent costs relate to
revenues during a respective period but can vary depending on our share of certain costs and expenses. Contingent
legal fees and expenses related to patent enforcement were $96,712 for the three months ended September 30, 2014 and $14,765 for
the three months ended September 30, 2013. The increase of $81,947 is the result of increased patent license revenues in the current
period.
Cost of revenues associated with products
and services increased from $62,587 in the prior year’s second quarter to $105,616 in the current year. The $43,029 increase
is primarily due to an increase to the reserve for obsolete inventory in the current period of $51,956, offset by reduced salaries
expense of $45,631 in the current period as compared to $52,814 in the same period of the prior year.
Selling and administrative costs for the three months ended September
30, 2014 decreased by $67,123 compared to the same period in the year prior. The prior period included $55,349 for annual meeting
costs with no comparable expense in the same period of the current year. The current year’s second quarter included $9,982
for noncash stock-based compensation expense with no comparable expense in the same period of the prior year.
Research and related expenses decreased by $2,926 primarily due
to $13,553 reduction in patent related legal fees, offset by increased salaries and related benefits expenses in the current year
of $10,155 as compared to the same period in the prior year. The current year’s second quarter included $2,547 for noncash
stock-based compensation expense with no comparable expense in the prior 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.
Income (Loss)
Net loss for the three months ended September 30, 2014 was $172,856.
The net loss for the prior comparable first quarter was $410,113.
Six months ended September 30, 2014 compared to the six months
ended September 30, 2013
|
|
Six Months Ended September 30, |
|
|
|
|
2014 |
% of |
2013 |
% of |
Change |
|
|
Dollars |
Revenue |
Dollars |
Revenue |
Dollars |
% |
Revenues: |
|
|
|
|
|
|
|
Product and services |
|
104,716 |
10% |
124,462 |
23% |
(19,746) |
(16%) |
Patent licensing |
|
972,534 |
90% |
426,725 |
77% |
545,809 |
128% |
|
|
1,077,250 |
100% |
551,187 |
100% |
526,063 |
95% |
Operating costs and expenses: |
|
|
|
|
|
|
|
Products and services |
|
159,407 |
15% |
170,597 |
31% |
(11,190) |
(7%) |
Patent licensing and litigation costs |
|
225,589 |
21% |
225,000 |
41% |
589 |
0% |
Contingent legal fees and expenses |
|
303,376 |
28% |
29,893 |
5% |
273,483 |
915% |
Selling and administrative |
|
363,487 |
34% |
446,227 |
81% |
(82,740) |
(19%) |
Research and related |
|
167,808 |
16% |
161,020 |
29% |
6,788 |
4% |
|
|
1,219,667 |
113% |
1,032,737 |
187% |
186,930 |
18% |
Operating (loss) before provision for income taxes |
|
(142,417) |
(13%) |
(481,550) |
(87%) |
339,133 |
(70%) |
Loss Before Income Taxes
The reduced loss before income taxes of $142,417 for the six months
ended September 30, 2014 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 $426,725 to $972,534. We experienced
reduced product and service revenues due to no significant new customers or product sales and reduced service revenues from ongoing
customers. Our service revenues declined and varied depending on repair and content services provided to a declining customer base
and are expected to cease after expiration of existing contracts 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 six months ended September 30, 2014, operating costs and expenses increased by $186,930 compared to the same period in
the prior year primarily due to patent licensing legal costs.
Patent
licensing legal costs related to patent enforcement were $225,589 for the six months ended September 30, 2014 compared to $225,000
for the same period in the prior year. 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.
Selling and administrative costs for the six months ended September
30, 2014 decreased by $82,740 compared to the same period in the year prior. The prior period included $55,349 for annual meeting
costs with no comparable expense in the same period of the current year. The current period includes decreased professional fees
of $34,235 as compared to $82,113 in the same period of the prior year.
Research and related expenses in the current period of $167,808
was consistent with comparable expenses the same period of the prior year of $161,020. 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, 2014, we had working capital of $1,734,620 compared
to working capital of $1,809,684 at March 31, 2014. At September 30, 2014 we had cash on hand of $1,845,753.
Operating Activities
Cash provided by operating activities was $57,890 for the six months
ended September 30, 2014. The net loss of $142,417 decreased by net non-cash expenses of $79,957 used operating cash. Major components
providing operating cash were a decrease of $176,892 in accounts receivable, a decrease of $53,919 in inventory including reserve
adjustments of $51,596, and an increase of $37,037 in accounts payable. A major component reducing operating cash was a decrease
of $111,693 in accrued and other liabilities.
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 a lower-of cost or market and reserve adjustment 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.
Our terms to customers vary but 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, 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, 2014 and 2013.
Debt and Other Commitments
We currently
have no debt outstanding other than trade payables and accruals. At
September 30, 2014 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
ranging from 33% to 40% of any license fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses.
We may terminate the representation at any time but would be obligated to pay fees and advances.
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, 2014 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 but the
timing of licenses are subject to many factors and risks, many outside our control.
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 September 30, 2014, 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 September 30, 2014 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. In fiscal 2013 the Company commenced enforcement action with respect to
its 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 the Company’s U.S. patents. The Company filed additional complaints in
fiscal 2014, and subsequently entered into license and settlement agreements with multiple defendants, won stipulated judgments
against three defendants, and dismissed seven defendants without prejudice.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Mine Safety Disclosures
NONE
Item 5. Other Information
(a) NONE
(b) NONE
Item 6. Exhibits
Exhibit 31.1 – Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, President and CEO (Principal
Executive Officer).
Exhibit 31.2 – Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by MarDee Haring-Layton (Chief Financial Officer).
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* |
|
*Previously filed with the Company’s original Form 10-Q
on November 12, 2014, Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended,
are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject
to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
e.DIGITAL CORPORATION |
|
|
|
By: /s/ ALFRED H. FALK |
|
Alfred H. Falk, President and Chief Executive Officer |
|
|
|
By: /s/ MARDEE HARING-LAYTON |
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MarDee Haring-Layton, Chief Financial Officer |
Date: November 18, 2014
Exhibit 31.1
CERTIFICATION
I, Alfred H. Falk, certify that:
| 1. | I have reviewed this Amendment to quarterly report on Form 10-Q of e.Digital Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: November 18, 2014
/s/ ALFRED H. FALK
Alfred H. Falk
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, MarDee Haring-Layton, certify
that:
| 1. | I have reviewed this Amendment to quarterly report on Form 10-Q of e.Digital Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: November 18, 2014
/s/ MARDEE HARING-LAYTON
MarDee Haring-Layton
Chief Financial Officer
(Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
Each of the undersigned hereby certifies, in accordance
with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an
officer of e.Digital Corporation (the "Company"), that, to his or her knowledge, the Amendment to Quarterly Report
of the Company on Form 10-Q for the period ended September 30, 2014, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition and results of operation of the Company.
Date: November 18, 2014
/s/ ALFRED H. FALK
Alfred H. Falk,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 18, 2014
/s/ MARDEE HARING-LAYTON
MarDee Haring-Layton
Chief Financial Officer
(Principal Financial Officer)