Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated
filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the issuer’s Common Stock held
by non-affiliates of the registrant on September 30, 2015 was approximately $12,606,154 based on the closing price as reported
on the NASD’s OTC Electronic Bulletin Board system.
As of June 10, 2016 there were 293,678,330 shares of e.Digital Corporation
Common Stock, par value $.001, outstanding.
IN ADDITION TO HISTORICAL INFORMATION, THIS
ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE “SAFE HARBOR” PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING
THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS
AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED
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 RISK FACTORS DESCRIBED
BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. BUSINESS
Overview
e.Digital Corporation (referred to as “e.Digital”, the
“Company”, “we”, “our” or “us”) is a holding company incorporated under the laws
of Delaware that operates through a wholly-owned California subsidiary of the same name. We are an intellectual property licensing
company developing and pursuing licensing of three intellectual property portfolios: context and interpersonal awareness systems
(“Nunchi®” technology), advanced data security technologies (“microSignet™” technology) and secure
communication technologies (“Synap™” technology).
Through September 30, 2015 the Company had two operating segments:
(1) patent licensing and enforcement and (2) products and services. Patent licensing and enforcement revenue consists of intellectual
property revenues from the Company’s patent portfolio. Products and services revenue consisted of the sale of eVU® mobile
entertainment products and accessories to customers, warranty and technical support services, and content integration fees and
related services. The Company ceased providing eVU services at September 30, 2015, effectively ending this segment’s operations.
We generate revenue through licensing and we aggressively pursue
enforcement of our intellectual property rights through patent infringement litigation against infringers of our patented technologies.
We commenced licensing and enforcement activities in 2007 related to our Flash-R™ flash memory patents, now expired. In fiscal
2015 we commenced enforcement action with respect to our Nunchi patent portfolio. Since September 2012, the law firm of Handal
and Associates has been handling our patent enforcement matters on a partial contingent fee basis.
We currently have one active complaint in the U.S. District Court
for the Southern District of California and six active complaints in the U.S. District Court for the Northern District of California,
asserting that products made and sold by the defendant companies infringe our U.S. patents. The Company entered into a license
agreement and a royalty bearing settlement agreement with one defendant during the fourth quarter of fiscal 2016. In December 2015,
the United States Patent Trial and Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the
asserted patents. An IPR is a procedure for challenging the validity of a United States patent before the United States Patent
and Trademark Office (USPTO) and often delays pending enforcement. As of June 16, 2016, one defendant had agreed to license and
settlement terms during the course of related enforcement litigation.
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 seek to
continue to develop new intellectual property for licensing.
Our principal executive offices and primary operating facilities
are located at 16870 West Bernardo Drive, Suite 120, San Diego, California 92127 and our telephone number is (858) 304-3016. Our
Internet site is located at
www.edigital.com.
Information contained on our Internet site is not part of this annual report.
Our Company, then known as Norris Communications, was incorporated
in the Province of British Columbia, Canada on February 11, 1988 and on November 22, 1994 changed its domicile to the Yukon Territory,
Canada. On August 30, 1996, we filed articles of continuance to change our jurisdiction to the State of Wyoming, then on September
4, 1996, reincorporated in the State of Delaware. On January 13, 1999, the stockholders approved a name change to e.Digital Corporation.
History of Technical Innovations
We have a record of pioneering technical innovations and achievements
in developing portable electronic products and other innovative technologies. These innovations and achievements include:
1990
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Invented the technology of combined microphone and speaker earpieces without feedback. (This was the first product in what ultimately became today’s line of Jabra hands-free communication products.)
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1993
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Developed the first portable digital player/recorder with removable flash memory, resulting in five U.S. patents on the use of flash memory in portable devices.
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1996
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Developed the first high-speed download device to store digital voice recordings on a personal computer in compressed format.
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1998
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Developed the first multi-codec (including MP3)
portable digital music player.
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1999
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Delivered an integrated digital voice recorder and computer docking station system for medical transcription of voice and data for Lanier Healthcare, LLC.
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2002
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Developed the first voice controlled MP3 player using our VoiceNav
®
speech navigation system. Bang & Olufsen introduced a branded digital audio player (BeoSound 2) developed by us pursuant to a license agreement.
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2003
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Designed, developed and delivered wireless MP3 headsets employing our MicroOS™ operating system to Hewlett-Packard for use at Disneyworld in Orlando, Florida. Licensed our digital audio platform to a multi-billion dollar Asian OEM for branding to Gateway Computers. Developed the first hard drive-based Hollywood studio-approved portable inflight entertainment (“IFE”) device.
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2006
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Introduced eVU, a next generation dedicated mobile entertainment device with 12+ hours of playback, wireless capability and proprietary content encryption approved by major studios.
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2007
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Introduced eVU-ER, an improved dedicated portable IFE player featuring a new power management technology providing an industry-leading 20+ hours of continuous video playback from a single battery. eVU is available in either a 7" or 8" high resolution LCD screen with 160 GB to 200 GB of rugged and reliable storage.
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2009
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Added new features to eVU including an advanced touch screen interface.
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2010 – 2013
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Developed new technology in the areas of context and interpersonal awareness, cloud technology, information security, user authentication and digital data distribution (Nunchi).
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2012 – 2013
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Granted six patents for our Nunchi technology.
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2014
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Granted first patent related to advanced data security (microSignet).
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2015
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Granted additional patent for Nunchi.
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2016
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Granted additional patents for Nunchi and microSignet.
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We have accumulated a body of proprietary technology some covered
by patents, both issued and pending, along with other technology protected by trade secrets and copyrights.
Intellectual Property Portfolios
Nunchi Technology® - - Context and Interpersonal Awareness
Systems
Our Nunchi patent portfolio covers certain aspects of advanced context
awareness, addressing emerging products, services and revenue models. Our Nunchi technology includes a patent portfolio of eight
U.S. patents (below):
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US8306514: System and Method for Managing Mobile Communications (expires
2030)
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US8311522: System and Method for Managing Mobile Communications (expires
2030)
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US8311523: System and Method for Managing Mobile Communications (expires
2030)
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US8311524: System and Method for Managing Mobile Communications (expires
2030)
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US8315618: System and Method for Managing Mobile Communications (expires
2030)
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US8315619: System and Method for Managing Mobile Communications (expires
2030)
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US9002331: System and Method for Managing Mobile Communications (expires
2030)
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US9178983: System and Method for Managing Mobile Communications (expires
2030)
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We have two U.S. patent continuation applications pending for technologies
related to our Nunchi technology and may file additional patent applications in the future and we evaluate additional developments
for new applications as we continue to develop this technology.
microSignet™- Data security technology based on characteristics
in semi-conductors
Our microSignet patents cover applications reliant on securing data,
derived from physical characteristics of semiconductors. Our microSignet technology includes two U.S. patents:
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US8572440: System and Method for Managing Information Stored in Semi-Conductors
(expires 2031)
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US9298565:System and Method for Identification of Memory (expires
2031)
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We believe our portfolios cover important aspects of integrating
cloud-based servers, existing communication networks and relational databases and data security, to both understand and anticipate
the needs of people.
Synap™ - Security system, method, and apparatus to uniquely
solve the issues of encryption key generation and exchange
Our Synap patent application encompasses systems and methods which
enable devices to create identical keys where those keys never need to be communicated between the devices.
Other Technology
We continue to focus on adding to our intellectual property portfolio.
There can be no assurance we can exploit any new innovations in future periods.
Intellectual Property Business
We believe we have an important portfolio of patents (Nunchi technology,
microSignet technology and Synap technology) and we are actively engaged in licensing and enforcement. We seek to obtain reasonable
license arrangements for use of our patented ideas, and our ability to close licensing transactions is generally dependent upon:
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Showing that the customer’s products infringe the claims in
our patents;
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Resolving disputes as to claim construction—the correct meaning
of the claims in our patents;
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Establishing a reasonable license fee or royalty rate for using our
patents; and
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Defeating arguments that our patents are not valid or are not enforceable.
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We, and our advisors, have performed due diligence on our patents
and we believe we have strong licensable intellectual property rights. Under U.S. law, an inventor or patent owner has the right
to exclude others from making, selling or using their patented invention. Unfortunately, in the majority of cases, infringers are
unwilling, at least initially, to negotiate or pay reasonable royalties for their unauthorized use of third-party patents and will
typically fight any allegations of patent infringement. Inventors and/or patent holders without sufficient financial or expert
technical resources to bring legal action may lack credibility in dealing with unwilling licensees and as a result, are often ignored.
Under U.S. law, a patent owner has the right to exclude others from
making, selling or using their patented invention. A third-party infringes a patent by making, offering for sale, selling, or using
a patented invention without a license from the patent owner. Unfortunately, in the majority of cases, infringers are generally
unwilling, at least initially, to negotiate or pay reasonable license fees for their unauthorized use of third-party patents and
will typically fight any allegations of patent infringement. As a result of the common reluctance of patent infringers to negotiate
and ultimately take a patent license for the use of third-party patented technologies without at least the threat of legal action,
patent licensing often requires the filing of patent enforcement litigation. 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 generate licensing revenues from users of our patented technologies
through licensing activities and through license and settlement arrangements arising from infringement litigation. We anticipate
additional licensing arrangements and patent enforcement actions in the future.
Some license agreements include nonexclusive cross licenses and
our policy is to value these only if directly used in operations. To date we have not valued any cross licenses received as they
were considered part of the licensee’s overall license and settlement strategy and are not currently used in our products.
Licensing and Patent Enforcement Activities
We commenced legal enforcement actions in 2007 related to our Flash-R
flash memory patent portfolio now expired. We successfully obtained license terms from 83 companies and related distributors through
September 30, 2015. We believe our success created both awareness and recognition of our intellectual property among household
named companies and their counsel.
Our current licensing and enforcement activity consists of the following:
Nunchi Technology Enforcement
- We commenced legal
action with regards to our Nunchi portfolio of patents in July 2014. As of March 31, 2016, we have filed patent infringement litigation
and sought licenses from eight companies and related distributors. We have entered into one royalty bearing license agreement and
one settlement agreement with one defendant. We currently have six active complaints in the U.S. District Court for the Northern
District of California and one active complaint in the U.S. District for the Southern District of California. We expect to file
future complaints against additional companies. In December 2015, the United States Patent Trial and Appeal Board (PTAB) granted
a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure for challenging the validity
of a United States patent before the United States Patent and Trademark Office (USPTO). If the patents are upheld, we believe the
patents will be stronger against other future defendants considering IPR challenges. We are in early negotiations with other defendants,
and are confident regarding license and settlement prospects for the Nunchi portfolio.
microSignet Technology
- We are seeking to license
our microSignet technology and to date have not commenced any legal actions but may do so in the future.
Synap Technology
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We are seeking to license
our Synap technology and to date have not commenced any legal actions, but may do so in the future.
Our historical licensing revenues were from our Flash-R patent portfolio
and we are now in the early stages of licensing activities on our other portfolios. As described above our activities to enforce
our Nunchi portfolio have resulted in one patent license agreement and one settlement agreement to date with revenues of $2,116.
We believe, but there can be no assurance due to the many risks involved in our business, that we can generate future licensing
revenue from our Nunchi, microSignet, and Synap patent portfolios. We also seek to extend our portfolio related to our existing
technologies and develop new technologies for licensing.
Since September 2012, the law firm of Handal and Associates has
been handling our Patent Enforcement Matters on a partial contingent fee basis.
Technology Licensing and Enforcement Strategy
Patent licensing and enforcement can be an effective and efficient
way to maximize the profit potential of patented technology. A patent license agreement grants a third-party user of an invention
specific patent rights to the patented invention in exchange for patent license fees.
Our strategy is to continue to expand our intellectual property
portfolio in both existing technology areas and develop new technologies for licensing. Currently we have no plans to introduce
new products but seek strategic partners or licensees for commercialization of products and services, based on our technologies.
We use the services of officers, employees and our legal firm, Handal
& Associates, to assist us in investigating and evaluating prospective licensees and strategic partners for our intellectual
property. While we have identified a large number of products and companies that we believe are using our technologies, this is
an ongoing process as new products and companies are identified from our research.
We believe we are building a track record of demonstrating the strength,
validity and clarity of our various patent claims and the value of our intellectual property and we believe that we can build a
growing licensing business from our intellectual property portfolios. The timing of future licensing or enforcement litigation
is subject to many factors, some of which are not within our control.
eVU Mobile Entertainment System Business
At September 30, 2015 we terminated providing eVU services, effectively
ending this segment’s operations.
Customer Concentration
Revenue from three licensees accounted for 25%, 21% and 14% of revenues
for the year ended March 31, 2016 (2015 – one licensee accounted for 16% of revenues). We seek to license new targeted companies
that we believe infringe our patent portfolio.
Research and Development Costs
For the years ended March 31, 2016 and 2015 we spent $367,068 and
$366,637, respectively, on research and development. We anticipate that we will continue to devote substantial resources to research
and development activities.
Intellectual Property
We have eight issued U.S. patents covering technology related to
our Nunchi context and interpersonal awareness systems. We have two issued U.S. patents covering our advanced data security technology,
microSignet.
We rely primarily on a combination of patents, copyright and trade
secret protection together with licensing arrangements and nondisclosure and confidentiality agreements to establish and protect
our proprietary rights. We may file additional patent applications in the future related to these or other technologies.
The patent position of any item for which we have filed a patent
application is uncertain and may involve complex legal and factual issues. Although we have filed certain U.S. patent applications,
we do not know whether any of these applications will result in the issuance of patents, or, for any patents already issued or
issued in the future, whether they will provide significant proprietary protection or will be circumvented or invalidated. Additionally,
since an issued patent does not guarantee the right to practice the claimed invention, there can be no assurance others will not
obtain patents that we would need to license or design around in order to practice our patented technologies, or that licenses
that might be required would be available on reasonable terms. Further there can be no assurance that any unpatented manufacture,
use, or sale of our technology or products will not infringe on patents or proprietary rights of others. We have made reasonable
efforts in the design and development of our products not to infringe on other known patents.
We also rely on trade secret laws for protection of our intellectual
property, but there can be no assurance others will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can protect our rights to
unpatented trade secrets.
We also file for trade name and trademark protection when appropriate.
We are the owner of U.S. federally registered trademarks including e.Digital®, eVU®, Smart Solutions for a Digital World®,
and Nunchi®
as registered trade names. We intend to make every reasonable effort to protect our proprietary rights to
make it difficult for competitors to market equivalent competing products without being required to conduct the same lengthy testing
and development conducted by us and not to use any of our innovative and novel solutions to overcome the many technical obstacles
involved in developing portable devices using flash memory and other portable storage formats.
Competition
While we do not compete with others on licensing our specific patents,
we compete generally for the attention and for funds from prospective licensees many of which are approached frequently regarding
licenses and/or are sued for patent infringement both with and without merit. Regardless of the merits of any infringement claim
many companies find it more economical, especially in the early stage of litigation, to defend the litigation rather than license.
Long-term licensing success may be dependent upon our ability to prevail in new litigation matters and possibly upon appeal. Technological
advances could also render the use of our patented methods obsolete prior to expiration of the term of our patents thus reducing
amounts of future infringement. There can be no assurance that we will generate any new licensing or settlement revenue in the
future.
We believe our existing know-how, contracts, patents, copyrights,
trade secrets and potential future patents and copyrights, will be significant in enabling us to compete successfully and license
our intellectual property.
Seasonality
Our current business is not seasonal.
Executive Officers and Employees
The current three executive officers of e.Digital Corporation are
Alfred H. Falk, President and Chief Executive Officer; MarDee Haring-Layton, Chief Financial Officer; and Eric M. Polis, Secretary.
As of March 31, 2016, we employed approximately three full-time
employees, one in research, development and engineering, and two in sales, general and administrative. None of our employees are
represented by a labor union, and we are not aware of any current efforts to unionize the employees. Management considers the relationship
between the Company and its employees to be good.
We also engage consultants or lease engineering personnel on a temporary
basis from time to time and use other outside consultants for various services.
Available Information
We file with the Securities and Exchange Commission (“SEC”)
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports,
proxy statements and registration statements. The public may read and copy any material we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain information from the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding issuers, including us, that file electronically.
Our Internet website address is http://www.edigital.com. Our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
are available free of charge through our Company’s website as soon as reasonably practical after those reports are electronically
filed with, or furnished to, the SEC. In addition, copies of the written charters for the committees of our board of directors,
our Code of Conduct, Corporate Governance, Communication and Whistleblower policies are also available on this website under the
About Us and Management links. We will provide any person, without charge, a copy of our charters, codes and/or policies upon written
request to Investor Relations, e.Digital Corporation, 16870 West Bernardo Drive, Suite 120, San Diego, California 92127. We may
post amendments or waivers of our charters, codes, or policies, if any, on our website. This website address is intended to be
an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated
in this report by reference.
ITEM 1A. RISK FACTORS
Cautionary Note on Forward Looking
Statements
In addition to the other information in this annual report the factors
listed below should be considered in evaluating our business and prospects. This annual 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.
Financial Risks
We May Not be Able to Continue as a Going
Concern.
We have incurred significant historical losses and negative cash flow from operations and have an accumulated
deficit of $82.8 million at March 31, 2016. Other than cash on hand, we have no other sources of financing currently available
as of March 31, 2016. We may incur additional losses in the future until licensing or other revenues are sufficient to sustain
continued profitability. Until we can demonstrate sustained profitability, our ability to continue as a going concern is in doubt
and may be dependent upon obtaining additional financing. There is no assurance that we will be successful in generating or raising
funds, if necessary, to sustain its operations for twelve months or beyond. Should we be unable to generate funds or obtain required
financing, we may have to curtail operations, which may have a material adverse effect on our financial position and results of
operations. Uncertainty as to the outcome of these factors raises substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements do not give effect to any adjustments that would be necessary should we be unable to continue
as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course
of business and at amounts different from those reflected in the accompanying consolidated financial statements.
We Have Not Achieved Consistent Profitability
and May Incur Future Losses
. We have recently experienced losses and profitable periods have been sporadic as revenues
vary significantly between periods as a result of license activity. Historically we have incurred significant losses and negative
cash flow from operations and we have an accumulated deficit of $82.8 million at March 31, 2016. Previous historical profitable
years have been the result of one-time patent licensing revenues and there is no assurance of future licensing revenues from new
licensees. Accordingly, we could continue to incur losses in the future until licensing revenues are sufficient to sustain continued
profitability. Failure to achieve and maintain profitability will likely negatively impact the value of our securities.
Our licensing and enforcement cycle is
lengthy and costly, and our sales and legal efforts may be unsuccessful.
We incur significant administrative, research
and legal expenses prior to entering into license agreements and generating license revenues. As such, we may incur significant
losses in any particular period before any associated revenue stream begins. We most often need to litigate to enforce our intellectual
property rights. Enforcement proceedings are typically protracted and complex. The costs are typically substantial and the outcomes
are unpredictable.
If We Encounter Unforeseen Difficulties
and Cannot Obtain any Required Additional Funding on Favorable Terms, Our Business May Suffer
.
Our consolidated
cash and cash equivalents on hand totaled $701,481 at
March 31, 2016. In recent periods we have relied primarily
on service revenues and payments
from licensees to generate the funds needed to finance our operations. We do not
expect future service revenues due to the discontinuance of our eVU business.
If we continue to incur losses in future
periods or we encounter unforeseen difficulties in the future, including difficulties arising as a result of the outside
influences identified below, we may deplete our capital resources. As a result, we may be required to obtain additional
financing in the future through debt or equity
financings or otherwise. If we are required to raise additional capital
in the future, such additional financing may not be
available on favorable terms, if at all, or may be dilutive to
our existing stockholders. If we fail to obtain additional capital as
and when needed, such failure could have a
material adverse impact on our business, results of operations and financial
condition.
We Expect Our Operating Results to Fluctuate
Significantly
. Our quarterly and annual operating results have fluctuated significantly in the past and we expect that
they will continue to fluctuate in the future. This fluctuation is a result of a variety of factors, including the following:
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Uncertainty regarding the timing and amount of any future patent licensing
revenues
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Changes in research and development costs
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Changes in general economic conditions
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We do not Anticipate Paying Dividends
.
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain any future earnings to fund the development and growth of our business. An investment in our common
stock, therefore, may be more suitable for an investor that is seeking capital appreciation rather than current yield and, as a
consequence, may be more speculative. Accordingly, investors should not purchase our common stock with an expectation of receiving
regular dividends.
Risks Related to our Patent Licensing and Enforcement Strategy
We Face Uncertain Revenue Prospects from
our Patent Enforcement Strategy.
Our current intellectual property portfolios have not been thoroughly tested in court
and there is no assurance we can prevail in any current or future patent enforcement. Future court rulings or rulings from any
reexamination of patent claims by the USPTO could have a significant positive or negative impact on future licensing activity.
The licensing demand for our patent portfolio is subject to fluctuation based upon the rate at which target infringers agree to
pay royalties or settle future enforcement actions, if any. There can be no assurance of future revenues from our strategy of enforcing
our patent portfolio. Due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt
of future license fees, if any, from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement
actions, rates of adoption of our patented technologies, the growth rates of our prospective licensees and other factors, our revenues
may vary significantly in the future, which could make our business difficult to manage, adversely affect our business and operating
results, cause our quarterly and annual results to be below market expectations and adversely affect the market price of our common
stock.
Our Fee Arrangement with Patent Enforcement
Counsel Subjects Us to Certain Risks and Substantial Costs and Fees and Could Limit Our Net Proceeds From Any Successful Patent
Enforcement Actions.
Our agreement for legal services and partial contingent fee arrangement with Handal and Associates
provides that Handal is our legal counsel in connection with the assertion of our Nunchi patents and microSignet patents against
infringers. Handal is advancing certain costs and expenses including travel expenses and court costs. We have agreed to pay Handal
a monthly retainer fee of $30,000 and a fee ranging from 33-40% of any license or litigation recovery related to patent enforcement
matters, less prior retainers and expenses. We are not in control of the timing, costs and fees, which could be substantial and
we could be required to pay substantial litigation support costs without any recovery. Costs and fees paid by Handal could also
limit our share of proceeds, if any, from future patent enforcement actions. There can be no assurance Handal will diligently and
timely pursue patent enforcement actions on our behalf.
New Legislation, Regulations or Rules
Related to Obtaining or Enforcing Patents Could Make Our Patent Enforcement More Difficult, Significantly Increase Our Operating
Costs and Decrease Our Revenues.
If new legislation,
regulations or rules are implemented by Congress, the USPTO or the courts that impact the patent application process, the patent
enforcement process or the rights of patent holders, such changes could negatively affect our business by making our patent enforcement
efforts more difficult, costly and decrease opportunities for future revenues. Recently, United States patent laws were amended
with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The
America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address
issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new
procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement
actions, increasing the likelihood that such actions will need to be brought against individual allegedly-infringing parties by
their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes review process
at the USPTO which can be, and often is, used by defendants, and other individuals and entities, to separately challenge the validity
of any patent. At this time, it is not clear what, if any, overall impact the America Invents Act will have on the operation of
our enforcement business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding
the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.
The U.S. Department of Justice, or the DOJ,
has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents
relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively license and enforce
standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies.
Also, in 2014, the Federal Trade Commission, or FTC, initiated a study under Section 6(b) of the Federal Trade Commission Act to
evaluate the patent assertion practice and market impact of Patent Assertion Entities, or PAEs. It is expected that the results
of the PAE study by the FTC will be provided to Congress and other agencies, such as the DOJ, who could take action, including
legislative proposals, based on the results of the study.
Finally,
new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement
actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from
such enforcement actions. In addition, recent federal court decisions have lowered the threshold for obtaining attorneys’
fees in patent infringement cases and increased the level of deference given to a district court’s fee-shifting determination.
These decisions may make it easier for district courts to shift a prevailing party’s attorneys' fees to a non-prevailing
party if the district court believes that the case was weak or conducted in an abusive manner. As a result, defendants in patent
infringement actions may elect not to settle because these decisions make it much easier for defendants to get attorneys’
fees.
Changes in patent law could adversely
impact our business.
Patent laws may continue to change, and may alter the historically consistent protections afforded
to owners of patent rights. Such
changes may not be advantageous for us and may make it more difficult to obtain
adequate patent protection to enforce our patents against
infringing parties. Increased focus on the growing number
of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement
actions. For instance, the United States Congress is considering a bill that would require, among other things, non-practicing
entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain
standards are not met.
Should Litigation Be Required to Enforce
Our Patents, Trial Judges and Juries Often Find It Difficult to Understand Complex Patent Enforcement Litigation, and as a Result,
We May Need to Appeal Adverse Decisions By Lower Courts In Order to Successfully Enforce Our Patents.
It is difficult to
predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand
complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation
than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed
revenue. Although we intend to diligently pursue enforcement litigation if necessary to monetize our patents, we cannot predict
with significant reliability the decisions made by juries and trial courts.
Federal Courts are Becoming More Crowded,
and as a Result, Patent Enforcement Litigation is Taking Longer.
Any patent enforcement actions we may be required to take
to monetize our patents will most likely be prosecuted in federal court. Federal trial courts that hear patent enforcement actions
also hear other cases that may take priority over any actions we may take. As a result, it is difficult to predict the length of
time it will take to complete any enforcement actions.
As Patent Enforcement Litigation Becomes
More Prevalent, It May Become More Difficult for Us to Voluntarily License Our Patents.
We believe that the more prevalent
patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents to major technology
firms as they may increasingly become more reluctant to settle and license. As a result, we may need to increase the number of
our patent enforcement actions and/or expend additional resources on enforcement actions to cause infringing companies to license
our patents or pay damages for lost royalties. This may increase the risks associated with an investment in our Company.
In Connection With Patent Enforcement
Actions That We May Conduct, a Court May Rule That We Have
Violated Certain Statutory, Regulatory, Federal, Local or
Governing Rules or Standards, Which May Expose Us
To Certain Material Liabilities.
In connection with
any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule
that we
have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating
to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions
against us or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if we are required
to pay
such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating
results and our
financial position.
Risks Related to Operations
If We Lose Key Personnel or Are Unable
to Attract and Retain Additional Highly Skilled Personnel Required For the Expansion of Our Activities Our Business Will Suffer
.
Our future success depends to a significant extent on the continued service of our key technical, sales and senior management
personnel and their ability to execute our strategy. The loss of the services of any of our senior level management, or certain
other key employees or our intellectual property consultant may harm our business. Our future success also depends on our ability
to attract, retain and motivate highly skilled employees and consultants. Competition for employees in our industry is intense.
We may be unable to retain our key employees or to attract, assimilate and retain other highly qualified employees in the future.
We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring
and retaining highly skilled employees with appropriate qualifications.
Risks Related to Intellectual Property and Government Regulation
Failing to Protect Our Proprietary Rights
to Our Technology Could Harm Our Ability to Compete, as well as Our Results of Our Operations.
Our success and ability
to compete substantially depends on our internally developed software, technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark laws. Patent applications or trademark registrations may not be approved.
Even when they are approved, our patents or trademarks may be successfully challenged by others or invalidated. If our trademark
registrations are not approved because third parties own such trademarks, our use of these trademarks would be restricted unless
we enter into arrangements with the third-party owners, which may not be possible on commercially reasonable terms or at all. We
generally enter into confidentiality or license agreements with our employees, consultants and strategic and industry partners,
and generally control access to and distribution of our software, technologies, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain
or use our solutions or technologies. The steps we have taken may not prevent misappropriation of our solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in
the United States. We have licensed, and we may license in the future, certain proprietary rights to third parties. While we attempt
to ensure that our business partners maintain the quality of our brand, they may take actions that could impair the value of our
proprietary rights or our reputation. In addition, these business partners may not take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
We May Face Intellectual Property Infringement
Claims That May Be Difficult to Defend and Costly to Resolve, Which Could Harm Our Business.
Although we do not
believe we infringe the proprietary rights of any third parties, we cannot assure you that third parties will not assert such claims
against us in the future or that such claims will not be successful. We could incur substantial costs and diversion of management
resources to defend any claims relating to proprietary rights, which could harm our business. In addition, we are obligated under
certain agreements to indemnify the other party for claims that we infringe on the proprietary rights of third parties. If we are
required to indemnify parties under these agreements, our business could be harmed. If someone asserts a claim relating to proprietary
technology or information against us, we may seek licenses to this intellectual property. We may not be able to obtain licenses
on commercially reasonable terms, or at all. The failure to obtain the necessary licenses or other rights may harm our business.
Risks Related to Government Regulation,
Content and Intellectual Property Government Regulation May Subject Us to Liability and Require Us to Change the Way We Do Business.
Our business is subject to rapidly changing laws and regulations. Although our operations are currently based in California,
the United States government and the governments of other states and foreign countries have attempted to regulate activities on
the Internet. Evolving areas of law that are relevant to our business include privacy law, copyright law, proposed encryption laws,
content regulation and import/export regulations. Because of this rapidly evolving and uncertain regulatory environment, we cannot
predict how these laws and regulations might affect our business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and regulations could harm us by subjecting us to liability
or forcing us to change how we do business.
Risks Related to Trading in Our Common Stock
Our Disclosure Controls and
Procedures May Not Prevent or Detect All Acts of Fraud.
Our disclosure controls and procedures are designed to reasonably
assure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated
to management and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms. Our management expects that our disclosure controls and procedures and internal controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and
instances of fraud, if any, within our Company have been prevented or detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized
override of the controls. The design of any systems of controls also is based in part upon certain assumptions about the likelihood
of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur
and not be detected.
Failure to Maintain an Effective System
of Internal Control Over Financial Reporting Could Harm Stockholder and Business Confidence In Our Financial Reporting, Our Ability
to Obtain Financing and Other Aspects of Our Business.
Maintaining an effective system of internal control over financial
reporting is necessary for us to provide reliable financial reports. Section 404 of the Sarbanes-Oxley Act of 2002 and the
related rules and regulations promulgated by the SEC require us to include in our Form 10-K a report by management regarding
the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the
effectiveness of our internal control over financial reporting as of the end of the respective fiscal year, including a statement
as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any
material weaknesses in our internal control over financial reporting identified by management. While our management has concluded
that we did not have any material weaknesses as of March 31, 2016, material weaknesses have been identified in prior years and
it is possible that material weaknesses will be identified in the future. In addition, components of our internal control over
financial reporting may require improvement from time to time. If management is unable to assert that our internal control over
financial reporting is effective in any future period, investors may lose confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on the Company’s stock price.
Evolving Regulation of Corporate
Governance and Public Disclosure May Result In Additional Expenses and Continuing Uncertainty.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, conversion to International Financial Reporting Standards, XBRL interactive SEC
filings, and new SEC regulations are creating uncertainty for public companies. We continually evaluate and monitor developments
with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing
of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to
their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory
and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices.
We are committed to maintaining high
standards of corporate governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards
differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities
may initiate legal proceedings against us and we may be harmed.
Investing in a Technology Stock (Such
as Ours) May Involve Greater Risk Than Other Investments Due to Market Conditions, Stock Price Volatility and Other Factors
.
The trading price of our common stock has been subject to significant fluctuations to date, and will likely be subject to wide
fluctuations in the future due to:
|
·
|
Quarter-to-quarter variations in operating results
|
|
·
|
Announcements of technological innovations by us, our customers or
competitors
|
|
·
|
New innovations or achievements by us or our competitors
|
|
·
|
The legal and regulatory environment for patent enforcement actions
|
|
·
|
General financial market conditions
|
|
·
|
Market conditions for technology stocks
|
|
·
|
Litigation or changes in operating results or estimates by analysts
or others
|
|
·
|
Other events or factors
|
In addition, potential dilutive effects of future
sales of shares of common stock by stockholders and by the Company and subsequent sale of common stock by the holders of options
could have an adverse effect on the market price of our shares.
We do not endorse and accept any responsibility
for the estimates or recommendations issued by stock research analysts or others from time to time or comments on any electronic
chat boards. The public stock markets in general, and technology stocks in particular, have experienced extreme price and trading
volume volatility. This volatility has significantly affected the market prices of securities of many high technology companies
for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely
affect the market price of our common stock in the future.
Low-Price Stocks and Stocks Traded on
the OTCQB Marketplace are Subject to Special Regulations and may have Increased Risk.
Our shares of common stock
are traded on the OTCQB Marketplace, an electronic, screen-based trading system operated by OTC Markets Group. Securities traded
on the OTCQB are, for the most part, thinly traded and are subject to special regulations not imposed on securities listed or traded
on the NASDAQ system or on a national securities exchange. As a result, an investor may find it difficult to dispose of, or to
obtain accurate quotations as to the price of, our common stock. Sales of substantial amounts of our outstanding common stock in
the public market could materially adversely affect the market price of our common stock. To date, the price of our common stock
has been extremely volatile with the sale price fluctuating from a low of $0.0351 to a high of $0.1149 in the last fiscal year.
In addition, our common stock is subject to Rules 15g-1-15g-6 promulgated under the Exchange Act that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors
(generally, a person with assets in excess of $1,000,000, excluding the value of such person’s primary residence, or annual
income exceeding $200,000 or $300,000 together with his or her spouse). For transactions covered by this rule, the broker-dealer
must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the
transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company’s securities
and may affect the ability of investors to sell their securities in the secondary market. The SEC has also adopted regulations
which define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the regulations require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating
to the penny stock market. The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing
recent price information for the penny stock in the account and information on the limited market in penny stocks.
Important Factors Related to Forward-Looking
Statements and Associated Risks
.
This prospectus contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act and we intend that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements include our plans and objectives of management for
future operations, including plans and objectives relating to the products and our future economic performance. The forward-looking
statements included herein are based upon current expectations that involve a number of risks and uncertainties. These forward-looking
statements are based upon assumptions that competitive conditions within the computer and technology markets will not change materially
or adversely, that the computer and technology markets will continue to experience growth, that demand for our technologies will
increase, that we will obtain and/or retain existing development partners and key management personnel, that our forecasts will
accurately anticipate market demand and that there will be no material adverse change in our operations or business. Assumptions
relating to the foregoing involve judgments with respect, among other things, to future economic, competitive and market conditions
and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our
control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will
be realized. In addition, as disclosed above, our business and operations are subject to substantial risks which increase the uncertainty
inherent in such forward-looking statements. Any of the other factors disclosed above could cause our net sales or net income (or
loss), or our growth in net sales or net income (or loss), to differ materially from prior results. Growth in absolute amounts
of costs of sales and selling and administrative expenses or the occurrence of extraordinary events could cause actual results
to vary materially from the results contemplated in the forward-looking statements. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn
affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives
or plans will be achieved.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In January 2012, we entered into a sixty-two month facility lease
for our corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive, Suite
120, San Diego, California. The aggregate monthly payment is $6,831 excluding utilities and costs. The aggregate payments adjust
annually with maximum payments totaling $7,157 in the forty-ninth through sixty-second months. Future lease commitments at March
31, 2016 total $107,027.
ITEM 3. LEGAL PROCEEDINGS
The Company engages in litigation from time to time as part of our
patent portfolio licensing and enforcement activities. The Company commenced legal action with regards to its Nunchi portfolio
of patents in July 2014 and currently has six active complaints in the U.S. District Court for the Northern District of California
and one in the U.S. District Court for the Southern District of California. In December 2015, the United States Patent Trial and
Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure
for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO).
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades in the over-the-counter
market on the OTCQB Marketplace. The following table sets forth, for the periods indicated, the high and low closing bid prices
for our common stock, as reported by the OTC Markets Group, for the quarters presented. Bid prices represent inter-dealer quotations
without adjustment for markups, markdowns, and commissions.
|
|
Low
|
|
High
|
Fiscal year ended March 31, 2016
|
|
|
First quarter
|
|
$
|
0.0744
|
|
|
$
|
0.115
|
|
Second quarter
|
|
$
|
0.040
|
|
|
$
|
0.089
|
|
Third quarter
|
|
$
|
0.0371
|
|
|
$
|
0.075
|
|
Fourth quarter
|
|
$
|
0.0351
|
|
|
$
|
0.050
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended March 31, 2015
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
0.0381
|
|
|
$
|
0.0600
|
|
Second quarter
|
|
$
|
0.0360
|
|
|
$
|
0.0470
|
|
Third quarter
|
|
$
|
0.0300
|
|
|
$
|
0.1385
|
|
Fourth quarter
|
|
$
|
0.0976
|
|
|
$
|
0.1300
|
|
Holders
At June 10, 2016 there were 293,678,330 shares of common stock outstanding
and approximately 2,843 stockholders of record.
Dividends
We have never paid any dividends to our common stockholders. Future
cash dividends or special payments of cash, stock or other distributions, if any, will be dependent upon our earnings, financial
condition and other relevant factors. The Board of Directors does not intend to pay or declare any dividends on our common stock
in the foreseeable future, but instead intends to have the Company retain all earnings, if any, for use in the business.
Equity Compensation Plan Information
The following table sets forth information as of March 31, 2016,
with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized
for issuance, aggregated as follows:
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options warrants and rights
(a)
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
|
Number
of securities remaining available for
future
issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
4,500,000
|
|
|
$
|
0.0799
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
-0-
|
|
|
$
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,500,000
|
|
|
$
|
0.0799
|
|
|
|
-0-
|
|
Recent Sales of Unregistered Securities
No unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL
DATA
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
our consolidated financial statements and the notes thereto and 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 elsewhere in this Annual Report and under the sub-heading, “Risk
Factors - Important Factors Related to Forward-Looking Statements and Associated Risks.”
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 an intellectual property licensing company
developing and pursuing licensing of three intellectual property portfolios: context and interpersonal awareness systems (“Nunchi®”
technology), advanced data security technologies (“microSignet™” technology) and secure communication technologies
(“Synap™” technology).
Through September 30, 2015 we had two operating segments: (1) patent
licensing and enforcement and (2) products and services. Our patent licensing consists of intellectual property revenues from our
patent and technology portfolio. Our products and services revenue consisted of sales of eVU products and accessories to customers
and related services. At September 30, 2015 we ceased providing eVU services, effectively ending this segment’s operations.
Licensing and Patent Enforcement Activities
We commenced legal enforcement actions in 2007 related to our Flash-R
flash memory patent portfolio now expired. We successfully obtained license terms from 83 companies and related distributors through
September 30, 2015. We believe our success created both awareness and recognition of our intellectual property among household
named companies and their counsel.
Our current licensing and enforcement activity consists of the following:
Nunchi Technology Enforcement
- We commenced legal
action with regards to our Nunchi portfolio of patents in July 2014. As of March 31, 2016, we have filed patent infringement litigation
and sought licenses from eight companies and related distributors. We have entered into one royalty bearing license agreement and
one settlement agreement with one defendant. We currently have six active complaints in the U.S. District Court for the Northern
District of California and one active complaint in the U.S. District for the Southern District of California. We expect to file
future complaints against additional companies. In December 2015, the United States Patent Trial and Appeal Board (PTAB) granted
a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure for challenging the validity
of a United States patent before the United States Patent and Trademark Office (USPTO). If the patents are upheld, we believe the
patents will be stronger against other future defendants considering IPR challenges. We are in early negotiations with other defendants,
and are confident regarding license and settlement prospects for the Nunchi portfolio.
microSignet Technology
- We are seeking to license
our microSignet technology and to date have not commenced any legal actions but may do so in the future.
Synap Technology –
We are seeking to license
our Synap technology and to date have not commenced any legal actions, but may do so in the future.
Our historical licensing revenues were from our Flash-R patent portfolio
and we are now in the early stages of licensing activities on our other portfolios. We also seek to extend our portfolio related
to our existing technologies and develop new technologies for licensing.
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 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 in the fiscal years ended March 31, 2016 and 2015. We have successfully completed enforcement litigation and
are in the process of additional enforcement actions. There is a reluctance of patent infringers to negotiate and ultimately take
a patent license without at least the threat of legal action. However, the majority of patent infringement contentions settle out
of court, based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed.
We believe we are building a track record of demonstrating the strength, validity and clarity of our patent claims that can result
in significant future revenues from our patent portfolio.
Revenues and profits have been sporadic in prior
years and we have incurred significant historical losses and negative cash flow from operations. We expect to incur losses in the
future until licensing or other revenues are sufficient to sustain continued profitability. Our ability to continue as a going
concern is in doubt and is dependent upon achieving a profitable level of operations and if necessary obtaining additional financing.
For the year ended March 31, 2016:
|
·
|
We recognized a net loss of $1,275,164 compared to net loss of $235,153
for fiscal 2015. The difference in results was primarily attributable to decreased patent license settlement revenues resulting
from the end of the Flash-R portfolio patents and our transition to Nunchi and other technologies.
|
|
·
|
Revenues of $709,531 decreased as compared to revenues of $2,235,803
for fiscal 2015. During fiscal 2016 we had 15 new license agreements as compared to 29 new license agreements in fiscal 2015. As
a result of the timing of such license agreements, our licensing revenues in fiscal 2016 totaled $693,500 compared to $2,079,534
in fiscal 2015. Product and service revenues from our now terminated eVU business were $16,031 in fiscal 2016 compared to $156,269
in fiscal 2015.
|
|
·
|
Operating expenses were $1.98 million for fiscal 2016 a decrease from
$2.69 million in fiscal 2015 primarily as a result of reduced headcount and expenses related to the terminated eVU business and
reduced contingent legal fees due to fewer new license agreements.
|
Management faces challenges in fiscal 2017 to generate license revenues
from our technologies. These challenges include, but are not limited to, successful execution of our legal and licensing enforcement
strategy in an uncertain and changing legal and regulatory environment related to patent infringement. The failure to obtain new
patent license revenues could have a material adverse impact on our operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements 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,
inventory valuation, financing operations, stock-based compensation, fair values, derivatives, 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 Note 2 to our consolidated financial statements, the following accounting policies require our most difficult, subjective or
complex judgments:
|
·
|
stock-based compensation expense; and
|
We discuss below the critical accounting assumptions, judgments
and estimates associated with these policies. Historically other than our estimate of foreign tax expense incurred in fiscal 2009
and recovered in fiscal years 2011 and 2015 as discussed below, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual results. For further information on our critical accounting policies,
refer to Note 2 to the consolidated financial statements included herein.
Revenue
Recognition
As described below, significant management judgments must be made
and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and
timing of revenue recognized or deferred for any period, if management made different judgments.
We recognize revenue in accordance with ASC Topic 605,
Revenue
Recognition
. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been
substantially performed pursuant to the terms of the license agreement, (iii) amounts are fixed or determinable and (iv) collectability
of amounts is reasonably assured.
We make estimates and judgments when determining whether the collectability
of license fees receivable from customers is reasonably assured. We assess the collectability of our receivables based on a number
of factors, including past transaction history and the credit-worthiness of customers. Management estimates regarding collectability
impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments
regarding future collectability could differ from actual events, thus materially impacting our financial position and results of
operations.
Certain license agreements provide for the payment of contractually
determined paid-up license fees in consideration for the grant of a non-exclusive, retroactive and future license to manufacture
and/or sell products covered by our patented technologies. Generally, the execution of these license agreements also provide for
the release of the licensee from certain past and future claims, and the dismissal of any pending litigation. Pursuant to the terms
of these agreements, we have no further obligation with respect to the grant of the non-exclusive retroactive and future license
and related releases, including no express or implied obligation to maintain or upgrade the technology, or provide future support
or services. Generally, the agreements provide for the grant of the license and releases upon execution of the agreement. As such,
the earnings process is generally complete upon the execution of the agreement, and as a result, revenue is recognized upon execution
of the agreement, when collectability is reasonably assured, and all other revenue recognition criteria have been met. While most
licenses contain similar standard provisions, management must evaluate each agreement and make judgments to assure that substantial
delivery of contract elements has occurred, whether any significant ongoing obligations exist subsequent to contract execution,
whether amounts due are collectible and the appropriate period or periods, in which, or during which, respectively, the completion
of the earning process occurs. Depending on the magnitude of specific license agreements, if different judgments, assumptions and
estimates are made regarding contracts executed in any specific period, our periodic financial results may be materially affected.
In fiscal 2010 we entered into our first licenses providing for
future royalties based on future licensee activities. Licensees that pay license fees on a periodic basis are required to report
to us actual activity after the activity takes place. The amount of license fees due under these license agreements each period
cannot be reasonably estimated by management. Consequently, we recognize revenue from these licensing agreements on a lag basis
as royalties are reported provided amounts are fixed or determinable and collectability is reasonably assured. The lag method allows
for the receipt of licensee royalty reports prior to the recognition of revenue. Differences between amounts recognized and amounts
that could subsequently be audited or reported as an adjustment to those amounts will be recognized in the period such adjustment
is determined as a change in accounting estimate.
Some license agreements include nonexclusive cross licenses and
our policy is to value these only if directly used in operations. To date the we have not valued any cross licenses received as
they were considered part of the licensee’s overall license and settlement strategy and are not used in our products. However
we must evaluate each license with cross license rights to determine what is being cross licensed and if it is used in our products
and this requires management to make judgments that affect our operations.
Stock-Based Compensation
ASC Topic 718, “
Compensation – Stock Compensation
,”
or ASC 718, sets forth the accounting requirements for “stock-based” compensation payments to employees, non-employee
directors and consultants and requires all stock based-payments to be recognized as expense in the statement of operations. The
compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using
a Black-Scholes option pricing model), and is recognized as an expense over the requisite service period (generally the vesting
period of the equity award). Determining the fair value of stock-based awards at the grant date requires significant estimates
and judgments, including estimating the market price volatility of our common stock, future employee stock option exercise behavior
and requisite service periods. Due to our limited exercise history we applied the simplified method prescribed by SEC Staff Accounting
Bulletin 110,
Share-Based Payment: Certain Assumptions Used in Valuation Methods - Expected Term
, to estimate expected life.
Options or stock awards issued to non-employees who are not directors
are recorded at their estimated fair value at the measurement date and are periodically revalued as the options vest and are recognized
as expense over the related service period on a graded vesting method. Stock options issued to consultants with performance conditions
are measured and recognized when the performance is complete.
ASC Topic 718 requires stock-based compensation expense to be recorded
only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, ASC Topic 718 requires us to estimate
pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation
expense recognized. Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if actual forfeitures
differ from those estimates. We consider several factors in connection with our estimate of pre-vesting forfeitures including types
of awards, employee class, and historical pre-vesting forfeiture data. The estimation of stock awards that will ultimately vest
requires judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative
adjustments in the period the estimates are revised. If actual results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
ASC 718 also provides that any corporate income tax benefit realized
upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a “windfall tax
benefit”) will be presented in the Consolidated Statements of Cash Flows as a financing (rather than as operating) cash flow. Realized
windfall tax benefits are credited to paid-in capital. Realized shortfall tax benefits (amounts which are less than
that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then
charged directly to income tax expense.
Refer to Notes 2 and 8 to our consolidated financial statements
included in this annual report for more information.
Income Taxes
In preparing our consolidated financial statements, we estimate
our income taxes in each of the countries in which we operate. While we believe we operate only in the United States, certain licensees
have withheld taxes on license payments in foreign countries. During fiscal 2015 we recorded a tax benefit of $169,888 consisting
of prior year foreign tax recoveries of $206,250 less foreign taxes paid of $36,362. We determined it unlikely we can recover a
refund of the $36,362 of foreign taxes withheld and that we can only use the foreign taxes as a future credit against U.S. taxes.
Matters regarding foreign taxes require us to make judgments and estimates based on various assumptions and these affect our reported
operations.
Our determination of income tax expense or benefit requires estimates
including an assessment of the current tax expense and the effects of temporary differences resulting from the different treatment
of transactions for tax and financial accounting purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. The Company accounts for deferred income taxes utilizing an asset and liability
method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the
financial statements and the tax bases of assets and liabilities, as measured by current enacted tax rates. Deferred tax assets
are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not
be realized. We evaluate the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the
amount of such allowance, if necessary. At March 31, 2016, we had net deferred tax assets primarily resulting from temporary differences
between the book and tax bases of assets and liabilities, and loss and credit carry forwards. We continue to provide a 100% valuation
allowance our deferred tax assets based on an assessment of the likelihood of their realization. In reaching our conclusion, we
evaluated certain relevant criteria including deferred tax liabilities that can be used to offset deferred tax assets, estimates
of future taxable income of appropriate character within the carry-forward period available under the tax laws, and tax planning
strategies. Our judgments regarding future taxable income may change due to market conditions, changes in U.S. or international
tax laws, our business and results of operations, and other factors. These changes, if any, may require material adjustments to
these deferred tax assets, resulting either in a tax benefit, if it is estimated that future taxable income is likely, or a reduction
in the value of the deferred tax assets, if it is determined that their value is impaired, resulting in a reduction in net income
or an increase in net loss in the period when such determinations are made.
Our income tax provision is based on calculations and assumptions
that will be subject to examination by the taxing authorities in the jurisdictions in which we operate. Should the actual results
differ from our estimates, we would have to adjust the income tax provision in the period in which the facts and circumstances
that give rise to the revision become known. Tax law and rate changes are reflected in the income tax provision in the period in
which such changes are enacted. As of March 31, 2016 and 2015, we had no material uncertain tax positions and uncertain tax positions
have had no impact on our consolidated financial condition or results of operations or cash flows.
Other
We do not have off-balance sheet transactions, arrangements or obligations.
Inflation has not had any significant impact on our business.
Recently Issued Accounting Standards
See Note 2 to our consolidated financial statements included herein
for a description of significant recent accounting standards. Other accounting standards have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact
on our consolidated financial statements upon adoption.
Results of Operations
Year ended March 31, 2016 Compared to Year ended March 31,
2015
|
|
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
|
Dollars
|
|
|
|
Revenue
|
|
|
|
Dollars
|
|
|
|
Revenue
|
|
|
|
Dollars
|
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
16,031
|
|
|
|
2%
|
|
|
|
156,269
|
|
|
|
7%
|
|
|
|
(140,238
|
)
|
|
|
(90%
|
)
|
Patent licensing
|
|
|
693,500
|
|
|
|
98%
|
|
|
|
2,079,534
|
|
|
|
93%
|
|
|
|
(1,386,034
|
)
|
|
|
(67%
|
)
|
|
|
|
709,531
|
|
|
|
100%
|
|
|
|
2,235,803
|
|
|
|
100%
|
|
|
|
(1,526,272
|
)
|
|
|
(68%
|
)
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
8,256
|
|
|
|
1%
|
|
|
|
242,027
|
|
|
|
11%
|
|
|
|
(233,771
|
)
|
|
|
(97%
|
)
|
Patent licensing and litigation costs
|
|
|
450,000
|
|
|
|
63%
|
|
|
|
455,274
|
|
|
|
20%
|
|
|
|
(5,274
|
)
|
|
|
(1%
|
)
|
Contingent legal fees and expenses
|
|
|
299,731
|
|
|
|
42%
|
|
|
|
700,352
|
|
|
|
31%
|
|
|
|
(400,621
|
)
|
|
|
(57%
|
)
|
Selling and administrative
|
|
|
859,640
|
|
|
|
121%
|
|
|
|
929,128
|
|
|
|
42%
|
|
|
|
(69,488
|
)
|
|
|
(7%
|
)
|
Research and development
|
|
|
367,068
|
|
|
|
52%
|
|
|
|
366,637
|
|
|
|
16%
|
|
|
|
431
|
|
|
|
0%
|
|
|
|
|
1,984,695
|
|
|
|
279%
|
|
|
|
2,693,418
|
|
|
|
120%
|
|
|
|
(708,723
|
)
|
|
|
(26%
|
)
|
Operating loss before other income, provision for or benefit from income taxes
|
|
|
(1,275,164
|
)
|
|
|
(179%
|
)
|
|
|
(457,615
|
)
|
|
|
(20%
|
)
|
|
|
(817,549
|
)
|
|
|
179%
|
|
Operating loss before other income, provision for or benefit
from income taxes
The operating loss before other income, provision for or benefit
from income taxes in fiscal years 2016 and 2015 resulted from a reduced number of new license agreements. Since a significant majority
of license revenues to date have been one-time licenses, they are non-recurring and accordingly there is no assurance of any future
license revenues.
Revenues
Revenues decreased during fiscal 2016 compared to the prior fiscal
year due to fewer new license arrangements as we transition enforcement efforts from the Flash-R patent portfolio to the Nunchi
patent portfolio and other technologies and the termination of eVU products and services. Revenues for the year ended March 31,
2016 included $693,500 of one-time non recurring license revenues and $16,031 of eVU service revenues.
Revenues for the year ended March 31, 2015 included $2,077,000 of
one-time non recurring license revenues, $2,534 of royalty-based license revenues and $156,269 of eVU product and service revenues.
In the current year we entered into a total of 15 patent licenses,
and in the prior year there were 29 new licenses. 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 licensees but our results will continue to
be dependent on the timing and amount of future licensing arrangements, if any.
Operating Expenses
Operating costs and expenses include costs associated with our licensing
and enforcement activities, and through September 30, 2015, costs of revenues associated with eVU products and services. eVU product
and service costs were 52% and 154% of related revenues for the fiscal years ended March 31, 2016 and 2015, respectively. The eVU
business was terminated at September 30, 2015.
Licensing and litigation costs of revenues include the costs and
expenses incurred in connection with our licensing and enforcement activities, including contingent and non-contingent litigation
costs and related enforcement support costs. 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 decreased by $69,488 from fiscal
2015 to fiscal 2016. The decrease is primarily due to shareholder meeting expenses of $54,687 in fiscal 2015, with no comparable
expense in fiscal 2016.
Research and related expenditures of $367,068 in fiscal 2016 were
consistent with the prior year. We expect future research and development costs to be comparable to the most recent year due to
current staffing levels and projects. Should we elect to develop significant new technologies or products we may require increased
internal and external research and development costs.
Income Taxes
We had no provision for or benefit from income taxes in fiscal 2016.
We had a tax benefit of $169,888 in the prior year, resulting from the recovery of $206,250 of foreign taxes paid in fiscal 2010,
less foreign taxes paid in fiscal 2015 of $36,362.
Loss
The net loss for the year ended March 31, 2016 was $1,275,164. The
net loss for the year ended March 31, 2015 was $235,153.
Liquidity and Capital Resources
|
|
2015
|
|
|
2016
|
|
|
2015 to 2016
variance
in $'s
|
|
|
2015 to 2016
variance
in %'s
|
|
|
|
(in thousands, except percentages)
|
|
Working capital
|
|
$
|
1,710
|
|
|
$
|
503
|
|
|
$
|
(1,207
|
)
|
|
|
(71%
|
)
|
Cash and cash equivalents
|
|
$
|
1,953
|
|
|
$
|
701
|
|
|
$
|
(1,252
|
)
|
|
|
(63%
|
)
|
Total assets
|
|
$
|
2,014
|
|
|
$
|
759
|
|
|
$
|
(1,255
|
)
|
|
|
(62%
|
)
|
|
|
2015
|
|
2016
|
|
2015 to 2016
variance
in $'s
|
|
2014 to 2015
variance
in %'s
|
Net cash provided by (used in)
|
|
(in thousands, except percentages)
|
Operating activities
|
|
$
|
164
|
|
|
$
|
(1,233
|
)
|
|
$
|
(1,397
|
)
|
|
|
(844%
|
)
|
Investing activities
|
|
$
|
0
|
|
|
$
|
(25
|
)
|
|
$
|
(25
|
)
|
|
|
–
|
|
Financing activities
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
|
(536%
|
)
|
At March 31, 2016, we had working capital of $503,000 compared to
working capital of $1.71 million for the prior year. We had no working capital invested in accounts receivable at March 31, 2016,
and $11,218 at March 31, 2015. License payments are normally due at signing of the license or within 30-45 days. We currently have
no credit lines or debt arrangements to provide working capital other than from cash as generated from operations.
Operating Activities
For the year ended March 31, 2016, net cash decreased by $1,251,500.
Cash used in operating activities was $1,232,943. Cash used in operating activities included the net loss of $1,275,164 decreased
by net non-cash expenses of $86,890. Major components using operating cash were a $47,687 decrease in accrued and other liabilities
and a $19,549 decrease in trade accounts payable.
For the year ended March 31, 2015, net cash increased by $165,118.
Cash provided by operating activities was $164,018. Cash provided by operating activities included the net loss of $235,153 decreased
by net non-cash expenses of $144,621. A major component using operating cash was a $73,810 decrease in accrued and other liabilities.
Investing Activities
We invested $25,157 in computer equipment and website costs in fiscal
2016. The Company’s efforts are primarily on operations and currently we have no significant investing capital needs. We
have no commitments requiring investment capital.
Financing Activities
We received $6,600 and $1,100 of proceeds from stock option exercises
during the years ending March 31, 2016 and March 31, 2015, respectively.
We currently have no sources of financing funding other than the
potential exercise of options that generally will be dependent on higher stock prices and thus additional exercises are uncertain.
Debt and Other Commitments
We have no debt other than normal trade payables
and accruals outstanding. We have no credit lines or access or commitments for any future debt financing.
We are committed for our office lease. Future lease commitments
at March 31, 2016 total $107,027. Refer to Note 10 to our consolidated financial statements included in this annual report for
more information.
Our legal firm, Handal and Associates, provides intellectual property
legal services in connection with licensing and prosecuting claims of infringement of our flash memory and Nunchi patent portfolios.
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 33-40% 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. Our monthly cash operating costs average approximately $113,000 per
month. Assuming no new license revenues and current expenditure levels we would require approximately $648,000 of additional resources
to fund operations for the next twelve months. We believe we may be able to obtain additional funds from future licensing
arrangements but the timing thereof is subject to many factors and risks, many outside our control. Our operating plans may require
additional funds in future periods and should additional funds not be available, we may be required to curtail or scale back operations.
Potential sources of such funds include exercise of outstanding options, or debt financing or new equity offerings. However, there
is no assurance that options will be exercised or that debt or equity financing will be available if and when needed. Any future
financing may be dilutive to existing stockholders.
Since we have not demonstrated sustainable profitability, our ability
to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary obtaining additional
financing. We currently have no plans, arrangements or understandings regarding any acquisitions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company required to
be included in this Item 8 are set forth in a separate section of this report following Item 15 and the Signature Page commencing
on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no disagreements or any reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
ITEM 9A. CONTROLS & PROCEDURES
We are required to maintain disclosure controls and procedures designed
to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized
and reported within the time periods specified in the SEC rules and forms.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls (as defined in Rule 13a-15(e) of
the Exchange Act) and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods specified in the SEC’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. Management, which, by their nature, can provide only reasonable
assurance regarding management’s control objectives. In designing and evaluating the 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 is required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
At the conclusion of the period ended March 31, 2016, we carried
out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures,
as defined in Rule 13a-15(e) of the Exchange Act, were effective at a reasonable assurance level.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March
31, 2016 based on the guidelines established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”) 2013. Our internal control over financial reporting includes policies and procedures
that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally accepted accounting principles in the United States. Based on this
evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of March
31, 2016.
This annual report does not include an attestation report
of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of
the SEC that permit the Company to provide only management’s report in this annual report.
Inherent Limitations on Effectiveness
of Controls
Our management does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can
also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections
of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control Over Financial
Reporting
No change in our internal controls over financial reporting occurred
during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
Notes to Consolidated Financial Statements
March 31, 2016
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
e.Digital Corporation is a holding company incorporated under the
laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company is developing and marketing
an intellectual property portfolio consisting of context and interpersonal awareness systems (“Nunchi®” technology),
advanced data security technologies (“microSignet™” technology), secure communication technologies (“Synap™”
technology) and other technologies.
The consolidated financial statements have been prepared, by management,
in accordance with accounting principles generally accepted in the United States on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
The Company has incurred significant losses and negative cash flow
from operations and has an accumulated deficit of $82,782,690 at March 31, 2016. Other than cash on hand, the Company has no other
sources of financing currently available as of March 31, 2016. The Company may incur additional losses in the future until licensing
or other revenues are sufficient to sustain continued profitability. Until the Company can demonstrate sustained profitability,
its ability to continue as a going concern is in doubt and may be dependent upon obtaining additional financing in the future.
There is no assurance that the Company will be successful in generating or raising funds, if necessary, to sustain its operations
for twelve months or beyond. Should the Company be unable to generate funds or obtain required financing, it may have to curtail
operations, which may have a material adverse effect on its financial position and results of operations. Uncertainty as to the
outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements do not give effect to any
adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize
its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected
in the accompanying consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting
policies used in the preparation of these consolidated financial statements:
Principles
of Consolidation
These consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, e.Digital Corporation (a company incorporated in the State of California).
All significant intercompany accounts and transactions have been eliminated.
Use of
Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods. Some of the estimates needed to be made by management
include the allowance for doubtful accounts, valuation of inventory, estimated useful lives of property and equipment and intangible
assets, warranty reserve, valuation of equity instruments associated with share-based compensation and for services rendered and
the valuation allowance for the Company’s deferred tax asset. Actual results could materially differ from these estimates.
Segment Information
Through September 30, 2015, the Company had two operating segments:
(1) patent licensing and enforcement (2) products and services. Patent licensing and enforcement revenue consists of intellectual
property revenues from the Company’s patent portfolio. Products and services revenue consisted of the sale of eVU products
and accessories to customers, warranty and technical support services and content integration fees and related services. The Company
ceased providing eVU services at September 30, 2015, effectively ending this segment’s operations. Segment information and
related disclosures about the Company’s products, services, geographical areas and major customers is contained in Note 9.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Fair Value of Financial
Instruments
U.S. generally accepted accounting principles define fair value
as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes
a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy
of valuation techniques established to measure fair value, is defined as follows:
|
·
|
Level 1: inputs are unadjusted quoted prices in active markets for
identical assets or liabilities.
|
|
·
|
Level 2: inputs other than level 1 that are observable, either directly
or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar
assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of assets or liabilities.
|
|
·
|
Level 3: unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities.
|
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.
The Company’s financial assets measured at fair value on a
recurring basis at March 31, 2016 are as follows:
|
|
Fair Value Measurement as of March 31, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Description
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cash and cash equivalents (1)
|
|
|
701,481
|
|
|
|
701,481
|
|
|
|
–
|
|
|
|
–
|
|
|
(1)
|
Included in cash and cash equivalents on the accompanying consolidated balance sheet.
|
Loss per Share
Basic loss per common share is computed by dividing net loss by
the weighted-average number of shares of common stock outstanding during the period. Diluted net 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 any additional shares of common stock that would have been outstanding if any potentially dilutive securities had
been issued. Potentially dilutive securities consist of stock options.
At March 31, 2016 and 2015, stock options exercisable into 4,500,000
and 5,948,578 shares of common stock were outstanding, respectively. These securities were not included in the computation of diluted
loss per share because they are antidilutive, but they could potentially dilute earnings (loss) per share in future years.
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 March 31, 2016 was approximately $451,481. 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.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Guarantees and Indemnifications
The Company enters into standard indemnification agreements in the
ordinary course of business. Some of the Company’s 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.
Revenue
Recognition
The Company
recognizes revenue in accordance with ASC Topic 605,
Revenue Recognition
. Revenue is recognized when (i) persuasive
evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the license
agreement, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured. The Company’s
segments have the following revenue recognition policies:
Patent Licensing
and Enforcement
The Company’s patent licensing operations include the licensing
and enforcement of its patented technologies. These activities include the negotiation of licensing arrangements with users of
patented technologies to realize a fair and reasonable license fee for all applicable periods (periods prior to and subsequent
to the execution of the license agreement). In most instances to date, the Company has initiated patent litigation against infringers
who are otherwise unwilling to engage in licensing negotiations, or in cases where a disagreement exists regarding whether or not
infringement exists.
Revenues generated from license agreements are recognized in the
period earned, provided that amounts are fixed or determinable and collectability is reasonably assured. The Company applies the
guidance of SEC Staff Accounting Bulletin Topic 13.A.3(f),
Nonrefundable Up-Front Fees
, to its patent license and settlement
agreements using the specific performance method analogous to the sale of an asset in such literature as ASC 840,
Leases
and ASC 926-605,
Entertainment – Films, Revenue Recognition
. At the time the Company enters into a contract and provides
the customer with the licensed technology the Company has performed all of its obligations under contract, the rights to the Company’s
technology have been transferred and no significant performance obligations remain. The Company’s licenses are perpetual
in nature, extending until the expiration of the related patents. The execution of license agreements also provides for the
release of the licensee from certain claims, the dismissal of any pending litigation and covenants not to sue. Pursuant
to the terms of these agreements, the Company has no further obligation with respect to the grant of the license and related releases,
including no express or implied obligation to maintain or upgrade the technology, or provide future support or services.
Most of the Company’s patent licenses have provided for a
contractually determined one time fully paid up license in consideration for the grant of a non-exclusive, retroactive and future
license to manufacture and/or sell products covered by patented technologies owned by the Company. The Company also has license
agreements providing for future royalties based on future licensee activities. Licensees that pay license fees on a periodic basis
generally report actual activity after the activity takes place. The amount of license fees due under these license agreements
each period cannot be reasonably estimated by management. Consequently, the Company recognizes revenue from these licensing
agreements on a lag basis as royalties are reported provided amounts are fixed or determinable and collectability is reasonably
assured. The lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue.
The Company considers its licensing and enforcement activities as
one unit of accounting under ASC 605-25,
Multiple-Element Arrangements
as the delivered items do not have value to customers
on a stand alone basis, there are no undelivered elements and there is no general right of return relative to the license. Under
ASC 605-25, the appropriate recognition of revenue is determined for the combined deliverables as a single unit of accounting and
revenue is recognized upon delivery of the final elements, including the license for past and future use and the release. Also
due to the fact that the settlement element and license element for past and future use are the major business activities of the
Company’s licensing segment, the Company does not present these two elements as different revenue streams in its consolidated
statement of operations. The Company does not expect to provide licenses that do not provide some form of settlement or release.
The Company evaluates each new license agreement for revenue recognition
in accordance with the above criteria and applicable literature.
The Company values nonexclusive cross licenses
received only if directly used in operations. To date the Company has not valued any cross licenses received as they were considered
part of the customer’s overall license and settlement strategy and are not used in the Company’s products.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Products and Services
The Company recognizes product revenue upon shipment of a product
to the customer, FOB shipping point, or upon acceptance by the customer depending on the specific contract terms, if a signed contract
exists, the fee is fixed and determinable, collection of resulting receivables is probable and there are no resulting obligations.
Service revenue is recognized once the services have been delivered, the fee is fixed and determinable, collection of the resulting
receivable is probable and there are no resulting obligations. If all of the service or product has been delivered and there is
one element that is more than perfunctory to the services or product that has not been delivered, revenue will be deferred and
recognized evenly over the remaining term of the undelivered element.
Service revenues may include revenue from coding, encrypting and
integrating content for periodic uploading to hardware players. Revenue is recognized upon acceptance of the content master file
by the customer if the fee is fixed and determinable, collection of the resulting receivables is probable and there are no resulting
obligations.
Revenue from separately priced extended warranty
or product replacement arrangements is deferred and recognized to income on a straight-line basis over the contract period. The
Company evaluates these arrangements to determine if there are excess costs greater than future revenues to be recorded as a loss.
Funds received
in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue as they are earned. Any amounts
related to periods beyond twelve months are considered long-term deferred revenue.
Costs
of Revenues
Patent licensing and litigation costs of revenues
include the costs and expenses incurred in connection with the Company’s licensing and enforcement activities, consisting
mostly of non-contingent litigation costs and related enforcement support costs. Contingent legal fees and expenses are expensed
in the period that the related revenues are recognized however legal fees and costs advanced or required to be paid in the event
no recoveries are obtained are expensed as incurred and included in patent licensing and litigation costs in the consolidated statement
of operations.
Prepaid
Expenses
Prepaid expenses are recorded at amounts paid
to suppliers or others. Amounts recorded are evaluated for impairment each reporting period.
Shipping and Handling Costs and Sales Taxes
Amounts paid by customers for shipping and handling and for sales
taxes are included in product revenues. Actual shipping and handling costs and sales taxes are included in product cost of revenues.
Inventory
Inventory is recorded at the lower of cost and net realizable value.
The cost of substantially all Company inventory is determined by the weighted average cost method. Carrying value of inventory
is periodically reviewed and impairments, if any, are recognized when the expected benefit is less than carrying value. The Company’s
policy is to reserve for inventory that is obsolete or determined to be slow-moving and classifies any slow moving portion of inventory
as a long-term asset. The Company ended eVU operations as of September 30, 2015 and as of March 31, 2016 all inventories had been
disposed.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Property
and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 7 years or, in
the case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term. When assets are
sold or retired, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition
is credited or charged to income. Maintenance and repair costs are charged to operations when incurred. The Company reviews the
carrying amount of fixed assets whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable in accordance with ASC 360-10-35,
Impairment or Disposal of Long-Lived Assets
.
Intangible
Assets
Intangible assets are recorded at cost, less accumulated amortization.
These costs are capitalized and amortized on a straight-line basis over the estimated periods benefited by the asset. The Company
assesses the recoverability of any affected long-lived assets in accordance with ASC 350-30-35-14 by determining whether the carrying
value of such assets can be recovered through undiscounted future operating cash flows.
Research and Development Costs
Research and development costs are expensed as incurred.
Warranty Liability
In connection with its now terminated eVu business, the Company
warranted its products to be free from defects in materials and workmanship for a period ranging up to one year from the date of
purchase, depending on the product. The warranty is generally a limited warranty, and in some instances imposes certain shipping
costs on the customer.
The Company’s policy was to establish a warranty reserve based
on anticipated warranty claims at the time product revenue is recognized. The Company had no warranty obligations at March 31,
2016 and 2015.
Leases
Leases entered into are classified as either capital
or operating leases. Leases, which substantially transfer all benefits and risks of ownership of property to the Company, are accounted
for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation
to reflect the purchase and financing. Rental payments under operating leases are expensed as incurred.
Deferred Rent
For the Company’s operating facility lease,
rent expense is recognized on a straight-line basis over the term of the lease and accordingly, the difference between cash rent
payments and the recognition of rent expense is recorded as a deferred rent liability.
Income Taxes
The Company accounts for income taxes using the asset and liability
method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards at enacted tax
rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets
is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company
provides a full valuation reserve related to its net deferred tax assets. In the future, if sufficient evidence of an ability to
generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce
the valuation allowances, resulting in income tax benefits in the consolidated statement of operations. The Company evaluates the
realizability of the deferred tax assets and assesses the need for valuation allowance quarterly. The utilization of the net operating
loss carry forwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership.
The Company has experienced various ownership changes as a result of past financings and could experience future ownership changes.
Upon the adoption of accounting for uncertainty in income taxes,
as of April 1, 2007 the Company recognized no adjustment for uncertain tax provisions and the total amount of unrecognized tax
benefits as of April 1, 2007 was $-0-. At the adoption date of April 1, 2007, deferred tax assets were fully reserved by a valuation
allowance to reduce the deferred tax assets to zero, the amount that more likely than not is expected to be realized.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
The Company recognizes interest and penalties related to uncertain
tax positions as part of the provision for income taxes. As of March 31, 2016, the Company had not recorded any provisions for
accrued interest and penalties related to uncertain tax positions.
The tax years 2011 through 2015 remain open under
the statute of limitations to examination by the major tax jurisdictions to which the Company is subject. However, due to net operating
loss carryforwards (“NOL”) from prior periods, the Internal Revenue Service (IRS) could potentially review the losses
related to NOL-generating years back to 1995.
Stock-based
Compensation
The Company has adopted stock plans as summarized in Note 8. The
Company measures all employee stock-based compensation awards in accordance with ASC 718 and records such expense in the consolidated
financial statements over the requisite service period. The Company records the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during
which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting
period). Options or stock awards issued to non-employees who are not directors of the Company are recorded at their estimated fair
value at the measurement date and are periodically revalued as the options vest and are recognized as expense over the related
service period on a graded vesting method. Stock options issued to consultants with performance conditions are measured and recognized
when the performance is complete.
The Company recorded $81,290 and $87,499 of stock-based compensation
expense for the years ended March 31, 2016 and 2015, respectively. The amounts of stock-based compensation expense are classified
in the consolidated statements of operations as follows:
Year Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Research and development
|
|
|
16,052
|
|
|
|
15,784
|
|
Selling and administrative
|
|
|
65,238
|
|
|
|
71,715
|
|
Total stock-based compensation expense
|
|
|
81,290
|
|
|
|
87,499
|
|
While certain research and development personnel costs are allocated
to cost of revenues for proportionate time spent on product and content services, the amounts of related stock-based compensation
costs are not considered significant.
ASC 718 also provides that any corporate income tax benefit realized
upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a “windfall tax
benefit”) will be presented in the Consolidated Statements of Cash Flows as a financing (rather than as operating) cash flow. Realized
windfall tax benefits are credited to paid-in capital. Realized shortfall tax benefits (amounts which are less than
that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then
charged directly to income tax expense.
Comprehensive
Loss
Comprehensive loss is defined to include all changes
in equity except those resulting from investments by owners and distributions to owners. For the years ended March 31, 2016 and
2015, there were no differences between comprehensive loss and net loss for the respective years.
New 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 was effective for annual reporting periods beginning after December 15, 2014 and interim periods
within those annual
periods. The Company adopted this guidance effective April 1, 2015 and, as a result, determined that
the discontinuation of eVU entertainment services was not a major strategic shift and did not have a significant impact on the
Company's consolidated financial
statements.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
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 June 2014, the FASB issued ASU No. 2014-12,
Compensation –
Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved
after the Requisite Service Period
. The guidance requires that a performance target that affects vesting, and that could be
achieved after the requisite service period, be treated as a performance condition. The guidance was effective for annual periods
and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company plans
to adopt ASU 2014-12 effective April 1, 2016 and it is not expected to have any impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of
Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going
Concern.
This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding
upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term
substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering
the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated as a result
of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated,
and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to
be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact
it will have on its consolidated financial statements.
In January
2015, the FASB issued ASU 2015-01,
“
Extraordinary and Unusual
Items,
”
eliminating the concept of extraordinary items for
presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature,
infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed
in the notes to financial statements. The new accounting guidance is effective for interim and annual periods beginning after December
15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the
presentation of amounts in the income statements. The Company plans to adopt ASU 2015-01 effective April 1, 2016.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory.” Under this ASU, inventory will be measured at the “lower of cost and net realizable value”
and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the
“estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective
for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively.
The Company is currently evaluating this guidance, including the period to adopt and the impact, if any, on its consolidated financial
statements.
In November 2015, the FASB issued ASU
2015-17, "Balance Sheet Classification of Deferred Taxes." This new guidance requires all deferred tax assets and
liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is
effective for fiscal periods beginning after December 15, 2016 and may be adopted either prospectively or retrospectively.
Early adoption is permitted. The Company has not yet selected a transition method and is currently evaluating the impact that
ASU 2015-17 will have on its consolidated financial statements.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
In February 2016, the FASB issued ASU 2016-02,
"Leases", which changes the accounting for leases and requires expanded disclosures about leasing activities. This new
guidance will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with
terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning
after December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. The Company is
currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
Other Accounting Standards Updates not effective until after March
31, 2016 are not expected to have a material effect on the Company’s financial position or results of operations.
3. INVENTORIES
Inventories consist of the following:
March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Raw materials
|
|
|
–
|
|
|
|
37,559
|
|
Work in process
|
|
|
–
|
|
|
|
12,842
|
|
Finished goods
|
|
|
–
|
|
|
|
29,512
|
|
|
|
|
–
|
|
|
|
79,913
|
|
Reserve for obsolescence
|
|
|
–
|
|
|
|
(79,913
|
)
|
|
|
|
–
|
|
|
|
–
|
|
The foregoing is net of an aggregate lower-of-cost-or-market
inventory adjustment of $0 and $70,858 at March 31, 2016 and 2015, respectively. The Company has ceased offering eVU products and
accordingly disposed of all remaining inventory by March 31, 2016.
4. PROPERTY, EQUIPMENT AND INTANGIBLES
Property and equipment consisted of
the following:
Year Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Computer hardware and software
|
|
|
41,493
|
|
|
|
45,402
|
|
Furniture and equipment
|
|
|
30,689
|
|
|
|
34,659
|
|
Machinery and equipment
|
|
|
15,661
|
|
|
|
49,554
|
|
Tooling
|
|
|
19,720
|
|
|
|
19,720
|
|
|
|
|
107,563
|
|
|
|
149,335
|
|
Accumulated depreciation and amortization
|
|
|
(103,073
|
)
|
|
|
(142,120
|
)
|
|
|
|
4,490
|
|
|
|
7,215
|
|
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Intangible assets consisted of the following:
Year Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Website development costs
|
|
|
23,750
|
|
|
|
–
|
|
|
|
|
23,750
|
|
|
|
–
|
|
Accumulated amortization
|
|
|
(1,468
|
)
|
|
|
–
|
|
|
|
|
22,282
|
|
|
|
–
|
|
5. ACCRUED AND OTHER LIABILITIES
Accrued liabilities consisted of the following:
March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Payroll and related
|
|
|
49,872
|
|
|
|
74,253
|
|
Contract accrual
|
|
|
–
|
|
|
|
7,283
|
|
Accrued professional fees
|
|
|
41,228
|
|
|
|
47,005
|
|
Deferred rent
|
|
|
17,972
|
|
|
|
28,218
|
|
|
|
|
109,072
|
|
|
|
156,759
|
|
6. INCOME TAXES
Details of
the income tax provision (benefit) for the years ended March 31, 2016 and 2015 are as follows:
Year ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Current tax expense (benefit)
|
|
|
–
|
|
|
|
(169,888
|
)
|
Deferred tax expense (benefit)
|
|
|
(428,000
|
)
|
|
|
72,000
|
|
Change in valuation allowance
|
|
|
428,000
|
|
|
|
(72,000
|
)
|
Income tax provision (benefit)
|
|
|
–
|
|
|
|
(169,888
|
)
|
Details of tax benefit are as follows:
Year ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal expense (benefit)
|
|
|
–
|
|
|
|
–
|
|
State expense (benefit)
|
|
|
–
|
|
|
|
–
|
|
Foreign expense (benefit)
|
|
|
–
|
|
|
|
(169,888
|
)
|
|
|
|
–
|
|
|
|
(169,888
|
)
|
For the year ended March 31, 2015, the Company recorded a tax benefit
of $169,888 consisting of prior year foreign tax recoveries of $206,250 less foreign taxes paid of $36,362.
The Company has U.S. federal NOL carryforwards available at March
31, 2016 of approximately $25,500,000 (2015 - $24,000,000) that will begin to expire in 2021. The Company has state net operating
loss carryforwards of $9,930,000 (2015 - $11,200,000) that began to expire in 2015. The difference between federal and state net
operating loss carryforwards is due to certain percentage limitations of California loss carryforwards and to expired California
carryforwards. Certain foreign taxes paid create a foreign tax credit carryover that will be available to offset federal tax expense
in future years, subject to certain limitations. The foreign tax credit carryover expires beginning in 2021.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Utilization of the NOL and any R&D credit carryforwards may
be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code (“IRC”) of 1986 and similar
state provisions, due to changes in ownership of the Company that have occurred previously or that could occur in the future. Since
the date of currently available NOLs from fiscal 1996, the Company has raised capital through the issuance of capital stock using
multiple types of securities on multiple occasions which, the Company believes, caused multiple ownership changes as defined by
Section 382. The Company performed a 382 analysis to assess whether ownership changes occurred which would limit the Company’s
utilization of its NOLs and any R&D credits carryforwards. Based on this analysis, the Company determined that no ownership
changes have occurred since March 31, 2000. Accordingly, NOL carryforwards generated during the 2001 through 2016 fiscal years,
are generally not subject to Section 382 limitations and the Company will be able to utilize such NOLs and any R&D carryforwards
provided it generates sufficient future earnings. Future ownership changes may limit the Company’s ability to fully utilize
these tax benefits. Accordingly, the Company has recorded the deferred tax assets associated with such federal NOLs, related state
NOLs, and R&D tax credits along with a corresponding valuation allowance.
During the year ended March 31, 2010 the Company completed a study
of prior year R&D credits and updated its related unrecognized tax benefits. Due to the existence of the valuation allowance,
this change and future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.
Significant components of the Company’s deferred tax assets
as of March 31, 2016 and 2015 are shown below. A valuation allowance of $10,957,000 and $10,529,000 was established at March 31,
2016 and 2015 respectively, to offset the net deferred tax assets as realization is uncertain. When and if the Company can sustain
consistent profitability and management determines that it is more likely than not that the Company will be able to utilize the
deferred tax assets prior to their expiration, the valuation allowance may be reduced or eliminated.
March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
9,395,000
|
|
|
|
8,955,000
|
|
Foreign tax credit
|
|
|
133,000
|
|
|
|
133,000
|
|
Research tax credit
|
|
|
1,751,000
|
|
|
|
1,722,000
|
|
Stock-based compensation
|
|
|
67,000
|
|
|
|
49,000
|
|
Accruals and other
|
|
|
37,000
|
|
|
|
127,000
|
|
|
|
|
11,383,000
|
|
|
|
10,986,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
–
|
|
|
|
(27,000
|
)
|
State taxes
|
|
|
(426,000
|
)
|
|
|
(430,000
|
)
|
|
|
|
(426,000
|
)
|
|
|
(457,000
|
)
|
Deferred tax assets
|
|
|
10,957,000
|
|
|
|
10,529,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(10,957,000
|
)
|
|
|
(10,529,000
|
)
|
Net deferred taxes
|
|
|
–
|
|
|
|
–
|
|
Deferred tax assets do not include excess or windfall tax benefits
from stock-based compensation of approximately $1,700 from prior years. Equity will be increased by $1,700 if and when such deferred
tax assets are ultimately realized. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.
There was no comparable tax benefits for March 31, 2016 or 2015.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
The difference between the provision for income taxes (benefit)
and the amount computed by applying the U.S. federal income tax rate for the years ended March 31, 2016 and 2015 is as follows:
Year ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Income taxes (benefit) computed at federal statutory rate
|
|
|
(446,000
|
)
|
|
|
(142,000
|
)
|
Foreign taxes - net
|
|
|
–
|
|
|
|
(169,888
|
)
|
Permanent book-tax differences
|
|
|
7,000
|
|
|
|
15,000
|
|
Foreign tax credit adjustment - net
|
|
|
–
|
|
|
|
170,000
|
|
State income tax expense (benefit), net of federal effect
|
|
|
(64,000
|
)
|
|
|
(9,000
|
)
|
True-ups and operating loss expirations, net
|
|
|
75,000
|
|
|
|
38,000
|
|
Change in valuation allowance
|
|
|
428,000
|
|
|
|
(72,000
|
)
|
Income tax provision (benefit)
|
|
|
–
|
|
|
|
(169,888
|
)
|
7. CAPITAL STOCK
Authorized Capital
The authorized capital of the Company consists
of 350,000,000 common shares with a par value of $.001 per share and 5,000,000 preferred shares with a par value of $10.00 per
share. The issued common stock of the Company consisted of 293,678,330 and 293,378,330 common shares as of March 31, 2016 and 2015,
respectively. The Company had no shares of preferred stock outstanding at March 31, 2016 or 2015.
8. BENEFIT PLANS AND STOCK-BASED COMPENSATION
Stock Plan and Awards
The Company’s 2005 Equity-Based Compensation
Plan expired on July 28, 2015. The plan covered a maximum of 10,000,000 common shares and allowed the Company to grant incentive
options, nonstatutory options, stock appreciation rights or restricted stock awards to employees, directors or consultants.
At March 31, 2016 there were options outstanding
on 4,500,000 common shares pursuant to the 2005 Plan with no options available for future grant under the 2005 Plan.
Stock-Based Compensation
The grant-date fair value of employee share options and similar
instruments is estimated using a Black-Scholes option-pricing model. The following table sets forth the weighted-average key assumptions
and fair value results for stock options granted during the year ended March 31, 2015. There were no options granted during the
year ended March 31, 2016.
|
Year Ended March 31,
2015
|
Volatility
|
104%
|
Risk-free interest rate
|
0.98%
|
Forfeiture rate
|
0.0%
|
Dividend yield
|
0.0%
|
Expected life in years
|
3.2
|
Weighted-average fair value of options granted
|
$0.07
|
The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical
volatility of the common stock over the period commensurate with the expected life of the options. The Company has a small number
of option grants and limited exercise history and accordingly has for all new option grants applied the simplified method prescribed
by SEC Staff Accounting Bulletin 110,
Share-Based Payment: Certain Assumptions Used in Valuation Methods - Expected Term
,
to estimate expected life (computed as vesting term plus contractual term divided by two). The expected forfeiture rate is estimated
based on historical experience and is assumed at 0.0% for nonemployees and certain long-term employees and 5.0% for other employees.
Additional expense is recorded when the actual forfeiture rates are lower than estimated and a recovery of prior expense will be
recorded if the actual forfeitures are higher than estimated.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Since the Company has a net operating loss carryforward as of March
31, 2016, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the year ended March 31,
2016. Additionally, no incremental tax benefits were recognized from stock options exercised during the year ended March 31, 2016
or 2015 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase
in net cash provided by financing activities.
As of March 31, 2016 total estimated compensation cost of options
granted but not yet vested was approximately $26,000 and is expected to be recognized over the weighted average period of 0.5 years.
Stock Option Summary Information
The following table summarizes stock option transactions:
|
|
|
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
|
Shares
|
|
|
exercise price
|
|
|
Intrinsic Value
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
Outstanding March 31, 2014
|
|
|
|
6,613,578
|
|
|
|
0.062
|
|
|
|
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
2,090,000
|
|
|
|
0.110
|
|
|
|
|
|
|
Exercised
|
|
|
|
(50,000
|
)
|
|
|
0.022
|
|
|
|
|
|
|
Canceled/expired
|
|
|
|
(2,705,000
|
)
|
|
|
0.091
|
|
|
|
|
|
Outstanding March 31, 2015
|
|
|
|
5,948,578
|
|
|
|
0.067
|
|
|
|
242,506
|
|
Exercisable at March 31, 2015
|
|
|
|
3,766,078
|
|
|
|
0.051
|
|
|
|
211,080
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
Exercised
|
|
|
|
(300,000
|
)
|
|
|
0.022
|
|
|
|
|
|
|
Canceled/expired
|
|
|
|
(1,148,578
|
)
|
|
|
0.027
|
|
|
|
|
|
Outstanding March 31, 2016
|
|
|
|
4,500,000
|
|
|
|
0.079
|
|
|
|
–
|
|
Exercisable at March 31, 2016
|
|
|
|
3,990,000
|
|
|
|
0.076
|
|
|
|
–
|
|
The following table
summarizes the number of options exercisable at March 31, 2016 and the weighted average exercise prices and remaining contractual
lives of the options.
Range of exercise prices
|
Number outstanding at March 31, 2016
|
Number exercisable at March 31, 2016
|
Weighted average exercise price
|
Weighted average remaining contractual life
|
Weighted average exercise price of options exercisable at March 31, 2016
|
$
|
#
|
#
|
$
|
Years
|
$
|
0.055
|
2,460,000
|
2,460,000
|
0.055
|
1.98
|
0.06
|
0.11
|
2,040,000
|
1,530,000
|
0.11
|
3.00
|
0.11
|
9. SEGMENT INFORMATION
Through September 30, 2015, the Company had two operating segments:
(1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from the Company’s
patent portfolio. Products and services consisted of sales of the Company’s eVU products and related services. The Company
terminated providing eVU services at September 30, 2015.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Reportable segment information for
the years ended March 31, 2016 and 2015 is as follows
Year Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
SEGMENT REVENUES:
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
16,031
|
|
|
|
156,269
|
|
Patent licensing
|
|
|
693,500
|
|
|
|
2,079,534
|
|
Total revenue
|
|
|
709,531
|
|
|
|
2,235,803
|
|
|
|
|
|
|
|
|
|
|
SEGMENT COST OF REVENUES:
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
8,256
|
|
|
|
242,027
|
|
Patent licensing and litigation costs
|
|
|
450,000
|
|
|
|
455,274
|
|
Contingent legal fees and expenses
|
|
|
299,731
|
|
|
|
700,352
|
|
Total cost of revenues
|
|
|
757,987
|
|
|
|
1,397,653
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION:
|
|
|
|
|
|
|
|
|
Segment income (loss) before corporate costs
|
|
|
(48,456
|
)
|
|
|
838,150
|
|
Other corporate operating costs
|
|
|
1,226,708
|
|
|
|
1,295,765
|
|
Operating loss before provision for income taxes
|
|
|
(1,275,164
|
)
|
|
|
(457,615
|
)
|
The Company does not have significant assets
employed in the patent license segment and does not track capital expenditures, assets, research or selling and administrative
costs by reportable segment. Consequently there is no disclosure of 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 or licensee’s parent home domicile.
Year Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
$
|
United States
|
|
|
693,500
|
|
|
|
2,079,534
|
|
International
|
|
|
16,031
|
|
|
|
156,269
|
|
Total revenue
|
|
|
709,531
|
|
|
|
2,235,803
|
|
Revenues from three licensees (25%, 21% and 14%) accounted for more
than 10% of revenues for the year ended March 31, 2016. Revenues from one licensee (16%) accounted for more than 10% of revenues
for the year ended March 31, 2015. There were no accounts receivable at March 31, 2016. Accounts receivable from three parties
comprised 46%, 35% and 19% of net accounts receivable at March 31, 2015.
10. COMMITMENTS AND CONTINGENCIES
Legal Matters
Intellectual Property Litigation
As of September 30, 2015, the Company had settled or dismissed all
complaints with respect to its Flash-R patent portfolio.
The Company commenced legal action with regards to its Nunchi portfolio
of patents in July 2014 and currently has six active complaints in the U.S. District Court for the Northern District of California
and one in the U.S. District Court for the Southern District of California. In December 2015, the United States Patent Trial and
Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure
for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO) and often delays
pending enforcement.
The Company entered into a license agreement and a royalty bearing
settlement agreement with one defendant during the fourth quarter of fiscal 2016.
e.Digital Corporation
Notes to Consolidated Financial Statements
March 31, 2016
Commitment Related to Intellectual Property Legal Services
In September 2012 the Company engaged Handal and Associates (“Handal”)
to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s patent
portfolio. 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 $6,831 excluding utilities and costs. The aggregate payments
adjust annually with maximum payments totaling $7,157 in the forty-ninth through sixty-second months. Future lease commitments
at March 31, 2016 total $107,027. The Company recognizes rent expense by the straight-line method over the lease term. As of March
31, 2016, deferred rent totaled $17,972.
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 March 31, 2016,
the Company made matching contributions totaling $9,957.