Item 1. Financial Statements:
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
232,048
|
|
|
|
701,481
|
|
Accounts receivable, net
|
|
|
68,000
|
|
|
|
–
|
|
Deposits and prepaid expenses
|
|
|
42,142
|
|
|
|
31,189
|
|
Total current assets
|
|
|
342,190
|
|
|
|
732,670
|
|
Property, equipment and intangibles, net of accumulated depreciation and
amortization of $114,151 and $128,950, respectively
|
|
|
20,114
|
|
|
|
26,772
|
|
Total assets
|
|
|
362,304
|
|
|
|
759,442
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
59,260
|
|
|
|
120,744
|
|
Accrued and other liabilities
|
|
|
76,256
|
|
|
|
109,072
|
|
Total current liabilities
|
|
|
135,516
|
|
|
|
229,816
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized None issued and outstanding
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.001 par value, authorized 350,000,000, 293,678,330 issued and outstanding each
period
|
|
|
293,678
|
|
|
|
293,678
|
|
Additional paid-in capital
|
|
|
83,055,470
|
|
|
|
83,018,638
|
|
Accumulated deficit
|
|
|
(83,122,360
|
)
|
|
|
(82,782,690
|
)
|
Total stockholders' equity
|
|
|
226,788
|
|
|
|
529,626
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
362,304
|
|
|
|
759,442
|
|
See notes to interim condensed consolidated financial statements
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
December 31
,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Products and services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,031
|
|
Patent licensing
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
693,500
|
|
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
709,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,256
|
|
Patent licensing and litigation costs
|
|
|
65,000
|
|
|
|
112,500
|
|
|
|
282,500
|
|
|
|
337,500
|
|
Contingent legal fees expenses and recaptures
|
|
|
(263,552
|
)
|
|
|
5,261
|
|
|
|
(41,050
|
)
|
|
|
292,156
|
|
Contingent royalties
|
|
|
1,139
|
|
|
|
–
|
|
|
|
16,164
|
|
|
|
–
|
|
Selling and administrative
|
|
|
189,561
|
|
|
|
176,366
|
|
|
|
570,064
|
|
|
|
657,549
|
|
Research and related expenditures
|
|
|
85,487
|
|
|
|
70,542
|
|
|
|
256,358
|
|
|
|
253,396
|
|
Total operating costs and expenses
|
|
|
77,635
|
|
|
|
364,669
|
|
|
|
1,084,036
|
|
|
|
1,548,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income and provision for income taxes
|
|
|
73,365
|
|
|
|
(364,669
|
)
|
|
|
(339,670
|
)
|
|
|
(839,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
–
|
|
|
|
800
|
|
|
|
–
|
|
|
|
800
|
|
Other income
|
|
|
–
|
|
|
|
800
|
|
|
|
–
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
73,365
|
|
|
|
(363,869
|
)
|
|
|
(339,670
|
)
|
|
|
(838,526
|
)
|
Income tax benefit (expense)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net income (loss) for the period
|
|
|
73,365
|
|
|
|
(363,869
|
)
|
|
|
(339,670
|
)
|
|
|
(838,526
|
)
|
Income (loss) per common share - basic and diluted
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
293,678,330
|
|
|
|
293,678,330
|
|
|
|
293,678,330
|
|
|
|
293,564,512
|
|
See notes to interim condensed consolidated financial statements
e.Digital Corporation and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the nine
months ended
|
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
OPERATING ACTIVITIES
|
|
$
|
|
|
$
|
|
Net loss for period
|
|
|
(339,670
|
)
|
|
|
(838,526
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,610
|
|
|
|
3,050
|
|
Stock-based compensation
|
|
|
36,832
|
|
|
|
67,961
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(68,000
|
)
|
|
|
10,756
|
|
Deposits and prepaid expenses
|
|
|
(10,953
|
)
|
|
|
1,509
|
|
Accounts payable, trade
|
|
|
(61,484
|
)
|
|
|
(38,389
|
)
|
Accrued and other liabilities
|
|
|
(32,816
|
)
|
|
|
(57,629
|
)
|
Cash used in operating activities
|
|
|
(466,481
|
)
|
|
|
(851,268
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of equipment and intangibles
|
|
|
(2,952
|
)
|
|
|
(25,157
|
)
|
Cash used in investing activities
|
|
|
(2,952
|
)
|
|
|
(25,157
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
–
|
|
|
|
6,600
|
|
Cash provided by financing activities
|
|
|
–
|
|
|
|
6,600
|
|
Net decrease
in cash and cash equivalents
|
|
|
(469,433
|
)
|
|
|
(869,825
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
701,481
|
|
|
|
1,952,981
|
|
Cash and cash equivalents, end of period
|
|
|
232,048
|
|
|
|
1,083,156
|
|
See notes to interim condensed consolidated financial statements
e.Digital Corporation
and subsidiary
Notes to Interim
Condensed Consolidated Financial Statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
e.Digital Corporation is a holding company incorporated under
the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company is developing and
marketing an intellectual property portfolio consisting of context and interpersonal awareness systems (“Nunchi®”
technology), advanced data security technologies (“microSignet™” technology), secure communication technologies
(“Synap™” technology) and other technologies.
Unaudited Interim Financial Statements
These unaudited condensed consolidated financial statements
have been prepared by management in accordance with accounting principles generally accepted in the United States and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. These interim condensed consolidated financial statements do not include
all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary
for a fair statement of the Company's financial position at December 31, 2016, and the results of its operations and cash flows
for the periods presented, consisting only of normal and recurring adjustments. All significant intercompany transactions have
been eliminated in consolidation. Operating results for the nine months ended December 31, 2016 are not necessarily indicative
of the results that may be expected for the fiscal year ending March 31, 2017. For further information, refer to the Company's
consolidated financial statements and footnotes thereto for the year ended March 31, 2016 filed on Form 10-K.
Going Concern/ Liquidity/Correction of Error
The Company has incurred significant losses and negative cash
flow from operations and has an accumulated deficit of $83,122,360 at December 31, 2016. Other than cash on hand, the Company has
no other sources of financing currently available as of December 31, 2016. The Company may incur additional losses in the future
until licensing or other revenues are sufficient to sustain continued profitability. Until the Company can demonstrate sustained
profitability, its ability to continue as a going concern is in doubt and may be dependent upon obtaining additional financing
in the future. There is no assurance that the Company will be successful in generating or raising funds, if necessary, to sustain
its operations for twelve months or beyond. Should the Company be unable to generate funds or obtain required financing, it may
have to curtail operations, which may have a material adverse effect on its financial position and results of operations. Uncertainty
as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.
These
consolidated financial statements do not give effect to any adjustments that would be necessary should the Company be unable to
continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal
course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
The Company has not identified any trends or any known demands,
commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease
in liquidity. The termination of eVU operations in the second quarter of fiscal 2016 and the loss of eVU revenues did not have
a material impact on liquidity, results of operations or financial condition of the Company.
During the three months
ended December 31, 2016 the Company determined that it had overstated accounts payable related to contingent legal fees
expenses and recaptures.
The Company assessed the materiality of this error on previously issued financial statements
in accordance with the ASC 250,
Presentation of Financial Statements
, and Securities and Exchange Commission (SEC)
Staff Accounting Bulletin No. 99, Materiality. The Company concluded, based on a review of the quantitative and qualitative
factors of the materiality of the amount, that the error was not material to any previously issued financial statements
and correction of the error in the three months ended December 31, 2016 was not material to that period’s
financial statements. The Company recorded the cumulative effect of the error as of October 1, 2016 by decreasing accounts
payable by $265,139. The correction of the error decreased contingent legal fees expenses and recaptures by $265,139 for the
nine months ended December 31, 2016.
Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which requires entities
to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The amendment is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual
periods. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial
statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation
of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as
a Going Concern.
This ASU requires management to assess an entity's ability to continue as a going concern by incorporating
and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition
of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles
for considering the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated
as a result of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt
is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued
(or available to be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods
and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine
the impact it will have on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. This new guidance requires all deferred tax assets and liabilities, along
with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is effective for fiscal periods
beginning after December 15, 2016 and may be adopted either prospectively or retrospectively. Early adoption is permitted. The
Company has not yet selected a transition method and is currently evaluating the impact that ASU 2015-17 will have on its consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance
will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with terms
greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after
December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation — Stock Compensation
, which amends ASC Topic 718,
Compensation — Stock Compensation.
The new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock
compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash
flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same
period. The Company is currently evaluating the potential impact that ASU 2016-09 may have on the Company’s financial position
or results of operations.
In August
2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments
(“ASU
2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments
in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for
annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides
for retrospective application for all periods presented.
The Company is currently evaluating the impact that ASU 2016-15
will have on its consolidated financial statements.
Other Accounting Standards Updates not effective until after
December 31, 2016 are not expected to have a material effect on the Company’s financial position or results of operations.
3. LOSS PER SHARE
Basic loss per common
share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding
during the period. Diluted loss per common share is computed by dividing net loss by the weighted-average number of shares of
common stock outstanding during the period increased to include the number of additional shares of common stock that would
have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities consist of
stock options. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by
application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the
Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
At December
31, 2016 and 2015, stock options exercisable into 5,000,000 and 4,500,000 shares of common stock were outstanding,
respectively. These securities were not included in the computation of diluted loss per share because they had no effect or
were antidilutive, but they could potentially dilute earnings per share in future periods. There was no difference in basic
and diluted loss per share or basic and diluted weighted average shares outstanding for the periods presented.
4. STOCK-BASED COMPENSATION COSTS
The Company
accounts for stock-based compensation under the provisions of ASC 718,
Share-Based Payment
and ASC 505-50,
Equity-Based
Payments to Non-Employees.
ASC 718 requires measurement of all employee stock-based awards using a fair-value method and recording
of related compensation expense in the consolidated financial statements over the requisite service period. Further, as required
under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company recorded stock-based
compensation in its consolidated statements of operations for the relevant periods as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Research and development
|
|
|
–
|
|
|
|
2,782
|
|
|
|
5,534
|
|
|
|
13,270
|
|
Selling and administrative
|
|
|
5,085
|
|
|
|
4,358
|
|
|
|
31,298
|
|
|
|
54,691
|
|
Total stock-based compensation expense
|
|
|
5,085
|
|
|
|
7,140
|
|
|
|
36,832
|
|
|
|
67,961
|
|
As of December 31, 2016 total estimated compensation cost of
stock options granted but not yet vested was $14,517 and is expected to be recognized over the weighted average period of 1.3 years.
The following table sets forth the weighted-average key assumptions
and fair value results for stock options granted during the nine-month period ended December 31, 2016 (annualized percentages).
No options were granted during the nine months ended December 31, 2015.
|
December 31,
|
|
2016
|
Volatility
|
107%
|
Risk-free interest rate
|
0.90%
|
Forfeiture rate
|
0.0%
|
Dividend yield
|
0.0%
|
Expected life in years
|
3.0
|
Weighted-average fair value of options granted
|
$0.046
|
The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical
volatility of the common stock over the period commensurate with the expected life of the options. The Company has a small number
of option grants and limited exercise history and accordingly has for all new option grants applied the simplified method prescribed
by SEC Staff Accounting Bulletin 110,
Share-Based Payment: Certain Assumptions Used in Valuation Methods - Expected Term
,
to estimate expected life (computed as vesting term plus contractual term divided by two). The expected forfeiture rate is estimated
based on historical experience and is assumed at 0.0% for nonemployees/directors and certain long-term employees and 5.0% for other
employees. Additional expense is recorded when the actual forfeiture rates are lower than estimated and a recovery of prior expense
will be recorded if the actual forfeitures are higher than estimated.
See Note 5 for further information on outstanding stock options.
5. STOCKHOLDERS’ EQUITY
The following table summarizes stockholders’ equity transactions
during the nine-month period ended December 31, 2016:
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Total stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
equity
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, April 1, 2016
|
|
|
293,678,330
|
|
|
|
293,678
|
|
|
|
83,018,638
|
|
|
|
(82,782,690
|
)
|
|
|
529,626
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
36,832
|
|
|
|
–
|
|
|
|
36,832
|
|
Loss for the period
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(339,670
|
)
|
|
|
(339,670
|
)
|
Balance, December 31
,
2016
|
|
|
293,678,330
|
|
|
|
293,678
|
|
|
|
83,055,470
|
|
|
|
(83,122,360
|
)
|
|
|
226,788
|
|
Options
The following table summarizes stock option
activity for the period:
|
|
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
exercise price
|
|
|
Intrinsic Value
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
Outstanding April 1, 2016
|
|
|
4,500,000
|
|
|
|
0.0799
|
|
|
|
|
|
Granted
|
|
|
500,000
|
|
|
|
0.071
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Canceled/expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
5,000,000
|
|
|
|
0.079
|
|
|
$
|
–
|
|
Exercisable at December 31, 2016
|
|
|
4,625,000
|
|
|
|
0.0797
|
|
|
$
|
–
|
|
|
(1)
|
Options outstanding are exercisable at prices ranging from $0.055 to $0.11 and expire over the period
from 2018 to 2020.
|
|
(2)
|
Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2016 of
$0.040 and all options outstanding were not in-the-money.
|
Since the Company has a net operating loss carryforward as of
December 31, 2016, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the nine months
ended December 31, 2016.
6. FAIR VALUE MEASUREMENTS
Cash and cash equivalents are measured at fair value in the
Company’s consolidated financial statements. Accounts receivable are financial assets with carrying values that approximate
fair value due to the short-term nature of these assets. Accounts payable, and accrued and other liabilities are financial liabilities
with carrying values that approximate fair value due to the short-term nature of these liabilities. Effective April 1, 2008 the
Company adopted and follows ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”) which established a
fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that
is significant to the fair value measurement.
The Company’s cash and cash equivalents are valued using
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820).
7. SEGMENT INFORMATION
Through September 30, 2015, the Company had two operating segments:
(1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from the Company’s
patent portfolio. Products and services consisted of sales of the Company’s eVU products and related services. The Company
ceased providing eVU services at September 30, 2015, effectively ending this segment’s operations.
Reportable segment information for the three and nine months
ended December 31, 2016 and 2015 is as follows:
|
|
For the three months ended
December 31,
(unaudited)
|
|
|
For the nine months ended
December 31,
(unaudited)
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
SEGMENT REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,031
|
|
Patent licensing
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
693,500
|
|
Total revenue
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
709,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,256
|
|
Patent licensing and litigation costs
|
|
|
65,000
|
|
|
|
112,500
|
|
|
|
282,500
|
|
|
|
337,500
|
|
Contingent legal fees expenses and recaptures
|
|
|
(263,552
|
)
|
|
|
5,261
|
|
|
|
(41,050
|
)
|
|
|
292,156
|
|
Contingent royalties
|
|
|
1,139
|
|
|
|
–
|
|
|
|
16,164
|
|
|
|
–
|
|
Total cost of revenues
|
|
|
(197,413
|
)
|
|
|
117,761
|
|
|
|
257,614
|
|
|
|
637,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) before corporate costs
|
|
|
348,413
|
|
|
|
(117,761
|
)
|
|
|
486,752
|
|
|
|
71,619
|
|
Other corporate operating costs
|
|
|
275,048
|
|
|
|
246,908
|
|
|
|
826,422
|
|
|
|
910,945
|
|
Operating income (loss) before other income and provision for income taxes
|
|
|
73,365
|
|
|
|
(364,669
|
)
|
|
|
(339,670
|
)
|
|
|
(839,326
|
)
|
The Company did not have significant assets
employed in the product and services segment during the periods and does not track capital expenditures or assets by reportable
segment. Consequently it is not practicable to show this information.
Revenue by geographic region is determined based on the location
of the Company’s direct customers or distributors for product sales and services. Patent license revenue is considered United
States revenue as payments are for licenses for United States operations irrespective of the location of the licensee’s
home domicile.
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
United States
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
693,500
|
|
International
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,031
|
|
Total revenue
|
|
|
151,000
|
|
|
|
–
|
|
|
|
744,366
|
|
|
|
709,531
|
|
Revenues from three licensees comprised 67%, 14% and 12% of
revenue for the nine months ended December 31, 2016, with no other licensee or customer accounting for more than 10% of revenues.
Revenues from three licensees comprised 25%, 21% and 14% of revenue for the nine months ended December 31, 2015, with no other
licensee accounting for more than 10% of revenues. Accounts receivable from one licensee comprised 100% of net accounts receivable
at December 31, 2016. Accounts receivable from one licensee comprised 100% of net accounts receivable at December 31, 2015.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
Intellectual Property Litigation
As of December 31, 2015, the Company had settled or dismissed
all complaints with respect to its Flash-R patent portfolio.
The Company commenced legal action with regards to its Nunchi
portfolio of patents in July 2014 and currently has two active complaints in the U.S. District Court for the Northern District
of California and four in the U.S. District Court for the Southern District of California.
The Company entered into two new Nunchi license agreements during
the third quarter of fiscal 2017, and during the first quarter of fiscal 2017, the Company entered into two new license agreements
covering three defendants.
Commitment Related to Intellectual Property Legal Services
In September 2012, the Company engaged Handal and Associates
(“Handal”) to provide IP legal services in connection with licensing and prosecuting claims of infringement of the
Company’s patent portfolio. From September 2012 through August 2016, pursuant to a partial contingent fee arrangement, the
Company paid a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries and a fee ranging from
33% to 40% of license fees. A new agreement, which supersedes and replaces all previous agreements, was executed effective September
1, 2016, reducing the monthly retainer fee to $22,500 so long as Handal is simultaneously litigating ten or fewer cases. Parties
agreed to meet and discuss an increase in the amount of the monthly retainer should the number of cases exceed ten. Monthly retainers
paid are creditable against future contingency recoveries. The Company has agreed to reimburse Handal for pre-approved expenditures
advanced on behalf of the Company and to pay Handal a fee of 40% of any net license fee or settlement.
Commitment Related to Intellectual Property Royalties
The Company is obligated for inventor royalties of 4% of net
Nunchi license revenues for the term of related patents, currently 2030.
Facility Lease
In January 2012, the Company entered into a sixty-two
month facility lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870
West Bernardo Drive, Suite 120, San Diego, California. The aggregate monthly payment is $7,157 excluding utilities and costs.
Future minimum lease commitments at December 31, 2016 total $42,940. The Company recognizes rent expense by the straight-line
method over the lease term. As of December 31, 2016, deferred rent totaled $7,319. The Company is negotiating with the
landlord an early exit from this lease.
In December 2016, the Company entered into a twelve-month sub
lease agreement for an executive suite in the same building as its corporate office location, commencing January 2, 2017. The monthly
payment is $1,100 excluding utilities and costs. Future minimum lease commitments at December 31, 2016 total $13,156.
Concentration of Credit Risk and Sources of Supply
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company maintains cash
and cash equivalent accounts with Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Certain
of the Company’s accounts are each insured up to $250,000 by the FDIC. The Company had exposure in excess of FDIC insured
limits of $17,269 at December 31, 2016. The Company has not experienced any losses in such accounts. The Company does not believe
that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company
performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not experienced
any significant losses on its cash equivalents.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the number and nature of customers comprising the Company’s customer base and their geographic
dispersion. The Company has not incurred any significant credit related losses.
Guarantees and Indemnifications
The Company enters into standard indemnification agreements
in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification
provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions
are accounted for in accordance with ASC 450,
Contingencies
. The indemnification is generally limited to the amount paid
by the customer. To date, there have been no claims under such indemnification provisions.
Employee Benefit – 401K Plan
In September 2012, the Company adopted a defined contribution
plan (401(k)) covering its employees. Matching contributions are made on behalf of all participants, according to the Safe Harbor
provision. The Company matches 100% (dollar for dollar) on deferrals of up to 4% of employee compensation deferred. During the
nine months ended December 31, 2016, the Company made matching contributions totaling $7,343.
9. INCOME TAXES
There is no provision for income taxes for the nine months ended
December 31, 2016 and 2015 as the Company currently estimates its effective tax rate to be zero due to uncertainty of income in
future interim quarters of the current year and due to net operating loss carryforwards.
At December 31, 2016 and 2015, the Company had deferred tax
assets associated with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal
and California research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
The Company records a liability for uncertain tax positions
when it is probable that a loss has been incurred and the amount can be reasonably estimated. At December 31, 2016,
the Company has no liabilities for uncertain tax positions.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS
WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED
AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2016.
Cautionary Note on Forward Looking
Statements
In addition to the other information in this report, the factors
listed below should be considered in evaluating our business and prospects. This report contains a number of forward-looking statements
that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ
materially from historical results or those anticipated. In this report, the words “anticipates,” “believes,”
“expects,” “intends,” “future” and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements,
to reflect events or circumstances that may arise after the date hereof.
General
We are a holding company incorporated under the laws of Delaware
that operates through a wholly-owned California subsidiary of the same name. We are developing and marketing intellectual property
consisting of context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies
(“microSignet” technology), secure communications technologies (“Synap” technology), and other technologies.
We ceased providing eVU® mobile entertainment services to our travel industry customers in the third quarter of fiscal 2015
(December 31, 2014), with related contract eVU services ending as of September 30, 2015.
Through September 30, 2015 we had two operating segments: (1)
patent licensing and enforcement and (2) products and services. Our patent licensing and enforcement revenue consists of intellectual
property revenues from our patent portfolio. Our products and services revenue consisted of the sale of eVU products and accessories
to customers, warranty and technical support services, and content integration fees and related services. At September 30, 2015
we terminated providing eVU services, effectively ending this segment’s operations.
Licensing and Patent Enforcement Activities
We commenced legal enforcement actions in 2007 related to our
Flash-R flash memory patent portfolio, now expired. We successfully obtained license terms from 83 companies and related distributors
through September 30, 2015. We believe our success created both awareness and recognition of our intellectual property among household
named companies and their counsel. Since September 2012, the law firm of Handal and Associates has been handling our patent enforcement
matters on a partial contingent fee basis.
Our current licensing and enforcement activity consists of the
following:
Nunchi Technology Enforcement
- We commenced
legal action with regards to our Nunchi portfolio of patents in July 2014. To date we have filed patent infringement litigation
and sought licenses from twelve companies and related distributors, resulting in one royalty bearing license and settlement agreement
with one defendant, and four license and settlement agreements covering five defendants. We currently have two active complaints
in the U.S. District Court for the Northern District of California and four active complaints in the U.S. District for the Southern
District of California. We expect to file future complaints against additional companies. We are in early negotiations with other
defendants, and are confident regarding the prospects for future license revenues from the Nunchi portfolio.
microSignet Technology
- We are seeking to
license our microSignet technology and to date have not commenced any legal actions but may do so in the future.
Synap Technology
- We are seeking to license
our Synap technology and to date have not commenced any legal actions, but may do so in the future.
We believe that our licensing and/or enforcement activities
with respect to our Nunchi, MicroSignet, and Synap patent portfolios will result in licensing revenue, and continue to develop
additional intellectual property in the areas of context and interpersonal awareness systems and explore new technologies for possible
development or licensing. Our legal action to enforce our Nunchi portfolio of patents has resulted in $744,366 revenue to date
and there can be no assurance that such legal action or future action against additional companies will be successful or result
in licensing revenue. For further information on our technologies and our patent portfolio and related licensing activities, refer
to “Item 1 – Business” of our Annual Report on Form 10-K for the year ended March 31, 2016.
Our business is high risk in nature. There can be no assurance
we can achieve sufficient patent license or other revenues to sustain profitability. We continue to be subject to the risks normally
associated with introducing new technologies, including unforeseeable expenses, delays and complications. Accordingly, there is
no guarantee that we can or will report operating profits in future periods.
Overall Performance and Trends
We focused significant efforts on developing, licensing and
enforcing our patent portfolio during the last two fiscal years and during our current fiscal year.
We have successfully completed enforcement litigation and are
in the process of additional enforcement actions. There is a reluctance of patent infringers to negotiate and ultimately take a
patent license without at least the threat of legal action. However, the majority of patent infringement contentions settle out
of court based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed.
We believe we are building a track record of demonstrating the strength, validity and clarity of our patent claims that can result
in significant future revenues from our patent portfolio.
We reported losses for the first nine months
of fiscal 2017. Revenues and profits have been sporadic in prior periods and we have incurred significant historical losses and
negative cash flow from operations. We expect to incur losses in the future until licensing or other revenues are sufficient to
sustain continued profitability. Our ability to continue as a going concern is in doubt and is dependent upon achieving a profitable
level of operations and if necessary obtaining additional financing.
For the nine months ended December 31, 2016:
|
·
|
We recognized a net loss of $339,670 compared to a net loss before
income taxes of $838,526 for the comparable nine month period of the prior fiscal year.
|
|
·
|
We recognized patent license revenues of $744,366 as compared to $693,500
for the comparable period of the prior fiscal year.
|
|
·
|
Operating costs and expenses decreased to $1,084,036 in the nine months
ended December 31, 2016 compared to $1,548,857 in the comparable period prior.
|
Management faces challenges for the remainder of fiscal 2017
to generate license revenues from our technologies. These challenges include, but are not limited to, successful execution of our
legal and licensing enforcement strategy in an uncertain and changing legal and regulatory environment related to patent infringement.
The failure to obtain additional patent license revenues could have a material adverse impact on our operations. Our patent licensing
business is subject to significant risks discussed herein and in our Annual Report on Form 10-K and is subject to uncertainties
as to the timing and amount of future license revenues, if any.
Our monthly cash operating costs average approximately $70,000
per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue
advanced product and technology research and development. Our quarterly results are highly dependent on the timing and amount of
licensing fees and accordingly quarterly results can vary dramatically from period to period. As a result of this and other factors,
past results and expenditure levels may not be indicative of future quarters.
Critical Accounting Policies
The discussion and analysis
of our financial condition and results of operations is based upon our consolidated financial statements
located in Item 1
of Part I, “Financial Statements,” and in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended March 31, 2016
. The preparation
of these financial statements prepared in accordance with accounting principles generally accepted in the United States requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including but not
limited to those related to revenue recognition, bad debts, intangible assets, financing operations, stock-based compensation,
fair values, income taxes, contingencies and litigation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe that, of the significant accounting policies discussed
in our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:
|
·
|
stock-based compensation expense; and
|
Historically, our assumptions, judgments and estimates relative
to our critical accounting policies have not differed materially from actual results. There were no significant changes or modification
of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the nine
months ended December 31, 2016. For further information on our critical accounting policies, refer to Note 2 to the consolidated
financial statements in our Annual Report on Form 10-K for the year ended March 31, 2016.
Results of Operations
Three months ended December
31, 2016 compared to the three months ended December 31, 2015 (Unaudited)
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent licensing
|
|
|
151,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
151,000
|
|
|
|
–
|
|
|
|
|
151,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
151,000
|
|
|
|
–
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent licensing and litigation costs
|
|
|
65,000
|
|
|
|
43%
|
|
|
|
112,500
|
|
|
|
–
|
|
|
|
(47,500
|
)
|
|
|
(42%
|
)
|
Contingent legal fees expenses and recaptures
|
|
|
(263,552
|
)
|
|
|
-175%
|
|
|
|
5,261
|
|
|
|
–
|
|
|
|
(268,813
|
)
|
|
|
(5110%
|
)
|
Contingent royalties
|
|
|
1,139
|
|
|
|
1%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,139
|
|
|
|
–
|
|
Selling and administrative
|
|
|
189,561
|
|
|
|
125%
|
|
|
|
176,366
|
|
|
|
–
|
|
|
|
13,195
|
|
|
|
7%
|
|
Research and development
|
|
|
85,487
|
|
|
|
57%
|
|
|
|
70,542
|
|
|
|
–
|
|
|
|
14,945
|
|
|
|
21%
|
|
|
|
|
77,635
|
|
|
|
51%
|
|
|
|
364,669
|
|
|
|
–
|
|
|
|
(287,034
|
)
|
|
|
(79%
|
)
|
Operating income (loss) before other income and provision for income taxes
|
|
|
73,365
|
|
|
|
49%
|
|
|
|
(364,669
|
)
|
|
|
–
|
|
|
|
438,034
|
|
|
|
(120%
|
)
|
Income (Loss) Before Other Income and Income Taxes
We reported a net income before income taxes of $73,365 for
the three months ended December 31, 2016. The net loss for the same period of the prior year was $364,669.
Revenues
Revenues increased during the third fiscal quarter of 2017 compared
to the same quarter of the prior fiscal year due to due to the timing and amount of individual license agreements.
License fee revenues recognized fluctuate significantly from
period to period primarily based on the following factors:
|
·
|
the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee;
|
|
·
|
the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and
|
|
·
|
fluctuations in the number of agreements executed.
|
In the future the following additional factors could also impact
revenue variability:
|
·
|
fluctuations in the sales results or other royalty per unit activities
of our licensees that impact the calculation of license fees due;
|
|
·
|
the timing of the receipt of periodic license fee payments and/or
reports from licensees.
|
We are targeting new patent licensees and our results will continue
to be dependent on the timing and amount of future patent licensing arrangements, if any.
Operating Costs and Expenses
Operating
costs and expenses include
costs associated with our patent licensing and enforcement activities including contingent and
non-contingent litigation costs and related enforcement support costs.
For
the three months ended December 31, 2016, operating costs and expenses decreased by $287,034 compared to the same period in the
prior year.
Patent
licensing and litigation costs related to patent enforcement were $65,000 for the three months ended December 31, 2016
as compared to $112,500 for the prior year’s third quarter. The difference is attributed to the reduced monthly
legal retainer fee effective September 1, 2016. Refer to Note 8 above.
Non-contingent
licensing and litigation costs and related enforcement support costs may be incurred without any directly related revenues
in a respective period. Generally contingent costs relate to revenues during a respective period but can vary depending on
our share of certain costs and expenses and accumulated retainers previously paid.
Contingent
legal fees expenses and recaptures related to patent enforcement was a credit of $263,552 for the three months ended
December 31, 2016 as compared to $5,261 for the prior year’s third quarter. The credit resulted from the correction in
the current period of a cumulative accounting error of $265,139 related to the accruing of contingent legal fees
expenses and recaptures.
Contingent royalties for the three months
ended December 31, 2016 were $1,139 with no comparable expense in the same period of the prior year.
Selling and administrative costs for the three months ended
December 31, 2016 increased by $13,195 primarily due to increased professional fees of $38,175 as compared to $32,637 for the same
period of the prior year. The current year’s third quarter included $5,085 for noncash stock-based compensation expense as
compared to $4,358 in the same period of the prior year.
Research and related expenses increased by $14,945 primarily
due to increased consulting fees of $40,091 in the current year as compared to $26,673 for the same period in the prior year. The
prior year’s third quarter included $2,782 for noncash stock-based compensation expense with no comparable expense in the
current period. Research and related expenses can vary significantly from quarter to quarter based on the allocation of time spent
by personnel who work on patent related costs and on internal research projects. Such expenses also vary based on decisions made
regarding outside engineering and consulting.
Net Income (Loss)
Net income for the three months ended December 31, 2016 was
$73,365. The net loss for the prior comparable third quarter was $363,869.
Nine months ended December 31, 2016 compared to the nine
months ended December 31, 2015 (Unaudited)
|
|
Nine Months Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and services
|
|
|
–
|
|
|
|
–
|
|
|
|
16,031
|
|
|
|
2%
|
|
|
|
(16,031
|
)
|
|
|
(100%
|
)
|
Patent licensing
|
|
|
744,366
|
|
|
|
100%
|
|
|
|
693,500
|
|
|
|
98%
|
|
|
|
50,866
|
|
|
|
7%
|
|
|
|
|
744,366
|
|
|
|
100%
|
|
|
|
709,531
|
|
|
|
100%
|
|
|
|
34,835
|
|
|
|
5%
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
–
|
|
|
|
8,256
|
|
|
|
1%
|
|
|
|
(8,256
|
)
|
|
|
(100%
|
)
|
Patent licensing and litigation costs
|
|
|
282,500
|
|
|
|
38%
|
|
|
|
337,500
|
|
|
|
47%
|
|
|
|
(55,000
|
)
|
|
|
(16%
|
)
|
Contingent legal fees expenses and recaptures
|
|
|
(41,050
|
)
|
|
|
(6%
|
)
|
|
|
292,156
|
|
|
|
41%
|
|
|
|
(333,206
|
)
|
|
|
(114%
|
)
|
Contingent royalties
|
|
|
16,164
|
|
|
|
2%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,164
|
|
|
|
–
|
|
Selling and administrative
|
|
|
570,064
|
|
|
|
77%
|
|
|
|
657,549
|
|
|
|
93%
|
|
|
|
(87,485
|
)
|
|
|
(13%
|
)
|
Research and related
|
|
|
256,358
|
|
|
|
34%
|
|
|
|
253,396
|
|
|
|
36%
|
|
|
|
2,962
|
|
|
|
1%
|
|
|
|
|
1,084,036
|
|
|
|
146%
|
|
|
|
1,548,857
|
|
|
|
218%
|
|
|
|
(464,821
|
)
|
|
|
(30%
|
)
|
Operating loss before other income and provision for income taxes
|
|
|
(339,670
|
)
|
|
|
(46%
|
)
|
|
|
(839,326
|
)
|
|
|
(118%
|
)
|
|
|
499,656
|
|
|
|
(60%
|
)
|
Loss Before Other Income and Income Taxes
We reported a net loss before income taxes of $339,670 for the
nine months ended December 31, 2016 compared to a net loss before income taxes of $839,326 for the comparable period of the prior
year primarily due to the reduced operating costs and expenses in the current year.
Revenues
Revenues increased during the
most recent nine months compared to the same period of the prior fiscal year due to the increase in patent license revenue from
$693,500 to $744,366.
There were no product and service revenues in the current year due to exiting the eVU business in
September 2015.
While we expect additional patent licenses in future periods,
there can be no assurance of the timing or amounts of future license revenues.
Operating Costs and Expenses
Operating
costs and expenses include
cost of revenues associated with products and services, and costs associated with our patent
licensing and enforcement activities including contingent and non-contingent litigation costs and related enforcement support costs.
For the nine months ended December 31, 2016, operating costs and expenses
decreased by $464,821 compared to the same period in the prior year including the $265,139 adjustment to contingent legal fees
expenses and recaptures from the cumulative correction recorded during the three months ended December 31, 2016.
Patent
licensing and litigation costs related to patent enforcement were $282,500 for the nine months ended December 31, 2016
and $337,500 for the same period in the prior year. The difference is attributed to the reduced monthly legal retainer
fee effective September 1, 2016.
Non-contingent licensing and litigation costs and
related enforcement support costs may be incurred without any directly related revenues in a respective period. Generally
contingent costs relate to revenues during a respective period but can vary depending on our share of certain costs and
expenses and accumulated retainers previously paid.
Contingent
legal fees expenses and recaptures related to patent enforcement was a credit of $41,050 for the nine months ended December
31, 2016 as compared to $292,156 for the same period of the prior year. The decrease included the effect from the correction
in the current period of a cumulative accounting error of $265,139 related to the accruing of contingent legal fees
expenses and recaptures.
Contingent royalties for the nine months
ended December 31, 2016 were $16,164 with no comparable expense in the same period of the prior year.
Selling and administrative costs for the nine months ended December
31, 2016 decreased by $87,485 compared to the same period in the year prior. The prior period includes $54,687 for annual meeting
costs with no comparable expense in the same period of the current year. The current period includes $31,298 in noncash stock-based
compensation expense, compared to $54,691 in the same period of the prior year.
Research and related expenses for the nine months ended December
31, 2016 increased by $2,962 compared to the same period in the prior year. The current period includes $5,534 in noncash stock-based
compensation expense, compared to $13,270 for the same period of the prior year. Research and related expenses can vary significantly
from quarter to quarter based on the allocation of time spent by personnel who work on both revenue producing service and repair
projects, on patent related costs and on internal research projects. Such expenses also vary based on decisions made regarding
outside engineering and consulting.
Liquidity and Capital Resources
At December 31, 2016, we had working capital of $206,674 as
compared to working capital of $502,854 at March 31, 2016. At December 31, 2016 we had cash on hand of $232,048.
Operating Activities
Cash used in operating activities was $466,481 for the nine
months ended December 31, 2016. Cash used in operating activities included the net loss of $339,670 decreased by net non-cash expenses
of $46,442 primarily consisting of stock based compensation of $36,832. A major components reducing operating cash was a decrease
in accounts payable of $61,484, an increase of $68,000 of accounts receivable and a decrease of $32,816 in accrued and other liabilities.
Cash used in operating activities was $851,268 for the nine
months ended December 31, 2015. Cash used in operating activities included the net loss of $838,526 decreased by net non-cash expenses
of $71,011 primarily consisting of stock based compensation of $67,961. A major component reducing operating cash was a decrease
of $57,629 in accrued and other liabilities.
Patent license payments are normally due at signing of the license
or within 30-45 days of settlement or end of royalty reporting period.
Individual working capital components can change dramatically
from period to period due to timing of licensing and services and corresponding receivable, and payable balances. Accordingly operating
cash requirements vary significantly from period to period.
Investing Activities
We invested $2,952 and $25,157 in computer and equipment and
website costs for the nine months ended December 31, 2016 and 2015, respectively. The Company’s efforts are primarily on
operations and currently we have no significant investing capital needs. We have no commitments requiring investment capital.
Financing Activities
We received $6,600 of proceeds from stock option exercises during
the nine months ended December 31, 2015. There were no cash financing activities during the nine months ended December 31, 2016.
Debt and Other Commitments
We currently have no debt outstanding other than trade payables
and accruals. At December 31, 2016 we had no significant purchase commitments for product and components.
We have future lease commitments on our current facilities as
more fully described in our accompanying interim condensed consolidated financial statements.
Our legal firm, Handal and Associates, provides IP legal services
in connection with licensing and prosecuting claims of infringement of our patent portfolio. From September 2012 through August
2016, pursuant to a partial contingent fee arrangement, the Company paid a monthly retainer fee of $30,000 to Handal creditable
against future contingency recoveries and a fee ranging from 33% to 40% of license fees. A new agreement, which supersedes and
replaces all previous agreements, was executed effective September 1, 2016, reducing the monthly retainer fee to $22,500 so long
as Handal is simultaneously litigating ten or fewer cases. Parties agreed to meet and discuss an increase in the amount of the
monthly retainer should the number of cases exceed ten. Monthly retainers paid are creditable against future contingency recoveries.
The Company has agreed to reimburse Handal for pre-approved expenditures advanced on behalf of the Company and to pay Handal a
fee of 40% of any net license fee or settlement. Net Recovery is defined as the gross amount paid by a licensee/defendant less
the amount of expenses paid and or advanced by e.Digital to Handal or third parties. We may terminate the representation at any
time but would be obligated to pay fees and advances.
We are obligated for inventor royalties of 4% of net Nunchi
license revenues for the term of related patents, currently 2030.
Cash Requirements
Other than cash on hand and
accounts receivable, we have no material unused sources of liquidity at this time. Our monthly cash operating costs average approximately
$70,000 per month. Assuming no new license revenues and current expenditure levels we would require approximately $840,000 of additional
resources to fund operations for the next twelve months. We believe we may be able to obtain additional funds from future
licensing arrangements or other financing sources but the timing thereof is subject to many factors and risks, many outside our
control.
Our operating plans may require additional funds in future periods and should additional funds not be available,
we may be required to curtail or scale back operations. Potential sources of such funds include exercise of outstanding options,
or debt financing or new equity offerings. However, there is no assurance that options will be exercised or that debt or equity
financing will be available if and when needed. Any future financing may be dilutive to existing stockholders.
Since we have not demonstrated sustainable profitability, our
ability to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary obtaining
additional financing. We currently have no plans, arrangements or understandings regarding any acquisitions.