10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

Commission File Number 0-20734

e.Digital Corporation

(Exact name of registrant as specified in its charter)

Delaware	33-0591385
(State or other jurisdiction of incorporation or organization)	(I.R.S. Empl. Ident. No.)

16870 West Bernardo Drive, Suite 120, San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

(858) 304-3016

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]  NO [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]  No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [_]	Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]

As of February 5, 2015 a total of 293,378,330 shares of the Registrant’s Common Stock, par value $0.001, were issued and outstanding.

e.DIGITAL CORPORATION

INDEX

		Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of December 31, 2014 and March 31, 2014	3
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2014 and 2013	5
	Notes to Interim Condensed Consolidated Financial Statements	6
	Item 2. Management's Discussion and Analysis of Financial  Condition and Results of Operations	13
	Item 4. Controls and Procedures	20
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	21
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3. Defaults Upon Senior Securities	21
	Item 4. Mine Safety Disclosures	21
	Item 5. Other Information	21
	Item 6. Exhibits	21
SIGNATURES		22

2

Part I. Financial Information

Item 1. Financial Statements:

e.Digital Corporation and subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,
	2014			March 31,
	(Unaudited)			2014
	$			$
ASSETS
Current
Cash and cash equivalents		2,244,145			1,787,863
Accounts receivable		75,551			238,623
Inventory		–			14,208
Deposits and prepaid expenses		44,641			65,264
Total current assets		2,364,337			2,105,958
Inventory, long-term		–			39,711
Property, equipment and intangibles, net of accumulated depreciation and amortization of $139,152 and $135,276, respectively		10,183			14,059
Total assets		2,374,520			2,159,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable, trade		205,550			65,705
Accrued and other liabilities		134,605			230,569
Total current liabilities		340,155			296,274
Commitments and Contingencies
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000 shares authorized      None issued and outstanding		–			–
Common stock, $0.001 par value; 350,000,000 shares authorized     293,328,330 shares issued and outstanding each period		293,328			293,328
Additional paid-in capital		82,880,086			82,842,499
Accumulated deficit		(81,139,049	)		(81,272,373	)
Total stockholders' equity		2,034,365			1,863,454
Total liabilities and stockholders' equity		2,374,520			2,159,728

See notes to interim condensed consolidated financial statements

3

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,
	2014			2013			2014			2013
Revenues:	$			$			$			$
Products and services		42,995			58,867			147,711			183,329
Patent license		1,078,500			1,227,500			2,051,034			1,654,225
		1,121,495			1,286,367			2,198,745			1,837,554
Operating costs and expenses:
Cost of revenues:
Products and services		79,322			83,925			238,729			254,522
Patent licensing and litigation costs		117,185			112,500			342,774			337,500
Contingent legal fees and expenses		338,630			119,004			642,006			148,897
Selling and administrative		185,481			179,708			548,968			625,935
Research and related expenditures		93,786			77,436			261,594			238,456
Total operating costs and expenses		814,404			572,573			2,034,071			1,605,310
Operating income before provision for income taxes		307,091			713,794			164,674			232,244
Income tax expense		(31,350	)		(15,000	)		(31,350	)		(15,000	)
Income for the period		275,741			698,794			133,324			217,244
Income per common share - basic		0.00			0.00			0.00			0.00
Income per common share - diluted		0.00			0.00			0.00			0.00
Weighted average common shares outstanding
Basic		293,328,330			293,186,908			293,328,330			293,186,908
Diluted		294,164,274			294,281,077			294,135,318			294,841,269

See notes to interim condensed consolidated financial statements

4

e.Digital Corporation and subsidiary

CONDENSED CONSOLIDATED (UNAUDITED) STATEMENTS OF CASH FLOWS

	For the nine months ended
	December 31,
	2014			2013
OPERATING ACTIVITIES	$			$
Income for period		133,324			217,244
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization		3,876			3,104
Inventory market and reserve adjustment		50,278			67,104
Warranty provision		–			338
Stock-based compensation		37,587			2,646
Changes in assets and liabilities:
Accounts receivable		163,072			114,421
Inventory		3,641			3,230
Deposits and prepaid expenses		20,623			23,775
Accounts payable, trade		139,845			16,089
Accrued and other liabilities		(95,964	)		(143,265	)
Cash provided by operating activities		456,282			304,686
INVESTING ACTIVITIES
Purchase of equipment		–			(1,623	)
Cash used in investing activities		–			(1,623	)
FINANCING ACTIVITIES
Cash provided by financing activities		–			–
Net increase in cash and cash equivalents		456,282			303,063
Cash and cash equivalents, beginning of period		1,787,863			1,741,439
Cash and cash equivalents, end of period		2,244,145			2,044,502

See notes to interim condensed consolidated financial statements

5

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

e.Digital Corporation is a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company is developing and marketing an intellectual property portfolio including (a) licensing and enforcing its Flash-R™ portfolio of patents related to the use of flash memory in portable devices, and (b) developing new licenseable intellectual property related to context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies (“microSignet” technology) and other technologies. The Company also provides eVU® mobile entertainment services to its travel industry customers.

Unaudited Interim Financial Statements

These unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These interim condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company's financial position at December 31, 2014, and the results of its operations and cash flows for the periods presented, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended March 31, 2014 filed on Form 10-K.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The new standard applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The amendment is effective for annual reporting periods beginning after December 15, 2014 and interim periods within those annual periods. The Company is currently evaluating the new standard.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendment is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the new standard.

6

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

Other Accounting Standards Updates not effective until after December 31, 2014 are not expected to have a material effect on the Company’s financial position or results of operations.

3. INCOME PER SHARE

Basic income per common share is computed by dividing net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities included outstanding stock options. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. 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.

The following table sets forth the computation of basic and diluted earnings per share:

	For the three months ended				For the nine months ended
	December 31,				December 31,
	2014		2013		2014		2013
		$		$		$		$
Net income	$	275,741	$	698,794	$	133,324	$	217,244
Weighted average common shares - basic		293,328,330		293,186,908		293,328,330		293,186,908
Effect of dilutive common shares		835,944		1,094,169		806,988		1,654,361
Weighted average common shares - diluted		294,164,274		294,281,077		294,135,318		294,841,269
Net income per common share - basic	$	0.00	$	0.00	$	0.00	$	0.00
Net income per common share - diluted	$	0.00	$	0.00	$	0.00	$	0.00
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive		0		2,555,000		0		2,555,000

There was no difference in basic and diluted income per share for the periods presented.

4. LIQUIDITY

The Company has not identified any trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease of liquidity. During the second quarter of fiscal 2015 the Company ceased marketing eVU products and accessories, but at December 31, 2014 continues to service one customer through the term of the existing contract in September 2015. The Company does not expect the termination of eVU operations and the loss of eVU revenues to have a material impact on liquidity, results of operations or financial condition.

7

5. INVENTORIES

Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the weighted average cost method. The Company reserves for inventory that is obsolete or determined to be slow-moving and classifies the slow moving portion of inventory as a long-term asset. The Company has ceased offering new eVU systems and accordingly has fully reserved inventory at December 31, 2014. The Company is providing eVU content services to one customer through the term of existing contract in September 2015.

Inventories consisted of the following:

	December 31,			March 31,
	2014			2014
	$			$
Raw materials		37,559			38,303
Work in process		12,842			13,393
Finished goods		29,512			31,858
		79,913			83,554
Reserve for obsolescence		(79,913	)		(29,635	)
		–			53,919
Less current portion		–			14,208
Inventory, long term		–			39,711

The foregoing is net of an aggregate lower-of-cost-or-market inventory adjustment of $81,609 at March 31, 2014.

6. STOCK-BASED COMPENSATION COSTS

The Company accounts for stock-based compensation under the provisions of ASC 718, Share-Based Payment and ASC 505-50, Equity-Based Payments to Non-Employees. ASC 718 requires measurement of all employee stock-based awards using a fair-value method and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further, as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	$		$		$		$
Research and development		2,547		–		7,641		849
Selling and administrative		9,982		–		29,946		1,797
Total stock-based compensation expense		12,529		–		37,587		2,646

As of December 31, 2014 total estimated compensation cost of stock options granted but not yet vested was $36,750 and is expected to be recognized over the weighted average period of approximately nine months.

No stock options were granted during the three or nine-month periods ended December 31, 2014.

See Note 8 for further information on outstanding stock options.

8

7. WARRANTY RESERVE

Details of the estimated warranty liability included in accrued and other liabilities are as follows:

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2014		2013			2014		2013
	$		$			$		$
Beginning balance		–		238			–		657
Warranty provision		–		(15	)		–		338
Warranty deductions		–		(188	)		–		(960	)
Ending balance		–		35			–		35

8. STOCKHOLDERS’ EQUITY

The following table summarizes stockholders’ equity transactions during the nine-month period ended December 31, 2014:

	Common stock				Additional		Accumulated			Total stockholders'
	Shares		Amount		paid-in capital		deficit			equity
			$		$		$			$
Balance, April 1, 2014		293,328,330		293,328		82,842,499		(81,272,373	)		1,863,454
Stock-based compensation		–		–		37,587		–			37,587
Net income for the period		–		–		–		133,324			133,324
Balance, December 31, 2014		293,328,330		293,328		82,880,086		(81,139,049	)		2,034,365

Options

The following table summarizes stock option activity for the period:

				Weighted average	Aggregate
	Shares			exercise price	Intrinsic Value
	#			$	$
Outstanding April 1, 2014	6,613,578			0.0624
Granted		–		-
Exercised		–		-
Canceled/expired		(2,210,000	)	0.086
Outstanding December 31, 2014		4,403,578		0.0505	$	341,219
Exercisable at December 31, 2014		3,173,578		0.0488	$	251,429

(1) Options outstanding are exercisable at prices ranging from $0.022 to $0.11 and expire over the period from 2015 to 2018.

(2) Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2014 of $0.128.

Share warrants

No warrants were outstanding at December 31, 2014 and December 31, 2013.

9

9. FAIR VALUE MEASUREMENTS

Cash and cash equivalents are measured at fair value in the Company’s consolidated financial statements. Accounts receivable are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable and accrued and other liabilities are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities. Effective April 1, 2008 the Company adopted and follows ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) which established a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company’s cash and cash equivalents are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820).

10. SEGMENT INFORMATION

ASC 280 Segment Reporting provides annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographical areas and major customers. The Company has two operating segments: (1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from the Flash-R patent portfolio and products and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content services. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continue to provide services to our existing customers under existing contracts. We intend to terminate providing eVU services after existing contract terms are complete by September 2015.

Accounting policies for each of the operating segments are the same as on a consolidated basis.

Reportable segment information for the three and nine months ended December 31, 2014 and 2013 is as follows:

	For the three months ended December 31,				For the nine months ended December 31,
	2014		2013		2014		2013
	$		$		$		$
SEGMENT REVENUES:
Products and services		42,995		58,867		147,711		183,329
Patent licensing		1,078,500		1,227,500		2,051,034		1,654,225
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554
SEGMENT COST OF REVENUES:
Products and services		79,322		83,925		238,729		254,522
Patent licensing and litigation costs		117,185		112,500		342,774		337,500
Contingent legal fees and expenses		338,630		119,004		642,006		148,897
Total cost of revenues		535,137		315,429		1,223,509		740,919
RECONCILIATION:
Segment income before corporate costs		586,358		970,938		975,236		1,096,635
Other corporate operating costs		279,267		257,144		810,562		864,391
Operating income before provision for income taxes		307,091		713,794		164,674		232,244

The Company does not have significant assets employed in the patent license segment and does not track capital expenditures or assets by reportable segment. Consequently it is not practical to show this information.

10

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,
	2014		2013		2014		2013
	$		$		$		$
United States		1,078,500		1,227,500		2,051,034		1,654,225
International		42,995		58,867		147,711		183,329
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554

Revenues from one licensee comprised 16% of revenues for the nine months ended December 31, 2014, with no other licensee or customer accounting for more than 10% of revenues. Revenues from four licensees comprised 13%, 11%, 11% and 11% of revenue for the nine months ended December 31, 2013, with no other licensee or customer accounting for more than 10% of revenues. Accounts receivable from three customers comprised 66%, 14% and 11% of net accounts receivable at December 31, 2014. Accounts receivable from two customers comprised 52% and 37% of net accounts receivable at December 31, 2013.

11. COMMITMENTS AND CONTINGENCIES

Legal Matters

Intellectual Property Litigation

Beginning in fiscal 2013 and continuing through the current fiscal year, the Company commenced new rounds of enforcement action with respect to its patent portfolios and as of February 1, 2015, had active a total of 12 complaints in the U.S. District Court for the Southern District of California, asserting that products made and sold by the defendant companies infringe the Company’s U.S. patent portfolio.

Commitment Related to Intellectual Property Legal Services

In September 2012 the Company terminated the legal representation of Duane Morris LLP related to Flash-R™ patent enforcement activities. The Company remains obligated to pay contingency fees on certain future royalty payments from previous matters.

In September 2012 the Company engaged Handal and Associates (“Handal”) to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s flash memory patent portfolio (“Patent Enforcement Matters”). Pursuant to a partial contingent fee arrangement, the Company is paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art search firms. The Company has agreed to pay Handal a fee ranging from 33-40% of any license fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses. The Company may terminate the representation at any time but would be obligated to pay fees and advances.

Facility Lease

In January 2012, the Company entered into a sixty-two month facility lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive, Suite 120, San Diego, California. The aggregate monthly payment is $6,343 excluding utilities and costs. The aggregate payments adjust annually with maximum payments increasing to $7,157 in the forty-ninth through sixty-second months. Future lease commitments at December 31, 2014 total $207,541. The Company recognizes rent expense by the straight-line method over the lease term. As of December 31, 2014, deferred rent totaled $29,438.

11

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 December 31, 2014 was approximately $2.03 million. The Company has not experienced any losses in such accounts. The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not experienced any significant losses on its cash equivalents.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the number and nature of customers comprising the Company’s customer base and their geographic dispersion. The Company has not incurred any significant credit related losses.

The Company relies on one legal firm to represent it in patent licensing and enforcement matters.

Guarantees and Indemnifications

The Company enters into standard indemnification agreements in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450, Contingencies. The indemnification is generally limited to the amount paid by the customer. To date, there have been no claims under such indemnification provisions.

The Company used to provide a one-year limited warranty for most of its products, but as of December 31, 2014, the Company no longer sells eVU products

Employee Benefit – 401K Plan

In September 2012, the Company adopted a defined contribution plan (401(k)) covering its employees. Matching contributions are made on behalf of all participants, according to the Safe Harbor provision. The Company matches 100% (dollar for dollar) on deferrals of up to 4% of employee compensation deferred. As of December 31, 2014, the Company made matching contributions totaling $10,537.

12. INCOME TAXES

For the nine months ended December 31, 2014, the provision for income taxes consisted of $31,350 of foreign withholding taxes on payments in connection with a patent license agreement. Excluding the impact of foreign withholding taxes, the current year annual effective tax rate is estimated to be zero due to the anticipated utilization of available net operating loss (“NOL”) carryforwards to reduce U.S. taxable income.

At December 31, 2014, the Company had deferred tax assets associated with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal and California research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated.  At December 31, 2014, the Company has no liabilities for uncertain tax positions. 

12

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2014.

Cautionary Note on Forward Looking Statements

In addition to the other information in this report, the factors listed below should be considered in evaluating our business and prospects. This report contains a number of forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that may arise after the date hereof.

General

We are a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. We are developing and marketing an intellectual property portfolio including (a) licensing and enforcing our Flash-R™ portfolio of patents related to the use of flash memory in portable devices, and (b) developing and licensing new intellectual property related to context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies (“microSignet” technology) and other technologies. We previously also provided eVU® mobile entertainment services to our travel industry customers, however we ceased eVU services in the second quarter of fiscal 2015 with the exception of one remaining contract to be complete by September 2015

With the inception of patent license revenue in fiscal 2009, we determined that we have two operating segments: (1) patent licensing and enforcement and (2) products and services. Our patent licensing and enforcement revenue consists of intellectual property revenues from our patent portfolio. Our products and services revenue has been derived from the sale of eVU products and accessories to customers, warranty and technical support services and content integration fees and related services. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but currently provide services to one customer under an existing contract. We intend to terminate providing eVU services after the contract term is complete by September 2015.

Licensing and Patent Enforcement Activities

We are commercializing our patent portfolios through licensing and we are aggressively pursuing enforcement by litigating against targeted parties that we believe are infringing our patents. We commenced legal enforcement actions in 2007 and since September 2012, the law firm of Handal and Associates has been handling our Patent Enforcement Matters on a partial contingent fee basis.

Beginning in fiscal 2013 we commenced new rounds of enforcement actions with respect to our patent portfolios by filing complaints in the U.S. District Court for the Southern District of California, asserting that products made and sold by the defendant companies infringe our U.S. patents. Currently, we have active lawsuits filed against parties believed to infringe patents covering the use of our Flash-R and Nunchi technologies.

Flash-R Technology Enforcement and Licensing Progress - In November 2014, our appeal to the Federal Circuit Court of Appeals regarding application of the doctrine of collateral estoppel as to our U.S. Patent No. 5,839,108 (“the ‘108 patent”) was successful. The Court upheld the lower court’s application of collateral estoppel to U.S. Patent No. 5,491,774 (“the ‘774), which has now expired. In December 2014 the United States District Court for the Southern District of California ruled favorably regarding our claim construction of the ‘108 patent. As a result, in December 2014 and January 2015, we entered into license and settlement agreements with additional defendants. In January 2015 we filed additional enforcement actions against multiple defendants.

13

Nunchi Technology Enforcement - We commenced legal action with regards to our Nunchi portfolio of patents in July 2014. We currently have two active complaints in the U.S. District Court for the Southern District of California.

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.

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 continue to develop additional intellectual property in the areas of context and interpersonal awareness systems as well as explore new technologies for possible development or licensing. 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, 2014.

Our business is high risk in nature. There can be no assurance we can achieve sufficient patent license or other revenues to sustain profitability. We continue to be subject to the risks normally associated with introducing new technologies, including unforeseeable expenses, delays and complications. Accordingly, there is no guarantee that we can or will report operating profits in future periods.

Overall Performance and Trends

We focused significant efforts on developing, licensing and enforcing our patent portfolio during the last two fiscal years and during our current fiscal year.

We have successfully completed two rounds of enforcement litigation and are in the process of additional enforcement actions. There is a reluctance of patent infringers to negotiate and ultimately take a patent license without at least the threat of legal action. However, the majority of patent infringement contentions settle out of court based on the strength of our patent claims, validity, and persuasive evidence and clarity that the patent is being infringed. We believe we are building a track record of demonstrating the strength, validity and clarity of our patent claims that can result in significant future revenues from our patent portfolio.

Our eVU IFE business continued to decline in the fiscal year ended March 31, 2014 (fiscal 2014) and thereafter, primarily due to increased competition from personal devices. During the second quarter of fiscal 2015, we ceased marketing eVU products and accessories, but continue to provide service to one customer through the term of an existing contract.

While we reported a profit for the nine months ended December 31, 2014, revenues and profits have been sporadic in prior periods and we have incurred historical losses and negative cash flow from operations. We may incur losses in the future unless or until licensing revenues are sufficient to sustain continued profitability.

For the nine months ended December 31, 2014:

· We recognized net income before income taxes of $164,674 compared to a net income before income taxes of $232,244 for the comparable period of the prior fiscal year.

· Our revenues from products and services were $147,711 for the first nine months of fiscal 2015 with $2,051,034 of patent license revenue. This compares to $183,329 of product and service revenue for the prior year’s first nine months with $1,654,225 of patent license revenue.

· Operating costs and expenses totaling $2,034,071 in the nine months ended December 31, 2014 compared to $1,605,310 in the comparable period prior primarily due to increased patent-related legal costs.

Management faces challenges and risks for the remainder of fiscal 2015 to execute our plan to increase Flash-R patent portfolio license fees and monetize our Nunchi and microSignet technologies. These challenges include, but are not limited to, successful execution of our legal and licensing enforcement strategy in an uncertain and changing legal and regulatory environment related to patent infringement. The failure to obtain additional patent license revenues could have a material adverse impact on our operations. Our patent licensing business is subject to significant risks discussed herein and in our Annual Report on Form 10-K and is subject to uncertainties as to the timing and amount of future license revenues, if any.

14

Our monthly cash operating costs average approximately $135,000 per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue advanced technology research and development. Our quarterly results are highly dependent on the timing and amount of licensing fees and accordingly quarterly results can vary dramatically from period to period. As a result of this and other factors, past results and expenditure levels may not be indicative of future quarters.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements located in Item 1 of Part I, “Financial Statements,” and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2014. The preparation of these financial statements prepared in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including but not limited to those related to revenue recognition, bad debts, inventory valuation, intangible assets, financing operations, stock-based compensation, fair values, income taxes, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe that, of the significant accounting policies discussed in our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:

· revenue recognition;

· stock-based compensation expense;

· income taxes; and

· Inventory reserve

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. There were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the nine months ended December 31, 2014. For further information on our critical accounting policies, refer to Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended March 31, 2014.

15

Results of Operations

Three months ended December 31, 2014 compared to the three months ended December 31, 2013

	Three Months Ended December 31,
	2014		% of		2013		% of		Change
	Dollars		Revenue		Dollars		Revenue		Dollars			%
Revenues:
Products and services		42,995		4%		58,867		5%		(15,872	)		(27%	)
Patent licensing		1,078,500		96%		1,227,500		95%		(149,000	)		0%
		1,121,495		100%		1,286,367		100%		(164,872	)		(13%	)
Operating costs and expenses:
Cost of revenues:
Products and services		79,322		7%		83,925		7%		(4,603	)		(5%	)
Patent licensing and litigation costs		117,185		11%		112,500		9%		4,685			4%
Contingent legal fees and expenses		338,630		30%		119,004		9%		219,626			0%
Selling and administrative		185,481		17%		179,708		14%		5,773			3%
Research and development		93,786		8%		77,436		6%		16,350			21%
		814,404		73%		572,573		45%		241,831			42%
Operating income before provision for income taxes		307,091		27%		713,794		55%		(406,703	)		(57%	)

Income Before Income Taxes

We reported a net income before income taxes of $307,091 for the three months ended December 31, 2014 compared to a net income before income taxes of $713,794 for the comparable period of the prior year due to decreased patent license settlements and increased patent-related legal costs in the current year.

Revenues

Revenues decreased during the third fiscal quarter of 2015 compared to the same quarter of the prior fiscal year due to decreased license arrangements.

During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continued to provide services to our existing customers under existing contracts. We intend to terminate providing eVU services after one remaining existing contract term is complete by September 2015.

License fee revenues recognized fluctuate significantly from period to period primarily based on the following factors:

· the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee;

· the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and

· fluctuations in the number of agreements executed.

In the future the following additional factors could also impact revenue variability:

· fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;

· the timing of the receipt of periodic license fee payments and/or reports from licensees.

We are targeting new patent licensees but our results will continue to be dependent on the timing and amount of future patent licensing arrangements, if any.

16

Operating Costs and Expenses

Operating costs and expenses include cost of revenues associated with products and services, and costs associated with our patent licensing and enforcement activities including contingent and non-contingent litigation costs and related enforcement support costs. For the three months ended December 31, 2014, operating costs and expenses increased by $241,831 compared to the same period in the prior year.

Patent licensing and litigation costs related to Flash-R portfolio enforcement were $117,185 at December 31, 2014 compared to $112,500 in the prior year’s third quarter. Non-contingent licensing and litigation costs and related enforcement support costs may be incurred without any directly related revenues in a respective period. Generally contingent costs relate to revenues during a respective period but can vary depending on our share of certain costs and expenses. Contingent legal fees and expenses related to the Flash-R portfolio enforcement were $338,630 for the three months ended December 31, 2014 compared to $119,004 for the prior year’s third quarter. The increase is primarily due to increased costs associated with patent litigation in the current period.

Cost of revenues associated with products and services decreased from $83,925 in the prior year’s third quarter to $79,322 in the current year. The decrease of $4,603 primarily relates to a $16,469 decrease in salaries expense due to reduction in the number of employees supporting products and services in the current quarter, inventory and reserve adjustments in the prior year totaling $18,373 with no comparable expense in the current quarter, offset by a reserve for loss on contracts at December 31, 2014 of $29,041 with no comparable expense in the prior year.

Selling and administrative costs for the three months ended December 31, 2014 were $185,481 comparable to $179,708 in the prior year period.

Research and related expenses increased by $16,350 primarily due an increase of salaries and related benefits expenses in the current year of $64,827 as compared $50,956 for the same period in the prior year. The current year’s third quarter includes $2,547 for noncash stock-based compensation expense with no comparable expense in 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.

Income Taxes

During the three months ended December 31, 2014, the Company recorded income tax expense of $31,350 for foreign taxes. During the same period of the prior year, the Company recorded a tax expense of $15,000 for state taxes.

Income

The net income for the three months ended December 31, 2014 was $275,741 which included the income tax expense of $31,350. The net income for the prior comparable third quarter was $698,794 which included the tax expense of $15,000.

17

Nine months ended December 31, 2014 compared to the nine months ended December 31, 2013

	Nine Months Ended December 31,
	2014		% of		2013		% of		Change
	Dollars		Revenue		Dollars		Revenue		Dollars			%
Revenues:
Product and services		147,711		7%		183,329		10%		(35,618	)		(19%	)
Patent licensing		2,051,034		93%		1,654,225		90%		396,809			24%
		2,198,745		100%		1,837,554		100%		361,191			20%
Operating costs and expenses:
Products and services		238,729		11%		254,522		14%		(15,793	)		(6%	)
Patent licensing and litigation costs		342,774		16%		337,500		18%		5,274			2%
Contingent legal fees and expenses		642,006		29%		148,897		8%		493,109			331%
Selling and administrative		548,968		25%		625,935		34%		(76,967	)		(12%	)
Research and related		261,594		12%		238,456		13%		23,138			10%
		2,034,071		93%		1,605,310		87%		428,761			27%
Operating income before provision for income taxes		164,674		7%		232,244		13%		(67,570	)		(29%	)

Income Before Income Taxes

The income before income taxes of $164,674 for the nine months ended December 31, 2014 compared to a net income before income taxes of $232,244 for the comparable nine month of the prior year due to increased patent-related legal costs 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 increase in patent license revenue from $1,654,225 to $2,051,034. We currently have one licensee reporting periodic royalties. One such payment was recognized in the second quarter of the current year and one in the second quarter of the prior year. All other royalties have been one-time fully paid up royalties. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continued to provide services to our existing customers under existing contracts. We intend to terminate providing eVU services after one existing contract term completes 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, 2014, operating costs and expenses increased by $428,761 compared to the same period in the prior year.

Cost of revenues associated with products and services were $238,729 for the nine months ended December 31, 2014 compared to $254,522 for the same period in the prior year. The decrease of $15,793 is primarily due to a $28,705 reduction in salaries expense as the result of a reduced workforce, a $25,188 decrease in material costs as a result of decreased lower-of-cost-or-market adjustments in the current year, offset by increased travel costs of $6,583 and a reserve against loss on contracts of $29,041 in the current year, with no comparable expense in the prior year.

18

Patent licensing and litigation costs related to the Flash-R portfolio enforcement were $342,774 for the nine months ended December 31, 2014 comparable to $337,500 for the same period in the prior year. Contingent legal fees and expenses related to the Flash-R portfolio enforcement were $642,006 for the nine months ended December 31, 2014 compared to $148,897 for the same period in the prior year. The $493,109 increase reflects the impact of prior year contingency fees being reduced against previously paid legal retainers. Generally contingent costs relate to revenues during a respective period but can vary depending on accumulated retainers paid and our share of certain costs and expenses.

Selling and administrative costs for the nine months ended December 31, 2014 decreased by $76,967 compared to the same period in the prior year, primarily due to annual meeting costs of $55,563 in the prior year with no comparable expense in the current year, and a $51,497 reduction in consulting, legal and accounting fees, offset by increased stock-based compensation expense of $29,946 in the current year as compared to $1,797 for the same period of the prior year.

Research and related expenses increased by $23,138 for the nine months ended December 31, 2014 due primarily to increased staffing costs of $119,991 in the current period as compared to $91,400 in the prior year. The increase is primarily due to the workforce reduction costs in the current period. Research and related expenses can vary significantly from quarter to quarter based on patent related costs and on timing of internal research projects. Such expenses also vary based on decisions made regarding outside engineering and consulting. Research and related expenses for the period ended December 31, 2014 included $7,641 of noncash stock-based compensation with no comparable expense in the same period of the prior year.

Income

The net income was $133,324 for the nine months ended December 31, 2014 which included the foreign income tax expense of $31,350. The net income for the prior comparable nine month period was $217,244 which included the tax expense of $15,000.

Liquidity and Capital Resources

At December 31, 2014, we had working capital of $2,024,182 compared to working capital of $1,809,684 at March 31, 2014. At December 31, 2014 we had cash on hand of $2,244,145.

Operating Activities

Cash provided by operating activities was $456,282 for the nine months ended December 31, 2014. Cash provided by operating activities included the net income of $133,324 increased by net non-cash expenses of $91,741. Major components also providing operating cash were an increase of $139,845 in accounts payable, a decrease of $20,623 in deposits and prepaid expenses and a decrease of $163,072 in accounts receivable. A major component reducing operating cash was a $95,964 decrease in accrued and other liabilities.

Cash provided by operating activities was $304,686 for the nine months ended December 31, 2013. Cash provided by operating activities included the net income of $217,244 increased by net non-cash expenses of $73,192. Major components also providing operating cash was a decrease of $23,775 in deposits and prepaid expenses and a decrease of $114,421 in accounts receivable. A major component reducing operating cash was a $143,265 decrease in accrued and other liabilities.

Our terms to customers vary but we often require payment prior to shipment of product and any such payments are recorded as deposits. Patent license payments are normally due at signing of the license or within 30-45 days of settlement or end of royalty reporting period.

Individual working capital components can change dramatically from period to period due to timing of licensing, sales and shipments and corresponding receivable, inventory and payable balances. Accordingly operating cash requirements vary significantly from period to period.

Investing Activities

The Company’s efforts are primarily on operations and currently we have no significant investing capital needs. We have no commitments requiring investment capital.

Financing Activities

There were no cash financing activities during the three or nine months ended December 31, 2014.

19

Debt and Other Commitments

We currently have no debt outstanding other than trade payables and accruals. At December 31, 2014 we had no significant purchase commitments for product and components.

We have future lease commitments on our current facility as more fully described in our interim condensed consolidated financial statements.

Our legal firm, Handal and Associates, provides IP legal services in connection with licensing and prosecuting claims of infringement of our flash memory patent portfolio. Pursuant to a partial contingent fee arrangement, we are paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art search firms. We have agreed to pay Handal a fee ranging from 33% to 40% of any license fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses. We may terminate the representation at any time but would be obligated to pay fees and advances.

Cash Requirements

Other than cash on hand and accounts receivable, we have no material unused sources of liquidity at this time.  Based on our cash position at December 31, 2014 and current planned expenditures and level of operation, we believe we have sufficient capital resources for the next twelve months. Actual results could differ significantly from management plans. We believe we may be able to obtain additional funds from future patent licensing but the timing of licenses are subject to many factors and risks, many outside our control.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting during our fiscal quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We engage in litigation from time to time as part of our patent portfolio licensing and enforcement activities. In fiscal 2013 we commenced new enforcement actions with respect to our Flash-R patent portfolio by filing complaints in the U.S. District Court for the Southern District of California, asserting that products made and sold by the defendant companies infringe our U.S. patents. In November 2014, our appeal to the Federal Circuit Court of Appeals regarding application of the doctrine of collateral estoppel as to our U.S. Patent No. 5,839,108 (“the ‘108 patent”) was successful. The Court upheld the lower court’s application of collateral estoppel to U.S. Patent No. 5,491,774 (“the ‘774), which has now expired. In December 2014 the United States District Court for the Southern District of California ruled favorably regarding our claim construction of the ‘108 patent. As a result, in December 2014 and January 2015, we entered into license and settlement agreements with additional defendants. In January 2015 we filed additional enforcement actions against multiple defendants.

We commenced legal action with regards to our Nunchi portfolio of patents in July 2014 and we currently have two active complaints in the U.S. District Court for the Southern District of California.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) NONE

(b) NONE

(c) NONE

Item 3. Defaults Upon Senior Securities

NONE

Item 4. Mine Safety Disclosures

NONE

Item 5. Other Information

(a) NONE

(b) NONE

Item 6. Exhibits

Exhibit 31.1 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, President and CEO (Principal Executive Officer).

Exhibit 31.2 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer).

Exhibit 32.1 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, President and CEO (Principal Executive Officer) and MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer).

Extensible Business Reporting Language (XBRL) Exhibits*
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

21

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

e.DIGITAL CORPORATION
By:/s/ ALFRED H. FALK
	Alfred H. Falk, President and Chief Executive Officer
	(Principal Executive Officer)
By:/s/ MARDEE HARING-LAYTON
	MarDee Haring-Layton, Chief Financial Officer (Principal Financial Officer)

Date: February 12, 2015

22

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Alfred H. Falk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of e.Digital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2015

/s/ ALFRED H. FALK                               

Alfred H. Falk

President and Chief Executive Officer
(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, MarDee Haring-Layton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of e.Digital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2015

/s/ MARDEE HARING-LAYTON                                

MarDee Haring-Layton

Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of e.Digital Corporation (the "Company"), that, to his or her knowledge, the Quarterly Report of the Company on Form 10-Q for the period ended December 31, 2014, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: February 12, 2015
	/s/ ALFRED H. FALK
	Alfred H. Falk,
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: February 12, 2015
	/s/ MARDEE HARING-LAYTON
	MarDee Haring-Layton
	Chief Financial Officer (Principal Financial Officer)

XML

10. SEGMENT INFORMATION (Details - Segment info) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Total revenue	$ 1,121,495	$ 1,286,367	$ 2,198,745	$ 1,837,554
Total cost of revenues	535,137	315,429	1,223,509	740,919
Segment income (loss) before corporate costs	586,358	970,938	975,236	1,096,635
Other corporate operating costs	279,267	257,144	810,562	864,391
Operating income (loss) before provision for income taxes	307,091	713,794	164,674	232,244
Products And Services [Member]
Total revenue	42,995	58,867	147,711	183,329
Total cost of revenues	79,322	83,925	238,729	254,522
Patent Licensing [Member]
Total revenue	1,078,500	1,227,500	2,051,034	1,654,225
Patent licensing and litigation costs [Member]
Total cost of revenues	117,185	112,500	342,774	337,500
Contingent Legal Fees [Member]
Total cost of revenues	$ 338,630	$ 119,004	$ 642,006	$ 148,897

XML

5. INVENTORIES (Details) (USD $)	Dec. 31, 2014	Mar. 31, 2014
Inventory Disclosure [Abstract]
Raw materials	$ 37,559	$ 38,303
Work in process	12,842	13,393
Finished goods	29,512	31,858
Total Current Inventory	79,913	83,554
Reserve for obsolescence	(79,913)	(29,635)
Inventory, Total	0	53,919
Less current portion	0	14,208
Inventory, long term	$ 0	$ 39,711

XML

12. INCOME TAXES (Details Narrative) (USD $)	9 Months Ended
	Dec. 31, 2014
Income Tax Disclosure [Abstract]
Provision for income taxes	$ 31,350
Liabilities for uncertain tax positions	$ 0

XML

4. LIQUIDITY

9 Months Ended

Dec. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

4. LIQUIDITY

4. LIQUIDITY

The Company has not identified any trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease of liquidity. During the second quarter of fiscal 2015 the Company ceased marketing eVU products and accessories, but at December 31, 2014 continues to service one customer through the term of the existing contract in September 2015. The Company does not expect the termination of eVU operations and the loss of eVU revenues to have a material impact on liquidity, results of operations or financial condition.

XML

7. WARRANTY RESERVE (Details) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Product Warranties Disclosures [Abstract]
Beginning balance	$ 0	$ 238	$ 0	$ 657
Warranty provision	0	(15)	0	338
Warranty deductions	0	(188)	0	(960)
Ending balance	$ 0	$ 35	$ 0	$ 35

XML

6. STOCK-BASED COMPENSATION COSTS (Details Narrative) (USD $)	3 Months Ended	9 Months Ended
	Dec. 31, 2014	Dec. 31, 2014	Dec. 31, 2013
Employee Service Share-based Compensation, Aggregate Disclosures [Abstract]
Compensation cost of options granted but not yet vested	$ 36,750	$ 36,750
Nonvested weighted average period		9 months
Stock options granted during period	0	0	0

XML

8. STOCKHOLDERS' EQUITY (Details) (USD $)	Common Stock [Member]	Additional Paid-In Capital [Member]	Accumulated Deficit [Member]	Total
Beginning balance, amount at Mar. 31, 2014	$ 293,328	$ 82,842,449	$ (81,272,373)	$ 1,863,454
Beginning balance, shares at Mar. 31, 2014	293,328,330
Stock-based compensation	0	37,587	0	37,587
Loss for the period			133,324	133,324
Ending balance, amount at Dec. 31, 2014	$ 293,328	$ 82,880,086	$ (81,139,049)	$ 2,034,365
Ending balance, shares at Dec. 31, 2014	293,328,330

XML

8. STOCKHOLDERS' EQUITY (Details-Stock Option Activity) (USD $)	9 Months Ended
	Dec. 31, 2014
Shares
Options Outstanding, beginning balance	6,613,578
Granted	0
Exercised	0
Canceled/expired	(2,210,000)
Outstanding, ending balance	4,403,578
Exercisable	3,173,578
Weighted average exercise price
Options Outstanding, beginning balance	$ 0.0624
Canceled/expired	$ 0.086
Outstanding, ending balance	$ 0.0505
Exercisable	$ 0.0488
Aggregate Intrinsic Value
Outstanding, ending balance	$ 341,219
Exercisable	$ 251,429

XML

3. INCOME PER SHARE

9 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

INCOME PER SHARE

3. INCOME PER SHARE

Basic income per common share is computed by dividing net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities included outstanding stock options. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. 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.

The following table sets forth the computation of basic and diluted earnings per share:

	For the three months ended				For the nine months ended
	December 31,				December 31,
	2014		2013		2014		2013
		$		$		$		$
Net income	$	275,741	$	698,794	$	133,324	$	217,244
Weighted average common shares - basic		293,328,330		293,186,908		293,328,330		293,186,908
Effect of dilutive common shares		835,944		1,094,169		806,988		1,654,361
Weighted average common shares - diluted		294,164,274		294,281,077		294,135,318		294,841,269
Net income per common share - basic	$	0.00	$	0.00	$	0.00	$	0.00
Net income per common share - diluted	$	0.00	$	0.00	$	0.00	$	0.00
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive		0		2,555,000		0		2,555,000

There was no difference in basic and diluted income per share for the periods presented.

XML

8. STOCKHOLDERS' EQUITY (Details Narrative) (USD $)	9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Stockholders' equity
Options outstanding exercisable at prices range Minimum	$ 0.022
Options outstanding exercisable at prices range Maximum	$ 0.11
Aggregate intrinsic value	$ 0.128
Warrants outstanding	$ 0	$ 0

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Dec. 31, 2014	Mar. 31, 2014
Current
Cash and cash equivalents	$ 2,244,145	$ 1,787,863
Accounts receivable	75,551	238,623
Inventory	0	14,208
Deposits and prepaid expenses	44,641	65,264
Total current assets	2,364,337	2,105,958
Inventory, long-term	0	39,711
Property, equipment and intangibles, net of accumulated depreciation and amortization of $139,152 and $135,276, respectively	10,183	14,059
Total assets	2,374,520	2,159,728
Current
Accounts payable, trade	205,550	65,705
Accrued and other liabilities	134,605	230,569
Total current liabilities	340,155	296,274
Commitments and Contingencies
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding	0	0
Common stock, $0.001 par value, authorized 350,000,000, 293,328,330 shares issued and outstanding each period	293,328	293,328
Additional paid-in capital	82,880,086	82,842,499
Accumulated deficit	(81,139,049)	(81,272,373)
Total stockholders' equity	2,034,365	1,863,454
Total liabilities and stockholders' equity	$ 2,374,520	$ 2,159,728

XML

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

9 Months Ended

Dec. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

e.Digital Corporation is a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company is developing and marketing an intellectual property portfolio including (a) licensing and enforcing its Flash-R™ portfolio of patents related to the use of flash memory in portable devices, and (b) developing new licenseable intellectual property related to context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies (“microSignet” technology) and other technologies. The Company also provides eVU® mobile entertainment services to its travel industry customers.

Unaudited Interim Financial Statements

These unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These interim condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company's financial position at December 31, 2014, and the results of its operations and cash flows for the periods presented, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended March 31, 2014 filed on Form 10-K.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

XML

10. SEGMENT INFORMATION (Details Narrative)	9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Revenue[Member] | Customer 1 [Member]
Concentration percentage	16.00%	13.00%
Revenue[Member] | Customer 2 [Member]
Concentration percentage		11.00%
Revenue[Member] | Customer 3 [Member]
Concentration percentage		11.00%
Revenue[Member] | Customer 4 [Member]
Concentration percentage		11.00%
Accounts Receivable [Member] | Customer 1 [Member]
Concentration percentage	66.00%	52.00%
Accounts Receivable [Member] | Customer 2 [Member]
Concentration percentage	14.00%	37.00%
Accounts Receivable [Member] | Customer 3 [Member]
Concentration percentage	11.00%

XML

8. STOCKHOLDERS' EQUITY (Tables)

9 Months Ended

Dec. 31, 2014

Stockholders' equity

Summarizes stockholders' equity transactions

	Common stock				Additional		Accumulated			Total stockholders'
	Shares		Amount		paid-in capital		deficit			equity
			$		$		$			$
Balance, April 1, 2014		293,328,330		293,328		82,842,499		(81,272,373	)		1,863,454
Stock-based compensation		–		–		37,587		–			37,587
Net income for the period		–		–		–		133,324			133,324
Balance, December 31, 2014		293,328,330		293,328		82,880,086		(81,139,049	)		2,034,365

Summarizes stock option activity

				Weighted average	Aggregate
	Shares			exercise price	Intrinsic Value
	#			$	$
Outstanding April 1, 2014	6,613,578			0.0624
Granted		–		-
Exercised		–		-
Canceled/expired		(2,210,000	)	0.086
Outstanding December 31, 2014		4,403,578		0.0505	$	341,219
Exercisable at December 31, 2014		3,173,578		0.0488	$	251,429

XML

11. COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $)	9 Months Ended
	Dec. 31, 2014
Commitments and Contingencies Disclosure [Abstract]
Future lease commitments	$ 207,541
Deferred rent	29,438
Cash in excess of FDIC insured limits	2,030,000
Company matching contributions to 401K Plan	$ 10,537

XML

3. INCOME PER SHARE (Details) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Earnings Per Share [Abstract]
Net income	$ 275,741	$ 698,794	$ 133,324	$ 217,244
Weighted average common shares - basic	293,328,330	293,186,908	293,328,330	293,186,908
Effect of dilutive common shares	835,944	1,094,169	806,988	1,654,361
Weighted average common shares - diluted	294,164,274	294,281,077	294,135,318	294,841,269
Net income per common share - basic	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Net income per common share - diluted	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive	0	2,555,000	0	2,555,000

XML

2. RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Dec. 31, 2014

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

RECENT ACCOUNTING PRONOUNCEMENTS

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The new standard applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The amendment is effective for annual reporting periods beginning after December 15, 2014 and interim periods within those annual periods. The Company is currently evaluating the new standard.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendment is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the new standard.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

Other Accounting Standards Updates not effective until after December 31, 2014 are not expected to have a material effect on the Company’s financial position or results of operations.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2014	Mar. 31, 2014
ASSETS
Accumulated depreciation	$ 139,152	$ 135,276
Stockholders' equity
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	350,000,000	350,000,000
Common stock, shares issued	293,328,330	293,328,330
Common stock, shares outstanding	293,328,330	293,328,330

XML

12. INCOME TAXES

9 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

INCOME TAXES

12. INCOME TAXES

For the nine months ended December 31, 2014, the provision for income taxes consisted of $31,350 of foreign withholding taxes on payments in connection with a patent license agreement. Excluding the impact of foreign withholding taxes, the current year annual effective tax rate is estimated to be zero due to the anticipated utilization of available net operating loss (“NOL”) carryforwards to reduce U.S. taxable income.

At December 31, 2014, the Company had deferred tax assets associated with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal and California research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated.  At December 31, 2014, the Company has no liabilities for uncertain tax positions. 

XML

Document and Entity Information	9 Months Ended
	Dec. 31, 2014	Feb. 05, 2015
DocumentAndEntityInformationAbstract
Entity Registrant Name	E DIGITAL CORP
Entity Central Index Key	0000886328
Document Type	10-Q
Document Period End Date	Dec. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		293,378,330
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2015

XML

3. INCOME PER SHARE (Tables)

9 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

Computation of basic and diluted earnings per share

	For the three months ended				For the nine months ended
	December 31,				December 31,
	2014		2013		2014		2013
		$		$		$		$
Net income	$	275,741	$	698,794	$	133,324	$	217,244
Weighted average common shares - basic		293,328,330		293,186,908		293,328,330		293,186,908
Effect of dilutive common shares		835,944		1,094,169		806,988		1,654,361
Weighted average common shares - diluted		294,164,274		294,281,077		294,135,318		294,841,269
Net income per common share - basic	$	0.00	$	0.00	$	0.00	$	0.00
Net income per common share - diluted	$	0.00	$	0.00	$	0.00	$	0.00
Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive		0		2,555,000		0		2,555,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Revenues:
Products and services	$ 42,995	$ 58,867	$ 147,711	$ 183,329
Patent license	1,078,500	1,227,500	2,051,034	1,654,225
Total Revenues	1,121,495	1,286,367	2,198,745	1,837,554
Cost of revenues:
Products and services	79,322	83,925	238,729	254,522
Patent licensing and litigation costs	117,185	112,500	342,774	337,500
Contingent legal fees and expenses	338,630	119,004	642,006	148,897
Selling and administrative	185,481	179,708	548,968	625,935
Research and development	93,786	77,436	261,594	238,456
Total operating costs and expenses	814,404	572,573	2,034,071	1,605,310
Operating loss before provision for income taxes	307,091	713,794	164,674	232,244
Income tax expense	(31,350)	(15,000)	(31,350)	(15,000)
Income for the period	$ 275,741	$ 698,794	$ 133,324	$ 217,244
Income per common share - basic	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Income per common share - diluted	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Weighted average common shares outstanding basic	293,328,330	293,186,908	293,328,330	293,186,908
Weighted average common shares outstanding diluted	294,164,274	294,281,077	294,135,318	294,841,269

XML

7. WARRANTY RESERVE

9 Months Ended

Dec. 31, 2014

Product Warranties Disclosures [Abstract]

WARRANTY RESERVE

7. WARRANTY RESERVE

Details of the estimated warranty liability included in accrued and other liabilities are as follows:

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2014		2013			2014		2013
	$		$			$		$
Beginning balance		–		238			–		657
Warranty provision		–		(15	)		–		338
Warranty deductions		–		(188	)		–		(960	)
Ending balance		–		35			–		35

XML

6. STOCK-BASED COMPENSATION COSTS

9 Months Ended

Dec. 31, 2014

Employee Service Share-based Compensation, Aggregate Disclosures [Abstract]

STOCK-BASED COMPENSATION COSTS

6. STOCK-BASED COMPENSATION COSTS

The Company accounts for stock-based compensation under the provisions of ASC 718, Share-Based Payment and ASC 505-50, Equity-Based Payments to Non-Employees. ASC 718 requires measurement of all employee stock-based awards using a fair-value method and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further, as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest. The Company recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	$		$		$		$
Research and development		2,547		–		7,641		849
Selling and administrative		9,982		–		29,946		1,797
Total stock-based compensation expense		12,529		–		37,587		2,646

As of December 31, 2014 total estimated compensation cost of stock options granted but not yet vested was $36,750 and is expected to be recognized over the weighted average period of approximately nine months.

No stock options were granted during the three or nine-month periods ended December 31, 2014.

See Note 8 for further information on outstanding stock options.

XML

10. SEGMENT INFORMATION (Tables)

9 Months Ended

Dec. 31, 2014

Segment Reporting, Measurement Disclosures [Abstract]

Reportable segment information

	For the three months ended December 31,				For the nine months ended December 31,
	2014		2013		2014		2013
	$		$		$		$
SEGMENT REVENUES:
Products and services		42,995		58,867		147,711		183,329
Patent licensing		1,078,500		1,227,500		2,051,034		1,654,225
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554
SEGMENT COST OF REVENUES:
Products and services		79,322		83,925		238,729		254,522
Patent licensing and litigation costs		117,185		112,500		342,774		337,500
Contingent legal fees and expenses		338,630		119,004		642,006		148,897
Total cost of revenues		535,137		315,429		1,223,509		740,919
RECONCILIATION:
Segment income before corporate costs		586,358		970,938		975,236		1,096,635
Other corporate operating costs		279,267		257,144		810,562		864,391
Operating income before provision for income taxes		307,091		713,794		164,674		232,244

Revenue by geographic region

	For the three months ended				For the nine months ended
	December 31,				December 31,
	2014		2013		2014		2013
	$		$		$		$
United States		1,078,500		1,227,500		2,051,034		1,654,225
International		42,995		58,867		147,711		183,329
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554

XML

5. INVENTORIES (Tables)

9 Months Ended

Dec. 31, 2014

Inventory Disclosure [Abstract]

Schedule of inventory

	December 31,			March 31,
	2014			2014
	$			$
Raw materials		37,559			38,303
Work in process		12,842			13,393
Finished goods		29,512			31,858
		79,913			83,554
Reserve for obsolescence		(79,913	)		(29,635	)
		–			53,919
Less current portion		–			14,208
Inventory, long term		–			39,711

XML

10. SEGMENT INFORMATION

9 Months Ended

Dec. 31, 2014

Segment Reporting, Measurement Disclosures [Abstract]

SEGMENT INFORMATION

10. SEGMENT INFORMATION

ASC 280 Segment Reporting provides annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographical areas and major customers. The Company has two operating segments: (1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from the Flash-R patent portfolio and products and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content services. During the second quarter of fiscal 2015 we ceased marketing eVU products and accessories but continue to provide services to our existing customers under existing contracts. We intend to terminate providing eVU services after existing contract terms are complete by September 2015.

Accounting policies for each of the operating segments are the same as on a consolidated basis.

Reportable segment information for the three and nine months ended December 31, 2014 and 2013 is as follows:

	For the three months ended December 31,				For the nine months ended December 31,
	2014		2013		2014		2013
	$		$		$		$
SEGMENT REVENUES:
Products and services		42,995		58,867		147,711		183,329
Patent licensing		1,078,500		1,227,500		2,051,034		1,654,225
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554
SEGMENT COST OF REVENUES:
Products and services		79,322		83,925		238,729		254,522
Patent licensing and litigation costs		117,185		112,500		342,774		337,500
Contingent legal fees and expenses		338,630		119,004		642,006		148,897
Total cost of revenues		535,137		315,429		1,223,509		740,919
RECONCILIATION:
Segment income before corporate costs		586,358		970,938		975,236		1,096,635
Other corporate operating costs		279,267		257,144		810,562		864,391
Operating income before provision for income taxes		307,091		713,794		164,674		232,244

The Company does not have significant assets employed in the patent license segment and does not track capital expenditures or assets by reportable segment. Consequently it is not practical 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,
	2014		2013		2014		2013
	$		$		$		$
United States		1,078,500		1,227,500		2,051,034		1,654,225
International		42,995		58,867		147,711		183,329
Total revenue		1,121,495		1,286,367		2,198,745		1,837,554

Revenues from one licensee comprised 16% of revenues for the nine months ended December 31, 2014, with no other licensee or customer accounting for more than 10% of revenues. Revenues from four licensees comprised 13%, 11%, 11% and 11% of revenue for the nine months ended December 31, 2013, with no other licensee or customer accounting for more than 10% of revenues. Accounts receivable from three customers comprised 66%, 14% and 11% of net accounts receivable at December 31, 2014. Accounts receivable from two customers comprised 52% and 37% of net accounts receivable at December 31, 2013.

XML

8. STOCKHOLDERS' EQUITY

9 Months Ended

Dec. 31, 2014

Stockholders' equity

STOCKHOLDERS' EQUITY

8. STOCKHOLDERS’ EQUITY

The following table summarizes stockholders’ equity transactions during the nine-month period ended December 31, 2014:

	Common stock				Additional		Accumulated			Total stockholders'
	Shares		Amount		paid-in capital		deficit			equity
			$		$		$			$
Balance, April 1, 2014		293,328,330		293,328		82,842,499		(81,272,373	)		1,863,454
Stock-based compensation		–		–		37,587		–			37,587
Net income for the period		–		–		–		133,324			133,324
Balance, December 31, 2014		293,328,330		293,328		82,880,086		(81,139,049	)		2,034,365

Options

The following table summarizes stock option activity for the period:

				Weighted average	Aggregate
	Shares			exercise price	Intrinsic Value
	#			$	$
Outstanding April 1, 2014	6,613,578			0.0624
Granted		–		-
Exercised		–		-
Canceled/expired		(2,210,000	)	0.086
Outstanding December 31, 2014		4,403,578		0.0505	$	341,219
Exercisable at December 31, 2014		3,173,578		0.0488	$	251,429

(1) Options outstanding are exercisable at prices ranging from $0.022 to $0.11 and expire over the period from 2015 to 2018.

(2) Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2014 of $0.128.

Share warrants

No warrants were outstanding at December 31, 2014 and December 31, 2013.

XML

9. FAIR VALUE MEASUREMENTS

9 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

9. FAIR VALUE MEASUREMENTS

Cash and cash equivalents are measured at fair value in the Company’s consolidated financial statements. Accounts receivable are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable and accrued and other liabilities are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities. Effective April 1, 2008 the Company adopted and follows ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) which established a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The Company’s cash and cash equivalents are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820).

XML

11. COMMITMENTS AND CONTINGENCIES

9 Months Ended

Dec. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

11. COMMITMENTS AND CONTINGENCIES

Legal Matters

Intellectual Property Litigation

Beginning in fiscal 2013 and continuing through the current fiscal year, the Company commenced new rounds of enforcement action with respect to its patent portfolios and as of February 1, 2015, had active a total of 12 complaints in the U.S. District Court for the Southern District of California, asserting that products made and sold by the defendant companies infringe the Company’s U.S. patent portfolio.

Commitment Related to Intellectual Property Legal Services

In September 2012 the Company terminated the legal representation of Duane Morris LLP related to Flash-R™ patent enforcement activities. The Company remains obligated to pay contingency fees on certain future royalty payments from previous matters.

In September 2012 the Company engaged Handal and Associates (“Handal”) to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s flash memory patent portfolio (“Patent Enforcement Matters”). Pursuant to a partial contingent fee arrangement, the Company is paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art search firms. The Company has agreed to pay Handal a fee ranging from 33-40% of any license fee or settlement related to Patent Enforcement Matters, less prior retainers and expenses. The Company may terminate the representation at any time but would be obligated to pay fees and advances.

Facility Lease

In January 2012, the Company entered into a sixty-two month facility lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive, Suite 120, San Diego, California. The aggregate monthly payment is $6,343 excluding utilities and costs. The aggregate payments adjust annually with maximum payments increasing to $7,157 in the forty-ninth through sixty-second months. Future lease commitments at December 31, 2014 total $207,541. The Company recognizes rent expense by the straight-line method over the lease term. As of December 31, 2014, deferred rent totaled $29,438.

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 December 31, 2014 was approximately $2.03 million. The Company has not experienced any losses in such accounts. The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not experienced any significant losses on its cash equivalents.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the number and nature of customers comprising the Company’s customer base and their geographic dispersion. The Company has not incurred any significant credit related losses.

The Company relies on one legal firm to represent it in patent licensing and enforcement matters.

Guarantees and Indemnifications

The Company enters into standard indemnification agreements in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450, Contingencies. The indemnification is generally limited to the amount paid by the customer. To date, there have been no claims under such indemnification provisions.

The Company used to provide a one-year limited warranty for most of its products, but as of December 31, 2014, the Company no longer sells eVU products

Employee Benefit – 401K Plan

In September 2012, the Company adopted a defined contribution plan (401(k)) covering its employees. Matching contributions are made on behalf of all participants, according to the Safe Harbor provision. The Company matches 100% (dollar for dollar) on deferrals of up to 4% of employee compensation deferred. As of December 31, 2014, the Company made matching contributions totaling $10,537.

XML

10. SEGMENT INFORMATION (Details - Revenue by Geographic Region) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Total revenue	$ 1,121,495	$ 1,286,367	$ 2,198,745	$ 1,837,554
United States [Member]
Total revenue	1,078,500	1,227,500	2,051,034	1,654,225
International [Member]
Total revenue	$ 42,995	$ 58,867	$ 147,711	$ 183,329

XML

7. WARRANTY RESERVE (Tables)

9 Months Ended

Dec. 31, 2014

Warranty Reserve Tables

Estimated warranty liability included in accrued and other liabilities

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2014		2013			2014		2013
	$		$			$		$
Beginning balance		–		238			–		657
Warranty provision		–		(15	)		–		338
Warranty deductions		–		(188	)		–		(960	)
Ending balance		–		35			–		35

XML

5. INVENTORIES (Details Narratives) (USD $)	Dec. 31, 2014	Mar. 31, 2014
Inventory Disclosure [Abstract]
Aggregate lower of cost-or-market adjustment	$ 0	$ 81,609

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
OPERATING ACTIVITIES
Income for period	$ 133,324	$ 217,244
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization	3,876	3,104
Inventory market and reserve adjustment	50,278	67,104
Warranty provision	0	338
Stock-based compensation	37,587	2,646
Changes in assets and liabilities:
Accounts receivable	163,072	114,421
Inventory	3,641	3,230
Deposits and prepaid expenses	20,623	23,775
Accounts payable, trade	139,845	16,089
Accrued and other liabilities	(95,964)	(143,265)
Cash provided by operating activities	456,282	304,686
INVESTING ACTIVITIES
Purchase of equipment	0	(1,623)
Cash used in investing activities	0	(1,623)
FINANCING ACTIVITIES
Cash provided by financing activities	0	0
Net increase in cash and cash equivalents	456,282	303,063
Cash and cash equivalents, beginning of period	1,787,863	1,741,439
Cash and cash equivalents, end of period	$ 2,244,145	$ 2,044,502

XML

5. INVENTORIES

9 Months Ended

Dec. 31, 2014

Inventory Disclosure [Abstract]

INVENTORIES

5. INVENTORIES

Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the weighted average cost method. The Company reserves for inventory that is obsolete or determined to be slow-moving and classifies the slow moving portion of inventory as a long-term asset. The Company has ceased offering new eVU systems and accordingly has fully reserved inventory at December 31, 2014. The Company is providing eVU content services to one customer through the term of existing contract in September 2015.

Inventories consisted of the following:

	December 31,			March 31,
	2014			2014
	$			$
Raw materials		37,559			38,303
Work in process		12,842			13,393
Finished goods		29,512			31,858
		79,913			83,554
Reserve for obsolescence		(79,913	)		(29,635	)
		–			53,919
Less current portion		–			14,208
Inventory, long term		–			39,711

The foregoing is net of an aggregate lower-of-cost-or-market inventory adjustment of $81,609 at March 31, 2014.

XML

6. STOCK-BASED COMPENSATION COSTS (Details) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Total stock-based compensation expense	$ 12,529	$ 0	$ 37,587	$ 2,646
Research and Development Expense [Member]
Total stock-based compensation expense	2,547	0	7,641	849
Selling, General and Administrative Expenses [Member]
Total stock-based compensation expense	$ 9,982	$ 0	$ 29,946	$ 1,797

XML

6. STOCK-BASED COMPENSATION COSTS (Tables)

9 Months Ended

Dec. 31, 2014

Employee Service Share-based Compensation, Aggregate Disclosures [Abstract]

Schedule of stock-based compensation expense

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2014		2013		2014		2013
	$		$		$		$
Research and development		2,547		–		7,641		849
Selling and administrative		9,982		–		29,946		1,797
Total stock-based compensation expense		12,529		–		37,587		2,646