Delaware
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33-0591385
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Empl. Ident. No.)
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16770 West Bernardo Drive, San Diego, California
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92127
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(Address of principal executive offices)
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(Zip Code)
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Large Accelerated Filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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Smaller reporting company x
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Page
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|||
PART I. FINANCIAL INFORMATION | |||
Item 1.
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Financial Statements (unaudited):
|
||
Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011
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3
|
||
Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010
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4
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||
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010
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5
|
||
Notes to Interim Consolidated Financial Statements
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6
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||
Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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12
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Item 4.
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Controls and Procedures
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17
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PART II. OTHER INFORMATION | |||
Item 1.
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Legal Proceedings
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17
|
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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18
|
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Item 3.
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Defaults Upon Senior Securities
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18
|
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Item 4.
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(Removed and Reserved)
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18
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Item 5.
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Other Information
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18
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Item 6.
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Exhibits
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18
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SIGNATURES |
19
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June 30,
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||||||||
2011
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March 31,
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|||||||
(Unaudited)
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2011
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|||||||
$
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$
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|||||||
ASSETS
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||||||||
Current
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||||||||
Cash and cash equivalents
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2,429,408 | 1,805,894 | ||||||
Accounts receivable
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1,162,712 | 98,152 | ||||||
Inventory
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219,883 | 256,458 | ||||||
Deposits and prepaid expenses
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33,974 | 30,327 | ||||||
Total current assets
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3,845,977 | 2,190,831 | ||||||
Property, equipment and intangibles, net of accumulated depreciation and amortization of $195,461 and $194,461, respectively
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5,145 | 6,506 | ||||||
Total assets
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3,851,122 | 2,197,337 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||||
Current
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||||||||
Accounts payable, trade
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571,917 | 24,466 | ||||||
Accrued and other liabilities
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524,386 | 153,013 | ||||||
Total current liabilities
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1,096,303 | 177,479 | ||||||
Commitments and Contingencies
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||||||||
Stockholders' equity
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||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized
None issued and outstanding
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- | - | ||||||
Common stock, $0.001 par value, authorized 350,000,000,
293,003,158 shares issued and outstanding each period
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293,003 | 293,003 | ||||||
Additional paid-in capital
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82,770,812 | 82,767,088 | ||||||
Accumulated deficit
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(80,308,996 | ) | (81,040,233 | ) | ||||
Total stockholders' equity
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2,754,819 | 2,019,858 | ||||||
Total liabilities and stockholders' equity
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3,851,122 | 2,197,337 |
For the three months ended
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||||||||
June 30,
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||||||||
2011
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2010
|
|||||||
$
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$
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|||||||
Revenues:
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||||||||
Products
|
39,007 | 298,615 | ||||||
Services
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117,808 | 188,519 | ||||||
Patent license
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2,025,000 | 25,264 | ||||||
2,181,815 | 512,398 | |||||||
Cost of revenues:
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||||||||
Products
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37,162 | 241,685 | ||||||
Services
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64,080 | 86,003 | ||||||
Patent license
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911,204 | 10,106 | ||||||
1,012,446 | 337,794 | |||||||
Gross profit
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1,169,369 | 174,604 | ||||||
Operating expenses:
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||||||||
Selling and administrative
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248,847 | 366,125 | ||||||
Research and related expenditures
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189,285 | 158,671 | ||||||
Total operating expenses
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438,132 | 524,796 | ||||||
Operating income (loss) before provision for income taxes
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731,237 | (350,192 | ) | |||||
Income tax provision
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- | - | ||||||
Income (loss) for the period
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731,237 | (350,192 | ) | |||||
Accrued and deemed dividends on preferred stock
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- | (31,396 | ) | |||||
Income (loss) attributable to common stockholders
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731,237 | (381,588 | ) | |||||
Income (loss) per common share - basic and diluted
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0.00 | (0.00 | ) | |||||
Weighted average common shares outstanding Basic and diluted
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293,003,158 | 287,017,408 |
For the three months ended
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||||||||
June 30,
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||||||||
2011
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2010
|
|||||||
$
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$
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|||||||
OPERATING ACTIVITIES
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||||||||
Income (loss) for period
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731,237 | (350,192 | ) | |||||
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
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||||||||
Depreciation and amortization
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1,361 | 2,704 | ||||||
Warranty provision
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(1,333 | ) | 8,345 | |||||
Stock-based compensation
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3,724 | 93,766 | ||||||
Changes in assets and liabilities:
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||||||||
Accounts receivable
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(1,064,560 | ) | (53,622 | ) | ||||
Inventory
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36,575 | 55,106 | ||||||
Deposits and prepaid expenses
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(3,647 | ) | 35,329 | |||||
Accounts payable, trade
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547,451 | 66,229 | ||||||
Accrued and other liabilities
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372,706 | (130,628 | ) | |||||
Cash provided by (used in) operating activities
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623,514 | (272,963 | ) | |||||
INVESTING ACTIVITIES
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||||||||
Purchase of equipment
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- | (1,103 | ) | |||||
Cash used in investing activities
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- | (1,103 | ) | |||||
Net increase (decrease) in cash and cash equivalents
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623,514 | (274,066 | ) | |||||
Cash and cash equivalents, beginning of period
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1,805,894 | 2,818,727 | ||||||
Cash and cash equivalents, end of period
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2,429,408 | 2,544,661 | ||||||
Supplemental schedule of noncash investing and financing activities:
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||||||||
Common stock issued on conversion of preferred stock
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- | 605,226 | ||||||
Accrued and deemed dividends on preferred stock
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- | 31,396 |
June 30,
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March 31,
|
|||||||
2011
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2011
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|||||||
$
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$
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|||||||
Raw materials
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60,997 | 70,835 | ||||||
Work in process
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18,751 | 19,027 | ||||||
Finished goods
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140,135 | 166,596 | ||||||
219,883 | 256,458 |
Three Months Ended
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||||||||
June 30,
|
||||||||
2011
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2010
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|||||||
$
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$
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|||||||
Research and development
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3,691 | 18,034 | ||||||
Selling and administrative
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33 | 75,732 | ||||||
Total stock-based compensation expense
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3,724 | 93,766 |
Three Months Ended
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||||||||
June 30,
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||||||||
2011
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2010
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|||||||
Volatility
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* | 77 | % | |||||
Risk-free interest rate
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* | 0.43 | % | |||||
Forfeiture rate
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* | 0.0 | % | |||||
Dividend yield
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* | 0.0 | % | |||||
Expected life in years
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* | 2.0 | ||||||
Weighted-average fair value of options granted
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* | $ | 0.04 |
Three Months Ended
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||||||||
June 30,
|
||||||||
2011
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2010
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|||||||
$
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$
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|||||||
Beginning balance
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4,589 | 5,262 | ||||||
Warranty provision
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(1,333 | ) | 8,345 | |||||
Warranty deductions
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(51 | ) | - | |||||
Ending balance
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3,205 | 13,607 |
Common stock
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Additional
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Accumulated
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Total stockholders'
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|||||||||||||||||
Shares
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Amount
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paid-in capital
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deficit
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equity
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||||||||||||||||
$
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$
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$
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$
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|||||||||||||||||
Balance, April 1, 2011
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293,003,158 | 293,003 | 82,767,088 | (81,040,233 | ) | 2,019,858 | ||||||||||||||
Stock-based compensation
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- | - | 3,724 | - | 3,724 | |||||||||||||||
Income for the period
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- | - | - | 731,237 | 731,237 | |||||||||||||||
Balance, June 30, 2011
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293,003,158 | 293,003 | 82,770,812 | (80,308,996 | ) | 2,754,819 |
Weighted average
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Aggregate
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|||||||||||
Shares
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exercise price
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Intrinsic Value
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||||||||||
#
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$
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$
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||||||||||
Outstanding April 1, 2011
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6,022,500 | 0.15 | - | |||||||||
Granted
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- | - | - | |||||||||
Exercised
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- | - | - | |||||||||
Canceled/expired
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(512,500 | ) | 0.18 | - | ||||||||
Outstanding June 30, 2011
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5,510,000 | 0.11 | $ | - | ||||||||
Exercisable at June 30, 2011
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4,447,080 | 0.11 | $ | - |
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(1)
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Options outstanding are exercisable at prices ranging from $0.09 to $0.155 and expire over the period from 2013 to 2015.
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(2)
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Aggregate intrinsic value is based on the closing price of our common stock on June 30, 2011 of $0.035 and excludes the impact of options that were not in-the-money.
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For the three months ended
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||||||||
June 30,
|
||||||||
2011
|
2010
|
|||||||
$
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$
|
|||||||
REVENUES:
|
||||||||
Products and services
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156,815 | 487,134 | ||||||
Patent licensing
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2,025,000 | 25,264 | ||||||
Total revenue
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2,181,815 | 512,398 | ||||||
GROSS PROFIT:
|
||||||||
Products and services
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55,573 | 159,446 | ||||||
Patent licensing
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1,113,796 | 15,158 | ||||||
Total gross profit
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1,169,369 | 174,604 | ||||||
RECONCILIATION:
|
||||||||
Total segment gross profit
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1,169,369 | 174,604 | ||||||
Operating expenses
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(438,132 | ) | (524,796 | ) | ||||
Other income (expense)
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- | - | ||||||
Income (loss) before income taxes
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731,237 | (350,192 | ) |
For the three months ended
|
||||||||
June 30,
|
||||||||
2011
|
2010
|
|||||||
$
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$
|
|||||||
United States
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2,025,000 | 25,264 | ||||||
International
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156,815 | 487,134 | ||||||
Total revenue
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2,181,815 | 512,398 |
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·
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revenue recognition;
|
|
·
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stock-based compensation expense; and
|
|
·
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income taxes.
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Three Months Ended June 30,
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||||||||||||||||||||||||
2011
|
% of
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2010
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% of
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Change
|
||||||||||||||||||||
Dollars
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Revenue
|
Dollars
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Revenue
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Dollars
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%
|
|||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Products
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39,007 | 2 | % | 298,615 | 58 | % | (259,608 | ) | (87 | )% | ||||||||||||||
Services
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117,808 | 5 | % | 188,519 | 37 | % | (70,711 | ) | (38 | )% | ||||||||||||||
Patent license
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2,025,000 | 93 | % | 25,264 | 5 | % | 1,999,736 | 7915 | % | |||||||||||||||
2,181,815 | 100 | % | 512,398 | 100 | % | 1,669,417 | 326 | % | ||||||||||||||||
Gross Profit:
|
||||||||||||||||||||||||
Product gross profit
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1,845 | 0 | % | 56,930 | 11 | % | (55,085 | ) | (97 | )% | ||||||||||||||
Service gross profit
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53,728 | 2 | % | 102,516 | 20 | % | (48,788 | ) | (48 | )% | ||||||||||||||
Patent license
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1,113,796 | 51 | % | 15,158 | 3 | % | 1,098,638 | 7248 | % | |||||||||||||||
1,169,369 | 54 | % | 174,604 | 34 | % | 994,765 | 570 | % | ||||||||||||||||
Operating Expenses:
|
||||||||||||||||||||||||
Selling and administrative
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248,847 | 11 | % | 366,125 | 71 | % | (117,278 | ) | (32 | )% | ||||||||||||||
Research and related
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189,285 | 9 | % | 158,671 | 31 | % | 30,614 | 19 | % | |||||||||||||||
438,132 | 20 | % | 524,796 | 102 | % | (86,664 | ) | (17 | )% | |||||||||||||||
Income (loss) before income taxes
|
731,237 | 34 | % | (350,192 | ) | (68 | )% | 1,081,429 | (309 | )% |
|
·
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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.
|
|
·
|
the effect of court and USPTO rulings and decisions;
|
|
·
|
fluctuations in the sales results or other royalty per unit activities of our licensees that impact the calculation of license fees due;
|
|
·
|
the timing of the receipt of periodic license fee payments and/or reports from licensees.
|
|
(a)
|
NONE
|
|
(b)
|
NONE
|
|
(c)
|
NONE
|
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*
|
e.DIGITAL CORPORATION
|
||
By:
|
/s/ ALFRED H. FALK
|
|
Alfred H. Falk, President and Chief Executive Officer
|
||
By:
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/s/ MARDEE HARING-LAYTON
|
|
MarDee Haring-Layton, Principal Accounting Officer
|
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: August 12, 2011
|
|
/s/ ALFRED H. FALK
|
|
Alfred H. Falk
|
|
President and Chief Executive Officer (Principal Executive Officer)
|
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: August 12, 2011
|
|
/s/ MARDEE HARING-LAYTON
|
|
MarDee Haring-Layton
|
|
Principal Accounting Officer
|
Date: August 12, 2011
|
||
/s/ ALFRED H. FALK
|
||
Alfred H. Falk,
|
||
President and Chief Executive Officer
|
||
(Principal Executive Officer)
|
||
Date: August 12, 2011
|
||
/s/ MARDEE HARING-LAYTON
|
||
MarDee Haring-Layton
|
||
Principal Accounting Officer
|
||
(Principal Financial Officer)
|
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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
|
Jun. 30, 2011
|
Mar. 31, 2011
|
---|---|---|
Property, equipment and intangibles, accumulated depreciation and amortization | $ 195,461 | $ 194,461 |
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, issued | 0 | 0 |
Preferred stock, outstanding | 0 | 0 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, authorized | 350,000,000 | 350,000,000 |
Common stock, shares issued | 293,003,158 | 293,003,158 |
Common stock, shares outstanding | 293,003,158 | 293,003,158 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
|
3 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Revenues: | Â | Â |
Products | $ 39,007 | $ 298,615 |
Services | 117,808 | 188,519 |
Patent license | 2,025,000 | 25,264 |
Revenues, Total | 2,181,815 | 512,398 |
Cost of revenues: | Â | Â |
Products | 37,162 | 241,685 |
Services | 64,080 | 86,003 |
Patent license | 911,204 | 10,106 |
Cost of Revenue, Total | 1,012,446 | 337,794 |
Gross profit | 1,169,369 | 174,604 |
Operating expenses: | Â | Â |
Selling and administrative | 248,847 | 366,125 |
Research and related expenditures | 189,285 | 158,671 |
Total operating expenses | 438,132 | 524,796 |
Operating income (loss) before provision for income taxes | 731,237 | (350,192) |
Income tax provision | ||
Income (loss) for the period | 731,237 | (350,192) |
Accrued and deemed dividends on preferred stock | Â | (31,396) |
Income (loss) attributable to common stockholders | $ 731,237 | $ (381,588) |
Income (loss) per common share - basic and diluted | $ 0.00 | $ 0.00 |
Weighted average common shares outstanding Basic and diluted | 293,003,158 | 287,017,408 |
Document and Entity Information
|
3 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Aug. 01, 2011
|
|
Document Information [Line Items] | Â | Â |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2012 | Â |
Document Fiscal Period Focus | Q1 | Â |
Trading Symbol | EDIG | Â |
Entity Registrant Name | E DIGITAL CORP | Â |
Entity Central Index Key | 0000886328 | Â |
Current Fiscal Year End Date | --03-31 | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Entity Common Stock, Shares Outstanding | Â | 293,003,158 |
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STOCKHOLDERS' EQUITY
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Jun. 30, 2011
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STOCKHOLDERS' EQUITY |
7. STOCKHOLDERS’ EQUITY
The
following table summarizes stockholders’ equity transactions
during the three-month period ended June 30, 2011:
Options
The
following table summarizes stock option activity for the
period:
Share warrants
A
total of 7,500,000 share warrants exercisable at $0.10 per share
expired on June 30, 2011 and no warrants were outstanding at June
30, 2011.
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INCOME (LOSS) PER SHARE
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3 Months Ended |
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Jun. 30, 2011
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INCOME (LOSS) PER SHARE |
3. INCOME (LOSS) PER SHARE
Basic
earnings (loss) per common share is computed by dividing income
(loss) attributable to common shareholders by the weighted-average
number of shares of common stock outstanding during the period. The
loss to common stockholders was increased by accrued and deemed
dividends on preferred stock during the three months ended June 30,
2010 of $31,396. Diluted earnings per common share is computed by
dividing loss attributable to common shareholders by the
weighted-average number of shares of common stock outstanding
during the period increased to include the number of additional
shares of common stock that would have been outstanding if the
potentially dilutive securities had been issued. Potentially
dilutive securities included outstanding stock options and
warrants. The dilutive effect of potentially dilutive securities is
reflected in diluted earnings per share by application of the
treasury stock method. These securities were not included in the
computation of diluted loss per share for the periods because they
are antidilutive, but they could potentially dilute earnings per
share in future periods. Under the treasury stock
method, an increase in the fair market value of the Company’s
common stock can result in a greater dilutive effect from
potentially dilutive securities. For the periods presented
potential dilutive securities were not included in the computation
of diluted earnings (loss) per share because they had no effect or
were antidilutive, but they could potentially dilute earnings per
share in future periods. There was no difference in basic and
diluted earnings (loss) per share or basic and diluted weighted
average shares outstanding for the periods presented.
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SEGMENT INFORMATION
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Jun. 30, 2011
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SEGMENT INFORMATION |
9. SEGMENT INFORMATION
ASC
280 Segment
Reporting provides annual and interim reporting standards
for an enterprise’s business segments and related disclosures
about its products, services, geographical areas and major
customers. The Company has two operating segments: (1) products and
services and (2) patent licensing. Products and services consist of
sales of the Company’s electronic eVU mobile entertainment
device and related content services and patent licensing consists
of intellectual property revenues from the Flash-R patent
portfolio.
Accounting
policies for each of the operating segments are the same as on a
consolidated basis.
Reportable
segment information for the three months ended June 30, 2011 and
2010 is as follows:
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.
Revenues
from two licensees comprised 47% and 46% of revenue for the three
months ended June 30, 2011, with no other licensee or customer
accounting for more than 10% of revenues. Revenues from three
customers comprised 44%, 18% and 14% of revenue for the three
months ended June 30, 2010, with no other customer accounting for
more than 10% of revenues. Accounts receivable from one
licensee comprised 88% of net accounts receivable at June 30,
2011.
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COMMITMENTS AND CONTINGENCIES
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3 Months Ended |
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Jun. 30, 2011
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COMMITMENTS AND CONTINGENCIES |
10. COMMITMENTS AND CONTINGENCIES
Legal Matters
Intellectual Property Litigation
In
September 2007 and March 2008, the Company filed complaints against
eight electronic product manufacturers in the U.S. District Court
for the Eastern District of Texas asserting that products made by
the companies infringe four of the Company's U.S. patents covering
the use of flash memory technology. These patents are part of the
Company’s Flash-R patent portfolio. By September 30, 2009 the
Company had licensed and settled the litigation with seven of the
manufacturers and suspended the complaint against one defendant in
bankruptcy.
In
November 2009 the Company filed an additional patent infringement
complaint in the United States District Court for the District of
Colorado against nineteen companies that manufacture devices
using flash memory. By June 30, 2011 the Company had licensed and
settled the litigation with seven of the defendants and suspended
the complaint against one defendant.
Although
most fees, costs and expenses of intellectual property litigation
are covered under the Company’s arrangement with Duane Morris
LLP as described below, the Company may incur support and related
expenses for this litigation that may become material.
Commitment Related to Intellectual Property Legal
Services
On
March 23, 2007, the Company entered into an agreement for legal
services and a contingent fee arrangement with Duane Morris LLP.
The agreement provides that Duane Morris is the Company’s
legal counsel in connection with the assertion of the
Company’s flash memory related patents against infringers
(“Patent Enforcement Matters’).
Duane
Morris has agreed to handle the Company’s Patent Enforcement
Matters and certain related appeals on a contingent fee basis.
Duane Morris also has agreed to advance certain costs and expenses
including travel expenses, court costs and expert fees. The Company
has agreed to pay Duane Morris a fee equal to 40% of any license or
litigation recovery related to Patent Enforcement Matters, after
recovery of expenses, and 50% of recovery if appeal is
necessary.
In
the event the Company is acquired or sold or elects to sell the
covered patents or upon certain other corporate events or in the
event the Company terminates the agreement for any reason, then
Duane Morris shall be entitled to collect accrued costs and a fee
equal to three times overall time and expenses accrued in
connection with the agreement and a fee of 15% of a good faith
estimate of the overall value of the covered patents. Any such
corporate event or termination fee will only be recorded if and
when such applicable event becomes probable. The Company has
provided Duane Morris a lien and a security interest in the covered
patents to secure its obligations under the agreement.
Facility Lease
In
March 2006 the Company entered into a sixty-two month lease,
commencing June 1, 2006 and expiring July 31, 2011, for
approximately 4,800 square feet. In May 2011 the Company entered
into a lease extension through April 2012 at the same monthly rate
of $6,534 excluding utilities and costs. Future lease commitments
aggregate to $65,340 at June 30, 2011.
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 at March 31, 2011 had substantially
all of its cash and cash equivalents at one financial institution
in a non-interest bearing account, which pursuant to current rules
is insured in full by the Federal Deposit Insurance Corporation
through December 31, 2012. The Company does not believe that it is
subject to any unusual financial risk beyond the normal risk
associated with commercial banking relationships. The Company
performs periodic evaluations of the relative credit standing of
these financial institutions. The Company has not experienced any
significant losses on its cash equivalents.
Concentrations
of credit risk with respect to trade accounts receivable are
limited due to the number and nature of customers comprising the
Company’s customer base and their geographic dispersion. The
Company has not incurred any significant credit related
losses.
The
Company relies on one third-party contract manufacturer to produce
its eVU mobile entertainment product and generally relies on single
suppliers for batteries, charging stations and other components.
The Company also relies on one legal firm to represent it in patent
licensing and enforcement matters.
Guarantees and Indemnifications
The
Company enters into standard indemnification agreements in the
ordinary course of business. Some of the Company’s product
sales and services agreements include a limited indemnification
provision for claims from third parties relating to the
Company’s intellectual property. Such indemnification
provisions are accounted for in accordance with ASC 450,
Contingencies. The
indemnification is generally limited to the amount paid by the
customer. To date, there have been no claims under such
indemnification provisions.
The
Company provides a one-year limited warranty for most of its
products.
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FAIR VALUE MEASUREMENTS
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3 Months Ended |
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Jun. 30, 2011
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FAIR VALUE MEASUREMENTS |
8. FAIR VALUE MEASUREMENTS
Cash
and cash equivalents are measured at fair value in the
Company’s 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,
deferred revenue 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).
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NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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3 Months Ended |
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Jun. 30, 2011
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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 markets the eVU™ mobile
entertainment system for the travel industry and licenses and
enforces its Flash-R™ portfolio of patents related to the use
of flash memory in portable devices.
Unaudited Interim Financial Statements
These
unaudited 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 on a going concern basis,
which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable
future. These interim 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 June 30, 2011, 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 months ended June 30, 2011 are not
necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2012. For further information, refer
to the Company's consolidated financial statements and footnotes
thereto for the year ended March 31, 2011 filed on Form
10-K.
Going Concern
The
Company has incurred significant historical losses and negative
cash flow from operations and has an accumulated deficit of
$80,308,996 at June 30, 2011. Although the
Company reported a profit in the first quarter of the current
fiscal year it could incur additional losses in the future until
product, service and/or licensing revenues are sufficient to
sustain continued profitability. Until the Company can demonstrate
sustained profitability its ability to continue as a going concern
is in doubt and may be dependent upon obtaining additional
financing in the future. These consolidated financial statements do
not give effect to any adjustments that would be necessary should
the Company be unable to continue as a going concern and therefore
be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial
statements.
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.
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INVENTORIES
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Jun. 30, 2011
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INVENTORIES |
4. INVENTORIES
Inventory
is recorded at the lower of cost and net realizable value. The cost
of substantially all the Company’s inventory is determined by
the weighted average cost method.
Inventories
consisted of the following:
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STOCK-BASED COMPENSATION COSTS
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Jun. 30, 2011
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STOCK-BASED COMPENSATION COSTS |
5. STOCK-BASED COMPENSATION COSTS
The
Company accounts for stock-based compensation under the provisions
of ASC 718, Share-Based Payment
and ASC 505-50, Equity-Based Payments to
Non-Employees. ASC 718 requires
measurement of all employee stock-based awards using a fair-value
method and recording of related compensation expense in the
consolidated financial statements over the requisite service
period. Further, as required under ASC 718, the Company estimates
forfeitures for stock-based awards that are not expected to vest.
The Company recorded stock-based compensation in its consolidated
statements of operations for the relevant periods as
follows:
As
of June 30, 2011 total estimated compensation cost of stock options
granted but not yet vested was $4,995 and is expected to be
recognized over the weighted average period of 0.6
years.
The
following table sets forth the weighted-average key assumptions and
fair value results for stock options granted during the three-month
period ended June 30, 2010 (annualized percentages).
*No stock options granted during the three months ended June
30, 2011.
The dividend yield of zero is based on the fact
that the Company has never paid cash dividends and has no present
intention to pay cash dividends. Expected volatility is based on
the historical volatility of the common stock over the period
commensurate with the expected life of the options. The Company has
a small number or option grants and limited exercise history and
accordingly has for all new option grants applied the simplified
method prescribed by SEC Staff Accounting Bulletin 110,
Share-Based
Payment: Certain Assumptions Used in Valuation Methods - Expected
Term, to estimate expected life (computed as vesting term
plus contractual term divided by two). The expected
forfeiture rate is estimated based on historical and expected
experience for determined option groups and is zero for options
vesting on grant. Additional expense is recorded when the actual
forfeiture rates are lower than estimated and a recovery of prior
expense will be recorded if the actual forfeitures are higher than
estimated.
See
Note 7 for further information on outstanding stock
options.
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WARRANTY RESERVE
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Jun. 30, 2011
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WARRANTY RESERVE |
6. WARRANTY RESERVE
Details
of the estimated warranty liability included in other accounts
payable and accrued liabilities are as follows:
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RECENT ACCOUNTING PRONOUNCEMENTS
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3 Months Ended |
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Jun. 30, 2011
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RECENT ACCOUNTING PRONOUNCEMENTS |
2. RECENT ACCOUNTING PRONOUNCEMENTS
There
have been no recent accounting pronouncements or changes in
accounting pronouncements during the three months ended June 30,
2011 that are of significance, or potential significance to the
Company’s financial statements.
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INCOME TAXES
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3 Months Ended |
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Jun. 30, 2011
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INCOME TAXES |
11. INCOME TAXES
There
is no income tax provision for the three months ended June 30, 2011
as the Company currently estimates its effective tax rate to be
zero due to uncertainty of income in future interim quarters of the
current year and due to net operating loss
carryforwards.
In
spite of state NOLs the Company could be subject to California
state taxes during fiscal 2012 if it generates taxable income of
$500,000 or more during the year due to the California extension of
the suspension of the net operating loss (“NOL”)
carryforwards to the 2011 tax year.
At
June 30, 2011, 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.
|
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