<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number 0-20734
e.DIGITAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 33-0865123
------------------------------ -----------------------
<S> <C>
State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
- ------------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
</TABLE>
(619) 679-1504
--------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
Common Stock, par value $0.001 112,004,551
------------------------------ -----------------------------
<S> <C>
(Class) (Outstanding at August 6, 1999)
</TABLE>
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
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<PAGE> 2
e.Digital CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 1999 and
March 31, 1999 3
Consolidated Statements of Operations for the three
months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash flows for the three
months ended June 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
$ $
------------- --------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 3,514,460 166,966
Accounts receivable, net 123,138 60,793
Amounts receivable on research and development contracts 52,725 92,725
Inventory [note 5] 115,450 46,907
Prepaid expenses and other 8,737 8,961
----------- -----------
TOTAL CURRENT ASSETS 3,814,510 376,352
----------- -----------
Property and equipment, net of accumulated depreciation of
$221,454 and $213,342, respectively 68,216 72,675
Other intangible assets, net of accumulated amortization of
$13,222 and $12,61, respectively 11,187 11,798
----------- -----------
TOTAL ASSETS 3,893,913 460,825
=========== ===========
LIABILITIES, PREFERRED STOCKHOLDERS' EQUITY
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 475,515 597,953
Other accounts payable and accrued liabilities 639,840 711,033
15% Promissory notes payable, net of unamortized discount of
$54,998 and nil, respectively [note 6] 445,002 417,501
Current portion term note payable [note 6] 126,932 28,020
----------- -----------
TOTAL CURRENT LIABILITIES 1,687,289 1,754,507
----------- -----------
Term note payable [note 6] -- 98,163
----------- -----------
TOTAL LIABILITIES 1,687,289 1,852,670
----------- -----------
PREFERRED STOCKHOLDERS' EQUITY [NOTE 7]
Series A, convertible voting preferred stock, $0.001 par value, redeemable at
$10 plus accrued and unpaid dividends at 8% cumulative,
100,000 shares authorized, 12,500 and 32,500 shares outstanding, respectively 13 33
Series B, 7% convertible, non-voting preferred stock, $0.001 par value,
redeemable in certain instances, 300 shares authorized,
300 and nil shares outstanding, respectively 300 --
Additional paid-in-capital 2,623,393 364,172
----------- -----------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 2,623,393 364,172
----------- -----------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) [NOTE 8]
Common stock, $0.001 par value, authorized 200,000,000,
110,002,027 and 97,321,297 shares outstanding, respectively 110,002 97,321
Additional paid-in capital 37,526,393 35,126,914
Prepaid warrants -- 261,047
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (39,645,793) (38,833,648)
----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (417,082) (1,756,050)
----------- -----------
TOTAL LIABILITIES, PREFERRED STOCKHOLDERS' EQUITY AND
STOCKHOLDERS' EQUITY (DEFICIENCY) 3,893,913 460,825
=========== ===========
</TABLE>
See notes to interim consolidated financial statements
3
<PAGE> 4
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended
June 30,
1999 1998
$ $
----------- ----------
<S> <C> <C>
REVENUES:
--
Products 15,062 22,496
Services 22,239 75,693
----------- ----------
37,301 98,189
----------- ----------
COST OF REVENUES:
Products 14,871 36,892
Services 14,707 82,878
----------- ----------
29,578 119,770
----------- ----------
Gross profit (loss) 7,723 (21,581)
----------- ----------
OPERATING EXPENSES:
Selling and administrative 166,618 220,758
Research and related expenditures 214,722 145,848
----------- ----------
Total operating expenses 381,340 366,606
----------- ----------
Operating loss (373,617) (388,187)
----------- ----------
OTHER INCOME (EXPENSE)
Interest income 847 907
Interest expense (21,074) (28,394)
Non-cash interest (27,501) (44,797)
Other (800) (4,067)
----------- ----------
Other income (expense) (48,528) (76,351)
----------- ----------
LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD (422,145) (464,538)
----------- ----------
LOSS AND COMPREHENSIVE LOSS AVAILABLE TO
COMMON STOCKHOLDERS' (NOTE 4) (968,117) (484,384)
=========== ==========
LOSS PER COMMON SHARE -- BASIC AND DILUTED (0.01) (0.01)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 106,021,410 58,446,738
=========== ==========
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 5
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended
June 30,
1999 1998
OPERATING ACTIVITIES $ $
--------- -------
<S> <C> <C>
Loss for the period (422,145) (464,538)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 8,722 15,969
Loss on disposal of property and equipment -- 4,067
Professional services paid by issuance of common stock 108,635 --
Non-cash interest expense 27,501 44,797
Changes in assets and liabilities:
Accounts receivable (62,345) 44,156
Amounts receivable on research and development contracts 40,000 24,182
Inventory (68,543) 12,497
Prepaid expenses and other 224 582
Accounts payable, trade (122,438) (100,448)
Other accounts payable and accrued liabilities (71,193) 4,516
--------- -------
Cash (used in) operating activities (561,582) (414,220)
--------- -------
INVESTING ACTIVITIES
Purchase of property and equipment (3,652) --
Proceeds on disposal of property and equipment -- 8,608
--------- -------
Cash (used in) provided by investing activities (3,652) 8,608
--------- -------
FINANCING ACTIVITIES
Repayments of term note payable 750 (11,636)
Proceeds from sale of Series B preferred stock 2,750,000 --
Proceeds from exercise of warrants 1,091,875 --
Proceeds from exercise of stock options 70,103 --
Proceeds from 12% convertible promissory notes -- 1,000,000
--------- -------
Cash provided by financing activities 3,912,728 988,364
--------- -------
Net increase in cash 3,347,494 582,752
Cash and cash equivalents, beginning of period 166,966 62,370
--------- -------
Cash and cash equivalents, end of period 3,514,460 645,122
========= =======
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 21,074 28,394
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Professional services paid by issuance of common stock 108,635 --
Common stock issued on exercise of prepaid warrants 261,047 --
Common stock issued on conversion of Series A preferred stock 221,474 --
Common stock issued on conversion of secured notes payable 25,000
Warrants issued for services 275,000 --
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
E.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
1. OPERATIONS
e.Digital Corporation, formerly Norris Communications, Inc. (the "Company"), was
incorporated in the Province of British Columbia, Canada on February 11, 1988
and on November 22, 1994, changed its domicile from British Columbia to the
Yukon Territory, Canada. The Company further changed its domicile to Wyoming on
August 30, 1997 and on September 4, 1997 reincorporated into Delaware. The
Company is engaged through its wholly-owned subsidiary in developing,
manufacturing and marketing advanced electronic products.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary of the same name, based in San
Diego, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in each of the last three fiscal years and for the three month period ended June
30, 1999 and has an accumulated deficit of $39,645,793 at June 30, 1999. The
Company's operational plan involves focusing on licensing and product
development on a contract basis and for the Company's own account. The Company's
ability to continue as a going concern is in doubt and is dependent upon
achieving a profitable level of operations, and if necessary, obtaining
additional financing.
These interim consolidated financial statements do not give effect to any
adjustments which 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 interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and the instructions to Form 10-QSB. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. The interim consolidated financial statements and notes
thereto should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended March 31, 1999.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
month period ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2000.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133") which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to have a material
effect on the Company's consolidated financial statements.
4. LOSS PER SHARE
The Company's losses for the periods presented cause the inclusion of potential
common stock ("Common Stock") instruments outstanding to be antidilutive and,
therefore, in accordance with SFAS No. 128, Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," the Company is not required to
present a diluted earnings (loss) per share. Stock options, warrants,
convertible notes payable, and convertible preferred stock exercisable into
19,610,024 shares of Common Stock were outstanding as at June 30, 1999. These
securities were not included in the computation of diluted earnings (loss) per
share because of the losses, but could potentially dilute earnings (loss) per
share in future periods.
6
<PAGE> 7
E.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
The loss available to common stockholders was increased during the three months
ended June 30, 1999 in computing loss per share by an imputed deemed dividend of
$390,000 based on the value of warrants issued in connection with 7% Series B
Convertible Preferred Stock ("Series B stock") (see note 7). The Company
calculated the fair value of the warrants at $275,000. The loss available to
common stockholders was increased by a $150,000 deemed dividend computed from
the discount provision included in the Series B stock. The deemed dividends are
not contractual obligations on the part of the Company to pay such deemed
dividends. The Series A Preferred stock provides for a dividend of 8% per annum
and the Series B stock provides for a dividend of 7% per annum. The dividends
for the period ended June 30, 1999 were $5,972, which also increases the loss
available to common stockholders. The loss available to common stockholders' is
computed as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
Loss and comprehensive loss $(422,145) $(464,538)
Imputed deemed dividend on warrants
issued with Series B stock (390,000) --
Dividends on Series A and B Preferred Stock (5,972) (19,846)
Series B stock dividends computed based on
imputed discount at issuance (150,000) --
--------- ---------
Loss available to common stockholders $(968,117) $(484,384)
========= =========
</TABLE>
5. INVENTORY
Inventory of raw material is recorded at the lower of cost and net realizable
value. Cost is determined on a first-in, first-out basis. Inventories consist of
the following:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
<S> <C> <C>
Raw material $115,450 $46,907
======== =======
</TABLE>
6. CONVERTIBLE AND TERM DEBT
15% Promissory Notes
Interest on the 15% unsecured, subordinated, promissory notes is payable
quarterly in cash and the notes are due December 31, 1999.
Term Note Payable
At June 30, 1999, the principal of the term note payable was $126,933, which
bears interest at 10%. Subsequent to June 30, 1999, the Company paid
approximately $64,000 of the term note. The balance of the term note is due
September 1, 1999.
7. PREFERRED STOCK
Series A
The 12,500 shares of Series A Preferred Stock (the "Series A stock") outstanding
at June 30, 1999 are convertible into shares of Common Stock computed by
dividing $10.00 plus accrued and unpaid dividends at 8% per annum by $0.0875,
subject to certain future adjustments. At June 30, 1999, the Series A stock was
convertible into approximately 1.63 million shares of Common Stock. The Company
is required to redeem the Series A stock at $10.00 per share plus accrued and
unpaid dividends on September 1, 2000 and upon the occurrence of certain other
events.
Series B
On June 25, 1999 the Company issued 300 shares of Series B stock for cash of
$10,000 per share and gross proceeds of $3,000,000. Dividends of 7% per annum
are payable, with certain exceptions, either in cash or in shares of Common
Stock at the election of the Company. The stated dollar amount of Series B
stock, is convertible into fully paid and nonassessable shares of Common Stock
of the Company at a conversion price which is the lower of (i) $2.00 per share
or (ii) a per share amount computed on each of two adjustment dates (30 and 60
days after registration of the underlying shares), but not less than $1.50 per
share except as may be subsequently modified as a consequence of certain
possible penalties and other adjustments. The conversion price on the two
adjustment dates is computed at a premium to the average of the three lowest
7
<PAGE> 8
E.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
of the ten day closing bid market prices prior to and including each adjustment
date. The Series B stock shall be subject to automatic conversion on June 24,
2002 subject to certain conditions. At June 30, 1999, the Series B stock was
convertible into approximately 1.5 million shares of Common Stock.
The Series B stock is redeemable in certain instances at the Company's option
and at the holder's election upon the occurrence of certain triggering events
including, without limitations, a lapse of a registration statement for ten
non-consecutive trading days and certain other events. The redemption price upon
such election following a triggering event is the greater of (a) 110% of the
stated value or (b) the product of the number of preferred shares multiplied by
the closing market price multiplied by the stated value per share divided by the
then conversion price per share. In addition, certain shares of Common Stock,
which are converted within 30 trading days of an event triggering redemption are
subject to repurchase. Because the redemption provisions are not entirely within
the control of the Company, the Series B stock is presented as preferred
stockholders' equity on the consolidated balance sheet.
The Company also issued to the purchaser of the Series B stock, warrants to
purchase 195,000 shares of Common Stock at $2.40 per share until June 24, 2004.
In connection with the Series B Stock financing, the Company incurred placement
agent fees and legal and related costs of approximately $250,000 and issued a
warrant to purchase 137,615 shares of Common Stock at $3.27 per share until June
24, 2004 as a placement agent fee. The value assigned to the 137,615 warrants
issued as a placement fee is $275,000.
8. COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
The following table summarizes Common Stockholders' equity transactions during
the three month period ended June 30, 1999:
<TABLE>
<CAPTION>
Additional
paid-in Prepaid Contributed Accumulated
Shares Amount capital Warrants Surplus Deficit Total
---------- -------- ----------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999 97,321,297 $ 97,321 $35,126,914 $261,047 $1,592,316 $(38,833,648) $(1,756,051)
Stock issued on exercise of
prepaid warrants 4,493,335 4,493 256,554 (261,047) -- -- --
Stock issued on exercise of
stock options 791,000 791 69,312 -- -- -- 70,103
Stock issued for service 84,639 85 108,550 -- -- -- 108,635
Stock issued on exercise of
warrants 3,928,571 3,929 1,087,946 -- -- -- 1,091,875
Stock issued for exercise of
cashless warrants 810,476 810 (810) -- -- -- --
Stock issued on conversion of
20,000 shares of Series A
stock 2,572,709 2,573 218,901 -- -- -- 221,474
Deemed dividend on 195,000
warrants issued with Series B
stock -- -- 390,000 -- -- (390,000) --
Value assigned to 137,615
warrants granted in connection
with issuance of Series B stock -- -- 275,000 -- -- -- 275,000
Dividends on Series A
stock -- -- (2,520) -- -- -- (2,520)
Dividends on Series B
stock -- -- (3,452) -- -- -- (3,452)
Net loss for the period -- -- -- -- -- (422,145) (422,145)
----------- -------- ----------- -------- ---------- ------------ ----------
Balance, June 30, 1999 110,002,027 $110,002 $37,526,393 -- $1,592,316 $(39,645,793) $ (417,082)
=========== ======== =========== ======== ========== ============ ==========
</TABLE>
8
<PAGE> 9
E.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
9. WARRANTS AND OPTIONS
At June 30, 1999 warrants were outstanding/exercisable into the following listed
shares.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ----------- --------- -------------- ----------------
<S> <C> <C> <C>
Warrants 82,100 4.00 August 1999
Warrants 20,570 0.25 February 2000
Warrants 25,000 0.25 March 2000
Warrants 500,000 0.10 January 2004
Warrants 5,000,000 0.10 June 2000
Warrants 27,500 0.25 March 2001
Warrants 125,000 0.0875 October 2001
Warrants 150,000 0.01 October 2001
Warrants 100,000 0.10 January 2002
Warrants 2,000,000 0.10 June 2003
Warrants 2,571,427 0.15 March 2002
Warrants 195,000 2.40 June 2004
Warrants 137,615 3.27 June 2004
----------
Total 10,934,212
==========
</TABLE>
The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at March 31, 1999 6,334,000 $0.1362
Granted -- --
Exercised (791,000) $0.0886
Expired -- --
Canceled -- --
---------
Outstanding at June 30, 1999 5,543,000 $0.143
=========
Exercisable at June 30, 1999 4,580,500 $0.152
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.0875 to $3.65 and
expire over the period from 1999 to 2003 with an average life of 3.66 years.
10. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $29,945,000 and $14,787,000 for federal and state tax purposes,
respectively, subject to certain limitations.
9
<PAGE> 10
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 AND UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED MARCH 31, 1999.
GENERAL
e.Digital Corporation provides innovative product designs and technologies for
the rapidly growing market for electronic devices using portable storage media.
The Company employs its patented MicroOS(TM) file management system as the
intelligence targeted for portable digital voice, music, audio, image, video and
data recording devices that interface with computers and the Internet. The
Company anticipates that the majority of its future revenues will be from
licenses, royalty fees, and private label agreements for products employing the
Company's MicroOS technology and from contract development services for and
sales to OEMs of custom digital products.
The Company recently announced initial shipments against approximately $3
million of production orders from Lanier Worldwide, Inc. ("Lanier") resulting
from a January 1997 development and supply agreement (the "Lanier Agreement").
These initial orders represent the first five months of orders for digital
recording products targeted for the medical market. These products are intended
to be sold worldwide by Lanier's sales force. The contract provides for rolling
six month forecasts of requirements and three month rolling orders for future
products.
The Company has also entered into a development agreement with Intel Corporation
("Intel") and is designing and developing a digital voice recorder reference
design and prototypes. Under the agreement, Intel is paying non-recurring
engineering fees for design and development of prototypes.
The Company is also supplying digital music player prototypes to Lucent and
performing other work to port Lucent's EPAC compression technology to a new
Texas Instrument DSP. The Company is actively developing licensing, private
label, and OEM opportunities seeking to penetrate the digital recording and
playback market.
Management is currently in discussions with OEM's interested in using the
Company's Internet music player reference designs. The Company intends to
support various emerging Digital Rights Management Systems ("DRMS") that support
the Secure Digital Music Initiative ("SDMI"). The Company has signed a
non-exclusive license agreement to support Liquid Audio's SP3 DRMS and intends
to support other emerging DRMS developers. Management is currently in
discussions with several popular DRMS providers. There can be no assurance that
the Company will support additional DRMS or that OEM's will use the Company's
Internet music player reference designs.
The Company has incurred operating losses in each of the last three fiscal years
and these losses have been material. The Company incurred an operating loss of
$2.6 million in fiscal 1998 (including an inventory write-off of $1.3 million)
and $1.8 million in fiscal 1999. The Company's current level of monthly cash
operating costs is approximately $140,000 per month. However, the Company may
increase expenditure levels in future periods to support its digital music
business and to support OEM customers. Accordingly, the Company's losses are
expected to continue until such time as the Company is able to realize supply,
licensing, royalty and development revenues sufficient to cover the fixed costs
of operations. The Company continues to be subject to the risks normally
associated with any new business activity, including unforeseeable expenses,
delays and complications. Accordingly, there is no assurance the Company can or
will report operating profits in the future.
Management is focused on OEM licensing with respect to the MicroOS(TM) file
system and contract development of private label and custom-designed products
for digital music applications, dictation systems, and computer peripherals and
telecommunication equipment. Revenue from licensing, royalties and development
services, and additional product supply arrangements, if any, are expected to be
subject to significant month to month variability resulting from the limited
market penetration and license activity to date, the timing and delays
associated with OEM new product introductions and the seasonal nature of demand
for consumer electronic products. Development and OEM contracts may be delayed
or terminated by customers and are subject to a number of factors beyond the
Company's control. The termination of the Lanier Agreement or the lack of market
success of the recently introduced digital recorder products by Lanier would
have a material adverse effect on operations. The markets for consumer
electronic products are subject to rapidly changing customer tastes and a high
level of competition. Demand for the Company's products is expected to be
influenced by OEM market success, technological developments and general
economic conditions. Because these factors can change rapidly, customer demand
for the Company's technology can also shift quickly. The Company may not be able
to respond to technical developments by competitors because of the time required
and risks involved in the development or introduction of new or improved
technology and due to limited financial resources.
10
<PAGE> 11
RESULTS OF OPERATIONS
For the first three months of fiscal 2000, the Company reported revenues of
$37,301, a 62% decrease from revenues of $98,189 for the first three months of
fiscal 1999. Three customers accounted for 95% of fiscal 1999's first three
months of revenues and three customers accounted for total revenue in the first
three months of fiscal 2000. The loss of a customer could have a material
adverse impact on the Company.
Revenue for the first three months of fiscal 2000 included product revenue of
$15,062 from Lanier for the initial shipment of their product late in the
quarter. These shipments are against a $3 million initial production order.
Services for the first fiscal 2000 quarter were $22,239 compared to $75,693 for
the prior year's first quarter. The decrease is consistent with the reduction in
Lanier activity. First quarter fiscal 2000 service revenue included $7,207 and
$15,000 recognized under the Intel and Lucent development agreements,
respectively.
For the three months ended June 30, 1999, the Company reported a gross profit of
$7,723 as compared to a gross loss of $21,581 for the first three months of
fiscal 1999. Cost of sales consisted of $14,871 of product costs and $14,707 of
contract services consisting mostly of research and development labor being
funded in part by the Lucent and Intel development agreements. The Company is
substantially completed on the Lanier development contract. Although the Company
does not anticipate any significant future contract losses, there can be no
assurance the Company can attain positive gross margins in the future or with
future customers.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the three months ended June 30, 1999,
were $381,340, as compared to $366,606 for the three months ended June 30, 1998.
Selling and administrative costs aggregated $166,618 in the first three months
of fiscal 2000 compared to $220,758 in the prior period. The $54,140 decrease in
selling and administrative costs resulted primarily from the inclusion of a
$55,000 non-recurring equity transaction fee in the prior years first quarter.
Research and related expenditures for the three months ended June 30, 1999 were
$214,722, as compared to $145,848, for the three months ended June 30, 1998. An
aggregate of $14,707 of development costs were incurred for contract development
work during the three months ended June 30, 1999 and are included in cost of
revenues. Research and development costs are subject to significant quarterly
variations depending on the use of outside services, the assignment of engineers
to development projects and the availability of financial resources. The
increase can be attributed to expanded engineering activities associated with
the development of new technology.
The Company reported an operating loss of $373,617 for the three months ended
June 30, 1999, which was comparable to the operating loss of $388,187 for the
three months ended June 30, 1998. Management believes, but there can be no
assurance, that investments in OEM developments with supply or royalty
provisions will provide positive margins in future periods. The timing and
amount of product sales and the recognition of contract service revenues impact
the Company's operating losses. Accordingly, there is substantial uncertainty
about future operating results and the results for the first three months are
not necessarily indicative of operating results for future periods or the fiscal
year.
The Company's cash interest expense for the three months ended June 30, 1999 was
$21,074, a decrease from the $28,394 for the prior period resulting from reduced
interest bearing debt outstanding during fiscal 2000.
The Company reported a loss for the first three months of the current fiscal
year of $422,145 compared to a loss of $464,538 for the prior year's first three
months.
The loss available to common stockholders for the three months ended June 30,
1999 of $668,117 includes $390,000 of imputed dividends on the issuance of
warrants with the Series B stock, $5,972 of dividends and $150,000 related to
the imputed discount at issuance of the Series B stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a working capital of $2,127,220 compared to a
working capital deficit of $1,378,155 at March 31, 1999. The Company had
approximately $115,000 of working capital invested in inventories at June 30,
1999. The increase in working capital resulted from the sale of Series B stock
during the first quarter.
11
<PAGE> 12
In June 1999, the Company completed the sale of $3,000,000 of Series B 7%
Convertible Preferred Stock. The proceeds are being applied for continued
operating capital.
For the three months ended June 30, 1999, net cash increased by $3,347,494. Cash
used in operating activities was $561,582. Major components using cash were a
net loss of $422,145 reduced by $8,722 of aggregate depreciation and
amortization, $108,635 for services paid by issuance of Common Stock and $27,501
of non-cash interest, or a loss use of cash of $277,287. The major change in
assets and liabilities providing cash from operating activities was a reduction
in amounts receivable on research and development contracts of $40,000. The
major changes in assets and liabilities using operating cash was an increase in
accounts receivable of $62,345, a reduction in accounts payable trade of
$122,438 and a reduction in other accounts payable and accrued liabilities of
$71,193.
At June 30, 1999 the Company had cash on hand of approximately $3.5 million.
Other than cash on hand and accounts receivable, the Company has no material
unused sources of liquidity at this time. Based on the Company's cash position
assuming (i) continuation of existing OEM development arrangements, (ii)
currently planned expenditures and level of operation, (iii) product sales
against existing orders; the Company believes it has sufficient capital
resources for the next twelve months. However actual results could differ
significantly from management plans. The actual future margins to be realized,
if any, and the timing of shipments and the amount and quantities of Lanier
shipments, orders and reorders are subject to many factors and risks, many
outside the control of the Company.
Should additional funds be required and not be available, the Company may be
required to curtail or scale back staffing or operations. There can be no
assurance that additional funding in the future will be available or on what
terms. Potential sources of such funds include exercise of outstanding warrants
and options, loans from shareholders or other debt financing or additional
equity offerings.
The Company may, from time to time, seek additional funds through lines of
credit, public or private debt or equity financing. The Company estimates that
it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed. Any future financings may also be
dilutive to existing shareholders.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company has recorded an obligation with a prior vendor providing for future
payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raised.
The Company has only recently commenced production on the Lanier products.
Management believes its third party contract manufacturing arrangement minimizes
the working capital funds required for the production of Lanier orders. The
Company is subject to the risk that should this arrangement be modified or not
produce the desired results, that it would be required to supply substantial
working capital for the production of the Lanier orders. The Company will be
relying on a third party manufacturer for production of the Lanier products and
will therefore be subject to the substantial risks associated with using a sole
supplier.
The Company's plans for its MicroOS Audio(TM) technology are to continue to
develop the technology and seek OEM partnerships to exploit the technology. The
Company may require additional funds to continue development of this and other
technologies and the extent of such requirements is not presently determinable
by management.
If, in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or expansion of facilities. The
Company currently has no plans, arrangements or understandings regarding any
acquisitions.
YEAR 2000 READINESS DISCLOSURE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way which could
lead to business disruptions in the U.S. and internationally.
12
<PAGE> 13
The Company has identified the following areas, which could be impacted by the
Year 2000 issue. They are: Company designed and produced products; internally
used systems and software; products or services provided by key third parties;
and the inability of OEM customers and prospective customers to process business
transactions relating to revenue and product sales.
During the first calendar quarter ended March 31, 1999 the Company completed an
initial review of its internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs,
which are primarily, packaged third party "off-the-shelf" software programs. As
a result of this review the Company has identified certain systems which require
further review and probable upgrades to be Year 2000 ready, the costs of which
are included in management's estimates outlined below. The Company is currently
evaluating new business software applications and one major selection and
evaluation criterion will be full compliance with Year 2000. The Company's
MicroOS(TM) technology does not have any material Year 2000 problems.
The Company is in the process of assessing the compliance of its major
customers, suppliers and vendors. Management believes that third-party
relationships upon which the Company relies represent the greatest risk with
respect to the Year 2000 issue, because the Company cannot guarantee that third
parties will be able to adequately assess and address their Year 2000 compliance
issues in a timely manner. The Company has tested the Lanier products being
produced and believe they are Year 2000 compliant. The Company's manufacturing
supplier has assured the Company in writing that it has no material Year 2000
issues and will be able to continue to produce product in their factory. However
production is dependent upon outside part and component suppliers and there can
be no assurance that supply of critical components would not impede production
of products pursuant to Lanier orders. Failures of component suppliers to the
factory or failure at the factory would have a material adverse effect on
Company operations.
As a consequence, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on future results of operations or
financial condition.
Total costs relating to the Company's compliance efforts, based on management's
best estimates range from $10,000 to $20,000 consisting primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software programs. Subsequent to the first quarter ended June 30, 1999, the
Company has hired an IS director to address all Year 2000 issues. To date there
have been no material direct out-of-pocket costs. Maintenance or modification
costs will be expensed as incurred, while the costs of new computers or software
will be capitalized and amortized over the respective useful life.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to distribute products under the Lanier contract or to
process transactions, develop products, send invoices or engage in similar
normal business activities at the Company or its vendors and suppliers. If the
Company determines certain suppliers are not Year 2000 compliant, it may have to
arrange for alternative sources of supply and the stockpiling of inventory in
the fall of 1999 in preparation for the Year 2000. The Company cannot estimate
at this time the cost or effect on the Company's financial condition of any
stockpiling of inventory. The Company currently does not have any other
contingency plans with respect to potential Year 2000 failures of its suppliers
or customers and at the present time, after an initial evaluation, does not
intend to develop one other than continuing to work with Eltech Electronics
Technology to mitigate the Lanier product Year 2000 exposure. If the above
failures would occur, depending upon their duration and severity, they could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations, (b) products and technologies licensed
or sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the "Year 2000 Information Readiness Act."
BUSINESS RISKS
This report contains a number of forward-looking statements that reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
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 and substantial
business risk factors described above and in the Company's Annual Report
13
<PAGE> 14
on Form 10-KSB for the year ended March 31, 1999 and not to place undue reliance
on the forward-looking statements contained herein, which speak only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that may arise
after the date hereof.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of its
business. There are currently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
(a) NONE
(b) NONE
(c) The following is a description of equity securities sold by the Company
during the first fiscal quarter ended June 30, 1999 that were not
registered under the Securities Act:
On June 25, 1999, the Company issued 300 shares of Series B stock for
cash at $10,000 per share to one institutional investor for gross
proceeds of $3,000,000. Dividends of 7% per annum are payable, with
certain exceptions, either in cash or in shares of Common Stock, at
the election of the Company. The stated dollar amount of Series B
stock is convertible into fully paid and nonassessable shares of
Common Stock of the Company at a conversion price which is the lower
of (i) $2.00 per share or (ii) a per share amount computed on each of
two adjustment dates (30 and 60 days after registration of the
underlying shares), but not less than $1.50 per share except as may be
subsequently modified as a consequence of certain possible penalties
and other adjustments related to the Company's failure to file a
registration statement on a timely basis or have the registration
statement declared effective within 180 days. The conversion price on
the two adjustment dates is computed at a premium to the average of
the three lowest of the ten day closing bid market prices prior to and
including each adjustment date. The Series B stock shall be subject to
automatic conversion on June 24, 2002, subject to certain conditions.
The Series B stock is redeemable in certain instances at the Company's
option and at the holder's election upon the occurrence of certain
triggering events including, without limitations, a lapse of a
registration statement for ten non-consecutive trading days and
certain other events. The redemption price upon such election
following a triggering event shall be the greater of (a) 110% of the
stated value or (b) the product of the number of preferred shares
multiplied by the closing market price, multiplied by the stated value
per share, divided by the then conversion price per share. In
addition, certain shares of Common Stock, which are converted within
30 trading days of an event triggering a redemption are subject to
repurchase.
The Company also issued to the purchaser of Series B stock warrants to
purchase 195,000 shares of Common Stock at $2.40 per share until June
24, 2004. In connection with the financing, the Company incurred
placement agent fees and legal and related costs of approximately
$250,000 and issued a warrant to purchase 137,615 shares of Common
Stock at $3.27 per share until June 24, 2004 as a placement agent fee
to Jesup & Lamont Securities Corporation in connection with the
offering. The Company intends to use the net proceeds of approximately
$2,750,000 for general corporate purposes.
The securities were offered and sold without registration under the
Act in reliance upon the exemption provided by Regulation D thereunder
and an appropriate legend was placed on the Series B stock and the
warrants and will be placed on the shares issuable upon conversion or
exercise unless registered under the Act prior to issuance. The
Company has filed a registration statement on the stock obtained upon
conversion of the Series B stock or exercise of the warrants and also
granted other registration rights to the holder.
(d) NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
e.DIGITAL CORPORATION
Date: August 13, 1999 By: /s/ RENEE WARDEN
------------------------------------
Renee Warden
Controller
(Principal Financial and Accounting
Officer and duly authorized to sign
on behalf of the Registrant)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB FOR QUARTERLY
PERIOD ENDED JUNE 30, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,514,460
<SECURITIES> 0
<RECEIVABLES> 124,091
<ALLOWANCES> 953
<INVENTORY> 115,450
<CURRENT-ASSETS> 3,814,510
<PP&E> 289,670
<DEPRECIATION> 221,454
<TOTAL-ASSETS> 3,893,913
<CURRENT-LIABILITIES> 1,687,289
<BONDS> 0
2,623,706
0
<COMMON> 110,002
<OTHER-SE> (527,084)
<TOTAL-LIABILITY-AND-EQUITY> 3,893,913
<SALES> 15,062
<TOTAL-REVENUES> 37,301
<CGS> 14,871
<TOTAL-COSTS> 29,578
<OTHER-EXPENSES> 381,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,575
<INCOME-PRETAX> (422,145)
<INCOME-TAX> 0
<INCOME-CONTINUING> (422,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (422,145)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
