<PAGE>
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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 THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission File Number 0-20734
e.DIGITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 33-0865123
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
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(Address of principal executive offices) (Zip Code)
(858) 679-1504
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(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:
Common Stock, par value $0.001 126,389,067
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(Class) (Outstanding at August 4, 2000)
Transitional Small Business Disclosure Format (check one): YES [X] NO [_]
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e.DIGITAL CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 2000 and
and March 31, 2000 .................................... 3
Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 ................... 4
Consolidated Statements of Cash Flows for the three
months ended June 30, 2000 and 1999 ................... 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 ...................................... 12
Item 2. Changes in Securities .................................. 13
Item 3. Defaults Upon Senior Securities ........................ 13
Item 4. Submission Matters to a Vote of Security Holders ....... 13
Item 5. Other Information ...................................... 13
Item 6. Exhibits and Reports on Form 8-K ....................... 13
SIGNATURES .............................................................. 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
$ $
----------- -----------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents ................................................... 2,602,717 3,294,366
Accounts receivable, trade .................................................. 167,190 272,732
Inventory [note 5] .......................................................... 63,850 79,599
Prepaid expenses and other .................................................. 8,459 8,459
----------- -----------
Total current assets ........................................................ 2,842,216 3,655,156
----------- -----------
Property and equipment, net of accumulated depreciation of
$284,522 and $269,144, respectively ...................................... 133,835 142,371
Intangible assets, net of accumulated amortization of
$15,663 and $15,052, respectively ........................................ 8,746 9,357
----------- -----------
Total assets ............................................................. 2,984,797 3,806,884
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current
Accounts payable, trade ..................................................... 508,374 571,101
Other accounts payable and accrued liabilities .............................. 20,000 45,000
Accrued lease liability ..................................................... 515,000 515,000
Accrued employee benefits ................................................... 126,993 154,311
----------- -----------
Total liabilities ....................................................... 1,170,367 1,285,412
----------- -----------
Redeemable preferred stock [note 6]
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, 1,400 and 1,900 shares
outstanding, respectively................................................. 17,106 22,840
----------- -----------
Total redeemable preferred stock ............................................ 17,106 22,840
----------- -----------
Common stockholders' equity [note 7]
Common stock, $0.001 par value, authorized 200,000,000,
126,332,953 and 126,261,182 shares outstanding, respectively .............. 126,333 126,261
Additional paid-in capital .................................................. 44,906,013 44,893,602
Contributed surplus ......................................................... 1,592,316 1,592,316
Accumulated deficit ......................................................... (44,827,338) (44,113,547)
----------- -----------
Total common stockholders' equity ........................................... 1,797,324 2,498,632
----------- -----------
Total liabilities, redeemable preferred stock and common
stockholders' equity ..................................................... 2,984,797 3,806,884
=========== ===========
</TABLE>
See notes to interim consolidated financial statements
3
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e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
$ $
----------- -----------
<S> <C> <C>
Revenues:
Products ......................................................... 104,042 15,062
Services ......................................................... 21,030 22,239
----------- -----------
125,072 37,301
----------- -----------
Cost of revenues:
Products ......................................................... 94,088 14,871
Services ......................................................... 18,822 14,707
----------- -----------
112,910 29,578
----------- -----------
Gross profit ........................................................ 12,162 7,723
----------- -----------
Operating expenses:
Selling and administrative ....................................... 370,191 166,618
Research and related expenditures ................................ 392,766 214,722
----------- -----------
Total operating expenses .................................. 762,957 381,340
----------- -----------
Operating loss ...................................................... (750,795) (373,617)
----------- -----------
Other income (expense):
Interest income .................................................. 37,004 847
Interest expense ................................................. -- (21,074)
Non-cash interest ................................................ -- (27,501)
Other ............................................................ -- (800)
----------- -----------
Other income (expense) .................................... 37,004 (48,528)
----------- -----------
Loss and comprehensive loss for the period .......................... (713,791) (422,145)
----------- -----------
Loss and comprehensive loss available to common stockholders
[note 4]........................................................... (714,163) (968,117)
=========== ===========
Loss per common share - basic and diluted [note 4] .................. (0.01) (0.01)
=========== ===========
Weighted average common shares outstanding .......................... 126,268,483 106,021,410
=========== ===========
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
$ $
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period .................................................... (713,791) (422,145)
Adjustments to reconcile loss to net cash used by operating activities:
Depreciation and amortization ..................................... 15,988 8,722
Professional services paid by issuance of common stock and warrants -- 108,635
Non-cash interest expense ......................................... -- 27,501
Changes in assets and liabilities
Accounts receivable, trade ........................................ 105,542 (62,345)
Accounts receivable on research and development contracts ......... -- 40,000
Inventory ......................................................... 15,749 (68,543)
Prepaid expenses and other ........................................ -- 224
Accounts payable, trade ........................................... (62,727) (122,438)
Other accounts payable and accrued liabilities .................... (25,000) (27,380)
Accrued employee benefits ......................................... (27,318) (43,813)
--------- ---------
Cash (used in) operating activities .................................... (691,557) (561,582)
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment ..................................... (6,842) (3,652)
--------- ---------
Cash (used in) investing activities .................................... (6,842) (3,652)
--------- ---------
FINANCING ACTIVITIES
Repayment of term note payable ......................................... -- 750
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 ................................ 6,750 70,103
--------- ---------
Cash provided by financing activities .................................. 6,750 3,912,728
--------- ---------
Net (decrease) increase in cash and cash equivalents ................... (691,649) 3,347,494
Cash and cash equivalents, beginning of period ......................... 3,294,366 166,966
--------- ---------
Cash and cash equivalents, end of period ............................... 2,602,717 3,514,460
========= =========
Supplemental disclosures of cash information:
Cash paid during the period for:
Interest ........................................................ -- 21,074
Supplemental schedule of noncash investing and financing activities:
Common stock issued on conversion of Series A preferred stock ....... 69,771 221,474
Professional services paid by issuance of common stock .............. -- 108,635
Common stock issued on exercise of prepaid warrants ................. -- 261,047
Warrants issued for services ........................................ -- 275,000
</TABLE>
See notes to interim consolidated financial statements
5
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e.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. OPERATIONS
The Company is incorporated under the laws of Delaware and 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, by management, in accordance with accounting principles generally
accepted in the United States on a going concern basis, which contemplates the
realization of assets and the discharge of liabilities in the normal course of
business for the foreseeable future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and for the three month period ended
June 30, 2000 and has an accumulated deficit of $44,827,338 at June 30, 2000. A
substantial portion of the losses is attributable to marketing costs of the
Company's new technology and substantial investments in research and development
of technologies. The Company's ability to continue as a going concern is in
substantial doubt and is dependent upon achieving a profitable level of
operations and, if necessary, obtaining additional financing.
Management of the Company has undertaken steps as part of a plan to improve
operations with the goal of sustaining Company operations for the next twelve
months and beyond. These steps include (a) focusing on the supply of product
under an existing OEM (Original Equipment Manufacturer) contract; (b) expanding
sales and marketing to additional OEM customers and markets; and (c) controlling
overhead and expenses. There can be no assurance the Company can attain
profitable operations in the future.
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, 2000.
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 ending June 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2001.
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, as extended by SFAS No. 137 and as amended by SFAS No. 138,
issued in June 2000, 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements of all public registrants. The provisions of SAB 101 are
effective for transactions beginning in the Company's fiscal year 2001. The
implementation of SAB 101has been deferred to the fourth quarter of the
Company's fiscal year 2001.
6
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e.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The Company does not expect the adoption of SAB 101 to have a material effect on
the Company's consolidated financial statements.
In March 2000, the FASB issued Emerging Issues Task Force Issue No. 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. Currently, as the Company
has no web site development costs, the adoption of EITF 00-2 would have no
impact on the Company's financial condition or results of operations. The
Company does not expect that the adoption of EITF 00-2 to have a material effect
on the Company's consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which is
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 will have no material impact on the Company's
financial condition, results of operations or cash flows.
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 Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," the Company is not required to present a
diluted loss per common share. Stock options, warrants, convertible notes
payable, and convertible preferred stock exercisable into 7,287,731 shares of
Common Stock were outstanding as at June 30, 2000. These securities were not
included in the computation of diluted loss per common share because of the
losses, but could potentially dilute earnings per common share in future
periods.
The loss available to common stockholders was increased during the three months
ended June 30, 1999 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 6]. The loss available to common stockholders was
also 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 ("Series A 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, 2000 were $372, which also increases the
loss available to common stockholders. The loss available to common stockholders
is computed as follows:
THREE MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
--------- ---------
Loss and comprehensive loss ....................... $(713,791) $(422,145)
Imputed deemed dividend on warrants issued
with Series B stock ............................. -- (390,000)
Dividends on Series A and B stock ................. (372) (5,972)
Series B stock dividends computed based on
imputed discount at issuance .................... -- (150,000)
--------- ---------
Loss available to common stockholders ............. $(714,163) $(968,117)
========= =========
5. INVENTORY
Inventory is recorded at the lower of cost and net realizable value. Cost is
determined on a first-in, first-out basis. Inventory consists of raw materials.
7
<PAGE>
e.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
6. REDEEMABLE PREFERRED STOCK
Series A
--------
The 1,400 shares of Series A stock outstanding at June 30, 2000 are convertible
into shares of Common Stock computed for each preferred share by dividing $10.00
plus accrued and unpaid dividends at 8% per annum by $0.0875, subject to certain
future adjustments. 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. At of June 30, 2000, the Series A stock
was convertible into 195,486 shares of Common Stock. Subsequent to June 30,
2000, 400 shares of Series A stock were converted into 56,114 shares of Common
Stock.
Series B
--------
On June 25, 1999, the Company issued 300 shares of convertible Series B stock
for cash of $10,000 per share and gross proceeds of $3,000,000. During the third
quarter ended December 31, 1999, the 300 shares of Series B stock and accrued
dividends of 7% were converted into 2,053,049 shares of Common Stock.
7. COMMON STOCKHOLDERS' EQUITY
The following table summarizes common stockholders' equity transactions during
the three month period ended June 30, 2000:
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL SURPLUS DEFECIT
----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, March 30, 2000 ....... 126,261,182 $126,261 $44,893,602 $ 1,592,316 $(44,113,547)
Stock issued on exercise of
stock options .............. 2,000 2 6,748 -- --
Stock issued on conversion of
Series A stock ............. 69,771 70 6,035 -- --
Accrued dividends on the
Series A stock .............. -- -- (372) -- --
Loss for the period ........... -- -- -- -- (713,791)
----------- -------- ----------- ----------- ------------
Balance, June 30, 2000 ........ 126,332,953 $126,333 $44,906,013 $ 1,592,316 $(44,827,338)
=========== ======== =========== =========== ============
</TABLE>
8. WARRANTS AND OPTIONS
At June 30, 2000 warrants were outstanding/exercisable into the following shares
of Common Stock.
EXERCISE
NUMBER OF PRICE
DESCRIPTION SHARES $ EXPIRATION DATE
----------- --------- -------- ---------------
Warrants ................ 571,429 $ 0.15 March 31, 2002
Warrants ................ 500,000 $ 0.10 June 12, 2003
Warrants ................ 50,000 $ 0.10 January 15,2004
---------
Total ................... 1,121,429
=========
The following table summarizes stock option activity for the period:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding at March 31, 2000............... 5,972,816 $ 2.7867
Granted .................................. -- --
Exercised ................................ (2,000) $ 3.3750
Expired .................................. -- --
Canceled ................................. -- --
---------
Outstanding at June 30, 2000................ 5,970,816 $ 2.7865
=========
Exercisable at June 30, 2000................ 4,290,816 $ 1.2260
=========
8
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e.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
8. WARRANTS AND OPTIONS (CONTINUED)
Options outstanding are exercisable at prices ranging from $0.0875 to $5.46 and
expire over the period from 2000 to 2004 with an average life of 4.41 years.
9. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. As of March 31, 2000, the Company has U.S. net operating loss
carryforwards of approximately $32,504,000 and $17,293,000 for federal and state
taxes purposes, respectively. These carryforwards will begin to expire in the
calendar years 2006 and 2000, respectively, unless previously utilized. The tax
losses of the Company may be subject to limitation arising from changes of
ownership over the three year statutory testing period.
9
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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, 2000.
GENERAL
We offer an engineering partnership for leading electronics companies to create
portable digital devices that can link to PCs and the Internet. We market to
OEMs (Original Equipment Manufacturers) complete end-to-end solutions for
delivery and management of open and secure digital media with a focus on music
players/recorders and portable digital voice recorders. Services offered by us
range from the licensing of our patented MicroOS(TM) file management system to
custom software and hardware development, industrial design and manufacturing
services, often incorporating the OEM's unique or proprietary features and/or
technology. We focus our marketing efforts on OEMs in a range of digital
processing markets including dictation equipment, digital music, consumer
electronics, digital image and video and other portable product markets. Our
revenue will result from a combination of fees from licensing, engineering
services, manufacturing services, warranty services, industrial design services,
and unit royalty payments.
We recently commenced delivery of digital dictation products that we developed
under contract for Lanier Worldwide, Inc. ("Lanier"). Shipments of the products,
known as "Cquence Mobile," are pursuant to our agreement with Lanier signed in
1997, and which expires at the end of December 2001. On April 27, 2000, Lanier
announced that it intends to sell its voice processing (dictation) business
which, we are informed, would include the Cquence Mobile line. Details of the
transaction, including the identity of the potential buyer or buyers and the
time frame for the transaction, are not known at this time. We do not know the
impact, if any, that any such transaction, if consummated, would have on future
orders under the Lanier agreement. Subsequent to June 30, 2000, we delivered to
Lanier approximately $800,000 of product to be reflected in the second fiscal
2001quarter. The loss of a customer could have a material adverse impact on our
results of operations.
We recently developed a reference design for a portable, Internet music player.
In January 2000, we licensed our design and technology to Maycom Company, Ltd.
("Maycom"), a turnkey manufacturer of digital audio and radio communication
products. Maycom has announced its intentions to incorporate our technology into
a portable, Internet music player scheduled to be introduced to the consumer
market in summer 2000. In addition, Maycom has incorporated our technology into
a portable Internet music player design being marketed to third party OEM
customers and/or licensees by both Maycom and our marketing personnel. It is
anticipated that any such OEM products would be manufactured by Maycom.
We are also developing portable solutions for the emerging mobile enterprise
industry that is implementing voice and voice processing incorporate-wide
environments involving mobile, wireless, and/or desktop technology.
We have incurred operating losses in each of the last three fiscal years and
these losses have been material. We have incurred an operating loss of $2.5
million in 1999 and $2.6 million in fiscal year 2000. Our current level of
monthly cash operating costs is approximately $250,000 per month. However, we
may increase expenditure levels in future periods to support our digital music
business and to support our OEM customers. Accordingly, our losses are expected
to continue until such time as we are able to realize supply, licensing, royalty
and development revenues sufficient to cover the fixed costs of operations. We
continue to be subject to the risks normally associated with any new business
activity, including unforeseeable expenses, delays and complications.
Accordingly, there is no guarantee that we can or will report operating profits
in the future.
RESULTS OF OPERATIONS
For the first three months of fiscal 2001, we reported revenues of $125,072, a
235% increase from revenues of $37,301 for the first three months of fiscal
1999. Product sales increased in the current period due to OEM shipments while
service revenues decreased primarily due to a decline in OEM development
services revenues. For the first quarter of fiscal 2000 there were three
customers who accounted for total revenue and one customer accounted for total
revenue in the first quarter of fiscal 2001. The loss of a customer could have a
material adverse impact on our results of operations.
Revenue for the first three months of fiscal 2001 included product revenue of
$104,042 compared to $15,062 for the prior year's first three months. The
increase is due from our OEM product shipments to Lanier. Product revenue
generated a
10
<PAGE>
gross profit for the three months ended June 30, 2000 of $9,954 compared to a
gross profit of $191 for the first three months of fiscal 2000.
Service revenues for the first three months of fiscal 2001 were $21,030 compared
to $22,239 for the comparable period of the prior year. The timing and amount of
service revenues is dependent upon limited number of projects. We are increasing
our focus on internally developed technology to be offered to OEM customers in
order to speed adoption and enhance our revenues.
For the three months ended June 30, 2000, we reported a gross profit of $12,162
compared to a gross profit of $7,723 for the first three months of fiscal 2000.
Cost of sales for the three months ended June 30, 2000 consisted of $94,088 of
product costs and $18,822 of contract services consisting mostly of research and
development labor being funded in part by OEM development agreements. Although
we do not anticipate any significant future contract losses, we can not
guarantee that we can attain positive gross margins in the future or with future
customers. At the present time warranty reserves are not material and we do not
anticipate significant warranty costs in future periods. Our contract supply
agreement provides a twelve month manufacturing warranty.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the three months ended June 30, 2000,
were $762,957, as compared to $381,340 for the three months ended June 30, 1999.
Selling and administrative costs aggregated $370,191 in the first three months
of fiscal 2001 compared to $166,618 in the prior period. The $203,573 increase
in selling and administrative costs resulted primarily from an increase in
personnel expenditures and associated costs of $113,655; an increase of $16,866
in accounting and auditing costs; and an increase of $51,838 in public relations
and related costs. We anticipate selling and administrative expenses to continue
at higher levels than prior periods due to increased personnel costs.
Research and related expenditures for the three months ended June 30, 2000 were
$392,766, as compared to $214,722, for the three months ended June 30, 1999. The
$178,044 increase in research and development costs resulted primarily from an
increase in preproduction and other related costs of $14,549; and an increase in
engineering personnel and related costs of $160,849 resulting from a greater
percentage of in-house development compared to contract services. 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.
We reported an operating loss of $750,795 for the three months ended June 30,
2000, as compared to operating loss of $373,617 for the three months ended June
30, 1999. The increase resulted primarily from increased operating expenses. We
believe, but we can not guarantee, that our strategy of investing 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 our 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.
We had no cash interest expense for the three months ended June 30, 2000 as
compared to $21,074 for the prior period.
We reported a loss for the first three months of the current fiscal year of
$713,791 as compared to a loss of $422,145 for the prior year's first three
months.
The loss available to common stockholders for the three months ended June 30,
2000 and 1999 is $714,163 and $968,117 respectively. Included in the loss
available to common stockholders for the period ending June 30, 2000 is accrued
dividends on the Series A stock of $372. For the period ending June 30, 1999 the
loss available to common stockholders includes $390,000 of imputed dividends on
the issuance of warrants with the Series B stock, $5,972 of dividends on the
Series A and B stock and $150,000 related to the imputed discount at issuance of
the Series B stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had working capital of $1,671,849 compared to a working
capital of $2,369,744 at March 31, 2000. We had $63,850 of working capital
invested in inventory at June 30, 2000.
For the three months ended June 30, 2000, net cash decreased by $691,649. Cash
used in operating activities was $691,557. Major components using cash were a
loss of $713,791 reduced by $15,988 of aggregate depreciation and amortization.
The major change in assets and liabilities providing cash from operating
activities was a reduction of $105,542 in accounts receivable, trade and a
reduction of $15,749 in inventory. The major changes in assets and liabilities
using operating cash
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was a reduction in accounts payable, trade of $62,727, a reduction in other
accounts payable and accrued liabilities of $25,000 and a reduction in accrued
employee benefits of $27,318.
At June 30, 2000, we had cash on hand of approximately $2.6 million. Other than
these cash resources and accounts receivable, we have no material unused sources
of liquidity at this time. Based on our cash position assuming (a) continuation
of existing OEM arrangements, (b) currently planned expenditures and level of
operation, (c) product sales against existing orders; we believe we have
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 OEM shipments, orders and reorders are subject to many factors and risks,
many outside our control.
Should additional funds be required and not be available, we may be required to
curtail or scale back staffing or operations. We can not guarantee 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 equity offerings.
We may, from time to time, seek additional funds through lines of credit, public
or private debt or equity financing. We estimate that we will require additional
capital to finance future developments and improvements to our technology. We
can not guarantee that additional capital will be available when needed. Any
future financings may be dilutive to existing shareholders.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
We have recorded an obligation with a prior vendor providing for future payments
of approximately $515,000 from time to time based upon percentages of future
equity raised.
We have only recently commenced production of OEM products. We believe our third
party contract manufacturing arrangement minimizes the working capital funds
required for the production of OEM orders. We are subject to the risk that
should this arrangement be modified or not produce the desired results, that we
would be required to supply substantial working capital for the production of
OEM orders. We rely on a third party manufacturer for production of our products
and are therefore subject to the substantial risks associated with using a sole
supplier.
Our plans for our MicroOS Audio(TM) technology are to continue to develop the
technology and seek OEM partnerships to exploit the technology. We 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, our operations increase significantly, we may require
additional funds. We might also require additional capital to finance future
developments, acquisitions or expansion of facilities. We currently have no
plans, arrangements or understandings regarding any acquisitions.
BUSINESS RISKS
This report contains a number of forward-looking statements that reflect our
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties 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 on Form 10-KSB for
the year ended March 31, 2000 and not to place undue reliance on the
forward-looking statements contained herein, which speak only as of the date
hereof. We undertake no obligation to publicly revise these forward-looking
statements, to reflect events or circumstances that may arise after the date
hereof.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in routine litigation incidental to the conduct of our business.
There are currently no material pending legal proceedings to which we are a
party or to which any of our property is subject.
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ITEM 2. CHANGES IN SECURITIES
(a) NONE
(b) NONE
(c) NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
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
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
NONE
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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 10, 2000 By: /s/ RENEE WARDEN
--------------------------------------
Renee Warden
Controller
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
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