<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 September 30, 2000
Commission File Number 0-20734
e.Digital Corporation
(Exact name of registrant as specified in its charter)
Delaware 33-0865123
-------- ----------
(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)
(858) 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:
Common Stock, par value $0.001 127,238,572
------------------------------ -----------
(Class) (Outstanding at November 7, 2000)
Transitional Small Business Disclosure Format (check one): YES X NO
-
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<PAGE>
e.DIGITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Independent Accountants Report on the Review of the Interim
Financial Information 3
Consolidated Balance Sheets as of September 30, 2000 and
March 31, 2000 4
Consolidated Statements of Operations for the three and six
months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the six
months ended September 30, 2000 and 1999 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE>
INDEPENDENT ACCOUNTANTS REPORT ON THE REVIEW OF THE INTERIM
FINANCIAL INFORMATION
To the Board of Directors of
e.Digital Corporation and subsidiary
We have reviewed the accompanying consolidated balance sheet of e.Digital
Corporation and subsidiary as of September 30, 2000 and the related consolidated
statements of operations for the three-month and six-month periods ended
September 30, 2000 and the consolidated statements of cash flows for the six-
month period ended September 30, 2000. These financial statements are the
responsibility of the Company's management. We did not make a similar review of
the consolidated balance sheet of e.Digital Corporation and subsidiary as of
September 30, 1999 and the related consolidated statements of operations for the
three-month and six-month periods ended September 30, 1999 and the consolidated
statements of cash flows for the six-month period ended September 30, 1999.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements at September 30,
2000 and for the three month and six month periods then ended for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of e.Digital
Corporation and subsidiary as of March 31, 2000, and the related consolidated
statements of operations, shareholders' equity (deficiency), and cash flows for
the year then ended, not presented herein, and in our report dated June 1, 2000,
we expressed an unqualified opinion on those consolidated financial statements
which included an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern
described in note 1 to the consolidated financial statements for the year ended
March 31, 2000. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of March 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Vancouver Canada /s/ ERNST & YOUNG LLP
November 7, 2000 Chartered Accountants
<PAGE>
Part I. Financial Information
Item 1. Financial Statements:
e.Digital Corporation and subsidiary
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
$ $
-------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents 2,066,980 3,294,366
Accounts receivable, trade 229,132 272,732
Inventory [note 5] 36,139 79,599
Prepaid expenses and other 10,360 8,459
-------------------------------------------------
Total current assets 2,342,611 3,655,156
-------------------------------------------------
Property and equipment, net of accumulated depreciation of
$172,428 and $269,144, respectively 170,203 142,371
Intangible assets, net of accumulated amortization of
$16,273 and $15,052, respectively 8,136 9,357
-------------------------------------------------
Total assets 2,520,950 3,806,884
=================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current
Accounts payable, trade 482,019 571,101
Other accounts payable and accrued liabilities 20,000 45,000
Accrued lease liability 515,000 515,000
Accrued employee benefits 160,693 154,311
-------------------------------------------------
Total liabilities 1,177,712 1,285,412
-------------------------------------------------
Redeemable preferred stock [notes 6 and 10]
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, Nil and 1,900 shares outstanding, respectively - 22,840
-------------------------------------------------
Total redeemable preferred stock - 22,840
-------------------------------------------------
Commitments and Contingencies
Common stockholders' equity [note 7]
Common stock, $0.001 par value, authorized 200,000,000,
127,238,572 and 126,261,182 shares outstanding, respectively 127,238 126,261
Additional paid-in capital 45,003,572 44,893,602
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (45,379,888) (44,113,547)
-------------------------------------------------
Total common stockholders' equity 1,343,238 2,498,632
-------------------------------------------------
Total liabilities, redeemable preferred stock and common
stockholders' equity 2,520,950 3,806,884
=================================================
</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE>
e.Digital Corporation and subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
September 30, September 30,
2000 1999 2000 1999
$ $ $ $
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Products 996,123 125,215 1,100,165 140,277
Services 100,163 25,372 121,192 47,611
---------------------------------------------------------
1,096,286 150,587 1,221,357 187,888
---------------------------------------------------------
Cost of revenues:
Products 848,347 84,353 942,436 99,224
Services 20,000 70,430 38,822 85,137
---------------------------------------------------------
868,347 154,783 981,258 184,361
---------------------------------------------------------
Gross profit (loss) 227,939 (4,196) 240,099 3,527
---------------------------------------------------------
Operating expenses:
Selling and administrative 384,812 296,824 755,002 463,442
Research and related expenditures 425,097 331,654 817,862 546,376
---------------------------------------------------------
Total operating expenses 809,909 628,478 1,572,864 1,009,818
---------------------------------------------------------
Operating loss (581,970) (632,674) (1,332,765) (1,006,291)
---------------------------------------------------------
Other income (expense):
Interest income 30,749 25,570 67,753 26,417
Interest expense - (17,390) - (38,463)
Non-cash interest - (27,500) - (55,001)
Other (800) (800) (800)
---------------------------------------------------------
Other income (expense) 29,949 (19,320) 66,953 (67,847)
---------------------------------------------------------
Loss and comprehensive loss for the period (552,021) (651,994) (1,265,812) (1,074,138)
---------------------------------------------------------
Loss available to common stockholders [note 4] (552,179) (707,446) (1,266,341) (2,610,562)
=========================================================
Loss per common share - basic and diluted [note 4] (0.004) (0.01) (0.01) (0.02)
=========================================================
Weighted average common shares outstanding 126,564,487 112,015,904 126,412,007 110,960,680
=========================================================
</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE>
e.Digital Corporation and subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
September 30,
2000 1999
$ $
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (1,265,812) (1,074,138)
Adjustments to reconcile loss to net cash
used by operating activities:
Depreciation and amortization 41,045 17,792
Professional services paid by issuance of common stock and warrants - 108,635
Non-cash interest expense - 55,001
Changes in assets and liabilities:
Accounts receivable, trade 43,600 (85,402)
Accounts receivable on research and development contracts - 60,000
Inventory 43,460 (78,977)
Prepaid expenses and other (1,901) (7,127)
Accounts payable, trade (89,082) (13,299)
Other accounts payable and accrued liabilities (25,000) (107,288)
Accrued employee benefits 6,382 -
------------ ------------
Cash (used in) operating activities (1,247,308) (1,124,803)
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (67,656) (57,959)
------------ ------------
Cash (used in) investing activities (67,656) (57,959)
------------ ------------
FINANCING ACTIVITIES
Repayment of term note payable - (126,183)
Proceeds from sale of Series B preferred stock - 2,750,000
Proceeds from exercise of warrants 5,000 1,103,375
Proceeds from exercise of stock options 82,578 169,674
------------ ------------
Cash provided by financing activities 87,578 3,896,867
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,227,386) 2,714,105
Cash and cash equivalents, beginning of period 3,294,366 166,966
------------ ------------
Cash and cash equivalents, end of period 2,066,980 2,881,071
============ ============
Supplemental disclosures of cash information:
Cash paid during the period for:
Interest - 38,463
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 23,369 221,474
Warrants issued for services - 275,000
Promissory note principal applied to warrant exercise - 150,000
Valued assigned to warrants granted in connection with issuance of
Series B preferred stock - 275,000
Deemed dividends on Series A and B preferred stock 529 61,424
</TABLE>
See notes to interim consolidated financial statements.
6
<PAGE>
E.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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 six month period ended
September 30, 2000 and has an accumulated deficit of $45,379,359 at September
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.
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; (c) controlling
overhead and expenses; and (d) raising, if necessary, additional capital and/or
financing (see note 10). These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities that
might be necessary should the Company be unable to continue in business.
There can be no assurance the Company can successfully accomplish these steps.
Accordingly, the Company's ability to continue as a going concern is uncertain
and dependent upon achieving a profitable level of operations and, if necessary,
obtaining additional financing.
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 six
month period ending September 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
adoption of SAB 101 has no material effect on the Company's consolidated
financial statements.
7
<PAGE>
E.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
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 and warrants, exercisable into
6,548,929 shares of Common Stock were outstanding as at September 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 six months
ended September, 30, 1999 by a value assigned to warrants granted in connection
with issuance of Series B Convertible Preferred stock of $275,000 ("Series B
stock"). The loss available to common stockholders was also increased by a
$1,200,000 beneficial conversion feature computed from the discount provision
included in the Series B stock. 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 September 30, 2000
and 1999 were $529 and $61,424, respectively, which also increases the loss
available to common stockholders. The loss available to common stockholders is
computed as follows:
<TABLE>
<CAPTION>
Six months ended September 30,
2000 1999
---- ----
<S> <C> <C>
Loss $(1,265,812) $(1,074,138)
Value assigned to warrants granted in
connection with issuance of Series B
preferred stock - (275,000)
Accrued dividends on Series A and B preferred
stock (529) (61,424)
Series B preferred stock beneficial conversion
feature - (1,200,000)
----------- -----------
Loss available to common stockholders $(1,266,341) $(2,610,562)
=========== ===========
</TABLE>
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
and production supplies.
6. REDEEMABLE PREFERRED STOCK
Series A
--------
During the six months ended September 30, 2000, the 1,900 shares of Series A
stock and accrued dividends were converted into 267,074 shares of Common Stock.
8
<PAGE>
E.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
7. COMMON STOCKHOLDERS' EQUITY
The following table summarizes common stockholders' equity transactions during
the six month period ended September 30, 2000:
<TABLE>
<CAPTION>
Additional Contributed Accumulated
Shares Amount paid-in capital surplus deficit
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 2000 126,261,182 $126,261 $44,893,602 $1,592,316 $(44,113,547)
Stock issued on exercise of
stock options 660,316 660 81,918 - -
Stock issued on exercise of
warrants 50,000 50 4,950 - -
Stock issued on conversion of
Series A stock 267,074 267 23,102 - -
Accrued dividends on the Series
A stock - - - - (529)
Loss for the period - - - - (1,265,812)
-----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 127,238,572 $127,238 $45,003,572 $1,592,316 $(45,379,888)
=============================================================================================================================
</TABLE>
8. WARRANTS AND OPTIONS
At September 30, 2000, warrants were outstanding/exercisable into the following
shares of Common Stock.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares $ Expiration Date
-------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants 571,429 $0.15 March 31, 2002
Warrants 500,000 $0.10 June 12, 2003
-------------------------------------------------------------------------
Total 1,071,429
=========================================================================
</TABLE>
The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>
Number of Weighted Average
Options Exercise Price
<S> <C> <C>
Outstanding at March 31, 2000 5,972,816 $2.7867
Granted 465,000 $4.2500
Exercised (660,316) $0.1250
Expired - -
Canceled (300,000) $5.4600
----------
Outstanding at September 30, 2000 5,477,500 $3.0856
==========
Exercisable at September 30, 2000 3,102,500 $1.6190
==========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.0875 to $5.53 and
expire over the period from 2002 to 2004 with an average life of 3.07 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 had 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.
10. SUBSEQUENT EVENTS
Series C Stock
--------------
On October 5, 2000, we issued 400 shares of Series C Convertible Redeemable
Preferred Stock ("Series C stock") for cash of $10,000 per share and gross
proceeds of $4,000,000. Dividends of 7% per annum are payable, with certain
exceptions,
9
<PAGE>
E.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
10. SUBSEQUENT EVENTS (cont'd)
either in cash or in shares of common stock, at our election. The stated dollar
amount of Series C stock, is convertible into fully paid and nonassessable
shares of common stock at a conversion price $4.33 per share which is fixed for
the first 90 days following the original issue date. Commencing 90 days
following the original issue date, the conversion price shall equal the lower of
(i) $4.33 and (ii) 90% of the average of the five lowest per share market values
during the twenty consecutive trading days immediately preceding the conversion
date. The number of shares is subject to a maximum number of shares of common
stock that we are required to issue upon conversions of the Series C preferred
stock and payment of dividends thereon in shares of common stock is 2,666,666,
except as may be subsequently modified as a consequence of certain possible
penalties and other adjustments. Such penalties include payment of a liquidated
damages amount equal to 2% of the purchase price paid, which is to be payable
monthly in cash in the event the registration statement ceases to be effective
as to all registrable securities and under certain other circumstances within
six months. The Series C stock shall be subject to automatic conversion on
October 5, 2002 subject to certain conditions. At November 3, 2000, the Series C
stock was convertible into approximately 923,788 shares of common stock.
The Series C stock is redeemable for cash in certain instances at our 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
our control, the Series C stock will be presented as redeemable preferred stock
on the consolidated balance sheet.
The Company also issued to the purchaser of the Series C stock, warrants to
purchase 230,946 shares of Common Stock, at $5.20 per share until October 5,
2005.
In connection with the Series C stock financing, the Company incurred placement
agent fees and legal and related costs of approximately $300,000 and issued a
warrant to purchase 138,568 shares of Common Stock at $5.20 per share until
October 5, 2005 as a placement agent fee. The fair value of the warrants granted
was estimated at $450,984 on the date of the grant using the Black Scholes
options price model with the following assumptions: no dividend yield; risk free
interest rate of 6%, expected volatility of 1.6602 and an expected life of 2.5
years.
Amendment to the 1994 Stock Option Plan
---------------------------------------
In August 2000, the Board of Directors amended the 1994 Stock Option Plan (the
"1994 Plan"), subject to stockholder approval, to increase the number of shares
authorized for issuance under the 1994 Plan by 4,000,000 shares to a total of
14,000,000 shares. The amendment was approved by shareholders on November 9,
2000. To date, no options have been granted to purchase any of such
additional 4,000,000 shares.
The 2000 Employee Stock Compensation Plan
-----------------------------------------
In August 2000, the Board of Directors adopted, subject to stockholder approval,
the Company's 2000 Employee Stock Compensation Plan (the "Plan") authorizing the
issuance of 250,000 shares of the Company's Common Stock. The Plan is intended
to provide equity incentives to recruit and retain employees. The Plan provides
for stock compensation through grants of the Company's Common Stock. Awards of
shares may be made as compensation for services rendered, directly or in lieu of
other compensation payable, as a bonus in recognition of past service or
performance or may be sold to an employee in exchange for cash, property,
services rendered or other lawful forms of consideration. Shares awarded other
than for services rendered will not be sold at less than fair market value.
The Plan was approved by shareholders on November 9, 2000. Unless sooner
terminated, the Plan will terminate on November 9, 2003.
10
<PAGE>
E.DIGITAL CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
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 continue 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. The loss of Lanier as 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 fall of 2000 as made available by the Company's OEM customers. 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 in corporate-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 $300,000 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 six months of fiscal 2001, we reported revenues of $1,221,357, a
550% increase from revenues of $187,888 for the first six months of fiscal 2000.
For the three month period ending September 30, 2000 and 1999 we reported
revenues of $1,096,286 and $150,587, respectively. Product sales increased in
the current period due to the response to OEM orders and shipments of products
that have recently been launched into the marketplace. For the second quarter of
fiscal 2000 and 2001 there were three customers who accounted for total revenue.
The loss of a customer could have a material adverse impact on our results of
operations.
Revenue for the first six months of fiscal 2001 included product revenue of
$1,100,165 compared to $140,277 for the prior year's first six months. The
increase is due to our OEM product shipments to Lanier. Product revenue
generated a gross profit for the six months ended September 30, 2000 of $157,729
compared to a gross profit of $41,053 for the first six
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months of fiscal 2000. Product sales for the three months ended September 30,
2000 increased to $996,123 as compared to $125,215 for the comparable period of
the prior year.
Service revenues for the six months of fiscal 2001 were $121,192 compared to
$47,611 for the comparable period of the prior year. Second fiscal 2001 quarter
service revenues were $100,163 compared to $25,372 for the prior year's second
quarter. 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 of our
technology and enhance our future revenues.
For the six months ended September 30, 2000, we reported a gross profit of
$240,099 compared to a gross profit of $3,527 for the six months of fiscal 2000.
Cost of sales for the six months ended September 30, 2000 consisted of $942,436
of product costs and $38,822 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.
Cost of sales for products for the three months ended September 30, 2000 and
1999 were $848,347 and $84,353, respectively. Cost of sales for services for the
three month period ending September 30, 2000 and 1999 were $20,000 and $70,430,
respectively.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the six months ended September 30,
2000, were $1,572,864, as compared to $1,009,818 for the six months ended
September, 30, 1999. Selling and administrative costs aggregated $755,002 in the
six months of fiscal 2001 compared to $463,442 in the prior period. The $291,560
increase in selling and administrative costs resulted primarily from an increase
in personnel expenditures and associated costs of $178,544; an increase of
$27,309 in accounting and auditing costs; and an increase of $69,070 in public
relations and related costs. We anticipate selling and administrative expenses
to continue at higher levels than prior periods due to an increased number of
personnel.
Research and related expenditures for the six months ended September 30, 2000
were $817,862, as compared to $546,376, for the six months ended September 30,
1999. The $271,486 increase in research and development costs resulted primarily
from an increase in engineering personnel and related costs of $261,750
resulting from a greater percentage of research 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 $1,332,765 for the six months ended September
30, 2000, as compared to operating loss of $1,006,291 for the six months ended
September 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 six months are not necessarily indicative of operating
results for future periods or the fiscal year.
We had no cash interest expense for the six months ended September 30, 2000 as
compared to $38,463 for the prior period.
We reported a loss for the first six months of the current fiscal year of
$1,265,812 as compared to a loss of $1,074,138 for the prior year's six months.
The loss available to common stockholders for the six months ended September 30,
2000 and 1999 is $1,266,341 and $2,610,562 respectively. Included in the loss
available to common stockholders for the period ending September 30, 2000 is
accrued dividends on the Series A stock of $529. For the period ending
September, 30, 1999 the loss available to common stockholders includes $275,000
which represents the value assigned to warrants granted in connection with the
issuance of Series B preferred stock, $61,424 of accrued dividends on the Series
A and B stock and $1,200,000 related to the series B preferred stock beneficial
conversion feature.
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Liquidity and Capital Resources
At September 30, 2000, we had working capital of $1,164,899 compared to a
working capital of $2,369,744 at March 31, 2000. We had $36,139 of working
capital invested in inventory at September 30, 2000.
For the six months ended September 30, 2000, net cash and cash equivalents
decreased by $1,227,386. Cash used in operating activities was $1,247,308. Major
components using cash were a loss of $1,265,812 reduced by $41,045 of aggregate
depreciation and amortization. The major change in assets and liabilities
providing cash from operating activities was a reduction of $43,600 in accounts
receivable, trade, a reduction of $43,460 in inventory and a reduction in
accrued employee benefits of $6,382. The major changes in assets and liabilities
using operating cash was a reduction in accounts payable, trade of $89,082, and
a reduction in other accounts payable and accrued liabilities of $25,000.
At September 30, 2000, we had cash and cash equivalents of approximately $2
million. Subsequent to September 30, 2000, we received net cash proceeds of
approximately $3.7 million from the sale of Series C Preferred Stock. 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 stockholders 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 stockholders.
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 continue production of our 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are currently no material pending legal proceedings to which we are a
party or to which any of our property is subject.
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
15 Acknowledgement of Independent Chartered Accountants
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: November 14, 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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