SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2008
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ]
Non-accelerated filer [ ] Smaller Reporting Company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On March 5, 2008, the registrant had outstanding 128,721,136 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of January 31, 2008 (Unaudited)
and October 31, 2007 3
Condensed Consolidated Statements of Operations (Unaudited) for the three
months ended January 31, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three
months ended January 31, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6 - 18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 19 - 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28
Item 4. Controls and Procedures. 29
PART II. OTHER INFORMATION
Item 1A. Risk Factors. 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 29
Item 6. Exhibits. 29 - 30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
---------------------
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
-------------
January 31, October 31,
ASSETS 2008 2007*
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 793,644 $ 669,141
Short-term investments 441,000 400,000
Accounts receivable, net of allowance for doubtful accounts of $60,000 and $-0-,
respectively 60,000 120,000
Inventories 225,112 191,923
Prepaid expenses and other current assets 33,397 34,555
------------- -------------
Total current assets 1,553,153 1,415,619
INVESTMENT in Videocon Industries Limited global depository receipts, at
fair value 17,271,026 -
INVESTMENT in Digital Info Security Co. Inc. common stock, at cost 417,000 417,000
LOAN RECEIVABLE 5,000,000 -
PROPERTY AND EQUIPMENT, net 30,539 26,653
OTHER ASSETS 10,887 10,887
------------- -------------
$ 24,282,605 $ 1,870,159
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 403,285 $ 347,141
Accrued liabilities 183,551 331,668
------------- -------------
Total current liabilities 586,836 678,809
LOAN PAYABLE 5,000,000 -
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000 shares authorized; no
shares issued or outstanding - -
Common stock, par value $.01 per share; 240,000,000 shares authorized;
128,580,416 and 106,911,315 shares issued and outstanding, respectively 1,285,804 1,069,113
Additional paid-in capital 104,991,001 86,088,974
Accumulated deficit (88,652,062) (85,966,737)
Accumulated other comprehensive income 1,071,026 -
------------- -------------
18,695,769 1,191,350
------------- -------------
$ 24,282,605 $ 1,870,159
============= =============
* Derived from audited balance sheet included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2007.
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
For the Three Months Ended
January 31,
---------------------------
2008 2007
------------- -------------
NET SALES
Sales of encryption products, net $ 52,225 $ 70,750
Sales of encryption services, net - 60,000
------------- -------------
52,225 130,750
------------- -------------
COST OF SALES
Cost of encryption products sold 12,898 20,291
Cost of encryption services sold - 20,905
------------- -------------
12,898 41,196
------------- -------------
Gross profit 39,327 89,554
OPERATING EXPENSES
Research and development expenses 1,312,702 1,002,931
Selling, general and administrative expenses 1,419,157 869,711
------------- -------------
Total operating expenses 2,731,859 1,872,642
------------- -------------
LOSS FROM OPERATIONS (2,692,532) (1,783,088)
INTEREST INCOME 7,207 9,654
------------- -------------
NET LOSS $ (2,685,325) $ (1,773,434)
============= =============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.02) $ (0.02)
============= =============
Shares used in computing net loss per share:
Basic and Diluted 126,739,111 100,913,968
============= =============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
For the Three Months Ended
January 31,
----------------------------
2008 2007
--------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (894,346) $ (883,663)
Cash received from customers 52,225 72,165
Interest received 7,207 9,654
--------------- ------------
Net cash used in operating activities (834,914) (801,884)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disbursements to acquire Videocon Industries Limited global depository receipts (16,200,000) -
Disbursement to acquire loan receivable (5,000,000) -
Proceeds from maturities of short-term investments (certificates of deposit) 400,000 38,000
Disbursements to acquire short-term investments (certificates of deposit) (441,000) (425,000)
Payments for purchases of property and equipment (6,188) (2,364)
--------------- ------------
Net cash used in investing activities (21,247,188) (389,364)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to Videocon Industries Limited 16,200,000 -
Proceeds from issuance of loan payable 5,000,000 -
Proceeds from exercise of stock options 1,006,605 737,599
--------------- ------------
Net cash provided by financing activities 22,206,605 737,599
--------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 124,503 (453,649)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 669,141 1,281,660
--------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 793,644 $ 828,011
=============== ============
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $ (2,685,325) $(1,773,434)
Stock option compensation to employees 1,088,373 708,204
Stock option compensation to consultants 206,976 -
Stock awards granted to employees pursuant to stock incentive plans 556,611 421,284
Stock awards granted to consultants pursuant to stock incentive plans 60,153 94,943
Provision for doubtful accounts 60,000 -
Recovery of slow-moving inventory reserve (1,634) -
Depreciation and amortization 2,302 3,094
Change in operating assets and liabilities:
Accounts receivable - (58,585)
Inventories (31,555) 17,631
Prepaid expenses and other current assets 1,158 (349)
Other assets - -
Accounts payable and accrued liabilities (91,973) (214,672)
--------------- ------------
Net cash used in operating activities $ (834,914) $ (801,884)
=============== ============
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
1. BUSINESS AND FUNDING
--------------------
Description of Business and Basis of Presentation
- -------------------------------------------------
Our principal operations are the development, production and marketing
of thin, flat low-voltage phosphor display technology and the development,
production and marketing of multi-functional encryption products that provide
information security for domestic and international users over virtually every
communications media.
The condensed consolidated financial statements are unaudited, and have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial reporting, and with
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by US GAAP for complete financial statements.
The information contained herein is for the three-month periods ended January
31, 2008 and 2007. In management's opinion, all adjustments (consisting only of
normal recurring adjustments considered necessary for a fair presentation of the
results of operations for such periods) have been included herein. Certain prior
year amounts have been reclassified to conform with current year presentation.
The condensed consolidated financial statements include the accounts of
CopyTele, Inc. and its wholly owned subsidiaries, CopyTele International Ltd.
("CopyTele International") and CopyTele Marketing Inc. ("CopyTele Marketing").
CopyTele International and CopyTele Marketing were incorporated in the British
Virgin Islands on July 12, 2007 and September 5, 2007, respectively. CopyTele
International was formed for the purpose of holding an investment in global
depository receipts of Videocon Industries Limited, an Indian company
("Videocon"). As of January 31, 2008, CopyTele Marketing was inactive. All
significant intercompany transactions have been eliminated in consolidation.
The results of operations for interim periods presented are not
necessarily indicative of the results that may be expected for a full year or
any interim period. Reference is made to the audited financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended October 31, 2007, for more extensive disclosures than contained in these
condensed financial statements.
Technology License Agreement with Videocon Industries Limited
- -------------------------------------------------------------
On November 2, 2007, we entered into a Technology License Agreement
(the "License Agreement") with Videocon. Under the License Agreement, we provide
Videocon with a non-transferable, worldwide license of our technology for thin,
flat, low voltage phosphor displays (the "Licensed Technology"), for Videocon
(or a Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing the Licensed Technology. Under the License
Agreement, we will receive a license fee of $11 million from Videocon, payable
in installments over a 27 month period, with the first installment of $2 million
payable 15 days after the License Agreement is effective. The License Agreement
will be effective after Videocon has obtained the necessary regulatory approvals
in India for the payment of the license fees and royalties and may be terminated
if the required approvals are not obtained in a reasonable period of time. We
will also receive an agreed upon royalty from Videocon based on display sales by
Videocon.
6
We will continue to have the right to produce and market, and to
utilize Volga Svet Ltd., a Russian display company that we have been working
with for more than ten years, and an Asian company that we have been working
with for more than four years, to produce and market, products utilizing the
Licensed Technology. Additional licenses of the Licensed Technology to third
parties require our joint agreement with Videocon.
On November 2, 2007, we also entered into a Share Subscription
Agreement (the "Subscription Agreement") with Mars Overseas Limited, an
affiliate of Videocon ("Mars Overseas"). Under the Subscription Agreement, Mars
Overseas agreed to purchase from us 20,000,000 shares of our common stock (the
"CopyTele Shares") for an aggregate purchase price of $16,200,000. The purchase
of the CopyTele Shares pursuant to the Subscription Agreement closed on November
6, 2007.
Also on November 2, 2007, our wholly-owned British Virgin Islands
subsidiary, CopyTele International, entered into a GDR Purchase Agreement (the
"Purchase Agreement") with Global EPC Ventures Limited ("Global"), for CopyTele
International to purchase from Global 1,495,845 global depository receipts of
Videocon (the "Videocon GDRs") for an aggregate purchase price of $16,200,000.
Videocon's global depository receipts are listed on the Luxembourg Stock
Exchange. The purchase of the Videocon GDRs pursuant to the Purchase Agreement
closed on December 19, 2007.
For the purpose of effecting a lock up of the Videocon GDRs and
CopyTele Shares (collectively, the "Securities") for a period of seven years,
and therefore restricting both parties from selling or transferring the
Securities during such period, CopyTele International and Mars Overseas have
entered into two Loan and Pledge Agreements dated November 2, 2007. The Videocon
GDRs are to be held as security for a loan in principal amount of $5,000,000
from Mars Overseas to CopyTele International, and the CopyTele Shares are
similarly held as security for a loan in principal amount of $5,000,000 from
CopyTele International to Mars Overseas. The loans are for a term of seven years
and do not bear interest. Prepayment of each loan requires payment of a premium
by the borrower and, in any event, the lien on the Securities securing the
prepaid loan will not be released until the seventh anniversary of the closing
of the loans and the prepaid amount would be held in escrow until such date. The
loan agreements required the parties to enter into an escrow agreement under
which the parties deposited the Securities with an escrow agent for the term of
the loans. The loan agreements also provide for customary events of default
which may result in forfeiture of the Securities by the defaulting party. The
loan and escrow agreements also provide for the transfer to the respective
parties, free and clear of any encumbrances under the agreements, any dividends,
distributions, rights or other proceeds or benefits received by the escrow agent
in respect of the Securities. The closing of the loans took place on December
19, 2007.
7
Investment in Videocon
- ----------------------
Although the Videocon GDRs are held as security for the loan payable to
Mars Overseas and prepayment of the loan will not release the Videocon GDRs
securing the loan until the seventh anniversary of the closing of the loan, our
investment in Videcon is classified as an "available-for-sale security" and
reported at fair value, with unrealized gains and losses excluded from
operations and reported as a component of accumulated other comprehensive
income, net of the related tax effects, in shareholders' equity. Cost is
determined using the specific identification method. The fair value of the
Videocon GDRs is based on the underlying price of Videocon's equity shares which
are traded on stock exchanges in India with prices quoted in rupees. The cost,
unrealized gain and fair value of our investment in Videocon as of January 31,
2008 are as follows:
January 31,
2008
-------------
Cost $16,200,000
Unrealized gain 1,071,026
-------------
Fair value 17,271,026
-------------
Funding and Management's Plans
- ------------------------------
From our inception, we have met our liquidity and capital expenditure
needs primarily through the proceeds from sales of common stock in our initial
public offering, in private placements, upon exercise of warrants issued in
connection with the private placements and public offering, and upon the
exercise of stock options. In 2001 and 2002, we also received payments under a
technology development agreement. In addition, commencing in the fourth quarter
of fiscal 1999, we have generated cash flows from sales of our encryption
products and in fiscal 2008 we expect to commence receiving license fees from
Videocon after Videocon has obtained the necessary regulatory approvals in India
for such payments.
During the three months ended January 31, 2008, our cash used in
operating activities was approximately $835,000. This resulted from payments to
suppliers, employees and consultants of approximately $894,000, which was offset
by cash of approximately $52,000 received from collections of accounts
receivable related to sales of encryption products, and approximately $7,000 of
interest income received. Our cash used in investing activities during the three
months ended January 31, 2008 was approximately $21,247,000, which resulted from
a disbursement of $16,200,000 for the purchase of Videocon GDRs, a disbursement
$5,000,000 to issue a loan to Mars Overseas, purchases of short-term investments
consisting of certificates of deposit of $441,000 and purchases of approximately
$6,000 of equipment, offset by $400,000 received upon maturities of short-term
investments consisting of certificates of deposit. Our cash provided by
financing activities during the three months ended January 31, 2008 was
approximately $22,207,000, which resulted from the sale of our common stock to
Videocon for $16,200,000, the proceeds received of $5,000,000 upon obtaining a
loan from Mars Overseas and cash received upon the exercise of stock options of
approximately $1,007,000. Accordingly, during the three months ended January 31,
2008, our cash and cash equivalents increased by approximately $125,000 and our
short-term investments increased by $41,000. As a result, our cash, cash
equivalents, and short-term investments, at January 31, 2008 increased to
approximately $1,235,000 from approximately $1,069,000 at the end of fiscal
2007.
We believe that our existing cash, cash equivalents, short-term
investments and accounts receivable, together with cash flows from expected
sales of our encryption products and revenue relating to our thin, flat,
low-voltage phosphor display technology, including license fees we expect to
receive from Videocon once Videocon has obtained the necessary regulatory
approvals in India for such payments, and other potential sources of cash flows,
will be sufficient to enable us to continue in operation until at least the end
of the first quarter of fiscal 2009. We anticipate that, thereafter, we will
require additional funds to continue our marketing, production, and research and
development activities, and we will require outside funding if cash generated
from operations is insufficient to satisfy our liquidity requirements. However,
our projections of future cash needs and cash flows may differ from actual
results. It is management's intention to continue to compensate their employees
by issuing stock or stock options. If current cash and cash that may be
generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit prior to the first quarter of fiscal 2009. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing. There can be no assurance that we will generate sufficient revenues
in the future (through sales or otherwise) to improve our liquidity or sustain
future operations, that the necessary regulatory approvals in India for payments
of license fees by Videocon to us will be obtained, that our production
capabilities will be adequate, that other products will not be produced by other
companies that will render our products obsolete, or that other sources of
funding would be available, if needed, on favorable terms or at all. If we
cannot obtain such funds if needed, we would need to curtail or cease some or
all of our operations.
8
2. STOCK-BASED COMPENSATION
------------------------
We maintain stock equity incentive plans under which we may grant
non-qualified stock options, incentive stock options, stock appreciation rights,
stock awards, performance and performance-based awards, or stock units to
employees, non-employee directors and consultants.
Stock Option Compensation Expense
- ---------------------------------
We account for stock options granted to employees and directors using
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R").
We recognize compensation expense for stock option awards on a straight-line
basis over the requisite service period of the grant. We recorded approximately
$1,088,000 and $708,000 of stock-based compensation expense, related to stock
options granted to employees and non-employee directors, during the three-month
periods ended January 31, 2008 and 2007, respectively, in accordance with SFAS
123R. Such compensation expense is included in the accompanying condensed
consolidated statements of operations in either research and development
expenses or selling, general and administrative expenses, as applicable based on
the functions performed by such employees and directors. Such stock-based
compensation expense increased both basic and diluted net loss per share for the
three-month periods ended January 31, 2008 and 2007 by $0.01 and $0.01,
respectively.
Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the three-month periods ended
January 31, 2008 and 2007 was approximately $-0- and $6,000, respectively, of
expense related to the amortization of compensation cost for stock options
granted prior to, but not yet vested as of, the end of the prior fiscal year. As
of January 31, 2008, there was approximately $873,000 of unrecognized
compensation cost related to non-vested share-based compensation arrangements.
Approximately $700,000 of this unrecognized cost is expected to be amortized
over the remaining portion of the current fiscal year and approximately
$121,000, $51,000, and $1,000 of this unrecognized cost is expected to be
amortized during fiscal 2009, 2010 and 2011, respectively.
9
We also account for stock options granted to consultants using SFAS
123R. We recognized consulting expense for options granted to non-employee
consultants, during the three-month periods ended January 31, 2008 and 2007, of
approximately $207,000 and $-0-, respectively. As of January 31, 2008, there was
approximately $23,000 of unrecognized consulting expense related to non-vested
share-based compensation arrangements. Approximately $10,000 of this
unrecognized consulting expense is expected to be amortized over the remaining
portion of the current fiscal year and approximately $13,000 is expected to be
amortized during fiscal 2009. Such consulting expense is included in the
accompanying condensed consolidated statements of operations in either research
and development expenses or selling, general and administrative expenses, as
applicable based on the functions performed by such consultants.
Fair Value Determination
- ------------------------
In accordance with SFAS No. 123R, we estimate the fair value of stock
options granted to employees, non-employee directors and consultants on the date
of grant using the Black-Scholes pricing model. We separate the individuals we
grant stock options to into three relatively homogenous groups, based on
exercise and post-vesting employment termination behaviors. To determine the
weighted average fair value of stock options on the date of grant, we take a
weighted average of the assumptions used for each of these groups. Stock options
we granted during the three-month period ended January 31, 2008 consisted of
awards of options with 10-year terms which vested either immediately or over
future periods of from three months to three years. All of the stock options we
granted during the three-month period ended January 31, 2007 consisted of awards
of options with 10-year terms which vested immediately.
We estimated the fair value of stock option awards using the following
assumptions:
For the Three Months
Ended January 31,
----------------------
2008 2007
----------- ----------
Expected term (in years) 4.4 3.8
Volatility 93% 98%
Risk-free interest rate 3.91% 4.62%
Dividend yield 0 0
Weighted average fair value at grant date $ 0.70 $ 0.40
The expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. Because we consider
our options to be "plain vanilla", we estimated the expected term using a
modified version of the simplified method of calculation, as prescribed by Staff
Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). This modified
calculation uses the actual life for options that have been settled, and a
uniform distribution assumption for the options still outstanding. Under SAB
107, options are considered to be "plain vanilla" if they have the following
basic characteristics: granted "at-the-money"; exercisability is conditioned
upon service through the vesting date; termination of service prior to vesting
results in forfeiture; limited exercise period following termination of service;
and options are non-transferable and non-hedgeable. In December 2007, the
Securities and Exchange Commission ("SEC") staff issued Staff Accounting
Bulletin No. 110, "Share-Based Payment" ("SAB 110"). SAB 110 permits the use of
the simplified method in SAB 107 for employee option grants after December 31,
2007 for companies whose historical data about their employees' exercise
behavior does not provide a reasonable basis for estimating the expected term of
the options. We have adopted SAB 110 and continued to use the simplified method
to estimate the expected term for options granted after December 2007, as
adequate historical experience is not available to provide a reasonable
estimate. We intend to continue applying the simplified method until enough
historical experience is readily available to provide a reasonable estimate of
the expected term for employee option grants.
10
We estimated the expected volatility of our shares of common stock
based upon the historical volatility of our share price over a period of time
equal to the expected life of the options.
We estimated the risk-free interest rate based on the implied yield
available on the applicable grant date of a U.S. Treasury note with a term equal
to the expected term of the underlying grants.
We made the dividend yield assumption based on our history of not
paying dividends and our expectation not to pay dividends in the future.
Under SFAS No. 123R, the amount of stock-based compensation expense
recognized is based on the portion of the awards that are ultimately expected to
vest. Accordingly, we reduce the fair value of the stock option awards for
expected forfeitures, which are forfeitures of the unvested portion of
surrendered options. We estimate expected forfeitures based on our historical
experience.
We will reconsider use of the Black-Scholes pricing model if additional
information becomes available in the future that indicates another model would
be more appropriate, or if grants issued in future periods have characteristics
that cannot be reasonably estimated using this model.
Stock Option Activity
- ---------------------
During the three-month periods ended January 31, 2008 and 2007, we
granted options to purchase 3,125,000 shares and 1,775,000 shares, respectively,
to employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $1.03 and $.61 per share, respectively, pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
three-month periods ended January 31, 2008 and 2007, stock options to purchase
1,174,200 shares and 1,612,230 shares, respectively, of common stock were
exercised with aggregate proceeds of approximately $1,007,000 and $738,000,
respectively.
11
Stock Option Plans
- ------------------
As of January 31, 2008, we have three stock option plans: the CopyTele,
Inc. 1993 Stock Option Plan (the "1993 Plan"), the CopyTele, Inc. 2000 Share
Incentive Plan (the "2000 Share Plan") and the 2003 Share Plan, which were
adopted by our Board of Directors on April 28, 1993, May 8, 2000 and April 21,
2003, respectively.
On July 14, 1993, our shareholders approved the 1993 Plan. The 1993
Plan was amended as of May 3, 1995 and May 10, 1996 to, among other things,
increase the number of shares available for issuance thereunder from 6,000,000
shares to 20,000,000 shares, after giving consideration to stock splits. The
1993 Plan provided for the granting of incentive stock options and stock
appreciation rights to key employees, and non-qualified stock options and stock
appreciation rights to key employees and consultants of the Company.
The 1993 Plan was administered by the Stock Option Committee, which
determined the option price, term and provisions of each option. However, the
purchase price of shares issuable upon the exercise of incentive stock options
could not be less than the fair market value of such shares at the date of grant
and incentive stock options are not exercisable for more than 10 years. Upon
approval of the 2000 Share Plan by our shareholders in July 2000, the 1993 Plan
was terminated with respect to the grant of future options. Since June 2004, the
1993 Plan has been administered by the Board of Directors.
Information regarding the 1993 Plan for the three months ended January
31, 2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
--------------- ----------------- ------------------
Shares Under Option at October 31, 2007 2,614,000 $ 2.33
Expired (975,000) $ 3.38
Exercised (5,000) $ 1.31
---------------
Shares Under Option and Exercisable at January 31, 2008 1,634,000 $ 1.72 $ 117,765
---------------
The following table summarizes information about stock options
outstanding under the 1993 Plan as of January 31, 2008:
Options Outstanding Options Exercisable
------------------------------------- -------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
- -----------------------------------------------------------------------------------------------
$0.84 to $1.56 779,000 1.78 $1.10 779,000 1.78 $1.10
$2.28 855,000 0.45 $2.28 855,000 0.45 $2.28
12
The exercise price with respect to all of the options granted under the
1993 Plan, since its inception, was equal to the fair market value of the
underlying common stock at the grant date.
On July 25, 2000, our shareholders approved the 2000 Share Plan. The
maximum number of shares of common stock that may be granted was 5,000,000
shares. On July 6, 2001 and July 16, 2002, the 2000 Share Plan was amended by
our Board of Directors to increase the maximum number of shares of common stock
that may be granted to 10,000,000 shares and 15,000,000 shares, respectively.
These amendments were approved by our shareholders on August 16, 2001 and
September 12, 2002, respectively. The 2000 Share Plan provides for the grant of
incentive stock options, nonqualified stock options, stock appreciation rights,
stock awards, performance awards and stock units to key employees and
consultants of the Company.
The 2000 Share Plan was administered by the Stock Option Committee
through June 2004 and since that date has been administered by the Board of
Directors, which determines the option price, term and provisions of each
option; however, the purchase price of shares issuable upon the exercise of
incentive stock options will not be less than the fair market value of such
shares at the date of grant and incentive stock options will not be exercisable
for more than 10 years.
Information regarding the 2000 Share Plan for the three months ended
January 31, 2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
-------------------- ------------------ -------------
Shares Under Option at October 31, 2007 2,182,466 $ 0.82
Exercised (410,000) $ 0.95
--------------------
Shares Under Option and Exercisable at
January 31, 2008 1,772,466 $ 0.79 $ 712,256
--------------------
The following table summarizes information about stock options
outstanding under the 2000 Share Plan as of January 31, 2008:
Options Outstanding Options Exercisable
------------------------------------- ------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
- ---------------------------------------------------------------------------------------------
$0.40 445,000 3.64 $0.40 445,000 3.64 $0.40
$0.69 505,466 2.92 $0.69 505,466 2.92 $0.69
$0.94 - $1.09 822,000 1.99 $1.06 822,000 1.99 $1.06
13
The exercise price with respect to all of the options granted under the
2000 Share Plan since its inception was equal to the fair market value of the
underlying common stock at the grant date. As of January 31, 2008, 21,508 shares
were available for future grants under the 2000 Share Plan.
The 2003 Share Plan provides for the grant of nonqualified stock
options, stock appreciation rights, stock awards, performance awards and stock
units to key employees and consultants of the Company. The maximum number of
shares of common stock available for issuance under the 2003 Share Plan
initially was 15,000,000 shares. On October 8, 2004, February 9, 2006 and August
22, 2007, the 2003 Plan was amended by our Board of Directors to increase the
maximum number of shares of common stock that may be granted to 30,000,000
shares, 45,000,000 shares and 55,000,000 shares, respectively. Current and
future non-employee directors are automatically granted nonqualified stock
options to purchase 60,000 shares of common stock upon their initial election to
the Board of Directors and at the time of each subsequent annual meeting of our
shareholders at which they are elected to the Board of Directors. The 2003 Share
Plan was administered by the Stock Option Committee through June 2004 and since
that date has been administered by the Board of Directors, which determines the
option price, term and provisions of each option.
Information regarding the 2003 Share Plan for the three months ended
January 31, 2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
--------------------- ----------------- -----------
Shares Under Option at October 31, 2007 14,476,245 $ 0.74
Granted 3,125,000 $ 1.03
Exercised (759,200) $ 0.81
---------------------
Shares Under Option at January 31, 2008 16,842,045 $ 0.79 $ 6,704,382
---------------------
Options Exercisable at January 31, 2008 13,907,045 $ 0.75 $ 6,151,882
---------------------
The following table summarizes information about stock options
outstanding under the 2003 Share Plan as of January 31, 2008:
Options Outstanding Options Exercisable
-------------------------------------- ------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Number Remaining Average Number Remaining Average
Range of Outstanding Contractual Exercise Exercisable Contractual Exercise
Exercise Prices at 1/31/08 Life Price at 1/31/08 Life Price
- ----------------------------------------------------------------------------------------------
$0.25 - $0.43 1,245,000 5.75 $0.33 1,245,000 5.75 $0.33
$0.52 - $0.77 5,450,970 7.41 $0.63 5,450,970 7.41 $0.63
$0.81 - $1.46 10,146,075 8.18 $0.94 7,211,075 7.54 $0.91
The exercise price with respect to all of the options granted under the
2003 Share Plan since its inception was equal to the fair market value of the
underlying common stock at the grant date. As of January 31, 2008, 6,725,186
shares were available for future grants under the 2003 Share Plan.
14
Stock Grants
- ------------
We account for stock awards granted to employees and consultants based
on their grant date fair value. During the three-month periods ended January 31,
2008 and 2007, we issued 448,575 shares and 548,800 shares, respectively, of
common stock to certain employees for services rendered, principally in lieu of
cash compensation, pursuant to the 2003 Share Plan. We recorded compensation
expense for the three-month periods ended January 31, 2008 and 2007 of
approximately $557,000 and $421,000, respectively, for the shares of common
stock issued to employees. In addition, during the three-month periods ended
January 31, 2008 and 2007, we issued 46,326 shares and 134,020 shares,
respectively, of common stock to consultants for services rendered pursuant to
the 2003 Share Plan. We recorded consulting expense for the three-month periods
ended January 31, 2008 and 2007 of approximately $60,000 and $95,000,
respectively, for the shares of common stock issued to consultants.
3. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. Management reviews our accounts receivable and
other receivables for potential doubtful accounts and maintains an allowance for
estimated uncollectible amounts. Generally, no collateral is received from
customers for our accounts receivable. During the three months ended January 31,
2008, three customers in the Encryption Products and Services Segment
represented 25%, 25% and 20%, respectively, of total net sales. During the three
months ended January 31, 2007, two customers in the Encryption Products and
Services Segment represented 46% and 38%, respectively, of total net sales. At
January 31, 2008 and October 31, 2007, one customer in the Encryption Products
and Services Segment represented 100% of accounts receivable.
4. SHORT-TERM INVESTMENTS
----------------------
Short-term investments represent certificates of deposits, carried at
amortized cost, with maturities of less than twelve months. The fair values of
the certificates of deposits, including accrued interest, approximate their
carrying value due to their short maturities.
5. INVESTMENT IN AND RELATED PARTY TRANSACTIONS WITH DIGITAL INFO SECURITY
-----------------------------------------------------------------------
CO. INC.
- --------
On February 13, 2006, we entered into a Software License and
Distribution Agreement (the "DISC License Agreement") to license to Digital Info
Security Co. Inc. ("DISC"), an encryption system that integrates our encryption
technology into DISC's e-mail services. The system allows companies to encrypt
all e-mail transactions in a manner transparent to the individual user.
Concurrently with entering into the DISC License Agreement with DISC, we
acquired a minority interest in DISC by exchanging 100,000 unregistered shares
of our common stock for 5,000,000 shares of DISC's common stock. On May 17, 2006
and July 14, 2006, we purchased an additional 1,000,000 shares and 1,200,000
shares, respectively, of DISC's common stock for $50,000 and $60,000 in cash,
respectively. On November 27, 2006, we acquired an additional 5,000,000 shares
of DISC's common stock in exchange for 300,000 unregistered shares of our common
stock. Accordingly, as of January 31, 2008, we held 12,200,000 shares of DISC's
common stock, all of which were restricted securities. DISC's common stock is
not registered under the Securities Exchange Act of 1934, but is quoted on the
Pink Sheets. According to DISC's most recent public financial report, as of
September 30, 2007 we held approximately 12% of the outstanding common stock of
DISC. Our investment in DISC as of January 31, 2008, is recorded in the
accompanying consolidated balance sheet at cost of $417,000, based on the
closing price of our common stock on the dates we acquired DISC common stock in
exchange for our common stock, and the price paid for the shares purchased for
cash.
15
Net sales for the three months ended January 31, 2007 included billings
to DISC for engineering services of $60,000. We had no net sales relating to
DISC for the three months ended January 31, 2008. Net accounts receivable at
January 31, 2008 and October 31, 2007 include $60,000 and $120,000,
respectively, from DISC.
6. INVENTORIES
------------
Inventories consist of the following as of:
January 31, October 31,
2008 2007
--------------- ---------------
Component parts $ 101,020 $ 113,458
Work-in-process 57,360 26,597
Finished products 66,732 51,868
--------------- ---------------
$ 225,112 $ 191,923
=============== ===============
7. NET LOSS PER SHARE OF COMMON STOCK
----------------------------------
In accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"),
basic net loss per common share ("Basic EPS") is computed by dividing net loss
by the weighted average number of common shares outstanding. Diluted net loss
per common share ("Diluted EPS") is computed by dividing net loss by the
weighted average number of common shares and dilutive common share equivalents
and convertible securities then outstanding. Diluted EPS for all periods
presented is the same as Basic EPS, as the inclusion of the effect of common
stock equivalents then outstanding would be anti-dilutive. For this reason,
excluded from the calculation of Diluted EPS for the three-month periods ended
January 31, 2008 and 2007, were options to purchase 20,248,511 shares and
21,637,711 shares, respectively.
8. EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
----------------------------------------
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprise's financial statements. The interpretation requires
that the Company determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authority.
If a tax position meets the more likely than not recognition criteria, FIN 48
requires the tax position be measured at the largest amount of benefit greater
than 50 percent likely of being realized upon ultimate settlement. This
accounting standard is effective for fiscal years beginning after December 15,
2006. We adopted FIN 48 on November 1, 2007. There were no unrecognized tax
benefits as of the date of adoption of FIN 48 and its adoption did not have a
material effect on our financial statements.
16
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
provisions of SFAS 157 are effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 157 will have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 159 will have on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" ("SFAS 141R"), which changes how an entity accounts for
the acquisition of a business. When effective, SFAS 141R will replace existing
SFAS No. 141, "Business Combinations" ("SFAS 141"), in its entirety. SFAS 141R
carries forward the existing requirements to account for all business
combinations using the acquisition method (formerly called the purchase method).
In general, SFAS 141R will require acquisition-date fair value measurement of
identifiable assets acquired, liabilities assumed, and noncontrolling interest
in the acquired entity. SFAS 141R will eliminate the current cost-based purchase
method under SFAS 141. SFAS 141R is effective for fiscal years and interim
periods within those fiscal years beginning on or after December 15, 2008. The
adoption of SFAS 141R is not expected to have a material effect on our financial
statements.
9. INCOME TAXES
------------
We file Federal and New York State income tax returns. Due to net
operating losses, the statue of limitations remains open since the fiscal year
ended October 31, 1992. We account for interest and penalties related to income
tax matters in selling, general and administrative expenses.
10. SEGMENT INFORMATION
-------------------
We follow the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While our results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Flat-panel display and (ii)
Encryption products and services. The following represents selected financial
information for our segments for the three-month periods ended January 31, 2008
and 2007:
17
Encryption Products
Segment Data Flat-Panel Display and Services Total
- --------------------------------------------------------- --------------------------- ------------------- --------------
Three Months Ended January 31, 2008:
Net sales $ - $ 52,225 $ 52,225
Net loss (1,496,273) (1,189,052) (2,685,325)
Three Months Ended January 31, 2007:
Net sales $ - $ 130,750 $ 130,750
Net loss (934,341) (839,093) (1,773,434)
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------
of Operations.
- --------------
GENERAL
- -------
Our principal operations are the development, production and marketing
of thin, flat, low-voltage phosphor display technology and the development,
production and marketing of multi-functional encryption products that provide
information security for domestic and international users over virtually every
communications media.
We have pioneered the basic development of an innovative new type of
flat panel display technology, which is brighter, has higher contrast and
consumes a less power than our prior display technology. This new proprietary
display is a color phosphor based display having a unique lower voltage electron
emission system to excite the color phosphors. As with our prior display
technology, the new technology emits light to display color images, such as
movies from DVD players. In addition, we are also developing another version of
our new type low voltage and low power display having a different matrix
configuration and phosphor excitation system. These new type of displays are
expected to be lower in cost than our prior displays.
On November 2, 2007, we entered into a Technology License Agreement
(the "License Agreement") with Videocon Industries Limited, an Indian company
("Videocon"). Under the License Agreement, we licensed to Videocon our
technology for thin, flat, low voltage phosphor displays, for Videocon (or a
Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing out technology. CopyTele and Videocon are
jointly cooperating to implement our technology into production displays.
Improvements to the technology will be jointly owned by CopyTele and Videocon,
and the parties will jointly decide whether to pursue patents for any
improvements. The license of our technology is non-transferable and worldwide.
Under the License Agreement, Videocon will pay us a license fee of $11 million,
payable in installments over a 27 month period. The first installment of $2
million will be paid after the License Agreement is effective. The License
Agreement will be effective after Videocon has obtained the necessary regulatory
approvals in India for the payment of the license fees and royalties. Videocon
has filed for approval with the Indian government. Videocon will also pay us an
agreed upon royalty based on display sales by Videocon.
We will continue to have the right to produce and market, and to
utilize Volga Svet Ltd., a Russian display company that we have been working
with for more than ten years ("Volga"), and an Asian company that CopyTele has
been working with for more than four years, to produce and market, products
utilizing our technology. Additional licenses of our technology to third parties
require the joint agreement of CopyTele and Videocon.
In connection with the License Agreement, for the term of the license
granted under the License Agreement, Videocon and CopyTele have each appointed
one senior advisor to the other's board of directors to advise with respect to
strategic planning and technology in the display field.
19
At the same time as we entered into the License Agreement, we entered
into a Share Subscription Agreement with an affiliate of Videocon ("Mars
Overseas") for Mars Overseas to purchase 20,000,000 shares of our common stock,
and a subsidiary of ours, CopyTele International Ltd. ("CopyTele
International"), entered into a GDR Purchase Agreement to purchase 1,495,845
global depository receipts ("GDRs") of Videocon. Both transactions were
completed in our first fiscal quarter of fiscal 2008. See Note 1 to the
Condensed Consolidated Financial Statements.
Our new display technology has been incorporated into display modules
which are brighter, have higher contrast and consume less power than our prior
carbon nanotube and proprietary low voltage color phosphor display technology.
We have developed various engineering models using such prior technology, which
demonstrated the display's ability to show movies from DVD players by
controlling the brightness of selected individual pixels. The carbon nanotubes,
which are supplied to us by a U.S. company, require a low voltage for electron
emission and are extremely small - approximately 10,000 times thinner than the
width of a human hair. The 5.5 inch (diagonal) display we developed has 960 x
234 pixels and utilizes a new memory-based active matrix thin film technology
with each pixel phosphor activated by electrons emitted by a proprietary carbon
nanotube network located approximately 10 microns (1/10th of a human hair) from
the pixels. As a result, each pixel phosphor brightness is controlled using a
maximum of only 40 volts. The carbon nanotubes and proprietary color phosphors
are precisely placed and separated utilizing our proprietary nanotube and
phosphor deposition technology. We have developed a process of maintaining
uniform carbon nanotube deposition independent of phosphor deposition. We have
also developed a method of enhancing nanotube electron emission to increase the
brightness of this type of display.
Some other characteristics of our display technology are as follows:
o We have developed a proprietary system which allows us to
evacuate our display; to rapidly vacuum seal it at a low
temperature to accommodate the matrix; and to create lithographic
type spacers to assemble our display utilizing only 0.7mm glass.
We thus obtain a display thickness of approximately 1/16th of an
inch, thinner than LCD (liquid crystal) and PDP (plasma)
displays.
o The display matrix, phosphor excitation system, and drivers are
all on one substrate.
o Our display is able to select and change the brightness of each
individual pixel, requiring only 40 volts on each pixel phosphor
to change the brightness from black to white. This compares to
thousands of volts required for other video phosphor based
displays, which leads to inherent breakdowns and short life.
o Our display has no backlight. Because power is only consumed when
a pixel is turned on, low power is needed to activate the whole
display. The display requires less than 20% the power required by
an LCD. This low power consumption could potentially allow use of
rechargeable batteries to operate TV products for wireless
applications and extend the battery operation time for portable
devices.
o The same basic display technology could potentially be utilized
in various size applications, from hand-held to TV size displays.
o Our proprietary matrix structures can be produced by existing
mass production TFT (thin film technology) LCD facilities, or
portions of these facilities.
20
o Our display eliminates display flicker.
o Our display has an approximately 1,000 times faster video
response time than an LCD, and matches the response time of a
cathode ray tube (CRT).
o Our display can be viewed with high contrast over approximately a
180 degree viewing angle, in both the horizontal and vertical
directions, which exceeds the viewing angle of LCDs.
o Also like CRTs, our display is capable of operating over a
temperature range (-40(degree)C to 85(degree)C) which exceeds the
range over which LCDs can operate, especially under cold
temperature conditions.
We believe our displays could potentially have a cost similar to a CRT
and thus less than current LCD or PDP displays (our display does not contain a
backlight, or color filter or polarizer, which represent a substantial portion
of the cost of an LCD).
During the past year we have also continued to pursue our encryption
business. We have sought encryption opportunities in both the commercial and
government security markets.
Our government market has been primarily handled by The Boeing Company
("Boeing") and its large distributors of the Thuraya satellite phones. The
Thuraya Satellite Network has grown as a communications provider due to its
geographic coverage, quality of service and cost effective usage. The third
Thuraya Geo-mobile satellite was successfully launched in January 2008, allowing
Thuraya to embark on major expansion plans to provide their mobile satellite
services in the Asia-Pacific region, thus potentially opening new markets for
CopyTele security solutions that are designed for the Thuraya network.
During fiscal 2007, we entered into a new three year agreement with
Boeing. Boeing now distributes 13 of our products, including our DCS-1400D
(docker voice encryption device), USS-900T (satellite fax encryption device),
USS-900TL (landline to satellite fax encryption device), USS-900WF (satellite
and cellular fax encryption device), USS-900WFL (landline to satellite and
cellular fax encryption device) and USS-900TC (satellite fax encryption to
computer) products, which were specifically designed for the Thuraya network.
Boeing sells these products under the brand name of Thuraya.
We are continuing to promote our Thuraya encryption solutions through
other Thuraya developers and resellers beside Boeing, including Asia Pacific
Satellite Industries ("APSI"). We offer a full line of voice, fax and data
encryption products that secure these communications, and our products are being
used by government agencies, military, and domestic and international
non-governmental organizations (NGOs) in the Middle East, Europe, Far East and
Africa.
APSI has manufactured new Thuraya handsets and docking units that allow
satellite and GSM cellular communications both outdoors and indoors. CopyTele
and APSI have developed connecting cables and compatibility arrangements that
customers can easily set up and utilize to secure their communications over the
Thuraya network and which are compatible with landline telephone systems. APSI's
new FDU-3500 docking unit for its SO-2510 phone is now available in the market.
This unit allows for outdoor and indoor operation of the satellite phone on the
Thuraya network. Our new PA-3500 and PA-3500T products allow compatibility
between our DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI
FDU-3500 docking unit and SO-2510 phone. We have continued to work on further
designs for encrypting the SO-2510 phone that we believe will increase customer
attraction to security by reducing the size of the encryption unit and greatly
improving the customer's graphical interface.
21
Our products provide secure communications with many different
satellite phones, including the Thuraya 7100/7101/SO-2510 handheld terminal
("HHT"), Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT, Globalstar
GSP-2800/2900 fixed phone, Iridium 9500/9505/9505A HHT, Inmarsat M4 and Mini "M"
HHT units from Thrane & Thrane and Nera. Through the use of our products,
encrypted satellite communications are available for many Thuraya docking units,
including Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter,
APSI's FDU-2500 and FDU-3500 Fixed Docking Units, and Sattrans's SAT-OFFICE
Fixed Docking Unit and SAT-VDA Hands-Free Car Kit.
We have also added Voice over Internet Protocol (VoIP) functions to the
DCS-1200 for corporate utilization over these popular new telephone systems.
In the commercial field, we licensed our encryption system for e-mail
to Digital Info Security Co. Inc. ("DISC"), located in Westminster, Colorado.
The system, our DCS-2200, integrates into DISC's e-mail services and allows
companies to encrypt all e-mail transactions in a manner transparent to the
individual user.
In furtherance of our relationship with DISC, during fiscal 2006 and
2007, we acquired an aggregate of 12,200,000 shares of DISC's common stock, all
of which were restricted securities. DISC's common stock is not registered under
the Securities Exchange Act of 1934, but is quoted on the Pink Sheets. According
to DISC's most recent public financial report, as of September 30, 2007 we held
approximately 12% of the outstanding common stock of DISC. More information on
DISC can be obtained on their website www.disecurityco.com.
Our operations and the achievement of our objectives in marketing,
production, and research and development are dependent upon an adequate cash
flow. Accordingly, in monitoring our financial position and results of
operations, particular attention is given to cash and accounts receivable
balances and cash flows from operations. Since our initial public offering, our
cash flows have been primarily generated through the sales of common stock in
private placements and upon exercise of stock options. Since 1999 we have also
generated cash flows from sales of our encryption products and services and in
fiscal 2008 we expect to commence receiving license fees from Videocon after
Videocon has obtained the necessary regulatory approvals in India for such
payments. During the past year we have continued to direct our encryption
marketing efforts to participate in the security opportunities created by the
U.S. Department of Homeland Security, the Defense Department, and the enactment
of laws such as HIPAA, the Sarbanes-Oxley Act, and Gramm-Leach-Bliley Act, which
mandate that government and private sector firms provide higher levels of
information privacy and security. We have pursued and are continuing to pursue
marketing and licensing opportunities for our display technology. To date we
have not received any revenue from sales or licensing of our display technology;
however, commencing in fiscal 2008 we expect to receive license fees from
Videocon after Videocon has obtained the necessary regulatory approvals in India
for such payments. We anticipate that current cash on hand, cash generated from
operations, and cash generated from the exercise of employee options will be
adequate to fund our operations at least through the end of the first quarter of
fiscal 2009.
22
CRITICAL ACCOUNTING POLICES
- ---------------------------
Our financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that management
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods.
We believe the following critical accounting polices affect the more
significant judgments and estimates used in the preparation of our financial
statements. For additional discussion on the application of these and other
accounting polices, refer to the financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended October 31, 2007.
Revenue Recognition
- -------------------
Revenues from sales are recorded when all four of the following
criteria are met: (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred and title has transferred or services have been rendered;
(iii) our price to the buyer is fixed or determinable; and (iv) collectibility
is reasonably assured.
Inventories
- -----------
Inventories are stated at the lower of cost, including material, labor
and overhead, determined on a first-in, first-out basis, or market, which
represents our best estimate of market value. We regularly review inventory
quantities on hand, particularly finished goods, and record a provision for
excess and obsolete inventory based primarily on forecasts of future product
demand. Our net loss is directly affected by management's estimate of the
realizability of inventories. To date, sales of our products have been limited.
Accordingly, there can be no assurance that we will not be required to reduce
the selling price of our inventory below our current carrying value in the
future.
Stock Based Compensation
- ------------------------
We account for stock options granted to employees, directors and
consultants using Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS
123R"). We recognize compensation expense for stock option awards on a
straight-line basis over the requisite service period of the grant. Determining
the appropriate fair value model and calculating the fair value of stock-based
awards requires judgment, including estimating stock price volatility,
forfeiture rates and expected life. If factors change and we employ different
assumptions in the application of SFAS No. 123R in future periods, the
compensation expense that we record under SFAS No. 123R may differ significantly
from what we have recorded in the current period.
23
RESULTS OF OPERATIONS
- ---------------------
Three months ended January 31, 2008 compared with three months ended January 31,
- --------------------------------------------------------------------------------
2007
- ----
Net Sales and Gross Profit
Net Sales. Net sales decreased by approximately $79,000 in the
three-month period ended January 31, 2008, to approximately $52,000, as compared
to approximately $131,000 in the comparable prior-year period. Revenue during
the current period was from encryption products, while revenue during the prior
year period was from encryption products and services. The decrease in net sales
resulted from a reduction in unit sales of approximately $19,000, to
approximately $52,000, as compared to approximately $71,000 in the comparable
prior-year period and a decrease in revenue from encryption services from
$60,000 in the comparable prior-year period to none in the current period. The
revenue from encryption services in the prior year period resulted from
engineering services billed to DISC. Our encryption sales have been limited and
are sensitive to individual large transactions. We believe that changes in sales
between periods generally represent the nature of the early stage of our product
and sales channel development.
Gross Profit. Gross profit from sales of encryption products and
services decreased by approximately $51,000 in the three-month period ended
January 31, 2008, to approximately $39,000, as compared to a gross profit of
approximately $90,000 in the comparable prior-year period. The decrease in gross
profit is primarily due to the decrease in sales. Gross profit as a percent of
net sales in the three-month period ended January 31, 2008 was approximately
75%, as compared to approximately 69% in the comparable prior-year period.
Because of the limited number of transactions during each of the periods, gross
profit percentages are sensitive to individual transactions.
Research and Development Expenses
Research and development expenses increased by approximately $310,000
in the three-month period ended January 31, 2008, to approximately $1,313,000,
from approximately $1,003,000 in the comparable prior-year period. The increase
in research and development expenses was principally due to an increase in
employee stock option compensation expense of approximately $205,000, an
increase in consultant stock option compensation expense of approximately
$45,000 and an increase in employee compensation and related costs, other than
stock option expense, of approximately $46,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$549,000 to approximately $1,419,000 in the three-month period ended January 31,
2008, from approximately $870,000 in the comparable prior-year period. The
increase in selling, general and administrative expenses was principally due to
an increase in employee stock option compensation expense of approximately
$175,000, an increase in consultant stock option compensation expense of
approximately $162,000, an increase in employee compensation and related costs,
other than stock option expense, of approximately $82,000, an increase
professional fees of approximately $75,000 and an increase in the provision for
doubtful accounts of $60,000, offset by the partial recovery of inventory from
an account receivable previously written off of approximately $29,000.
24
Interest Income
Interest income was approximately $7,000 in the three-month period
ended January 31, 2008, compared to approximately $10,000 in the comparable
prior-year period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
From our inception, we have met our liquidity and capital expenditure
needs primarily through the proceeds from sales of common stock in our initial
public offering, in private placements, upon exercise of warrants issued in
connection with the private placements and public offering, and upon the
exercise of stock options. In 2001 and 2002, we also received payments under a
technology development agreement. In addition, commencing in the fourth quarter
of fiscal 1999, we have generated cash flows from sales of our encryption
products and in fiscal 2008 we expect to commence receiving license fees from
Videocon after Videocon has obtained the necessary regulatory approvals in India
for such payments.
During the three months ended January 31, 2008, our cash used in
operating activities was approximately $835,000. This resulted from payments to
suppliers, employees and consultants of approximately $894,000, which was offset
by cash of approximately $52,000 received from collections of accounts
receivable related to sales of encryption products, and approximately $7,000 of
interest income received. Our cash used in investing activities during the three
months ended January 31, 2008 was approximately $21,247,000, which resulted from
a disbursement of $16,200,000 for the purchase of Videocon GDRs, a disbursement
$5,000,000 to issue a loan to Mars Overseas, purchases of short-term investments
consisting of certificates of deposit of $441,000 and purchases of approximately
$6,000 of equipment, offset by $400,000 received upon maturities of short-term
investments consisting of certificates of deposit. Our cash provided by
financing activities during the three months ended January 31, 2008 was
approximately $22,207,000, which resulted from the sale of our common stock to
Videocon for $16,200,000, the proceeds received of $5,000,000 upon obtaining a
loan from Mars Overseas and cash received upon the exercise of stock options of
approximately $1,007,000. Accordingly, during the three months ended January 31,
2008, our cash and cash equivalents increased by approximately $125,000 and our
short-term investments increased by $41,000. As a result, our cash, cash
equivalents, and short-term investments, at January 31, 2008 increased to
approximately $1,235,000 from approximately $1,069,000 at the end of fiscal
2007.
Accounts receivable decreased by $60,000 from $120,000 at the end of
fiscal 2007 to $60,000 at January 31, 2008. The decrease in accounts receivable
is a result of a provision for doubtful accounts of $60,000 related to accounts
receivable from DISC. Inventories increased by approximately $33,000 from
approximately $192,000 at October 31, 2007 to approximately $225,000 at January
31, 2008, primarily as a result of the timing of shipments and production
schedules. Investment in Videocon increased to $16,200,000 at January 31, 2008,
as a result of our purchase of Videocon global depository receipts for that
amount. Investment in DISC at cost of $417,000 has not changed at January 31,
2008 from the end of fiscal 2007. Loan receivable increased to $5,000,000 at
January 31, 2008, as a result of issuing a loan in that amount to Mars Overseas.
Accounts payable and accrued liabilities decreased by approximately $92,000 from
approximately $679,000 at the end of fiscal 2007 to approximately $587,000 at
January 31, 2008, as a result the timing of payments. Loan payable increased to
$5,000,000 at January 31, 2008, as a result obtaining a loan from Mars Overseas.
25
As a result of these changes, working capital at January 31, 2008
increased to approximately $966,000 from approximately $737,000 at the end of
fiscal 2007.
Our working capital includes inventory of approximately $225,000 at
January 31, 2008. Management has recorded our inventory at the lower of cost or
our current best estimate of net realizable value. To date, sales of our
products have been limited. Accordingly, there can be no assurance that we will
not be required to reduce the selling price of our inventory below our current
carrying value.
During the three-month periods ended January 31, 2008 and 2007, we
issued 448,575 shares and 548,800 shares, respectively, of common stock to
certain employees for services rendered, principally in lieu of cash
compensation, pursuant to the CopyTele, Inc. 2003 Share Incentive Plan (the
"2003 Share Plan"). We recorded compensation expense for the three-month periods
ended January 31, 2008 and 2007 of approximately $557,000 and $421,000,
respectively, for the shares of common stock issued to employees. In addition,
during the three-month periods ended January 31, 2008 and 2007, we issued 46,326
shares and 134,020 shares, respectively, of common stock to consultants for
services rendered pursuant to the 2003 Share Plan. We recorded consulting
expense for the three-month periods ended January 31, 2008 and 2007 of
approximately $60,000 and $95,000, respectively, for the shares of common stock
issued to consultants.
During the three-month periods ended January 31, 2008 and 2007, we
granted options to purchase 3,125,000 shares and 1,775,000 shares, respectively,
to employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $1.03 and $.61 per share, respectively, pursuant to
the 2003 Share Plan. During the three-month periods ended January 31, 2008 and
2007, stock options to purchase 1,174,200 shares and 1,612,230 shares,
respectively, of common stock were exercised with aggregate proceeds of
approximately $1,007,000 and $738,000, respectively.
26
During the three-month period ended January 31, 2008, we issued
20,000,000 shares of our common stock to an affiliate of Videocon for an
aggregate purchase price of $16,200,000 and we purchased 1,495,845 Videocon GDRs
for an aggregate purchase price of $16,200,000. On February 25, 2008 the Board
of Directors of Videocon recommended for approval at the annual general meeting
of Videocon to be held on March 31, 2008 a dividend of 3.5 rupees per equity
share (each Videocon GDR represents the equivalent of one Videocon equity
share). While the Videocon GDRs are held as security for the loan payable to
Mars Overseas, the agreement governing such loan provides that any dividends,
distributions, rights or other proceeds or benefits in respect of the Videocon
GDRs shall be promptly transferred to us free and clear of any encumbrances
under the agreements.
We believe that our existing cash, cash equivalents, short-term
investments and accounts receivable, together with cash flows from expected
sales of our encryption products and revenue relating to our thin, flat,
low-voltage phosphor display technology, including license fees we expect to
receive from Videocon once Videocon has obtained the necessary regulatory
approvals in India for such payments, and other potential sources of cash flows,
will be sufficient to enable us to continue in operation until at least the end
of the first quarter of fiscal 2009. We anticipate that, thereafter, we will
require additional funds to continue our marketing, production, and research and
development activities, and we will require outside funding if cash generated
from operations is insufficient to satisfy our liquidity requirements. However,
our projections of future cash needs and cash flows may differ from actual
results. If current cash and cash that may be generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell debt or
equity securities or to obtain a line of credit prior to the first quarter of
fiscal 2009. The sale of additional equity securities or convertible debt could
result in dilution to our stockholders. We currently have no arrangements with
respect to additional financing. There can be no assurance that we will generate
sufficient revenues in the future (through sales or otherwise) to improve our
liquidity or sustain future operations, that the necessary regulatory approvals
in India for payments of license fees by Videocon to us will be obtained, that
our production capabilities will be adequate, that other products will not be
produced by other companies that will render our products obsolete, or that
other sources of funding would be available, if needed, on favorable terms or at
all. If we cannot obtain such funds if needed, we would need to curtail or cease
some or all of our operations.
We are seeking to improve our liquidity through increased sales or
license of products and technology. In an effort to generate sales, we have
marketed our encryption products directly to U.S. and international
distributors, dealers and original equipment manufacturers that market our
encryption products and to end-users. We have been working with several large
organizations to provide them with both our hardware and software encryption
solutions for them to evaluate whether the solutions meet their security
requirements and have begun supplying several major U.S. companies with our
encryption products. We have pursued and are continuing to pursue marketing and
licensing opportunities for our display technology. To date we have not received
any revenue from sales or licensing of our display technology; however,
commencing in fiscal 2008 we expect to receive license fees from Videocon after
Videocon has obtained the necessary regulatory approvals in India for such
payments. During the three-month period ended January 31, 2008, we have
recognized revenue from sales of encryption products of approximately $52,000.
The following table presents our expected cash requirements for
contractual obligations outstanding as of January 31, 2008:
27
Payments Due by Period
-----------------------------------------------------------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
Consulting
Agreement $ 43,000 - - - $ 43,000
Noncancelable
Operating Leases $ 232,000 - - - $ 232,000
Loan Payable - - - $ 5,000,000 $ 5,000,000
----------- ---------- ---------- ------------- -------------------
Total Contractual
Cash Obligations $ 275,000 - - $ 5,000,000 $ 5,275,000
----------- ---------- ---------- ------------- -------------------
FORWARD-LOOKING STATEMENTS
- --------------------------
Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in Part II, Item 1A - "Risk
Factors" below and Note 1 to Condensed Financial Statements. You should read
this discussion and analysis along with our Annual Report on Form 10-K for the
year ended October 31, 2007 and the condensed financial statements included in
this Report. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
We have invested a portion of our cash on hand in short-term, fixed
rate and highly liquid instruments that have historically been reinvested when
they mature throughout the year. Although our existing instruments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on these securities could be affected at
the time of reinvestment, if any.
At January 31, 2008, our investment in Videocon GDRs is recorded at
fair value of approximately $17,271,000, including an unrealized gain of
approximately $1,071,000, and has exposure to price risk. The fair value of the
Videocon GDRs is based on the underlying price of Videocon's equity shares which
are traded on stock exchanges in India with prices quoted in rupees.
Accordingly, the fair value of the Videocon GDRs is subject to price risk and
foreign exchange risk. The potential loss in fair value resulting from a
hypothetical 10% adverse change in prices of Videocon equity shares quoted by
Indian stock exchanges and in foreign currency exchange rates, as of January 31,
2008 amounts to approximately $1,727,000.
28
Item 4. Controls and Procedures.
------------------------
We carried out an evaluation, under the supervision and with the
participation of our management including our Chairman of the Board and Chief
Executive Officer and our Vice President - Finance and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our Chairman of the Board and Chief
Executive Officer and our Vice President - Finance and Chief Financial Officer
concluded that our disclosure controls and procedures are effective as of the
end of the period covered by this report.
There was no change in our internal control over financial reporting
during the quarter ended January 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
--------------------------
Item 1A. Risk Factors.
------------
There have been no material changes in our risk factors from those
disclosed in our Annual Report on Form 10-K for the year ended October 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
On November 2, 2007, we also entered into a Share Subscription
Agreement (the "Subscription Agreement") with Mars Overseas Limited, an
affiliate of Videocon Industries Limited ("Mars Overseas"). Under the
Subscription Agreement, Mars Overseas agreed to purchase from us 20,000,000
shares of our common stock (the "CopyTele Shares") for an aggregate purchase
price of $16,200,000. The purchase of the CopyTele Shares pursuant to the
Subscription Agreement closed on November 6, 2007.
The CopyTele Shares were issued without registration in reliance on
the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, for transactions not involving a public offering. In claiming such
exemption, we relied on representations that, among other things, Mars Overseas
was acquiring the shares for its own account (and not for the account of others)
for investment and not with a view to the distribution thereof.
Item 6. Exhibits.
---------
10.1 Technology License Agreement, dated November 2, 2007, between
CopyTele, Inc. and Videocon Industries Limited.
10.2 GDR Purchase Agreement, dated November 2, 2007, between CopyTele
International Ltd. and Global EPC Ventures Limited. (Incorporated
by reference to Exhibit 2.1 to our Current Report on Form 8-K
filed December 21, 2007.)
29
10.3 Addendum to GDR Purchase Agreement, dated November 30, 2007,
between CopyTele International Ltd. and Global EPC Ventures
Limited. (Incorporated by reference to Exhibit 2.2 to our Current
Report on Form 8-K filed December 21, 2007.)
10.4 Share Subscription Agreement, dated November 2, 2007, between
CopyTele, Inc. and Mars Overseas Limited.
10.5 Loan and Pledge Agreement, dated November 2, 2007, Between Mars
Overseas Limited and CopyTele International Ltd.
10.6 Loan and Pledge Agreement, dated November 2, 2007, Between
CopyTele International Ltd. and Mars Overseas Limited.
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 11, 2008.
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 11, 2008.
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated March 11, 2008.
32.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated March 11, 2008.
30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COPYTELE, INC.
By: /s/ Denis A. Krusos
---------------------------------
Denis A. Krusos
Chairman of the Board and
Chief Executive Officer
March 11, 2008 (Principal Executive Officer)
By: /s/ Henry P. Herms
----------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
March 11, 2008 Financial and Accounting Officer)
31