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, 2009
Commission file number 0-11254
COPYTELE, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(631) 549-5900
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(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 [ ] (Do not check if a smaller reporting company) Smaller Reporting Company [ ]
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 9, 2009, the registrant had outstanding 137,141,218 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, 2009 (Unaudited)
and October 31, 2008 3
Condensed Consolidated Statements of Operations (Unaudited) for the three
months ended January 31, 2009 and 2008 4
Condensed Consolidated Statement of Shareholder's Equity (Unaudited)
for the three months ended January 31, 2009 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three
months ended January 31, 2009 and 2008 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7 - 22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 23 - 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 34
Item 4. Controls and Procedures. 34 - 35
PART II. OTHER INFORMATION
Item 1A. Risk Factors. 36
Item 6. Exhibits. 36
SIGNATURES 36
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
---------------
January October 31,
ASSETS 31, 2009 2008*
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,715,993 $ 478,599
Short-term investments in certificates of deposit and U.S. government securities 749,769 1,442,484
Accounts receivable, net of allowance for doubtful accounts of $223,000 111,790 103,000
Inventories 176,768 178,144
Prepaid expenses and other current assets 76,780 54,348
--------------- ---------------
Total current assets 2,831,100 2,256,575
INVESTMENT in U. S. government securities, noncurrent, at amortized cost - 749,711
INVESTMENT in Videocon Industries Limited global depository receipts,
at fair value 2,857,064 3,619,945
INVESTMENT in Digital Info Security Co. Inc. common stock, at fair value 338,700 841,800
PROPERTY AND EQUIPMENT, net 27,037 29,838
--------------- ---------------
$ 6,053,901 $ 7,497,869
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 469,940 $ 384,896
Accrued liabilities 210,267 69,364
Deferred revenue, non-refundable license fee - 313,332
--------------- ---------------
Total current liabilities 680,207 767,592
LOAN PAYABLE TO RELATED PARTY 5,000,000 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;
135,428,811 and 132,497,881 shares issued and outstanding, respectively 1,354,288 1,324,979
Additional paid-in capital 110,572,571 109,348,894
Loan receivable from related party (5,000,000) (5,000,000)
Accumulated deficit (93,163,051) (91,788,341)
Accumulated other comprehensive loss (13,390,114) (12,155,255)
--------------- ---------------
373,694 1,730,277
--------------- ---------------
$ 6,053,901 $ 7,497,869
=============== ===============
* Derived from audited balance sheet included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2008.
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,
------------------------------------
2009 2008
--------------- ---------------
NET REVENUE
Revenue from sales of encryption products, net $ 8,790 $ 52,225
Revenue from display engineering services, net 52,000 -
Display technology license fee 313,332 -
--------------- ---------------
Total net revenue 374,122 52,225
--------------- ---------------
COST AND OPERATING EXPENSES
Cost of encryption products sold 1,411 12,898
Cost of display engineering services 18,200 -
Research and development expenses 821,781 1,312,702
Selling, general and administrative expenses 914,722 1,419,157
--------------- ---------------
Total cost and operating expenses 1,756,114 2,744,757
--------------- ---------------
LOSS FROM OPERATIONS (1,381,992) (2,692,532)
INTEREST INCOME 7,282 7,207
--------------- ---------------
NET LOSS $ (1,374,710) $ (2,685,325)
=============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.01) $ (0.02)
=============== ===============
Shares used in computing net loss per share:
Basic and Diluted 133,876,310 126,739,111
=============== ===============
The accompanying notes are an integral part of these condensed statements.
4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS JANUARY 31, 2009 (UNAUDITED)
Loan
Receivable Accumulated
Common Stock Additional From Other Total
------------------------ Paid-in Related Accumulated Comprehensive Shareholder's
Shares Par Value Capital Party Deficit Loss Equity
----------- ----------- ------------- ----------- ------------ ------------ -----------
BALANCE, October 31, 2008 132,497,881 $ 1,324,979 $ 109,348,894 $(5,000,000) $(91,788,341) $(12,155,255) $1,730,277
Stock option compensation to
employees - - 228,876 - - - 228,876
Stock option compensation to
consultants - - 3,306 - - - 3,306
Common stock issued upon exercise
of stock options under stock
option plans 1,350,000 13,500 412,350 - - - 425,850
Common stock issued to employees
pursuant to stock incentive plans 1,578,295 15,783 578,171 - - - 593,954
Common stock issued to consultants
pursuant to stock incentive plans 2,635 26 974 - - - 1,000
Unrealized loss on investment in
Videocon Industries Limited global
depository receipts - - - - - (762,881) (762,881)
Unrealized loss on investment in
Digital Info Security Co., Inc. - - - - - (471,978) (471,978)
Net loss - - - - (1,374,710) - (1,374,710)
----------- ----------- ------------- ----------- ------------ ------------ -----------
BALANCE, January 31, 2009 135,428,811 $ 1,354,288 $ 110,572,571 $(5,000,000) $(93,163,051) $(13,390,114) $ 373,694
----------- ----------- ------------- ----------- ------------ ------------ -----------
The accompanying notes are an integral part of this statement.
5
COPYTELE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended
January 31,
------------------------------------
2009 2008
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (724,357) $ (894,346)
Cash received from encryption products and services 52,000 52,225
Interest received 14,973 7,207
-------------- ---------------
Net cash used in operating activities (657,384) (834,914)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disbursements to acquire Videocon Industries Limited global depository
receipts - (16,200,000)
Disbursements to acquire short-term investments (certificates of deposit
and U.S. government securities) - (441,000)
Proceeds from maturities of short-term investments (certificates of deposit
and U.S. government securities) 1,443,000 400,000
Proceeds from sale of Digital Info Security Co., Inc. common stock 25,928 -
Payments for purchases of property and equipment - (6,188)
-------------- ---------------
Net cash provided by (used in) investing activities 1,468,928 (16,247,188)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to Videocon Industries Limited - 16,200,000
Issuance of loan receivable from related party - (5,000,000)
Proceeds from issuance of loan payable to related party - 5,000,000
Proceeds from exercise of stock options 425,850 1,006,605
-------------- ---------------
Net cash provided by financing activities 425,850 17,206,605
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,237,394 124,503
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 478,599 669,141
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,715,993 $ 793,644
============== ===============
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $ (1,374,710) $ (2,685,325)
Stock option compensation to employees 228,876 1,088,373
Stock option compensation to consultants 3,306 206,976
Stock awards granted to employees pursuant to stock incentive plans 593,954 556,611
Stock awards granted to consultants pursuant to stock incentive plans 1,000 60,153
Provision for doubtful accounts - 60,000
Depreciation and amortization 2,801 2,302
Amortized discount on investments (U.S. government securities) (574) -
Loss on sale of Digital Info Security Co., Inc. common stock 5,194 -
Change in operating assets and liabilities:
Accounts receivable (8,790) -
Inventories 1,376 (33,189)
Prepaid expenses and other current assets (22,432) 1,158
Accounts payable and accrued liabilities 225,947 (91,973)
Deferred revenue (313,332) -
-------------- ---------------
Net cash used in operating activities $ (657,384) $ (834,914)
============== ===============
The accompanying notes are an integral part of these condensed statements.
6
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, 2009 and 2008. 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 in July 2007 and September 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, 2009, CopyTele Marketing was inactive. All
significant intercompany transactions have been eliminated in consolidation.
On November 1, 2008, we adopted Statement of Financial Standards ("SFAS")
No. 157, "Fair Value Measurement" ("SFAS No. 157"), except for non financial
assets and liabilities measured at fair value on a non-recurring basis, which
will be effective for us November 1, 2009. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements. In
accordance with SFAS No. 157, we have categorized our financial assets, based on
the priority of the inputs to the valuation technique, into a three-level fair
value hierarchy as set forth below. We do not have any financial liabilities
that are required to be measured at fair value on a recurring basis. If the
inputs used to measure the financial instruments fall within different levels of
the hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
7
Financial assets recorded in the accompanying condensed consolidated
balance sheets are categorized based on the inputs to the valuation techniques
as follows:
Level 1 - Financial assets whose values are based on unadjusted quoted
prices for identical assets or liabilities in an active market which we
have the ability to access at the measurement date (examples include active
exchange-traded equity securities and most U.S. Government and agency
securities).
Level 2 - Financial assets whose value are based on quoted market prices in
markets where trading occurs infrequently or whose values are based on
quoted prices of instruments with similar attributes in active markets. We
do not currently have any Level 2 financial assets.
Level 3 - Financial assets whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant
to the overall fair value measurement. These inputs reflect management's
own assumptions about the assumptions a market participant would use in
pricing the asset. We do not currently have any Level 3 financial assets.
As of January 31, 2009, our Level 1 financial assets consist of the
following:
Fair Value
as of
January 31,
2009
-----------
Money market funds - Cash and cash equivalents $ 207,953
Certificates of deposit - Cash and cash equivalents 300,000
U.S. government securities - Cash and cash equivalents 999,900
U.S. government securities - Short-term investments 749,769
Videocon Industries Limited global depository receipts 2,857,064
Digital Info Security Co., Inc. common stock 338,700
The adoption of SFAS No. 157 did not have a material effect on our
consolidated financial statements. The adoption of the deferred portion of SFAS
No. 157 is not expected to have a material effect on our consolidated financial
statements. On November 1, 2008, we also adopted SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS
No. 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. The adoption of SFAS No. 159 did not have
a material effect on our consolidated financial statements.
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,
2008, for more extensive disclosures than contained in these condensed financial
statements.
8
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 addition, commencing in the fourth quarter of fiscal 1999, we have
generated cash flows from sales of our encryption products and services and in
May 2008 commenced receiving license fees related to our display technology from
Videocon pursuant to the License Agreement (as defined below).
During the three months ended January 31, 2009, our cash used in operating
activities was approximately $657,000. This resulted from payments to suppliers,
employees and consultants of approximately $724,000, which was offset by cash of
$52,000 received from collections of accounts receivable related to sales of
encryption products and display technology engineering services, and
approximately $15,000 of interest income received. Our cash provided by
investing activities during the three months ended January 31, 2009 was
approximately $1,469,000, which resulted from $1,443,000 received upon
maturities of short-term investments consisting of certificates of deposit and
U.S. government securities and approximately $26,000 received upon the sale of
Digital Info Security Co. Inc. common stock. Our cash provided by financing
activities during the three months ended January 31, 2009 was approximately
$426,000, which resulted from cash received upon the exercise of stock options.
Accordingly, during the three months ended January 31, 2009, our cash and cash
equivalents increased by approximately $1,237,000 and our investments in
certificates of deposit and U.S. government securities decreased by
approximately $1,442,000. As a result, our cash, cash equivalents, and
investments in certificates of deposit and U.S. government securities at January
31, 2009 decreased to approximately $2,466,000 from approximately $2,671,000 at
the end of fiscal 2008. Our operating cash accounts are maintained at
FDIC-insured banks. Our bank accounts and certificates of deposit are maintained
within FDIC coverage limits.
Total employee compensation expense during the three-month periods ended
January 31, 2009 and 2008 was approximately $984,000 and $1,797,000,
respectively. During the three-month periods ended January 31, 2009 and 2008, a
significant portion of employee compensation consisted of the issuance of stock
and stock options to employees in lieu of cash compensation. We recorded
compensation expense for the three-month periods ended January 31, 2009 and 2008
of approximately $594,000 and $557,000, respectively, for shares of common stock
issued to employees. We recorded approximately $229,000 and $1,088,000 of
stock-based compensation expense, related to stock options granted to employees
and directors, during the three-month periods ended January 31, 2009 and 2008,
respectively. It is managements' intention to continue to compensate employees
by issuing stock or stock options.
We believe that our existing cash, cash equivalents, investments in
certificates of deposit, investments in U.S. government securities 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 and royalties from Videocon, and other
potential sources of cash flows, will be sufficient to enable us to continue our
marketing, production, and research and development activities. 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
9
to satisfy our liquidity requirements, we may seek to sell debt or equity
securities or to obtain a line of credit. The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. It
is also management's intention to continue to compensate employees by issuing
stock or stock options. 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, license fees and royalties, or otherwise)
to satisfy our liquidity requirements or sustain future operations, 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.
Investment in and Related Party Transactions with Videocon Industries Limited
- -----------------------------------------------------------------------------
In November 2007, we entered into a Technology License Agreement (as
amended in May 2008, 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 commencing
in May 2008, and an agreed upon royalty from Videocon based on display sales by
Videocon. In April 2008, the Indian Government approved the License Agreement
and in May 2008, we received the first installment of the license fee of $2
million.
Under the License Agreement, Videocon, with our assistance, is to provide
the design and process engineering required to produce display modules, and also
is to provide all tooling and fixtures required for the production process. As
part of our assistance to Videocon to produce such display modules, we have been
exchanging information with Videocon employees so that they may understand the
CopyTele technology. We are currently cooperating with Videocon to jointly
implement the CopyTele technology prior to production, to produce prototypes of
such modules. Videocon is utilizing its display processing technology and
facilities and is producing our display matrix. The matrix is the main component
of our display, since it contains the structure to accommodate our electron
emission technology and the color phosphors that are used to illuminate our
display. CopyTele and Videocon are also working together to incorporate another
version of our display technology. Improvements to the technology, when and if
available, are to be jointly owned by CopyTele and Videocon. Significant
improvements, as defined in the License Agreement, may result in additional
compensation to CopyTele. CopyTele has determined that any improvements which
are not significant in nature are inconsequential.
The arrangement with Videocon also provides for each of the parties to
designate an advisor to the other party's Board of Directors. The purpose of the
advisor to the Board of Directors is to provide knowledge to the Board of the
display market and to apprise the Board of developments in this market. CopyTele
believes this to be inconsequential to the operation of the License Agreement.
10
Under the License Agreement we continue to have the right to produce and
market products utilizing our technology. We also continue to have the right to
utilize Volga Svet Ltd., a Russian display company that we have been working
with for more than eleven years ("Volga"), and an Asian company that CopyTele
has been working with for more than five years, to produce and market, products
utilizing the Licensed Technology. Additional licenses of the Licensed
Technology to third parties require the joint agreement of CopyTele and
Videocon.
In November 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 purchased
20,000,000 shares of our common stock (the "CopyTele Shares") from us for an
aggregate purchase price of $16,200,000, which was determined by management to
approximate fair market value. The purchase of the CopyTele Shares pursuant to
the Subscription Agreement closed in November 2007.
Also in November 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"), acquired by Global on the open market for an
aggregate purchase price of $16,200,000, which was determined by management to
approximate fair market value. Videocon's global depository receipts are listed
on the Luxembourg Stock Exchange. The purchase of the Videocon GDRs pursuant to
the Purchase Agreement closed in December 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 entered into two
Loan and Pledge Agreements in November 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 in December 2007.
We previously reported the $5,000,000 loan receivable as an asset on our
condensed consolidated balance sheets at January 31, 2008 and April 30, 2008.
During the three months ended July 31, 2008, it was determined that the loan
receivable should have been reported within shareholders' equity, because the
loan receivable is secured by the CopyTele Shares and the Subscription Agreement
and Loan and Pledge Agreement were entered into concurrently. Accordingly, we
11
have classified the loan receivable as a contra-equity in the accompanying
condensed consolidated balance sheets. In addition, we previously reported the
issuance of the $5,000,000 loan receivable as cash used in investing activities
on our condensed consolidated statement of cash flows for the three-month and
six-month periods ended January 31, 2008 and April 30, 2008. Because of the
change in classification of the loan receivable, we have also changed the
classification of the loan receivable as cash flows from financing activities in
the accompanying condensed consolidated statement of cash flows.
Revenue Recognition
-------------------
Revenues 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.
We have assessed the guidance of Emerging Issues Task Force No. 00-21
"Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") to determine
whether multiple deliverables in our arrangement with Videocon represent
separate units of accounting. Under the License Agreement, CopyTele is required
to: (a) disclose to Videocon the Licensed Technology and provide reasonable
training of Videocon personnel; (b) jointly cooperate with Videocon to produce
prototypes prior to production; and (c) assist Videocon in preparing for
production. CopyTele has determined that these performance obligations do not
have value to Videocon on a standalone basis, as defined in EITF 00-21, and
accordingly they do not represent separate units of accounting.
We have established objective and reasonable evidence of fair value for the
royalty to be earned during the production period based on analysis of the
pricing for similar agreements. Accordingly, we have determined that the license
fee of $11 million to be paid during the pre-production period and royalties on
product sales reflects the established fair value for these deliverables. We
will recognize the $11 million license fee over the estimated period that we
expect to provide cooperation and assistance during the pre-production period,
limiting the revenue recognized on a cumulative basis to the aggregate license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized. On this basis, we have recognized license fee
revenue during the three months ended January 31, 2009 of approximately
$313,000. License fee payments received from Videocon which are in excess of the
amounts recognized as revenue ($-0- as of January 31, 2009 and approximately
$313,000 as of October 31, 2008) are recorded as non-refundable deferred revenue
on the accompanying condensed consolidated balance sheets.
Investment in Videocon
----------------------
Our investment in Videocon 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
loss, 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 price on the Luxembourg Stock Exchange, which
12
price 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 loss and fair value of our investment in Videocon as of January 31,
2009 and October 31, 2008, are as follows:
January 31, 2009 October 31, 2008
---------------- ----------------
Cost $ 16,200,000 $ 16,200,000
Unrealized loss (13,342,936) (12,580,055)
---------------- ----------------
Fair Value $ 2,857,064 $ 3,619,945
================ ================
SFAS No. 115, "Accounting for Certain Investments in Debt or Equity
Securities", requires an evaluation to determine if the decline in fair value of
an investment is either temporary or other than temporary. Unless evidence
exists to support a realizable value equal to or greater than the cost of the
investment, a write-down accounted for as a realized loss should be recorded. We
assess at each reporting period our investment in Videocon to determine if a
decline that is other than temporary has occurred. In evaluating the realizable
value of the investment in Videocon, we considered the requirement that the
Videocon GDRs must be held in escrow for seven years from the purchase closing
date of December 2007 as security for the loan from Mars Overseas to CopyTele
International. Videocon's financial condition and its future potential in both
its Consumer Electronics & Home Appliances segment and its Crude Oil & Natural
Gas segment are also evaluated. Based on our evaluation, we have determined that
the decline in our investment in Videocon is due to the current economic climate
and that such decline is temporary. Accordingly, a realized loss was not
recognized during the quarter ended January 31, 2009. The unrealized loss
recognized during the quarter ended January 31, 2009 is reflected in
comprehensive loss in the accompanying condensed consolidated statement of
shareholder's equity.
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 SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No.123R"). We recognize
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the grant. We recorded stock-based compensation
expense, related to stock options granted to employees and non-employee
directors, of approximately $229,000, and $1,088,000 during the three-month
periods ended January 31, 2009 and 2008, respectively, in accordance with SFAS
No. 123R. Such compensation expense is included in the accompanying 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, 2009 and 2008 by $-0-, and $0.01, respectively.
13
Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the three-months periods
ended January 31, 2009 and 2008 was approximately $17,000, and $-0-,
respectively, of expense related to the amortization of compensation cost for
stock options granted in prior periods but not yet vested. As of January 31,
2009, there was approximately $17,000 of unrecognized compensation cost related
to non-vested share-based compensation arrangements for stock options granted to
employees and directors which is expected to be amortized during the current
fiscal year.
We also account for stock options granted to consultants using SFAS No.
123R. We recognized consulting expense for options granted to non-employee
consultants, during the three-months periods ended January 31, 2009, and 2008,
of approximately $3,000, and $207,000, respectively. Such consulting expense is
included in the accompanying 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. As
of January 31, 2009, there was approximately $10,000 of unrecognized consulting
expense related to non-vested share-based compensation arrangements for stock
options granted to consultants which is expected to be amortized during the
current fiscal year.
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 months ended January 31, 2009 consisted of awards of
options with 10-year terms which vested immediately. Stock options granted
during the three months 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.
We estimated the fair value of stock option awards using the following
assumptions:
For the Three Months
Ended January 31,
------------------------
2009 2008
-------- --------
Expected term (in years) 2.3 4.4
Volatility 95% 93%
Risk-free interest rate 0.67% 3.91%
Dividend yield 0 0
Weighted average fair value at grant date $0.16 $0.70
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
14
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.
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 estimated 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. 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.
Stock Option Activity
- ---------------------
During the three-month periods ended January 31, 2009 and 2008, we granted
options to purchase 1,360,000 shares and 3,125,000 shares, respectively, to
employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $0.31 and $1.03 per share, respectively, pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
three-month periods ended January 31, 2009 and 2008, stock options to purchase
1,350,000 shares and 1,174,200 shares, respectively, of common stock were
exercised with aggregate proceeds of approximately $426,000 and $1,007,000,
respectively.
15
Stock Option Plans
- ------------------
As of January 31, 2009, we have three stock option plans: the CopyTele,
Inc. 1993 Stock Option Plan (the "1993 Plan"), the CopyTele, Inc. 2000 Share
Incentive Plan ("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.
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.
Information regarding the 1993 Plan for the three months ended January 31, 2009
is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
------------- ------------------ -----------------
Shares Under Option at October 31, 2008 779,000 $1.10
Cancelled (43,000) $1.31
-------------
Shares Under Option and Exercisable at
January 31, 2009 736,000 $1.09 $-0-
-------------
The following table summarizes information about stock options outstanding
under the 1993 Plan as of January 31, 2009:
Options Outstanding and Exercisable
-------------------------------------------------------------------------
Weighted
Average
Remaining Weighted
Range of Number Contractual Average
Exercise Prices Outstanding Life Exercise Price
-------------------------- --------------- --------------- --------------
$0.84 to $1.00 575,000 0.79 $0.99
$1.13 to $1.56 161,000 0.75 $1.44
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.
16
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, 2009 is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
------------- ------------------ -----------------
Shares Under Option at October 31, 2008 1,772,466 $0.79
Exercised - $-0-
-------------
Shares Under Option and Exercisable at
January 31, 2009 1,772,466 $0.79 $-0-
-------------
The following table summarizes information about stock options outstanding
under the 2000 Share Plan as of January 31, 2009:
Options Outstanding and Exercisable
-------------------------------------------------------------------------
Weighted
Average
Remaining Weighted
Range of Number Contractual Average
Exercise Prices Outstanding Life Exercise Price
-------------------------- --------------- --------------- --------------
$0.40 445,000 2.63 $0.40
$0.69 505,466 1.92 $0.69
$0.94 - $1.09 822,000 1.67 $1.06
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, 2009, 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, August 22, 2007 and
December 3, 2008, 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, 55,000,000 shares, and 70,000,000 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.
17
Information regarding the 2003 Share Plan for the three months ended
January 31, 2009 is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
------------- ------------------ -----------------
Shares Under Option at October 31, 2008 17,217,045 $0.79
Granted 1,360,000 $0.31
Exercised (1,350,000) $0.32
Cancelled (1,200,000) $0.91
-------------
Shares Under Option at January 31, 2009 16,027,045 $0.78 $37,200
-------------
Options Exercisable at January 31, 2009 15,917,045 $0.78 $37,200
-------------
The following table summarizes information about stock options outstanding
under the 2003 Share Plan as of January 31, 2009:
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------------------------
Weighted
Average Weighted Weighted Weighted
Number Remaining Average Number Average Average
Range of Outstanding Contractual Exercise Exercisable Remaining Exercise
Exercise Prices at 1/31/09 Life Price at 1/31/09 Contractual Life Price
- -------------------- ------------------ ---------------- ------------- -------------- ----------------- ------------
$0.25 - $0.43 1,180,000 4.74 $0.33 1,180,000 4.74 $0.33
$0.52 - $0.77 5,420,970 6.75 $0.63 5,420,970 6.75 $0.63
$0.81 - $1.46 9,426,075 7.17 $0.93 9,316,075 7.17 $0.93
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, 2009, 15,691,791
shares were available for future grants under the 2003 Share Plan.
Stock Grants
- ------------
We account for stock grants to employees and consultants based on their
grant date fair value. During the three-month periods ended January 31, 2009 and
2008, we issued 1,578,295 shares and 448,575 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, 2009 and 2008 of approximately
$594,000 and $577,000, respectively, for the shares of common stock issued to
employees. In addition, during the three-month periods ended January 31, 2009
and 2008, we issued 2,635 shares and 46,326 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, 2009
and 2008 of approximately $1,000 and $60,000, respectively, for the shares of
common stock issued to consultants.
18
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 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 2009, one
customer in the Display Technology Segment represented 84% of total net revenue
and one customer in the Encryption Products and Services Segment represented 14%
of total net revenue. 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 revenue. At January 31, 2009, one customer
in the Encryption Products and Services Segment represented 92% of net accounts
receivable. At October 31, 2008, one customer in the Encryption Products and
Services Segment represented 100% of net accounts receivable.
4. SHORT-TERM INVESTMENTS AND INVESTMENT IN U.S. GOVERNMENT SECURITIES
-------------------------------------------------------------------
At January 31, 2009 and October 31, 2008, we had marketable securities that
were classified as "held-to-maturity securities" and were carried at amortized
costs. Held-to-maturity securities consist of the following:
January 31, October 31,
2009 2008
----------- -----------
Current:
U.S. Government securities $ 749,769 $ 999,484
Certificates of deposit - 443,000
----------- -----------
Total current held-to-maturity securities $ 749,769 $ 1,442,484
=========== ===========
Noncurrent:
U.S. Government securities $ - $ 749,711
----------- -----------
Total noncurrent held-to-maturity securities $ - $ 749,711
=========== ===========
Total held-to-maturity securities $ 749,769 $ 2,192,195
=========== ===========
At January 31, 2009, the length of time until maturity of current
held-to-maturity securities was less than twelve months. At October 31, 2008,
the length of time until maturity of current held-to-maturity securities was
less than twelve months and the length of time until maturity of noncurrent
held-to-maturity securities was fifteen months. At January 31, 2009, and October
31, 2008, the estimated fair value of each investment approximated its amortized
cost, and, therefore, there were no significant unrecognized holding gains or
losses.
19
5. INVESTMENT IN AND RELATED PARTY TRANSACTIONS WITH DIGITAL INFO SECURITY
-----------------------------------------------------------------------
CO., INC.
---------
In February 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 DISC License Agreement expired in February
2009. 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. In May and July
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. In November 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.
During the three months ended January 31, 2009, we sold 910,000 shares of
DISC's common stock for approximately $26,000 and recorded a loss on such sale
of approximately $5,000. As of January 31, 2009, we held 11,290,000 shares of
DISC's common stock. DISC's common stock is not registered under the Securities
Exchange Act of 1934, but is quoted on the Pink Sheets. Based on the number of
DISC shares outstanding as set forth in DISC's September 30, 2008 public
financial report, the most recent available, as of January 31, 2009 we held
approximately 11% of the outstanding common stock of DISC.
Our investment in DISC 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 loss,
net of the related tax effects, in shareholders' equity. Cost is determined
using the specific identification method. The fair value of DISC's common stock
is based on the closing price on the Pink Sheets. The cost, unrealized (loss)
gain and fair value of our investment in DISC as of January 31, 2009 and October
31, 2008, are as follows:
January 31, October 31,
2009 2008
----------- -----------
Cost $ 385,878 $ 417,000
Unrealized (loss) gain (47,178) 424,800
----------- -----------
Fair Value $ 338,700 $ 841,800
=========== ===========
6. INVENTORIES
-----------
Inventories consist of the following as of:
January 31, October 31,
2009 2008
----------- -----------
Component parts $ 67,706 $ 67,853
Work-in-process 4,840 5,079
Finished products 104,222 105,212
----------- -----------
$ 176,768 $ 178,144
=========== ===========
20
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
share 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, 2009 and 2008, were options to purchase 18,535,511 shares and
20,248,511 shares, respectively.
8. EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
----------------------------------------
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which changes how an entity accounts for the
acquisition of a business. When effective, SFAS No. 141R will replace existing
SFAS No. 141, "Business Combinations" ("SFAS No. 141"), in its entirety. SFAS
No. 141R carries forward the existing requirements to account for all business
combinations using the acquisition method (formerly called the purchase method).
In general, SFAS No. 141R will require acquisition-date fair value measurement
of identifiable assets acquired, liabilities assumed, and noncontrolling
interest in the acquired entity. SFAS No. 141R will eliminate the current
cost-based purchase method under SFAS No. 141. SFAS No. 141R is effective for
fiscal years and interim periods within those fiscal years beginning on or after
December 15, 2008. The adoption of SFAS No. 141R is not expected to have a
material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years and interim periods
within those fiscal years beginning on or after December 15, 2008. The adoption
of SFAS No. 160 is not expected to have a material effect on our consolidated
financial statements.
9. INCOME TAXES
------------
We file Federal and New York State income tax returns. Due to net operating
losses, the statute of limitations remains open since the fiscal year ended
October 31, 1994. We account for interest and penalties related to income tax
matters in selling, general and administrative expenses.
On November 1, 2007, we adopted FIN 48. FIN 48 clarifies the accounting for
uncertainties in income taxes recognized in an enterprise's financial
statements. There were no unrecognized tax benefits as of the date of our
adoption of FIN 48 and its adoption did not have a material effect on our
financial statements.
21
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) Display Technology and (ii)
Encryption Products and Services. The following represents selected financial
information for our segments for the three-months ended January 31, 2009 and
2008:
Display Encryption
Segment Data Technology Products and Total
Services
------------------------------------ ---------- ------------ --------
Three Months Ended January 31, 2009:
Net revenue $ 365,332 $ 8,790 $374,122
Net loss (407,808) (966,902)(1,374,710)
Three Months Ended January 31, 2008:
Net revenue - $ 52,225 $ 52,225
Net loss (1,496,273) (1,189,052)(2,685,325)
22
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
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.
In November 2007, we entered into a Technology License Agreement (as
amended, the "License Agreement") with Videocon Industries Limited, an Indian
company ("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 and an agreed upon royalty from Videocon
based on display sales by Videocon. In April 2008, the Indian Government
approved the License Agreement and in May 2008, we received the first
installment of the license fee of $2 million.
Videocon Industries Limited is the flagship company of the Videocon Group,
one of India's leading business houses. Videocon Group is a fully integrated
consumer electronics and home appliances enterprise with backward integration in
plasma panel, CRT glass, color picture tubes and other key components for the
consumer electronics, home appliances and components industries. The company
also operates in the oil & gas sector. The Videocon Group has sales and service
networks throughout India and operates facilities in Europe and elsewhere in the
world.
CopyTele and Videocon are working together to implement our technology into
production display modules. The display modules consist of our low voltage
phosphor displays, the attached associated driver circuits, and controller
circuits. Under the License Agreement, Videocon, with assistance from CopyTele,
is to provide the design and process engineering required to produce such
display modules, and also is to provide all tooling and fixtures required for
the production process. Videocon has a group of qualified and experienced
personnel assigned to this program. As part of our assistance to Videocon to
produce such display modules, we have been exchanging information with Videocon
employees so that they may understand the CopyTele technology. We are currently
cooperating with Videocon to jointly implement the CopyTele technology prior to
production to produce prototypes of such modules. Videocon is utilizing its
display processing technology and facilities and is producing our display
matrix. The matrix is the main component of our display, since it contains the
structure to accommodate our electron emission technology and the color
phosphors that are used to illuminate our display. CopyTele and Videocon are
also working together to incorporate another version of our display technology.
Improvements to the technology are to be jointly owned by CopyTele and Videocon.
23
Under the License Agreement we continue to have the right to produce and
market products utilizing the Licensed Technology. We also continue to have the
right to utilize Volga Svet Ltd., a Russian display company that we have been
working with for more than eleven years ("Volga"), and an Asian company that
CopyTele has been working with for more than five years, to produce and market,
products utilizing the Licensed Technology. Additional licenses of the Licensed
Technology to third parties require the joint agreement of CopyTele and
Videocon.
In connection with 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.
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 technology improves on 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.
24
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 power than an LCD. This lower 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.
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 expansion plans to provide its mobile satellite services in
the Asia-Pacific region.
Our three year agreement with Boeing continued during fiscal 2008. Boeing
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.
25
We are continuing to promote our Thuraya encryption solutions through other
Thuraya developers and resellers beside Boeing. 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, as well as domestic
and international non-governmental organizations (NGOs) in the Middle East,
Europe, Far East and Africa.
Asia Pacific Satellite Industries ("APSI") has manufactured new Thuraya
handsets and docking units that allow satellite communications both outdoors and
indoors. CopyTele has 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.
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 added Voice over Internet Protocol (VoIP) functions to the DCS-1200
for corporate utilization over popular new telephone systems.
In the past year, we have uncovered new opportunities to market our
products for securing landline and wireless voice and fax communications. Our
USS-900AF, USS-900WF and USS-900WFL products are being evaluated for use by two
Middle Eastern governments for encrypting fax communications. Also, a Far
Eastern government is in the process of determining the system requirements
necessary to encrypt voice communications utilizing our DCS-1200 and DCS-1400
products.
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. We are
continuing to direct our encryption marketing efforts to opportunities in both
the commercial and government security markets and have recently uncovered new
opportunities to market products to Middle Eastern and Far Eastern governments
to secure voice and fax communications. In addition, in fiscal 2008, we entered
into the License Agreement with Videocon and in May 2008, we commenced receiving
from Videocon license fees related to our display technology.
26
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, 2008.
Revenue Recognition
- -------------------
Revenues 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.
We have assessed the guidance of Emerging Issues Task Force No. 00-21
"Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") to determine
whether multiple deliverables in our arrangement with Videocon represent
separate units of accounting. Under the License Agreement, CopyTele is required
to: (a) disclose to Videocon the Licensed Technology and provide reasonable
training of Videocon personnel; (b) jointly cooperate with Videocon to produce
prototypes prior to production; and (c) assist Videocon in preparing for
production. CopyTele has determined that these performance obligations do not
have value to Videocon on a standalone basis, as defined in EITF 00-21, and
accordingly they do not represent separate units of accounting.
We have established objective and reasonable evidence of fair value for the
royalty to be earned during the production period based on analysis of the
pricing for similar agreements. Accordingly, we have determined that the license
fee of $11 million to be paid during the pre-production period and royalties on
product sales reflects the established fair value for these deliverables. We
will recognize the $11 million license fee over the estimated period that we
expect to provide cooperation and assistance during the pre-production period,
limiting the revenue recognized on a cumulative basis to the aggregate license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized. On this basis, we have recognized license fee
revenue during the three months ended January 31, 2009 of $313,000. License fee
payments received from Videocon which are in excess of the amounts recognized as
revenue ($-0- as of January 31, 2009 and approximately $313,000 as of October
31, 2008) are recorded as non-refundable deferred revenue on the accompanying
condensed consolidated balance sheets.
27
Investment Securities
- ---------------------
We classify our investment securities in one of two categories:
available-for-sale or held-to-maturity. Available-for-sale securities are
recorded at fair value. Unrealized gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a component of accumulated other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. Held-to-maturity
securities, which are investment securities that the company has the intent and
ability to hold to maturity, are carried at amortized cost. The amortization of
premiums and accretion of discounts are recorded on the level yield (interest)
method, over the period from the date of purchase to maturity. When sales do
occur, gains and losses are recognized at the time of sale and the determination
of cost of securities sold is based upon the specific identification method.
Dividend and interest income are recognized when earned.
We monitor the value of our investments for indicators of impairment,
including changes in market conditions and the operating results of the
underlying investment that may result in the inability to recover the carrying
value of the investment. We will record an impairment charge if and when we
believe any such investment has experienced a decline that is other than
temporary.
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 No.
123R"). We recognize compensation expense for stock option awards on a
straight-line basis over the requisite service period of the grant. During the
three-month periods ended January 31, 2009 and 2008, we recorded stock-based
compensation expense, related to stock options granted to employees and
non-employee directors, of approximately $229,000 and $1,088,000, respectively,
and consulting expense, for options granted to non-employee consultants, of
approximately $3,000 and $207,000, respectively. See Note 2 to the Condensed
Consolidated Financial Statements for additional information.
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.
28
RESULTS OF OPERATIONS
- ---------------------
Three months ended January 31, 2009 compared with three months ended January 31,
- --------------------------------------------------------------------------------
2008
- ----
Net Revenue
Net revenue increased by approximately $322,000 in the three months ended
January 31, 2009, to approximately $374,000, as compared to approximately
$52,000 in the comparable prior-year period. Revenue recognized during the
current period included display technology license fees related to the License
Agreement with Videocon of approximately $313,000, as compared to none in the
comparable prior-year period and revenue from display technology engineering
services of $52,000, as compared to none in the comparable prior-year period.
The revenue from display technology engineering services resulted from
engineering services billed to Volga. Revenue from sales of encryption products
decreased by approximately $43,000 in the three months ended January 31, 2009,
to approximately $9,000, as compared to approximately $52,000 in the comparable
prior-year period. Our encryption revenue has been limited and is sensitive to
individual large transactions. We believe that changes in revenue between
periods generally represent the nature of the early stage of our product and
sales channel development.
Cost of Encryption Products Sold
The cost of encryption products sold decreased by approximately $12,000 in
the three months ended January 31, 2009, to approximately $1,000, as compared to
approximately $13,000 in the comparable prior-year period. The decrease in cost
of encryption products sold was primarily due to a decrease in unit shipments of
encryption products.
Cost of Display Engineering Services
The cost of display engineering services increased to approximately $18,000
in the three months ended January 31, 2009, as compared to none in the
comparable prior year period, as there was no revenue from display engineering
services in the prior year period.
Research and Development Expenses
Research and development expenses decreased by approximately $491,000 in
the three months ended January 31, 2009, to approximately $822,000, from
approximately $1,313,000 in the comparable prior-year period. The decrease in
research and development expenses was principally due to a decrease in employee
stock option compensation expense of approximately $496,000, which resulted from
a decrease in the number of options granted and a decrease in the weighed
average fair value at grant dates, a decrease in consultant stock option expense
of approximately $45,000, offset by an increase in travel expense of
approximately $30,000, an increase in employee compensation and related costs,
other than stock option expense, of approximately $29,000, and an increase in
patent related expenses of approximately $27,000.
29
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$504,000 to approximately $915,000 in the three months ended January 31, 2009,
from approximately $1,419,000 in the comparable prior-year period. The decrease
in selling, general and administrative expenses was principally due to a
decrease in employee stock option compensation expense of approximately
$364,000, which resulted from a decrease in the number of options granted and a
decrease in the weighed average fair value at grant dates, a decrease consultant
stock option expense of approximately $159,000, a decrease in the provision for
doubtful accounts of approximately $60,000, offset by increase in professional
fees of approximately $54,000.
Interest Income
Interest income was approximately $7,000 in the three months ended January
31, 2009, compared to approximately $7,000 in the comparable prior-year period.
The interest income earned on the additional funds available for investment on
the current period was offset by a reduction in prevailing interest rates.
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 addition, commencing in the fourth quarter of fiscal 1999, we have
generated cash flows from sales of our encryption products and in May 2008, we
commenced receiving license fees related to our display technology from Videocon
pursuant to the License Agreement.
During the three months ended January 31, 2009, our cash used in operating
activities was approximately $657,000. This resulted from payments to suppliers,
employees and consultants of approximately $724,000, which was offset by cash of
approximately $52,000 received from collections of accounts receivable related
to sales of encryption products and display technology engineering services, and
approximately $15,000 of interest income received. Our cash provided by
investing activities during the three months ended January 31, 2009 was
approximately $1,469,000, which resulted from approximately $1,443,000 received
upon maturities of short-term investments consisting of certificates of deposit
and U.S. government securities and approximately $26,000 received upon the sale
of Digital Info Security Co. Inc. ("DISC") common stock. Our cash provided by
financing activities during the three months ended January 31, 2009 was
approximately $426,000, which resulted from cash received upon the exercise of
stock options. Accordingly, during the three months ended January 31, 2009, our
cash and cash equivalents increased by approximately $1,237,000 and investments
in certificates of deposits and U.S. government securities decreased by
approximately $1,442,000. As a result, our cash, cash equivalents and
investments in certificates of deposits and U.S. government securities at
January 31, 2009 decreased to approximately $2,466,000 from approximately
$2,671,000 at the end of fiscal 2008. Our operating cash accounts are maintained
at FDIC-insured banks. Our bank accounts and certificates of deposit are
maintained within FDIC coverage limits.
30
Net accounts receivable increased by approximately $9,000 from $103,000 at
the end of fiscal 2008 to approximately $112,000 at January 31, 2009, as a
result the timing of receipts. Inventories decreased by approximately $1,000
from approximately $178,000 at October 31, 2008 to approximately $177,000 at
January 31, 2009, primarily as a result of the timing of shipments and
production schedules. Investment in Videocon is recorded at fair value and
decreased to approximately $2,857,000 at January 31, 2009 from $3,620,000 at the
end of fiscal 2008, as a result of an increase in unrealized loss of
approximately $763,000 during the three months ended January 31, 2009.
Investment in DISC is recorded at fair value and decreased to approximately
$339,000 at January 31, 2009 from $842,000 at the end of fiscal 2008, as a
result of a decrease in the price of the DISC common stock on the Pink Sheets
during the three months ended January 31, 2009 and the sale of 910,000 shares of
DISC common stock with a cost of approximately $31,000. Accounts payable and
accrued liabilities increased by approximately $226,000 from approximately
$454,000 at the end of fiscal 2008 to approximately $680,000 at January 31,
2009, as a result the timing of payments. Deferred revenue decreased to $-0- at
January 31, 2009 from $313,000 at the end of fiscal 2008, as a result of the
license fee revenue recognized during the three months ended January 31, 2009.
Working capital at January 31, 2009 increased to approximately $2,151,000
from approximately $1,489,000 at the end of fiscal 2008. Our working capital
includes inventory of approximately $177,000 at January 31, 2009. 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.
Total employee compensation expense during the three-month periods ended
January 31, 2009 and 2008 was approximately $984,000 and $1,797,000,
respectively. During the three-month periods ended January 31, 2009 and 2008, a
significant portion of employee compensation consisted of the issuance of stock
and stock options to employees in lieu of cash compensation. We recorded
compensation expense for the three-month periods ended January 31, 2009 and 2008
of approximately $594,000 and $557,000, respectively, for shares of common stock
issued to employees. We recorded approximately $229,000 and $1,088,000 of
stock-based compensation expense, related to stock options granted to employees
and directors, during the three-month periods ended January 31, 2009 and 2008,
respectively. It is managements' intention to continue to compensate employees
by issuing stock or stock options.
In addition, during the three-month periods ended January 31, 2009 and
2008, we issued shares of common stock to consultants for services rendered. We
recorded consulting expense for the three-month periods ended January 31, 2009
and 2008 of approximately $1,000 and $60,000, respectively, for shares of common
stock issued to consultants. In addition, during the three-month periods ended
January 31, 2009 and 2008, we recorded approximately $3,000 and $207,000,
respectively, of consulting expense for stock options granted to consultants. It
is also managements' intention to continue to compensate consultants by issuing
stock or stock options.
31
During the three-month periods ended January 31, 2009 and 2008, stock
options to purchase 1,350,000 shares and 1,174,200 shares, respectively, of
common stock were exercised with aggregate proceeds of approximately $426,000
and $1,007,000, respectively.
During the three months 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. 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, investments in
certificates of deposit, investments in U.S. government securities 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 and royalties from Videocon, and other
potential sources of cash flows, will be sufficient to enable us to continue our
marketing, production, and research and development activities. 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. The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. It
is also management's intention to continue to compensate employees by issuing
stock or stock options. 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, license fees and royalties, or otherwise)
to satisfy our liquidity requirements or sustain future operations, 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. In fiscal 2008, we entered into the License Agreement with Videocon.
Under the License Agreement, we will receive a license fee of $11 million from
Videocon, payable in installments over a 27 month period and an agreed upon
royalty from Videocon based on display sales by Videocon. During the three
months ended January 31, 2009, we have recognized revenue from sales of
encryption products of approximately $9,000, revenue from display technology
engineering services of $52,000 and revenue from display technology license fee
of approximately $313,000.
The following table presents our expected cash requirements for contractual
obligations outstanding as of January 31, 2009:
32
Payments Due by Period
--------------------------------------------------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
------------------ ---------- ---------- ---------- ---------- ----------
Consulting
Agreement $ 20,000 - - - $ 20,000
Noncancelable
Operating Leases $ 288,000 $ 550,000 $ - $ 838,000
Loan Payable - - - $5,000,000 $5,000,000
---------- ---------- ---------- ---------- ----------
Total Contractual
Cash Obligations $ 308,000 $ 550,000 $ - $5,000,000 $5,858,000
========== ========== ========== ========== ==========
EFFECT OF RECENTLY ISSURD PRONOUNCEMENTS
- ----------------------------------------
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which changes how an entity accounts for the
acquisition of a business. When effective, SFAS No. 141R will replace existing
SFAS No. 141, "Business Combinations" ("SFAS No. 141"), in its entirety. SFAS
No. 141R carries forward the existing requirements to account for all business
combinations using the acquisition method (formerly called the purchase method).
In general, SFAS No. 141R will require acquisition-date fair value measurement
of identifiable assets acquired, liabilities assumed, and noncontrolling
interest in the acquired entity. SFAS No. 141R will eliminate the current
cost-based purchase method under SFAS No. 141. SFAS No. 141R is effective for
fiscal years and interim periods within those fiscal years beginning on or after
December 15, 2008. The adoption of SFAS No. 141R is not expected to have a
material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years and interim periods
within those fiscal years beginning on or after December 15, 2008. The adoption
of SFAS No. 160 is not expected to have a material effect on our consolidated
financial statements.
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 the Condensed Consolidated Financial Statements.
You should read this discussion and analysis along with our Annual Report on
Form 10-K for the year ended October 31, 2008 and the condensed consolidated
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.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
As of January 31, 2009, we had 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
short-term 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, 2009, our investment in Videocon GDRs is recorded at fair value
of approximately $2,857,000 including an unrealized loss of approximately
$13,343,000 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, 2009 amounts to
approximately $286,000.
Our investment in DISC common stock at January 31, 2009 is recorded at fair
value of approximately $339,000 including an unrealized loss of $47,000 and has
exposure to price risk. DISC's common stock is not registered under the
Securities Exchange Act of 1934, but is quoted on the Pink Sheets. Accordingly,
the fair value of DISC's common stock is subject to price risk. The potential
loss in fair value resulting from a hypothetical 10% adverse change in price of
this investment, as of January 31, 2009 amounts to approximately $34,000.
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.
34
There was no change in our internal control over financial reporting during
the quarter ended January 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
35
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, 2008.
Item 6. Exhibits.
---------
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 12, 2009.
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 12, 2009.
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated March 12, 2009.
32.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated March 12, 2009.
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 12, 2009 (Principal Executive Officer)
By: /s/ Henry P. Herms
------------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
March 12, 2009 Financial and Accounting Officer)
36