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 July 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
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(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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On September 3, 2009, the registrant had outstanding 142,976,137 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 July 31, 2009 (Unaudited)
and October 31, 2008 3
Condensed Consolidated Statements of Operations (Unaudited) for the nine
months ended July 31, 2009 and 2008 4
Condensed Consolidated Statements of Operations (Unaudited) for the three
months ended July 31, 2009 and 2008 5
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
for the nine months ended July 31, 2009 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended July 31, 2009 and 2008 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8 - 26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 27 - 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 42
Item 4. Controls and Procedures. 42
PART II. OTHER INFORMATION
Item 1A. Risk Factors. 43
Item 6. Exhibits. 43
SIGNATURES 43
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
---------------------
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
----------------
July 31, October 31,
ASSETS 2009 2008
------ ---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 320,832 $ 478,599
Short-term investments in certificates of deposit and U.S. government securities 1,649,751 1,442,484
Accounts receivable, net of allowance for doubtful accounts of $206,000 and
$223,000, respectively 12,090 103,000
Inventories 138,477 178,144
Prepaid expenses and other current assets 58,196 54,348
---------------- ----------------
Total current assets 2,179,346 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 5,654,294 3,619,945
INVESTMENT in Digital Info Security Co. Inc. common stock, at fair value 220,000 841,800
PROPERTY AND EQUIPMENT, net 23,679 29,838
---------------- ----------------
$ 8,077,319 $ 7,497,869
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 103,551 $ 384,896
Accrued liabilities 108,461 69,364
Deferred revenue, non-refundable license fee - 313,332
---------------- ----------------
Total current liabilities 212,012 767,592
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;
141,817,996 and 132,497,881 shares issued and outstanding, respectively 1,418,180 1,324,979
Additional paid-in capital 112,841,759 109,348,894
Loan receivable from related party (5,000,000) (5,000,000)
Accumulated deficit (95,692,966) (91,788,341)
Accumulated other comprehensive loss (10,701,666) (12,155,255)
---------------- ----------------
2,865,307 1,730,277
---------------- ----------------
$ 8,077,319 $ 7,497,869
================ ================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
For the Nine Months Ended
July 31,
---------------------------------
2009 2008
--------------- ---------------
NET REVENUE
Revenue from sales of encryption products, net $ 71,305 $ 329,710
Revenue from display engineering services, net 52,000 -
Display technology license fee 813,332 770,000
--------------- ---------------
Total net revenue 936,637 1,099,710
--------------- ---------------
COST AND OPERATING EXPENSES
Cost of encryption products sold 40,384 84,881
Cost of display engineering services 18,200 -
Research and development expenses 2,532,922 3,374,270
Selling, general and administrative expenses 2,295,653 3,052,585
--------------- ---------------
Total cost and operating expenses 4,887,159 6,511,736
--------------- ---------------
LOSS FROM OPERATIONS (3,950,522) (5,412,026)
DIVIDEND INCOME 29,468 130,887
INTEREST INCOME 16,429 25,297
--------------- ---------------
NET LOSS $ (3,904,625) $ (5,255,842)
=============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.03) $ (0.04)
=============== ===============
Weighted average shares used in computing net loss per share:
Basic and Diluted 137,191,065 128,798,027
=============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
For the Three Months Ended
July 31,
----------------------------------
2009 2008
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NET REVENUE
Revenue from sales of encryption products, net $ 49,765 $ 112,130
Revenue from display engineering services, net - -
Display technology license fee 250,000 770,000
--------------- ----------------
Total net revenue 299,765 882,130
--------------- ----------------
COST AND OPERATING EXPENSES
Cost of encryption products sold 34,866 34,711
Cost of display engineering services - -
Research and development expenses 649,092 930,266
Selling, general and administrative expenses 806,108 658,535
--------------- ----------------
Total cost and operating expenses 1,490,066 1,623,512
--------------- ----------------
LOSS FROM OPERATIONS (1,190,301) (741,382)
DIVIDEND INCOME - -
INTEREST INCOME 4,537 12,216
--------------- ----------------
NET LOSS $ (1,185,764) $ (729,166)
=============== ================
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.01) $ (0.01)
=============== ================
Weighted average shares used in computing net loss per share:
Basic and Diluted 140,425,848 130,406,487
=============== ================
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------
FOR THE NINE MONTHS JULY 31, 2009 (UNAUDITED)
---------------------------------------------
Loan Accumulated
Common Stock Additional Receivable Other Total
---------------------- Paid-in From Accumulated Comprehensive Shareholders'
Shares Par Value Capital Related 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 - - 660,152 - - - 660,152
Stock option compensation to consultants - - 9,918 - - - 9,918
Common stock issued upon exercise of
stock options under stock option plans 4,150,000 41,500 1,206,600 - - - 1,248,100
Common stock issued to employees
pursuant to stock incentive plans 5,017,790 50,178 1,570,745 - - - 1,620,923
Common stock issued to consultants
pursuant to stock incentive plans 152,325 1,523 45,450 - - - 46,973
Unrealized gain on investment in
Videocon Industries Limited
global depository receipts - - - - - 2,034,349 2,034,349
Unrealized (loss) on investment in
Digital Info Security Co., Inc. - - - - - (580,760) (580,760)
Net loss - - - - (3,904,625) - (3,904,625)
----------- ---------- ------------ ------------- ------------- ------------- -------------
BALANCE, July 31, 2009 141,817,996 $1,418,180 $112,841,759 $(5,000,000) $(95,692,966) $(10,701,666) $ 2,865,307
=========== ========== ============ ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
COPYTELE, INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
For the Nine Months Ended
July 31,
-----------------------------------
2009 2008
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CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (2,387,870) $ (2,545,210)
Cash received from encryption and display products and services 111,835 122,310
Cash received from display technology license fees 250,000 2,000,000
Dividend received 29,468 130,887
Interest received 17,663 25,297
--------------- -----------------
Net cash used in operating activities (1,978,904) (266,716)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Disbursements to acquire Videocon Industries Limited global depository
receipts - (16,200,000)
Disbursements to acquire long-term investments (U.S. government securities) - (999,538)
Disbursements to acquire short-term investments (certificates of deposit
And U.S. government securities) (899,866) (1,881,321)
Proceeds from maturities of short-term investments (certificates of deposit
And U.S. government securities) 1,443,000 841,000
Proceeds from sale of Digital Info Security Co., Inc. common stock 31,838 -
Payments for purchases of property and equipment (1,935) (12,354)
--------------- -----------------
Net cash provided by (used in) investing activities 573,037 (18,252,213)
--------------- -----------------
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 1,248,100 2,107,305
--------------- -----------------
Net cash provided by financing activities 1,248,100 18,307,305
--------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (157,767) (211,624)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 478,599 669,141
--------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 320,832 $ 457,517
=============== =================
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $ (3,904,625) $ (5,255,842)
Stock option compensation to employees 660,152 2,388,387
Stock option compensation to consultants 9,918 213,588
Stock awards granted to employees pursuant to stock incentive plans 1,620,923 1,437,284
Stock awards granted to consultants pursuant to stock incentive plans 46,973 92,363
Provision for doubtful accounts 103,000 120,000
Provision for (recovery of) slow moving inventory reserve 14,482 (16,440)
Depreciation and amortization 8,094 7,809
Amortized discount on investments (U.S. government securities) (690) -
Loss on sale of Digital Info Security Co., Inc. common stock 9,202 -
Change in operating assets and liabilities:
Accounts receivable (12,090) (207,400)
Inventories 25,185 23,062
Prepaid expenses and other current assets (3,848) 14,936
Accounts payable and accrued liabilities (242,248) (314,463)
Deferred revenue (313,332) 1,230,000
--------------- -----------------
Net cash used in operating activities $ (1,978,904) $ (266,716)
=============== =================
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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, the development of thin,
flat, low-power passive 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 nine-month and three-month periods
ended July 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 July 31, 2009, CopyTele Marketing was inactive. All
significant intercompany transactions have been eliminated in consolidation. In
preparing these condensed consolidated financial statements, we have evaluated
events and transactions for potential recognition or disclosure through
September 9, 2009, the date the condensed consolidated financial statements were
issued.
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 consolidated 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 consolidated financial statements.
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
8
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.
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 values 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 July 31, 2009, our Level 1 financial assets consist of the
following:
Fair Value
as of
July 31, 2009
--------------
Money market funds - Cash and cash equivalents $ 45,934
U.S. government securities - Short-term investments 1,649,751
Videocon Industries Limited global depository receipts 5,654,294
Digital Info Security Co. Inc. common stock 220,000
The adoption of SFAS No. 157 did not have a material effect on our
condensed consolidated financial statements. In February 2007, The FASB issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159"), to permit all entities to choose to elect, at
specified election dates, to measure eligible financial instruments at fair
value. An entity shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date, and recognize upfront costs and fees to those items in earnings as
9
incurred and not deferred. SFAS No. 159 became effective for us as of November
1, 2008. As we did not elect the fair value option for our financial
instruments, the adoption of this standard did not have an impact on our
condensed consolidated financial statements.
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 initial 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 nine months ended July 31, 2009, our cash used in operating
activities was approximately $1,979,000. This resulted from payments to
suppliers, employees and consultants of approximately $2,388,000, which was
offset by cash of approximately $112,000 received from collections of accounts
receivable related to sales of encryption products and display technology
engineering services, $250,000 received from display technology licensing fee,
approximately $18,000 of interest income and approximately $29,000 of dividend
income received. Our cash provided by investing activities during the nine
months ended July 31, 2009 was approximately $573,000, 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 $32,000
received upon the sale of Digital Info Security Co. Inc. common stock, offset by
a purchase of short-term U.S. government securities of approximately $900,000
and purchases of approximately $2,000 of equipment. Our cash provided by
financing activities during the nine months ended July 31, 2009 was
approximately $1,248,000, which resulted from cash received upon the exercise of
stock options. Accordingly, during the nine-months ended July 31, 2009, our cash
and cash equivalents decreased by approximately $158,000 and our short-term and
non-current investments in certificates of deposit and U.S. government
securities decreased by approximately $542,000. As a result, our cash, cash
equivalents, and investments in certificates of deposit and U.S. government
securities at July 31, 2009 decreased to approximately $1,971,000 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 for the nine-month periods ended
July 31, 2009 and 2008 was approximately $2,811,000 and $4,340,000,
respectively, and for the three-month periods ended July 31, 2009 and 2008 was
approximately $889,000 and $1,053,000, respectively. During the nine-month ended
July 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 stock-based compensation expense for the nine-month
periods ended July 31, 2009 and 2008 of approximately $1,621,000 and $1,437,000,
respectively, and for the three-month periods ended July 31, 2009 and 2008 of
approximately $449,000 and $396,000, respectively, for shares of common stock
issued to employees. We recorded stock-based compensation expense for the
nine-month periods ended July 31, 2009 and 2008 of approximately $660,000 and
$2,388,000, respectively, and for the three-month periods ended July 31, 2009
10
and 2008 of approximately $259,000 and $479,000, respectively, related to stock
options granted to employees and directors. 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
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.
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 expect to receive a license fee of
$11 million from Videocon, payable in installments over a 27 month period, which
commenced in May 2008, and an agreed upon royalty from Videocon based on display
sales by Videocon. In April 2008, the government of India approved the License
Agreement. As of July 31, 2009, we have received aggregate license fee payments
of $2,500,000.
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 to continue to produce various configurations of our
display matrix to optimize its performance. 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 two
other versions of our display technology. Improvements to the technology, when
and if available, are to be jointly owned by CopyTele and Videocon. Significant
11
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.
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
12
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.
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 $11 million license fee over the estimated period that we
expect to provide cooperation and assistance during the pre-production period,
limiting the revenue recognized on a cumulative basis to the aggregate license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized. License fee payments received from Videocon
which are in excess of the amounts recognized as revenue ($-0- as of July 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.
During the quarter ended April 30, 2009, we agreed to reimburse
Videocon $250,000 for engineering services related to another version of our
display technology and we modified the payment terms from Videocon during the
quarter. The license fee revenue recognized during the three months ended April
30, 2009 of $250,000 represented an offset against amounts due to Videocon for
the aforementioned engineering services, in lieu of a cash payment. In addition,
in June 2009, we received a license fee payment from Videocon of $250,000, which
was due during the quarter ended April 30, 2009 pursuant to the modified payment
terms, which was recognized as license fee revenue during the three months ended
July 31, 2009. In August 2009, we received an additional license fee payment
from Videocon of $100,000, which was due during the quarter ended July 31, 2009
pursuant to the modified payment terms. However, the total license fee of $11
million remains payable over the 27 month period, which commenced in May 2008,
13
and Videocon's obligations with respect to production, and CopyTele's
assistance, under the License Agreement remain unaffected.
Subsequent Events
- -----------------
In August 2009, we entered into a development agreement with a U.S.
company to provide engineering and implementation support for the development of
our patented extremely low power passive monochrome or color display for use in
portable devices. This company has experience in the field involving portions of
our display technology. Our proprietary extremely low power display that we are
developing, in conjunction with the U.S. company, incorporates a new
micro-matrix substrate. The display is designed to have bi-stability capability,
and uses low power when an image is being created. Once an image is created,
power consumption is negligible. The display is expected to have both monochrome
and or color capability, and operate over wide temperature and environmental
conditions. The display utilizes a single substrate so that it can be extremely
thin, rugged and low weight. This display can be made any size, is expected to
be low cost, and is especially suitable for portable devices, such as, cell
phones, I-phones, and e-books, and other potential portable devices.
With the arrival of the rapidly expanding digital book and news media
applications, in August 2009 we entered into an Engagement Agreement with ZQX
Advisors, LLC ("ZQX") to assist us in seeking business opportunities and
licenses for our electrophoretic display technology (E-Paper(R)). ZQX has an
experienced business and legal team to assist us in this area. Concurrently with
entering into the Engagement Agreement, we acquired a 19.5% interest in ZQX in
exchange for 800,000 unregistered shares of our common stock and warrants to
purchase an additional 500,000 unregistered shares, of which warrants to
purchase 250,000 shares are exercisable at $0.37 per share and warrants to
purchase 250,000 shares are exercisable at $0.555 per share. The warrants expire
in August 2019.
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 $660,000, and $2,388,000 during the
nine-month periods ended July 31, 2009 and 2008, respectively, and of
approximately $259,000 and $479,000 during the three-month periods ended July
31, 2009 and 2008, respectively, in accordance with SFAS No. 123R. Such
compensation expense is included in the accompanying condensed consolidated
statements of operations in either research and development expenses or selling,
general and administrative expenses, as applicable based on the functions
performed by such employees and directors. Such stock-based compensation expense
14
increased both basic and diluted net loss per share for the nine-month periods
ended July 31, 2009 and 2008 by $0.00 and $0.02, respectively and for the
three-month periods ended July 31, 2009 and 2008 by $0.00 and $0.00,
respectively.
Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the nine-months periods ended
July 31, 2009 and 2008 was approximately $32,000, and $-0-, respectively, and
during the three-month periods ended July 31, 2009 and 2008 was approximately
$7,000 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 July 31, 2009, there was approximately $2,000 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 stock options granted to non-employee
consultants, during the nine-months periods ended July 31, 2009, and 2008, of
approximately $10,000, and $214,000, respectively, and during the three-month
periods ended July 31, 2009 and 2008, of approximately $3,000 and $3,000,
respectively. Such consulting expense is included in the accompanying condensed
consolidated statements of operations in either research and development
expenses or selling, general and administrative expenses, as applicable based on
the functions performed by such consultants. As of July 31, 2009, there was
approximately $3,000 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 nine months ended July 31, 2009 consisted of awards of
stock options with 10-year terms which vested immediately. Stock options granted
during the nine months ended July 31, 2008 consisted of awards of stock 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 Nine Months For the Three Months
Ended July 31, Ended July 31,
------------------------------ -------------------------------
2009 2008 2009 2008
------------- ------------- ------------- -------------
Expected term (in years) 2.0 3.5 1.9 2.4
Volatility 103% 91% 110% 86%
Risk-free interest rate .87% 3.25% .94% 2.58%
Dividend yield 0 0 0 0
Weighted average fair value at grant date $0.15 $0.56 $0.17 $0.34
15
The expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. Because our stock
options are "plain vanilla", we estimated the expected term using a modified
version of the simplified method of calculation, as prescribed by Staff
Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). This modified
calculation uses the actual life for stock options that have been settled, and a
uniform distribution assumption for the stock options still outstanding. Under
SAB 107, stock 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 stock 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 stock 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 stock options. We have adopted SAB 110 and continued to
use a modified version of the simplified method to estimate the expected term
for stock options granted after December 2007, as adequate historical experience
is not available to provide a reasonable estimate of the expected term for the
stock options still outstanding. We intend to continue applying a modified
version of the simplified method until enough historical experience is readily
available to provide a reasonable estimate of the expected term for employee
stock 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 stock 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. 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 nine-month periods ended July 31, 2009 and 2008, we granted
stock options to purchase 4,160,000 shares and 5,005,000 shares, respectively,
16
to employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $.30 and $0.92 per share, respectively, pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
nine-month periods ended July 31, 2009 and 2008, stock options to purchase
4,150,000 shares and 2,679,200 shares, respectively, of common stock were
exercised with aggregate proceeds of approximately $1,248,000 and $2,107,000,
respectively.
Stock Option Plans
- ------------------
As of July 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 stock options.
Information regarding the 1993 Plan for the nine months ended July 31, 2009 is
as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
-------------- ----------------- ---------------
Shares Under Option at October 31, 2008 779,000 $1.10
Cancelled (43,000) $1.31
Expired (50,000) $1.31
--------------
Shares Under Option and Exercisable at
July 31, 2009 686,000 $1.07 $-0-
--------------
The following table summarizes information about stock options
outstanding under the 1993 Plan as of July 31, 2009:
Stock Options Outstanding and Exercisable
-----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
-----------------------------------------------------------------------------
$0.84 to $1.00 575,000 0.30 $0.99
$1.13 to $1.56 111,000 0.80 $1.49
The exercise price with respect to all of the stock 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.
17
These amendments were approved by our shareholders on August 16, 2001 and
September 12, 2002, respectively. The 2000 Share Plan provides for the grant of
incentive stock options, nonqualified stock options, stock appreciation rights,
stock awards, performance awards and stock units to key employees and
consultants of the Company.
The 2000 Share Plan was administered by the Stock Option Committee
through June 2004 and since that date has been administered by the Board of
Directors, which determines the option price, term and provisions of each stock
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 nine months ended
July 31, 2009 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
-------------- ------------------- --------------
Shares Under Option at October 31, 2008 1,772,466 $0.79
Exercised - $-0-
--------------
Shares Under Option and Exercisable at
July 31, 2009 1,772,466 $0.79 $-0-
--------------
The following table summarizes information about stock options
outstanding under the 2000 Share Plan as of July 31, 2009:
Stock Options Outstanding and Exercisable
----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted
Range of Number Contractual Average
Exercise Prices Outstanding Life (in years) Exercise Price
----------------------------------------------------------------------------
$0.40 445,000 2.14 $0.40
$0.69 505,466 1.42 $0.69
$0.94 - $1.09 822,000 1.17 $1.06
The exercise price with respect to all of the stock 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 July 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
18
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 stock option.
Information regarding the 2003 Share Plan for the nine months ended
July 31, 2009 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
--------------- ------------------- --------------
Shares Under Option at October 31, 2008 17,217,045 $0.79
Granted 4,160,000 $0.30
Exercised (4,150,000) $0.30
Cancelled (1,200,000) $0.91
---------------
Shares Under Option at July 31, 2009 16,027,045 $0.78 $62,400
---------------
Options Exercisable at July 31, 2009 15,917,045 $0.78 $62,400
---------------
The following table summarizes information about stock options
outstanding under the 2003 Share Plan as of July 31, 2009:
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------- -----------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Life Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable (in years) Price
- ----------------------------------------------------------------------------------------------------------------------
$0.25 - $0.65 5,005,970 5.40 $0.54 5,005,970 5.40 $0.54
$0.70 - $0.84 5,251,075 7.13 $0.79 5,141,075 7.16 $0.79
$0.86 - $1.46 5,770,000 6.46 $0.99 5,770,000 6.46 $0.99
The exercise price with respect to all of the stock 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 July 31, 2009, 9,302,606
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 nine-month periods ended July 31, 2009 and
2008, we issued 5,017,790 shares and 1,453,060 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
19
for the nine-month periods ended July 31, 2009 and 2008, of approximately
$1,621,000 and $1,437,000, respectively, and for the three-month periods ended
July 31, 2009 and 2008, of approximately $449,000 and $396,000, respectively,
for the shares of common stock issued to employees. In addition, during the
nine-month periods ended July 31, 2009 and 2008, we issued 152,325 shares and
85,171 shares, respectively, of common stock to consultants for services
rendered pursuant to the 2003 Share Plan. We recorded consulting expense for the
nine-month periods ended July 31, 2009 and 2008 of approximately $47,000 and
$92,000, respectively, and for the three-month periods ended July 31, 2009 and
2008 of approximately $12,000 and $17,000, respectively, for the shares of
common stock issued to consultants.
3. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. Management reviews our accounts receivable 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 nine months ended July 31, 2009, one
customer in the Display Technology Segment represented 87% of total net revenue.
During the nine months ended July 31, 2008, one customer in the Display
Technology Segment represented 70% of total net revenue and one customer in the
Encryption Products and Services Segment represented 19% of total net revenue.
At July 31, 2009, one customer in the Encryption Products and Services Segment
represented 100% of net accounts receivable and at October 31, 2008, one
customer in the Encryption Products and Services Segment represented 100% of net
accounts receivable.
4. 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 nine months ended July 31, 2009, we sold 1,200,000 shares
of DISC's common stock for approximately $32,000 and recorded a loss on such
sale of approximately $9,000. As of July 31, 2009, we held 11,000,000 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 July 31, 2009 we held
approximately 10% of the outstanding common stock of DISC.
20
5. FINANCIAL INSTRUMENTS
---------------------
Short-term Investments and Investments in U.S. Government Securities
- --------------------------------------------------------------------
At July 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:
July 31, October 31,
2009 2008
-------------- ------------
Current:
U.S. Government securities $ 1,649,751 $ 999,484
Certificates of deposit - 443,000
-------------- ------------
Total current held-to-maturity securities $ 1,649,751 $ 1,442,484
============== ============
Noncurrent:
U.S. Government securities $ - $ 749,711
-------------- ------------
Total noncurrent held-to-maturity securities $ - $ 749,711
============== ============
Total held-to-maturity securities $ 1,649,751 $ 2,192,195
============== ============
At July 31, 2009 and October 31, 2008, 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 noncurrent
held-to-maturity securities was fifteen months. At July 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.
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
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 July 31, 2009
and October 31, 2008, are as follows:
July 31, October 31,
2009 2008
------------------ ------------------
Cost $16,200,000 $16,200,000
Unrealized loss (10,545,706) (12,580,055)
------------------ ------------------
Fair Value $ 5,654,294 $ 3,619,945
================== ==================
21
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 nine-months ended July 31, 2009. The unrealized loss
recognized during the nine-months ended July 31, 2009 is reflected in
accumulated other comprehensive loss in the accompanying condensed consolidated
statement of shareholders' equity.
Investment in 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 July 31,
2009 and October 31, 2008, are as follows:
July 31, October 31,
2009 2008
------------------ ------------------
Cost $ 375,960 $ 417,000
Unrealized (loss) gain (155,960) 424,800
------------------ ------------------
Fair Value $ 220,000 $ 841,800
================== ==================
6. INVENTORIES
-----------
Inventories consist of the following as of:
July 31, October 31,
2009 2008
------------------ ------------------
Component parts $ 46,793 $ 67,853
Work-in-process 5,207 5,079
Finished products 86,477 105,212
------------------ ------------------
$ 138,477 $ 178,144
================== ==================
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
22
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 nine- month and three-month
periods ended July 31, 2009 and 2008, were stock options to purchase 18,485,511
shares and 19,708,511 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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"), to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures about
fair value measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exact
price). SFAS No. 157 also stipulates that, as a market-based measurement, fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 157 did not have a material effect on our consolidated financial
statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157" ("FSP No. FAS 157-2") This FSP
permits a one-year deferral of application of SFAS No. 157 for non financial
assets and liabilities measured at fair value on a non-recurring basis. The
23
adoption of FSP No. FAS 157-2 is not expected to have a material effect on our
consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significant Decreased and Identifying Transactions That Are Not Orderly" ("FSP
No. FAS 157-4"). This FSP provides additional guidance for estimating fair value
in accordance with SFAS No. 157 when there has been a significant decrease in
market activity for a financial asset. An entity is required to base its
conclusion about whether a transaction was distressed on the weight of the
evidence presented. This FSP also re-affirms that the objective of fair value,
when the market for an asset is not active, is the price that would be received
to sell the asset in an orderly market (as opposed to a distressed or forced
transaction). Additional enhanced disclosures are also required in accordance
with this FSP. FSP No. FAS 157-4 must be applied prospectively and is effective
for interim and annual periods ending after June 15, 2009. The adoption of FSP
No. FAS 157-4 did not have a material effect on our consolidated financial
statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments" ("FSP No. FAS 107-1 and
APB 28-1"), principally to require publicly traded companies to provide
disclosures about fair value of financial instruments in interim financial
information. This guidance is effective for interim and annual periods ending
after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB 28-1 did not have
a material effect on our consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Investments" (FSP No.
115-2 and FSP 124-2"). FSP No. FAS 115-23 and FSP 124-2 amends the
other-than-temporary impairment guidance for debt securities. Under FSP No. FAS
115-2 and FAS 124-2, the pre-existing "intent and ability" trigger was modified
such that an other-than-temporary impairment is now trigged when there is intent
to sell the security, it is more likely than not that the security will be
required to be sold before recovery in value, or the security is not expected to
recover the entire amortized cost basis of the security ("credit related loss").
Credit related losses on debt securities will be considered an
other-than-temporary impairment recognized in earnings, and any other losses due
to a decline in fair value relative to the amortized cost deemed not to be
other-than-temporary will be recorded in other comprehensive income. FSP No. FAS
115-2 and 124-2 is effective for interim and annual periods ending after June
15, 2009. The adoption of FSP No. FAS 115-2 and 124-2 did not have a material
effect on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS
No. 165"). SFAS No. 165 establishes accounting and reporting standards for
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No. 165 is effective for fiscal
years and interim periods ending after June 15, 2009. The adoption of SFAS No.
165 did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles."
This standard replaces SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles," and establishes only two levels of U.S. generally
24
accepted accounting principles (GAAP): authoritative and non-authoritative. The
FASB Accounting Standards Codification (the Codification) will become the source
of authoritative, nongovernmental GAAP for Securities and Exchange Commission
("SEC") registrants. All other non-grandfathered, non-SEC accounting literature
not included in the Codification will become non-authoritative. This Standard is
effective for financial statements for interim or annual reporting ending after
September 15, 2009. As the Codification was not intended to change or alter
existing GAAP, it will not have any 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
condensed consolidated financial statements.
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 nine-month and three-month periods ended
July 31, 2009 and 2008:
Display Encryption
Segment Data Technology Products and Total
Services
- ----------------------------------------------------- ----------------- -----------------
Nine Months Ended July 31, 2009:
Net revenue $ 865,332 $ 71,305 $ 936,637
Net loss (1,476,301) (2,428,324) (3,904,625)
Nine Months Ended July 31, 2008:
Net revenue $ 770,000 $ 329,710 $ 1,099,710
Net loss (2,620,384) (2,635,458) (5,255,842)
25
Display Encryption
Segment Data Technology Products and Total
Services
- ----------------------------------------------------- ----------------- -----------------
Three Months Ended July 31, 2009:
Net revenue $ 250,000 $ 49,765 $ 299,765
Net loss (472,659) (713,105) (1,185,764)
Three Months Ended July 31, 2008:
Net revenue $ 770,000 $ 112,130 $ 882,130
Net loss (69,161) (660,005) (729,166)
26
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, the development of thin,
flat, low-power passive 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 expect to receive a license fee of $11 million from Videocon,
payable in installments over a 27 month period, which commenced in May 2008, and
an agreed upon royalty from Videocon based on display sales by Videocon. In
April 2008, the government of India approved the License Agreement. As of July
31, 2009, we have received aggregate license fee payments of $2,500,000.
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 are providing technical support to Videocon's
technical team. We are also cooperating with Videocon to jointly implement the
27
CopyTele technology prior to production to produce prototypes of such modules.
Videocon is utilizing its display processing technology and facilities to
continue to produce various configurations of our display matrix to optimize its
performance. 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 two other versions of our display
technology. Improvements to the technology are to be jointly owned by CopyTele
and Videocon.
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 twelve years ("Volga"), and an Asian company
that CopyTele has been working with for more than six 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 display technology includes a proprietary mixture of specially
coated carbon nanotubes and nano materials in combination with our proprietary
low voltage color phosphors. The specially coated carbon nanotubes, which are
supplied to us by a U.S. company, and nano materials, 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 extremely close from the pixels. The
matrix also has a high pixel field factor to obtain high contrast and low power
consumption. As a result, each pixel phosphor brightness is controlled using
less than 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.
28
We thus obtain a display thickness of approximately 1/16th of an
inch, thinner than LCD (liquid crystal) and PDP (plasma)
displays.
o The display matrix, phosphor excitation system, and drivers are
all on one substrate.
o Our display is able to select and change the brightness of each
individual pixel, requiring less than 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).
In August 2009, we entered into a development agreement with a U.S.
company to provide engineering and implementation support for the development of
our patented extremely low power passive monochrome or color display for use in
portable devices. This company has experience in the field involving portions of
our display technology. Our proprietary extremely low power display that we are
developing, in conjunction with the U.S. company, incorporates a new
micro-matrix substrate. The display is designed to have bi-stability capability,
and uses low power when an image is being created. Once an image is created,
power consumption is negligible. The display is expected to have both monochrome
and or color capability, and operate over wide temperature and environmental
conditions. The display utilizes a single substrate so that it can be extremely
thin, rugged and low weight. This display can be made any size, is expected to
be low cost, and is especially suitable for portable devices, such as, cell
phones, I-phones, and e-books, and other potential portable devices.
With the arrival of the rapidly expanding digital book and news media
applications, in August 2009 we entered into an Engagement Agreement with ZQX
Advisors, LLC ("ZQX") to assist us in seeking business opportunities and
licenses for our electrophoretic display technology (E-Paper(R)). ZQX has an
29
experienced business and legal team to assist us in this area. Concurrently with
entering into the Engagement Agreement, we acquired a 19.5% interest in ZQX in
exchange for 800,000 unregistered shares of our common stock and warrants to
purchase an additional 500,000 unregistered shares, of which warrants to
purchase 250,000 shares are exercisable at $0.37 per share and warrants to
purchase 250,000 shares are exercisable at $0.555 per share. The warrants expire
in August 2019.
We are continuing to pursue voice, fax and data encryption business
over landline and wireless telephone systems and networks. We have sought
encryption opportunities in both the commercial and government security markets.
Our government market is still being primarily handled by The Boeing
Company ("Boeing") and its large distributors of the Thuraya satellite phones
and services. The Thuraya Satellite Network provides blanket coverage to more
than 110 countries in Europe, North, Central Africa and large parts of Southern
Africa, the Middle East, Central and South Asia; it has grown as a
communications provider due to its geographic coverage, quality of service and
cost effective usage.
Our three year agreement with Boeing has continued into fiscal 2009 and
expires in May 2010. 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.
We are continuing to promote our Thuraya encryption solutions through
other Thuraya developers and resellers in addition to 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 created devices allowing customers to easily set up and
engage in secure communications over the Thuraya network compatible with
landline telephone systems. APSI's FDU-3500 docking unit for its SO-2510 phone
allows for outdoor and indoor operation of the satellite phone on the Thuraya
network. Our 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. Together with APSI, we have continued to develop the
DCS-2500 integrated encryption system, which is designed for convenience,
portability and easy of use with the Thuraya 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,
30
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 are continuing our consultations with specialists of the Inmarsat
BGAN system and the new Iridium satellite phone developing compliant encryption
solutions that offer new opportunity and an increased customer base. We continue
to seek opportunities to market our products for securing landline and wireless
voice and fax communications. Our specific Thuraya products are being evaluated
for use by a Middle Eastern government. Also, a Far Eastern government is in the
process of determining the system requirements necessary to encrypt voice
communications utilizing our USS-900, 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.
CRITICAL ACCOUNTING POLICES
- ---------------------------
Our condensed consolidated 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 condensed consolidated 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 condensed
consolidated financial statements. For additional discussion on the application
of these and other accounting polices, refer to the consolidated 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
31
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 $11 million license fee over the estimated period that we
expect to provide cooperation and assistance during the pre-production period,
limiting the revenue recognized on a cumulative basis to the aggregate license
fee payments received from Videocon. We will assess at each reporting period the
progress and assistance provided and will continue to evaluate the period during
which this fee will be recognized. License fee payments received from Videocon
which are in excess of the amounts recognized as revenue ($-0- as of July 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.
During the quarter ended April 30, 2009, we agreed to reimburse
Videocon $250,000 for engineering services related to another version of our
display technology and we modified the payment terms from Videocon during the
quarter. The license fee revenue recognized during the three months ended April
30, 2009 of $250,000 represented an offset against amounts due to Videocon for
the aforementioned engineering services, in lieu of a cash payment. In addition,
in June 2009, we received a license fee payment from Videocon of $250,000, which
was due during the quarter ended April 30, 2009 pursuant to the modified payment
terms, which was recognized as license fee revenue during the three months ended
July 31, 2009. In August 2009, we received an additional license fee payment
from Videocon of $100,000, which was due during the quarter ended July 31, 2009
pursuant to the modified payment terms. However, the total license fee of $11
million remains payable over the 27 month period, which commenced in May 2008,
and Videocon's obligations with respect to production, and CopyTele's
assistance, under the License Agreement remain unaffected.
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
32
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. We recorded
stock-based compensation expense, related to stock options granted to employees
and non-employee directors, of approximately $660,000 and $2,338,000 during the
nine-month periods ended July 31, 2009 and 2008, respectively, and of
approximately $259,000 and $479,000 during the three-month periods ended July
31, 2009 and 2008, respectively, in accordance with SFAS 123R. We recognized
consulting expense for stock options granted to non-employee consultants, during
the nine-months periods ended July 31, 2009, and 2008, of approximately $10,000,
and $214,000, respectively, and during the three-month periods ended July 31,
2009 and 2008, of approximately $3,000 and $3,000, 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.
33
RESULTS OF OPERATIONS
- ---------------------
Nine months ended July 31, 2009 compared with nine months ended July 31, 2008
- -----------------------------------------------------------------------------
Net Revenue
Net revenue decreased by approximately $163,000 in the nine months
ended July 31, 2009, to approximately $937,000, as compared to approximately
$1,100,000 in the comparable prior-year period. Revenue from display technology
license fees related to the License Agreement with Videocon increased by
approximately $43,000, to approximately $813,000, as compared to $770,000 in the
comparable prior-year period. Revenue during the current period included 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 $259,000 in the
nine months ended July 31, 2009, to approximately $71,000, as compared to
approximately $330,000 in the comparable prior-year period. Our encryption
revenue has been limited and is sensitive to individual large transactions.
Cost of Encryption Products Sold
The cost of encryption products sold decreased by approximately $45,000
in the nine months ended July 31, 2009, to approximately $40,000, as compared to
approximately $85,000 in the comparable prior-year period. The cost of
encryption products sold in the nine months ended July 31, 2009 includes a
provision for excess inventory of approximately $20,000. The cost of encryption
products shipped in the current period decreased to approximately $20,000, as
compared to approximately $85,000 in the comparable prior-year period, 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 nine months ended July 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 $841,000
in the nine months ended July 31, 2009, to approximately $2,533,000, from
approximately $3,374,000 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 $1,076,000, which resulted
from a decrease in the number of stock options granted and a decrease in the
weighed average fair value at grant dates, a decrease in patent-related expenses
of approximately $90,000, a decrease in consultant stock option expense of
approximately $45,000, offset by an increase in outside research and development
expense of approximately $213,000, which primarily resulted from engineering
services performed by Videocon related to another version of our display
technology, an increase in employee compensation and related costs, other than
stock option expense, of approximately $119,000, and an increase in travel
expense of approximately $56,000.
34
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$757,000 to approximately $2,296,000 in the nine months ended July 31, 2009,
from approximately $3,053,000 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
$652,000, which resulted from a decrease in the number of stock options granted
and a decrease in the weighed average fair value at grant dates, a decrease in
consultant stock option expense of approximately $159,000, a decrease in travel
expense of approximately $70,000, a decrease in consultant expense, other than
stock option expense, of approximately $49,000, offset by an increase in
employee compensation and related costs, other than stock option expense, of
approximately $80,000, and an increase in professional fees of approximately
$78,000.
Dividend Income
Dividend income, which was received in connection with the Videocon
GDRs we acquired in December 2007, decreased by approximately $102,000 to
approximately $29,000 in the nine months ended July 31, 2009, compared to
approximately $131,000 in the comparable prior-year period. The decrease in
dividend income was due to a reduction by Videocon of dividends paid.
Interest Income
Interest income was approximately $16,000 in the nine months ended July
31, 2009, compared to approximately $25,000 in the comparable prior-year period.
The decrease in interest income was primarily the result of a reduction in short
term interest rates.
Three months ended July 31, 2009 compared with three months ended July 31, 2008
- -------------------------------------------------------------------------------
Net Revenue
Net revenue decreased by approximately $582,000 in the three months
ended July 31, 2009, to approximately $300,000, as compared to approximately
$882,000 in the comparable prior-year period. Revenue from display technology
license fees related to the License Agreement with Videocon decreased by
$520,000, to $250,000, as compared to $770,000 in the comparable prior-year
period, due to the timing of payments from Videocon. Revenue from sales of
encryption products decreased by approximately $62,000 in the three months ended
July 31, 2009, to approximately $50,000, as compared to approximately $112,000
in the comparable prior-year period. Our encryption revenue has been limited and
is sensitive to individual large transactions.
Cost of Encryption Products Sold
The cost of encryption products sold was approximately $35,000 in both
the three months ended July 31, 2009 and in the comparable prior-year period.
The cost of encryption products sold in the three months ended July 31, 2009
includes a provision for excess inventory of approximately $20,000. The cost of
35
encryption products shipped in the current period decreased to approximately
$15,000, as compared to approximately $35,000 in the comparable prior-year
period, due to a decrease in unit shipments of encryption products.
Research and Development Expenses
Research and development expenses decreased by approximately $281,000
in the three months ended July 31, 2009, to approximately $649,000, from
approximately $930,000 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 $246,000, which resulted from
a decrease in the weighed average fair value of stock options at grant dates, a
decrease in patent-related expenses of approximately $87,000, offset by an
increase in outside research and development expense of approximately $38,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$147,000 to approximately $806,000 in the three months ended July 31, 2009, from
approximately $659,000 in the comparable prior-year period. The increase in
selling, general and administrative expenses was principally due to an increase
in professional fees of approximately $64,000, an increase in the provision for
doubtful accounts of $43,000, an increase in employee compensation and related
costs, other than stock option expense, of approximately $32,000, an increase in
employee stock option compensation expense of approximately $26,000, offset by a
decrease in consultant expense of approximately $29,000.
Interest Income
Interest income was approximately $5,000 in the three months ended July
31, 2009, compared to approximately $12,000 in the comparable prior-year period.
The decrease in interest income was primarily the result of a reduction in short
term 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 initial 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 nine months ended July 31, 2009, our cash used in operating
activities was approximately $1,979,000. This resulted from payments to
suppliers, employees and consultants of approximately $2,388,000, which was
offset by cash of approximately $112,000 received from collections of accounts
receivable related to sales of encryption products and display technology
engineering services, $250,000 received from display technology licensing fee,
approximately $18,000 of interest income and approximately $29,000 of dividend
36
income received. Our cash provided by investing activities during the nine
months ended July 31, 2009 was approximately $573,000, 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 $32,000
received upon the sale of Digital Info Security Co. Inc. common stock, offset by
a purchase of short-term U.S. government securities of approximately $900,000
and purchases of approximately $2,000 of equipment. Our cash provided by
financing activities during the nine months ended July 31, 2009 was
approximately $1,248,000, which resulted from cash received upon the exercise of
stock options. Accordingly, during the nine-months ended July 31, 2009, our cash
and cash equivalents decreased by approximately $158,000 and our short-term and
non-current investments in certificates of deposit and U.S. government
securities decreased by approximately $542,000. As a result, our cash, cash
equivalents, and investments in certificates of deposit and U.S. government
securities at July 31, 2009 decreased to approximately $1,971,000 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.
Net accounts receivable decreased by approximately $91,000 from
$103,000 at the end of fiscal 2008 to approximately $12,000 at July 31, 2009,
principally due to a provision for doubtful accounts of $103,000. Inventories
decreased by approximately $40,000 from approximately $178,000 at October 31,
2008 to approximately $138,000 at July 31, 2009, primarily as a result of the
timing of shipments and production schedules and a provision for excess
inventory of approximately $20,000 in the current year. Investment in Videocon
is recorded at fair value and increased to approximately $5,654,000 at July 31,
2009 from $3,620,000 at the end of fiscal 2008, as a result of a decrease in
unrealized loss of approximately $2,034,000 during the nine months ended July
31, 2009. Investment in DISC is recorded at fair value and decreased to $220,000
at July 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
nine months ended July 31, 2009 and the sale of 1,200,000 shares of DISC common
stock with a cost of approximately $41,000. Accounts payable and accrued
liabilities decreased by approximately $242,000 from approximately $454,000 at
the end of fiscal 2008 to approximately $212,000 at July 31, 2009, as a result
the timing of payments and the reversal of certain patent related cost which are
no longer an obligation of the Company. Deferred revenue decreased to $-0- at
July 31, 2009 from $313,000 at the end of fiscal 2008, as a result of the
license fee revenue recognized during the nine months ended July 31, 2009.
Working capital at July 31, 2009 increased to approximately $1,967,000
from approximately $1,489,000 at the end of fiscal 2008. Our working capital
includes inventory of approximately $138,000 at July 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 for the nine-month periods ended
July 31, 2009 and 2008 was approximately $2,811,000 and $4,340,000,
respectively, and for the three-month periods ended July 31, 2009 and 2008 was
approximately $889,000 and $1,053,000, respectively. During the nine-month ended
July 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. During the nine-month periods ended July 31, 2009 and 2008, we
issued 5,017,790 shares and 1,453,060 shares, respectively, of common stock to
37
certain employees for services rendered. We recorded stock-based compensation
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$1,621,000 and $1,437,000, respectively, and for the three-month periods ended
July 31, 2009 and 2008 of approximately $449,000 and $396,000, respectively, for
shares of common stock issued to employees. We recorded stock-based compensation
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$660,000 and $2,388,000, respectively, and for the three-month periods ended
July 31, 2009 and 2008 of approximately $259,000 and $479,000, respectively,
related to stock options granted to employees and directors. It is management's
intention to continue to compensate employees and directors by issuing stock or
stock options.
In addition, during the nine-month periods ended July 31, 2009 and
2008, we issued 152,325 shares and 85,171 shares, respectively, of common stock
to non-employee consultants for services rendered. We recorded consulting
expense for the nine-month periods ended July 31, 2009 and 2008 of approximately
$47,000 and $92,000, respectively, and for the three-month periods ended July
31, 2009 and 2008 of approximately $12,000 and $17,000, respectively, for shares
of common stock issued to consultants. In addition, we recorded consulting
expense for stock options granted to non-employee consultants, during the
nine-month periods ended July 31, 2009 and 2008, of approximately $10,000 and
$213,000, respectively, and during the three-month periods ended July 31, 2009
and 2008, of approximately $3,000 and $3,000, respectively. It is also
management's intention to continue to compensate consultants by issuing stock or
stock options.
During the nine-month periods ended July 31, 2009 and 2008, stock
options to purchase 4,150,000 shares and 2,679,200 shares, respectively, of
common stock were exercised with aggregate proceeds of approximately $1,248,000
and $2,107,000, respectively.
During the nine months ended July 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. In April 2009 and April 2008, we received
dividends of approximately $29,000 and $131,000, respectively, on the Videocon
GDRs we hold. 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
38
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, a license fee of
$11 million from Videocon is payable in installments over a 27 month period and
an agreed upon royalty from Videocon is payable based on display sales by
Videocon. During the nine months ended July 31, 2009, we have recognized revenue
from sales of encryption products of approximately $71,000, revenue from display
technology engineering services of $52,000 and revenue from display technology
license fee of approximately $813,000.
The following table presents our expected cash requirements for
contractual obligations outstanding as of July 31, 2009:
Payments Due by Period
----------------------------------------------------------------------------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
----------------------- ------------- ------------- ------------ ---------------- ------------------
Noncancelable
Operating Leases $ 294,000 $404,000 $ - $ - $ 698,000
Loan Payable - - - 5,000,000 $ 5,000,000
------------- ------------- ------------ ---------------- ------------------
Total Contractual
Cash Obligations $ 294,000 $404,000 $ - $ 5,000,000 $ 5,698,000
============= ============= ============ ================ ==================
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.
39
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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"), to clarify the definition of fair value,
establish a framework for measuring fair value and expand the disclosures about
fair value measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exact
price). SFAS No. 157 also stipulates that, as a market-based measurement, fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (b) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 157 did not have a material effect on our consolidated financial
statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS
157-2, "Effective Date of FASB Statement No. 157" ("FSP No. FAS 157-2") This FSP
permits a one-year deferral of application of SFAS No. 157 for non financial
assets and liabilities measured at fair value on a non-recurring basis. The
adoption of FSP No. FAS 157-2 is not expected to have a material effect on our
consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significant Decreased and Identifying Transactions That Are Not Orderly" ("FSP
No. FAS 157-4"). This FSP provides additional guidance for estimating fair value
in accordance with SFAS No. 157 when there has been a significant decrease in
market activity for a financial asset. An entity is required to base its
conclusion about whether a transaction was distressed on the weight of the
evidence presented. This FSP also re-affirms that the objective of fair value,
when the market for an asset is not active, is the price that would be received
to sell the asset in an orderly market (as opposed to a distressed or forced
transaction). Additional enhanced disclosures are also required in accordance
with this FSP. FSP No. FAS 157-4 must be applied prospectively and is effective
for interim and annual periods ending after June 15, 2009. The adoption of FSP
No. FAS 157-4 did not have a material effect on our consolidated financial
statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments" ("FSP No. FAS 107-1 and
APB 28-1"), principally to require publicly traded companies to provide
disclosures about fair value of financial instruments in interim financial
information. This guidance is effective for interim and annual periods ending
40
after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB 28-1 did not have
a material effect on our consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Investments" (FSP No.
115-2 and FSP 124-2"). FSP No. FAS 115-23 and FSP 124-2 amends the
other-than-temporary impairment guidance for debt securities. Under FSP No. FAS
115-2 and FAS 124-2, the pre-existing "intent and ability" trigger was modified
such that an other-than-temporary impairment is now trigged when there is intent
to sell the security, it is more likely than not that the security will be
required to be sold before recovery in value, or the security is not expected to
recover the entire amortized cost basis of the security ("credit related loss").
Credit related losses on debt securities will be considered an
other-than-temporary impairment recognized in earnings, and any other losses due
to a decline in fair value relative to the amortized cost deemed not to be
other-than-temporary will be recorded in other comprehensive income. FSP No. FAS
115-2 and 124-2 is effective for interim and annual periods ending after June
15, 2009. The adoption of FSP No. FAS 115-2 and 124-2 did not have a material
effect on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS
No. 165"). SFAS No. 165 establishes accounting and reporting standards for
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No. 165 is effective for fiscal
years and interim periods ending after June 15, 2009. The adoption of SFAS No.
165 did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles."
This standard replaces SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles," and establishes only two levels of U.S. generally
accepted accounting principles (GAAP): authoritative and non-authoritative. The
FASB Accounting Standards Codification (the Codification) will become the source
of authoritative, nongovernmental GAAP for Securities and Exchange Commission
("SEC") registrants. All other non-grandfathered, non-SEC accounting literature
not included in the Codification will become non-authoritative. This Standard is
effective for financial statements for interim or annual reporting ending after
September 15, 2009. As the Codification was not intended to change or alter
existing GAAP, it will not have any 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,
41
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
As of July 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 July 31, 2009, our investment in Videocon GDRs is recorded at fair
value of approximately $5,654,000 including an unrealized loss of approximately
$10,546,000 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 July 31, 2009 amounts to approximately
$565,000.
Our investment in DISC common stock at July 31, 2009 is recorded at
fair value $220,000 including an unrealized loss of $156,000 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 July 31, 2009 amounts to approximately $22,000.
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.
There was no change in our internal control over financial reporting
during the quarter ended July 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
42
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 September
9, 2009.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated September
9, 2009.
32.1 Statement of Chief Executive Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated September 9,
2009.
32.2 Statement of Chief Financial Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated September 9,
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
September 9, 2009 (Principal Executive Officer)
By: /s/ Henry P. Herms
-------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
September 9, 2009 Financial and Accounting Officer)
43