If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [x] |
| (Do not check if a smaller reporting company) |
|
CALCULATION OF REGISTRATION FEE
| Title of Each Class of |
| Amount to Be |
| Proposed |
|
| Proposed |
| Amount of | |||
| Shares of common stock(2) |
| 2,520,000 |
| $ | 0.15 | (3) |
| $ | 378,000.00 |
| $ | 43.92 |
| Shares of common stock underlying Series A Convertible Preferred Stock (4) |
| 18,498,943 |
| $ | 0.1892 | (5) |
| $ | 3,500,000.00 |
| $ | 406.70 |
| Shares of common stock underlying warrants (6) |
| 9,249,472 |
|
| - |
|
|
| - |
|
| (6) |
| Total |
| 30,268,415 |
|
|
|
|
| $ | 3,878,000.00 |
| $ | 450.62 |
|
| (1) | Pursuant to Rule 416 of the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock offered hereby also include such presently indeterminate number of shares of the registrant’s common stock as a result of stock splits, stock dividends or similar transactions. |
|
| (2) | Represents shares of common stock being registered for resale that were issued to the selling stockholder on September 9, 2014 in connection with the conversion of the principal and all accrued but unpaid interest on a convertible debenture (the “Debt Conversion”) originally issued in a private placement on November 11, 2013 (the “November Private Placement”). |
|
| (3) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low sales price of the common stock on the OTCQB Market on December 2, 2014. |
|
| (4) | Represents shares of common stock underlying shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) issued in connection with the Debt Conversion. |
|
| (5) | Proposed maximum offering price per share is based on the conversion price of the Series A Preferred Stock in accordance with Rule 457(g). |
|
| (6) | Represents shares of common stock issuable upon the exercise of warrants (the “Warrants”) issued in the November Private Placement and amended in connection with the Debt Conversion. The registrant has previously paid $450.80 in connection with the filing of Registration Statement No. 333-193826 which registered the sale of these shares and is included in this Registration Statement pursuant to Rule 429 of the Securities Act. |
Pursuant to Rule 429 under the Securities Act, the prospectus contained in this Registration Statement will be used as a combined prospectus in connection with this Registration Statement and Registration Statement No. 333-193826 (the “Prior Registration Statement”), which was filed on February 7, 2014, amended on April 23, 2014 and May 6, 2014 and became effective on May 8, 2014, under which the 9,249,472 shares underlying the Warrants remain unsold. This Registration Statement is a new registration statement and also constitutes Post-Effective Amendment No. 1 to the Prior Registration Statement. Such Post-Effective Amendment will become effective concurrently with the effectiveness of this Registration Statement in accordance with Section 8(c) of the Securities Act.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
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EXPLANATORY NOTE
Pursuant to Rule 429 under the Securities Act, the prospectus included in this Registration Statement is a combined prospectus relating to:
(i) the resale of 2,520,000 shares of common stock issued to Adaptive Capital in connection with the Debt Conversion as described in further detail in the prospectus, such shares being initially registered herein;
(ii) the resale of 18,498,943 shares of common stock underlying our Series A Preferred Stock issued to Adaptive Capital in connection with the Debt Conversion as described in further detail in the prospectus, such shares being initially registered herein; and
(iii) the resale of 9,249,472 shares of common stock issuable upon the exercise of Warrants which were issued to Adaptive Capital in the November Private Placement and previously registered on Registration Statement No. 333-193826, filed on Form S-3 and declared effective on May 8, 2014.
This Registration Statement, which is a new registration statement, also constitutes Post-Effective Amendment No. 1 to Registration Statement No. 333-193826, and such post-effective amendment shall hereafter become effective concurrently with the effectiveness of this Registration Statement and in accordance with Section 8(c) of the Securities Act.
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated December 8, 2014
Prospectus
ITUS CORPORATION
30,268,415 Shares of Common Stock
This prospectus relates to the resale of up to 30,268,415 shares of common stock, par value $0.01 per share, of ITUS Corporation (“we,” “us,” “our,” the “Company,” or “ITUS”) held by a selling stockholder, consisting of the following:
We will not receive any proceeds from the resale of any of the shares of common stock being registered hereby. However, we may receive proceeds from the exercise of the warrants exercised other than pursuant to any applicable cashless exercise provisions of the warrants.
Our common stock is quoted on the OTCQB under the symbol “ITUS.” On December 2, 2014, the last reported sale price of our common stock on the OTCQB was $0.15 per share.
The selling stockholder may offer all or part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices. With regard only to the shares it sells for its own behalf, Adaptive Capital is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). The Company is paying all of the registration expenses incurred in connection with the registration of the shares. We will not pay any of the selling commissions, brokerage fees and related expenses.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 3 to read about factors you should consider before investing in shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is _________, 2014.
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You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with information different from or in addition to that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
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| Page |
| 5 | |
| 6 | |
| 8 | |
| 17 | |
| 17 | |
| 17 | |
| 18 | |
| 20 | |
| 22 | |
| 25 | |
| 31 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| 40 | |
| 43 | |
| 44 | |
| Beneficial Ownership of Principal Stockholders, Officers and Directors | 50 |
| 54 | |
| 54 | |
| Disclosure of Commission Position of Indemnification For Securities Act Liabilities | 54 |
| 54 | |
| 54 |
In this prospectus, we rely on and refer to information and statistics regarding our industry. We obtained this statistical, market and other industry data and forecasts from publicly available information. While we believe that the statistical data, market data and other industry data and forecasts are reliable, we have not independently verified the data.
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements that involve risks and uncertainties. All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy, and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors” or elsewhere in this prospectus, which may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a highly regulated, very competitive, and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long term business operations, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this prospectus, and in particular, the risks discussed below and under the heading “Risk Factors” and those discussed in other documents we file with the SEC. The following discussion should be read in conjunction with the consolidated financial statements for the fiscal years ended October 31, 2013 and 2012 and notes incorporated by reference therein. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statement.
You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. You should be aware that the occurrence of the events described in the section entitled “Risk Factors” and elsewhere in this prospectus could negatively affect our business, operating results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this prospectus to conform our statements to actual results or changed expectations.
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This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in the common stock. You should carefully read the entire prospectus. In particular, attention should be directed to our “Risk Factors,” “Information With Respect to the Company,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto contained herein before making an investment decision.
Unless otherwise indicated, all references in this prospectus to “dollars” or “$” refer to US dollars.
Business Overview
Our principal operations include the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company or one of our wholly-owned subsidiaries. The Company currently owns or controls 9 patent portfolios. As part of our patent assertion activities and in the ordinary course of our business, the Company, and our wholly-owned subsidiaries, have initiated and will likely continue to initiate patent infringement lawsuits, and engage in patent infringement litigation. Since implementing our new business model in January 2013, the Company has initiated 47 lawsuits in connection with 8 of our patent portfolios. Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits. In the calendar year eneded 2013, we entered into 4 revenue producing licenses from 2 of our patent portfolios. Since January 2014, we have entered into 28 license and/or settlement agreements from our patent portfolios. In addition to continuing to mine and monetize our existing patents, our wholly-owned subsidiary, ITUS Patent Acquisition Corporation (“IPAC”), will continue to acquire patents and the exclusive rights to license and enforce patents from third parties.
We were incorporated on November 5, 1982 under the laws of the State of Delaware. From inception through end of fiscal year 2012, our primary operations involved licensing in connection with the development of patented technologies. Since that date, our primary operations include the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company or one of our wholly-owned subsidiaries.
Transactions with Selling Stockholder
On November 11, 2013, we entered into a subscription agreement with Adaptive Capital, an institutional investor, pursuant to which we issued a 6% convertible debenture with a principal amount of $3,500,000 and a Warrant to purchase 9,249,472 shares of common stock (the “Warrant Shares”). The shares of common stock underlying the Debenture and the Warrant Shares were subsequently registered by us pursuant to a Registration Statement on Form S-3 (No. 333-193826) which was declared effective on May 8, 2014. On September 9, 2014, we entered into a debt conversion agreement (the “Debt Conversion Agreement”) with Adaptive Capital pursuant to which we converted the Debenture issued in the November Private Placement into shares of our common stock and Series A Preferred Stock. Specifically, in consideration for the conversion of the outstanding principal and all accrued but unpaid interest on the Debenture, we issued to Adaptive Capital 18,498,943 shares of our common stock (the “Conversion Shares”), of which Adaptive Capital agreed to exchange 15,978,943 Conversion Shares into 3,500 shares of our Series A Preferred Stock. In addition, we agreed to amend the terms of the Warrant issued in the November Private Placement to decrease the exercise price from $0.3784 to $0.31. The 3,500 shares of Series A Preferred Stock are convertible into up to 18,498,943 shares of our common stock. The conversion of the Series A Preferred Stock and the exercise of the Warrant are subject to certain beneficial ownership limitations. For further information regarding the transactions with this selling stockholder, see “Selling Stockholder.”
Where You Can Find Us
Our principal executive offices are located at 900 Walt Whitman Road, Melville, New York 11747, our telephone number is 631-549-5900, and our Internet website address is http://www.ituscorp.com. The information on our website is not a part of, or incorporated in, this prospectus.
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Table of Contents
The Offering
| Common stock outstanding: | 219,712,190 shares as of the date of this prospectus
|
| Common stock offered by selling stockholders: | 30,268,415 shares |
| Common stock outstanding after the offering: | 249,980,605 shares |
| Use of Proceeds: | We will not receive any proceeds from the sale of the common stock by the selling stockholder. We would, however, receive proceeds upon the exercise of the Warrant held by the selling stockholder which, if such Warrant is exercised in full for cash, would be approximately $2,867,336. Proceeds, if any, received from the exercise of such Warrant will be used for general corporate purposes and working capital or for other purposes that our Board of Directors, in their good faith, deem to be in the best interest of the Company. No assurances can be given that any of such warrant will be exercised.
|
| Quotation of common stock: | Our common stock is listed for quotation on the OTCQB market under the symbol “ITUS.”
|
| Dividend policy: | We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying cash dividends on our common stock.
|
| Risk Factors: | An investment in our company is highly speculative and involves a significant degree of risk. See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. |
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8
Failure to effectively manage our potential growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.
Our change in business strategy and potential growth is expected to place a strain on managerial, operational and financial resources and systems. Further, as our business grows, we will be required to manage multiple relationships as well as multiple patent enforcement cases. Any growth by us, or an increase in the number of our strategic relationships or litigation, may place additional strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business and financial results will be materially harmed.
Risks Related to Patent Monetization and Patent Assertion Activities
We may not be able to monetize our patent portfolios which may have an adverse impact on our future operations.
The primary operations of the Company are patent monetization and patent assertion. We expect to generate revenues and related cash flows from the licensing and enforcement of patents that we currently own and from the rights to license and enforce additional patents we have obtained, and may obtain in the future, from third parties. However, we can give no assurances that we will be able to identify opportunities to exploit such patents or that such opportunities, even if identified, will generate sufficient revenues to sustain future operations.
Certain of our patent portfolios are subject to existing license agreements with AUO which may limit our ability to monetize them.
In the course of entering into the EPD License Agreement and the Nano Display License Agreement with AUO certain rights to our ePaper® Electrophoretic Display patents and Nano Field Emission Display patents were licensed to AUO. We have terminated the EPD License Agreement and the Nano Display License Agreement with AUO although we can give no assurance that AUO will not challenge the effectiveness of such terminations. We intend to take the steps necessary to seek to remove any encumbrances that may inhibit our patent licensing and enforcement efforts in connection with the ePaper® Electrophoretic Display patents, however, we can give no assurance that the patents will be unencumbered. If the patent portfolios remain encumbered or if our termination of the AUO license agreements are deemed to be ineffective, it could limit our ability to assert the ePaper® Electrophoretic Display patents against potential infringers, and otherwise monetize the Nano Field Emission Display patents. See the section entitled “Legal Proceedings” for additional information.
While we recently commenced lawsuits against AUO and E Ink, and currently have pending seven patent infringement lawsuits brought by us or a subsidiary against various entities, it expects such proceedings to be time-consuming and costly and we may not be successful in obtaining judgments in our favor which may adversely affect our financial condition and our ability to operate our business.
On January 28, 2013, we filed the AUO/E Ink lawsuit and currently we have seven separate patent infringement lawsuits pending which were brought by us or a subsidiary against various entities. Such patent infringement litigation may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. The defendants or other third parties involved in the lawsuits may have substantially more resources than we do. Furthermore, such parties may allege defenses and/or file counterclaims in an effort to avoid or limit liability and damages for patent infringement. If such defenses or counterclaims are successful, they may preclude our ability to derive licensing revenue from the patent portfolios. A negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact our business. Additionally, we anticipate that legal fees and other expenses will be significant. Expenses are also dependent on the outcome of such proceedings. We can give no assurance that these lawsuits will be decided in our favor or even if they are that the damages and other remedies will be material.
9
Our revenues are unpredictable, may come from a small number of licensees, and may harm our financial condition and the market price of our stock.
In our nine months ended July 31, 2014, our revenue was derived from five licenses, and a substantial portion of our revenue was derived from two licensees. It is likely that going forward, a substantial portion of our revenue in each reporting period may come from a small number of licensees, and that one licensee may account for a substantial portion of our revenue. As a result, our revenues may be unpredictable and may vary from period to period.
If we are unable to retain top legal counsel to represent us in patent enforcement litigation, it may adversely affect our business.
The success of our licensing business depends in part upon our ability to retain top legal counsel to prosecute patent infringement litigation. As our patent enforcement actions increase, it will become more difficult to find top legal counsel to handle all of our cases because many of the top law firms may have a conflict of interest that prevents their representation of us. In addition, the terms of retention of such firms may be unacceptable to us.
We, in certain circumstances, rely on representations, warranties and opinions made by third parties that, if determined to be false or inaccurate, may expose us to certain material liabilities.
From time to time, we may rely upon the opinions of purported experts. In certain instances, we may not have the opportunity to independently investigate and verify the facts upon which such opinions are made. By relying on these opinions, we may be exposed to liabilities in connection with the licensing and enforcement of certain patents and patent rights which could have a material adverse effect on our operating results and financial condition.
In connection with patent enforcement actions conducted by certain of our subsidiaries, a court may rule unfavorably in counterclaims filed against us or that we have violated certain statutory, regulatory, federal, local or governing rules or standards, which may expose us and our operating subsidiaries to certain material liabilities.
In connection with any of our patent enforcement actions, it is possible that a defendant may file counterclaims against us or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if we or our operating subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and our financial position.
New legislation, regulations, rules and case-law related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue.
We may apply for patents and may spend a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented either by Congress, the United States Patent and Trademark Office (“USPTO”), or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our expenses and revenue. For example, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions, and potential new rules requiring that the losing party pay legal fees of the prevailing party could also significantly increase the cost of our enforcement actions.
10
United States patent laws were recently amended with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. The America Invents Act and its implementation increases the uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.
In addition, the U.S. Department of Justice (“DOJ”) has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies.
Further, in various pending litigation and appeals in the United States Federal courts, various arguments and legal theories are being advanced to potentially limit the scope of damages a patent licensing company such as the Company might be entitled to. Any one of these pending cases could result in new legal doctrines that could make our existing or future patent portfolios less valuable or more costly to enforce.
More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.
We hold a number of pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in recognizing revenue, if any, from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
U.S. Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.
Patent enforcement actions are almost exclusively prosecuted in U.S. Federal court. Federal trial courts that hear patent enforcement actions also hear criminal cases. Criminal cases always take priority over patent enforcement actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before United States Judges, and as a result, we believe that the risk of delays in patent enforcement actions will have a significant effect on our business in the future unless this trend changes.
Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications.
Our primary asset is our patent portfolios, including pending patent applications before the USPTO. The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses.
Competition is intense in the industries in which we do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents.
Our licensing business may compete with venture capital firms and various industry leaders for technology licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
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Our patented technologies have an uncertain market value.
Many of our patents and technologies are in the early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services.
As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents.
We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This may increase the risks associated with an investment in our company.
Weak global economic conditions may cause infringing parties to delay entering into licensing agreements, which could adversely affect our financial condition and operating results.
Our business plan depends significantly on economic conditions, and the United States and world economies are only beginning to emerge from weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on our patent assets to enter into licensing or other revenue generating agreements voluntarily which could cause material harm to our business.
We are dependent upon a few key personnel and the loss of their services could adversely affect us.
Our future success to monetize our patent portfolios will depend on the efforts of our President and Chief Executive Officer, Robert A. Berman, and our Senior Vice President – Engineering, John Roop, and our strategic advisor, Dr. Amit Kumar. While we maintain “key person” life insurance on Mr. Berman, we do not maintain such “key person” life insurance on Messrs. Roop or Dr. Kumar. The loss of the services of any such persons could have a material adverse effect on our business and operating results.
Risks Related to Our Common Stock
The availability of shares for sale in the future could reduce the market price of our common stock.
In the future, we may issue securities to raise cash for operations and acquisitions of patents and/or companies. We have and in the future may issue securities convertible into our common stock. Any of these events may dilute stockholders' ownership interests in our company and have an adverse impact on the price of our common stock.
In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
Any actual or anticipated sales of shares by our stockholders or by Aspire Capital may cause the trading price of our common stock to decline. Additional issuances of shares to Aspire Capital may result in dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock by our stockholders including Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of our company that might otherwise result in our stockholders receiving a premium over the market price of their shares.
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Provisions of Delaware General Corporation Law (“DGCL”) and our certificate of incorporation, as amended (the “Certificate of Incorporation”) and by-laws (“By-Laws”) could make the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors, more difficult. These provisions include:
· Section 203 of the DGCL, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder;
· The authorization in our Certificate of Incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover; and
· Provisions in our By-Laws regarding stockholders' rights to call a special meeting of stockholders limit such rights to stockholders holding together at least a majority of shares of the Company entitled to vote at the meeting, which could make it more difficult for stockholders to wage a proxy contest for control of our Board of Directors or to vote to repeal any of the anti-takeover provisions contained in our Certificate of Incorporation and By-Laws.
Together, these provisions may make the removal of management more difficult and may discourage transactions that could otherwise involve payment of a premium over prevailing market prices for our common stock.
We may fail to meet market expectations because of fluctuations in quarterly operating results, which could cause the price of our common stock to decline.
Our reported revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods, revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period:
· the dollar amount of agreements executed in each period, which is primarily driven by the nature and characteristics of the technology being licensed and/or the magnitude of infringement associated with a specific licensee;
· the specific terms and conditions of agreements executed in each period and/or the periods of infringement contemplated by the respective payments;
· fluctuations in the total number of agreements executed;
· fluctuations in the sales results or other royalty-per-unit activities of our licensees that impact the calculation of license fees due;
· the timing of the receipt of periodic license fee payments and/or reports from licensees;
· fluctuations in the net number of active licensees period to period;
· costs related to acquisitions, alliances, licenses and other efforts to expand our operations;
· the timing of payments under the terms of any customer or license agreements into which we may enter;
· expenses related to, and the timing and results of, patent filings and other enforcement proceedings relating to intellectual property rights, as more fully described in this section; and
· the outcome of any of our patent infringement lawsuits.
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Technology company stock prices are especially volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
· announcements of developments in our patent enforcement actions;
· developments or disputes concerning our patents;
· our or our competitors' technological innovations;
· developments in relationships with licensees;
· variations in our quarterly operating results;
· our failure to meet or exceed securities analysts' expectations of our financial results;
· a change in financial estimates or securities analysts' recommendations;
· changes in management's or securities analysts' estimates of our financial performance;
· changes in market valuations of similar companies;
· the current sovereign debt crises affecting several countries in the European Union and concerns about sovereign debt of the United States;
· announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new technologies, or patents; and
· the timing of or our failure to complete significant transactions.
In addition, we believe that fluctuations in our stock price during applicable periods can also be impacted by court rulings and/or other developments in our patent licensing and enforcement actions. Court rulings in patent enforcement actions are often difficult to understand, even when favorable or neutral to the value of our patents and our overall business, and we believe that investors in the market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets.
In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our common stock was the object of securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources, which could materially harm our business and financial results.
Our common stock is subject to the SEC’s penny stock rules which may make our shares more difficult to sell.
Our common stock fits the definition of a penny stock and therefore is subject to the rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. The SEC rules may have the effect of reducing trading activity in our common stock making it more difficult for investors to sell their shares. The SEC’s rules require a broker or dealer proposing to effect a transaction in a penny stock to deliver the customer a risk disclosure document that provides certain information prescribed by the SEC, including, but not limited to, the nature and level of risks in the penny stock market. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction. In addition, the SEC’s rules also require a broker or dealer to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction before completion of the transaction. The existence of the SEC’s rules may result in a lower trading volume of our common stock and lower trading prices.
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We do not anticipate declaring any cash dividends on our common stock which may adversely impact the market price of our stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. If we do not pay dividends, our stock may be less valuable to you because a return on your investment will only occur if our stock price appreciates.
The securities issued in our private placements and registered direct offering may dilute your percentage ownership interest and may also result in downward pressure on the price of our common stock.
In connection with our private placements in February 2011, January 2013 and November 2013 and our registered direct offering in July 2014, we have outstanding shares of preferred stock (following the conversion of the Debenture issued in November 2013) and warrants which are convertible into or exercisable for an aggregate of 25,623,281 shares of our common stock, at prices ranging from $0.1786 to $0.40 per share. In addition, as we are required to register these shares for resale by the holders, it is possible that a significant number of shares could be sold at the same time. Because the market for our common stock is thinly traded, the sales and/or the perception that those sales may occur, could adversely affect the market price of our common stock. Furthermore, the mere existence of a significant number of shares of common stock issuable upon conversion of the debentures or the exercise of warrants may be perceived by the market as having a potential dilutive effect, which could lead to a decrease in the price of our common stock.
We are registering in this Registration Statement an aggregate of 27,748,415 shares of common stock that may be issued upon exercise of Warrants and conversion of the Series A Preferred Stock. The sale of such shares could depress the market price of our common stock.
We are registering an aggregate of 27,748,415 shares of common stock underlying a warrant and shares of Series A Preferred Stock pursuant to our registration obligations contained in the Warrant and Debt Conversion Agreement. Notwithstanding ownership limitations in the Warrant and in the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (the “Certificate of Designations”), the 27,748,415 shares represent approximately 12.63% of our shares of common stock outstanding assuming the conversion of the Series A Preferred Stock and exercise rights Warrant issued in our November Private Placement at the time the registration statement is filed.
The sale of our common stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale, actual or anticipated, of the shares of common stock acquired by Aspire Capital could cause the price of our common stock to decline.
We have the right to sell up to $10 million of our shares of common stock to Aspire Capital, including the 5,380,000 shares sold to Aspire Capital since April 23, 2013, and have issued 3,500,000 shares to Aspire Capital as a commitment fee. We were obligated to register these shares with the SEC. The registration statement declared effective by the SEC on June 19, 2013 (post-effective amendment no. 1 of the registration statement updating the registration statement was declared effective on February 5, 2014) registers 20,000,000 shares for issuance and sale to Aspire Capital under the Purchase Agreement. It is anticipated that these shares will be sold by Aspire Capital pursuant to a registration statement or sold in reliance on an exemption from registration in Rule 144 of the Securities Act.
Any actual or anticipated sales of shares by Aspire Capital may cause the trading price of our common stock to decline. Additional issuances of shares to Aspire Capital may result in dilution to the interests of other holders of our common stock. However, we have the right to control the timing and amount of sales of our shares to Aspire Capital, and the purchase agreement may be terminated by us at any time at our discretion without any penalty or cost to us.
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We may not have access to the full amount available under the Stock Purchase Agreement with Aspire Capital.
In order for us to receive the full $10 million proceeds under the Stock Purchase Agreement it is unlikely that the 20,000,000 shares registered will be sufficient. Accordingly, our ability to have access to the full amount under the Stock Purchase Agreement with Aspire Capital will likely be subject to our ability to prepare and file one or more additional registration statements registering the resale of additional shares. These subsequent registration statements may be subject to review and comment by the staff of the SEC, and will require the consent of our independent registered public accounting firm. Therefore, the timing of effectiveness of these subsequent registration statements cannot be assured. The effectiveness of these subsequent registration statements is a condition precedent to our ability to sell the shares of common stock subject to these subsequent registration statements to Aspire Capital under the Stock Purchase Agreement.
Raising funds by issuing equity or debt securities could dilute the value of the common stock and impose restrictions on our working capital.
If we were to raise additional capital by issuing equity securities, including sales of shares of common stock to Aspire Capital, the value of the then outstanding common stock would be reduced, unless the additional equity securities were issued at a price equal to or greater than the market value of the common stock at the time of issuance of the new securities. If the additional equity securities were issued at a per share price less than the per share value of the outstanding shares, then all of the outstanding shares would suffer a dilution in value with the issuance of such additional shares. Further, the issuance of debt securities in order to obtain additional funds may impose restrictions on our operations and may impair our working capital as we service any such debt obligations.
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We will not receive any proceeds from the sale of shares by the selling stockholder. However, we may receive proceeds from the sale of securities upon the exercise of the Warrants issued in the November Private Placement (to the extent the registration statement of which this prospectus is a part is then effective and, if applicable, the “cashless exercise” provision is not utilized by the holder). As of the date of this prospectus, we have not received proceeds from such exercises.
Any net proceeds we receive will be used for general corporate and working capital or other purposes that the Board of Directors deems to be in the best interest of the Company. As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds we may receive. Accordingly, we will retain broad discretion over the use of these proceeds, if any.
We have not declared any dividends and do not anticipate that we will declare dividends in the foreseeable future; rather, we intend to retain any future earnings for the development of the business. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any.
DETERMINATION OF OFFERING PRICE
The selling stockholders will offer common stock at the prevailing market prices or privately negotiated price.
The offering price of our common stock does not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value. The facts considered in determining the offering price were our financial condition and prospects, our limited operating history and the general condition of the securities market.
In addition, there is no assurance that our common stock will trade at market prices in excess of the offering price as prices for common stock in any public market will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity.
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In connection with the November Private Placement, we granted Adaptive Capital registration rights with respect to the Warrant Shares. We were obligated to use our reasonable best efforts to cause a registration statement registering for resale the Warrant Shares to be filed no later than February 9, 2014 and to keep the registration statement effective until the Warrant Shares can be sold under without restriction under Rule 144 of the Securities Act or such earlier date when all the Warrant Shares have been sold; provided, however, we are not required to keep the Registration Statement effective after November 11, 2016.
Selling Stockholder Table
The following table sets forth certain information as of December 2, 2014 regarding the selling stockholder and the shares offered by the selling stockholder in this prospectus. The table assumes the full conversion of the Series A Preferred Stock and the complete exercise of the Warrant by the selling stockholder. Except as indicated in the footnotes to the following table, the selling stockholder has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name. The percentage of ownership of the selling stockholder in the following table is based upon 219,712,190 shares of common stock outstanding as of December 2, 2014.
Except as set forth below, the selling stockholder has not held a position as an officer or director of the Company, nor has the selling stockholder had any material relationship of any kind with us or any of our affiliates. All information with respect to share ownership has been furnished by the selling stockholder. The common stock being offered is being registered to permit secondary trading of the shares and the selling stockholder may offer all or part of the common stock owned for resale from time to time. The selling stockholder has no family relationships with our officers, directors or controlling stockholders. The selling stockholder is not a registered broker-dealer but Adaptive Capital is an affiliate of a registered broker-dealer. Adaptive Capital was issued the Conversion Shares, Series A Preferred Stock and Warrant in the ordinary course of business and had no agreement or understandings, directly or indirectly, with any person to distribute the Conversion Shares, Series A Preferred Stock or Warrant Shares at the time of issuance.
The term “selling stockholder” also includes any transferees, pledges, donees, or other successors in interest to the selling stockholder named in the table below. To our knowledge, subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the common stock set forth opposite such person’s name. We will file a supplement to this prospectus (or a post-effective amendment hereto, if necessary) to name successors to any named selling stockholder who is able to use this prospectus to resell the securities registered hereby.
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| Number of Shares of Common Stock Owned | Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus (1) | Number of Shares of Common Stock Owned After Offering Assuming All Shares are Sold (2) | Percentage of Common Stock Owned After Offering Assuming All Shares are Sold (2) |
| Adaptive Capital, LLC (3) | 30,268,415 | 30,268,415 | 0 | 0% |
(1) Consists of (i) 2,520,000 shares of common stock, (ii) 18,498,943 shares of common stock underlying 3,500 shares of Series A Preferred Stock and (iii) 9,249,472 shares of common stock issued or issuable upon exercise of a Warrant.
(2) Assumes the sale of all shares offered pursuant to this prospectus.
(3) Tahoe Pacific Corp. exercises the voting and investment control for Adaptive Capital pursuant to an asset management agreement. James Brown, the President of Tahoe Pacific Corp., exercises voting and investment control for Tahoe Pacific Corp.
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The common stock may be sold or distributed from time to time by the selling stockholder directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which may be changed on any stock exchange, market or trading facility on which the shares are traded or in private transactions. The sale of the common stock offered by this prospectus may be effected in one or more of the following methods:
· ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
· transactions involving cross or block trades;
· purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
· an exchange distribution in accordance with the rules of the applicable exchange;
· in privately negotiated transactions;
· short sales after the registration statement, of which this prospectus forms a part, becomes effective;
· broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share;
· “at the market” into an existing market for the common stock;
· through the writing of options on the shares;
· a combination of any such methods of sale; and
· any other method permitted pursuant to applicable law.
In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the registration or qualification requirement is available and complied with.
Adaptive Capital may also sell shares of common stock under Rule 144 promulgated under the Securities Act, if available, rather than under this prospectus. In addition, Adaptive Capital may transfer the shares of common stock by other means not described in this prospectus.
The selling stockholder may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that the selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholder cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, such selling stockholder.
Brokers, dealers, underwriters, or agents participating in the distribution of the shares as agents may receive compensation in the form of commissions, discounts, or concessions from the selling stockholder and/or purchasers of the common stock for whom the broker-dealers may act as agent. Adaptive Capital has informed us that each such broker-dealer will receive commissions from Adaptive Capital which will not exceed customary brokerage commissions. The selling stockholder may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.
The selling stockholder acquired the securities offered hereby in the ordinary course of business and has advised us that it has not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by such selling stockholder. If we are notified by the selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of common stock, if required, we will file a supplement to this prospectus.
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With regard only to the shares it sells for its own behalf, Adaptive Capital may be deemed an “underwriter” within the meaning of the Securities Act. This offering as it relates to Adaptive Capital will terminate on the date that all shares issued to and issuable to Adaptive Capital that are offered by this prospectus have been sold by Adaptive Capital.
We may suspend the sale of shares by the selling stockholder pursuant to this prospectus for certain periods of time for certain reasons, including if the prospectus is required to be supplemented or amended to include additional material information.
If the selling stockholder uses this prospectus for any sale of the shares of common stock, such selling stockholder will be subject to the prospectus delivery requirements of the Securities Act.
Regulation M
The anti-manipulation rules of Regulation M under the Exchange Act of 1934, as amended (the “Exchange Act”) may apply to sales of our common stock and activities of the selling stockholder.
We have advised the selling stockholder that while it is engaged in a distribution of the shares included in this prospectus it is required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes the selling stockholder, any affiliated purchasers, and any broker-dealer or other person who participates in the distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the shares offered hereby this prospectus.
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Capital Stock
Our authorized share capital consists of 600,000,000 shares of common stock, $0.01 par value per share, of which 219,712,190 shares of common stock is issued and outstanding as of December 2, 2014 and 500,000 shares of preferred stock, $0.01 par value per share, of which 3,500 shares have been designated as Series A Convertible Preferred Stock, all of which are issued and outstanding as of December 2, 2014. We are a Delaware corporation and our affairs are governed by our Certificate of Incorporation and By-laws. The following are summaries of material provisions of our Certificate of Incorporation and By-laws insofar as they relate to the material terms of our common shares. Complete copies of our Certificate of Incorporation and By-laws are filed as exhibits to our public filings.
Common Stock
Our common stock is quoted on the OTCQB under the symbol “ITUS”.
All outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders of the Company. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. In the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative or preemptive rights.
Dividend Rights
Holders of the common stock may receive dividends when, as and if declared by our Board of Directors out of the assets legally available for that purpose and subject to the preferential dividend rights of any other classes or series of stock of our Company. We have never paid, and have no plans to pay, any dividends on our shares of common stock.
Voting Rights
Holders of the common stock are entitled to one vote per share in all matters as to which holders of common stock are entitled to vote. Holders of not less than a majority of the outstanding shares of common stock entitled to vote at any meeting of stockholders constitute a quorum unless otherwise required by law.
Election of Directors
Directors hold office until the next annual meeting of stockholders and are eligible for reelection at such meeting. Directors are elected by a plurality of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. There is no cumulative voting for directors.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, holders of the common stock have the right to receive ratably and equally all of the assets remaining after payment of liabilities and liquidation preferences of any preferred stock then outstanding.
Redemption
The common stock is not redeemable or convertible and does not have any sinking fund provisions.
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Preemptive Rights
Holders of the common stock do not have preemptive rights.
Other Rights
Our common stock is not liable to calls or to assessment by the registrant and for liabilities of the registrant imposed on its stockholders under state statutes.
Series A Convertible Preferred Stock
Conversion
The Series A Preferred Stock is convertible into shares of common stock at any time following issuance at the option of the holder (subject to certain limitations described below). Each share of Series A Preferred Stock is convertible into approximately 5,285.4 shares of common stock pursuant to the terms of the Certificate of Designations. Such ratio is calculated by dividing the stated value of each share of Series A Preferred Stock ($1,000) by $0.1892.
Ranking; Dividends
The Company may not, directly or indirectly, incur any indebtedness or create a new class of equity that is expressly senior in right of payment to the Series A Preferred Stock without prior written consent of at least two-thirds of the outstanding Series A Preferred Stock holders. The Series A Preferred Stock holders are not entitled to receive cash dividends. In the event that the Company declares a stock dividend or otherwise makes a distribution to the common stock holders, the terms of the Series A Preferred Stock will be adjusted proportionately so that the holder after such dividend or distribution will be entitled to receive the aggregate number and kind of shares, evidences, rights, options, warrants or securities which, the holder would have owned if the Series A Preferred Stock had been converted immediately prior to the time of the distribution.
Subsequent Equity Sales
In the event that the Company issues additional shares of common stock and/or any rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of common stock or otherwise entitling any person to acquire shares of Common Stock in connection with a financing pursuant to which the effective net price to the Company for such securities (the “Effective Price”) is less than 75% of the then conversion price, then subject to certain exceptions set forth in the Certificate of Designations, the conversion price will be reduced to the Effective Price.
Maximum Conversion
The Company will not effect any conversion of the Series A Preferred Stock if after giving effect to such conversion, the holder, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Securities Exchange Act, as amended) on an as-converted basis with the common stock in excess of 4.99% (the “Maximum Percentage”) of the number of shares of common stock outstanding immediately after giving effect to such conversion. A holder may increase the Maximum Percentage by providing written notice to the Company of its intention to exceed the Maximum Percentage at a time no earlier than 60 days after such notice.
Board and Observer Rights
For so long as any holder of Series A Preferred Stock beneficially owns at least 2,000,000 shares of Common Stock, such holder has the right to designate one representative, reasonably acceptable to the Company as a board observer, to the Company’s Board of Directors. In lieu of the right to designate an observer to the Board of Directors, the holder may designate one representative, reasonably acceptable to the Company, to serve on the Board of Directors.
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Redemption; Mandatory Conversion
Upon at least 60 days prior written notice to the Company, on November 11, 2016, any holder of Series A Preferred Stock has a one-time right to require the Company to redeem all or some of its shares of Series A Preferred Stock for cash that is specifically generated from the sale of the Company’s equity securities. The redemption price per share is equal to the “stated value.”
After November 11, 2016, the Company has the right to convert any outstanding shares of Series A Preferred Stock into shares of common stock, subject to certain volume restrictions, if the average of the high and low trading price of the common stock for any 10 out of 20 consecutive trading days exceeds the then conversion price.
Liquidation Preference
In the event of a liquidation, dissolution or winding up of the Company, then the holders of the Series A Preferred Stock are entitled to receive out of the assets of the Company legally available for distribution, prior to and in preference to distributions to the holders of common stock and either in preference to or pari pasu with the holders of any other series of preferred stock that may be issued in the future, an amount equal to the “stated value” of the Series A Preferred Stock. The remaining assets of the Company will then be distributed to the holders of the Series A Preferred Stock and the holders of the common stock on an as converted basis.
Other Provisions
This section is a summary and may not describe every aspect of the common stock and Series A Preferred Stock that may be important to you. We urge you to read applicable Delaware law, our Certificate of Incorporation, including the Certificate of Designations, and By-laws, because they, and not this description, define your rights as a holder of common stock. See “How to Get More Information” for information on how to obtain copies of these documents.
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INFORMATION WITH RESPECT TO THE REGISTRANT
Description of Business
Overview
The primary operations of the Company involve the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company. The Company currently owns or controls 9 patent portfolios. As part of our patent assertion activities and in the ordinary course of our business, the Company has initiated and will likely continue to initiate patent infringement lawsuits, and engage in patent infringement litigation. Since implementing our new business model in January 2013, the Company has initiated 47 lawsuits in connection with 8 of our patent portfolios. Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits. Since January 2014, we entered into 28 revenue producing agreements. In addition to continuing to mine and monetize our existing patents, our wholly owned subsidiary, IPAC, will continue to acquire patents and the exclusive rights to license and enforce patents from third parties. In 2014, the Company acquired the rights to 1 additional patent portfolio.
Due to arrangements previously entered into by the Company, certain of our patents contain encumbrances, as described below, which may negatively impact our patent monetization and patent assertion activities. Where we are able, we will take the steps necessary to remove any encumbrances that may inhibit our patent monetization and patent assertion activities. In August 2014, the Company ended its relationship with Videocon Industries Limited (“Videocon”), terminating Videocon’s license to the Company’s patented Nano Field Emissions Display technology. We have obtained and will continue to obtain the rights to license and enforce additional patents from third parties, and when necessary, will assist such parties in the further development of their patent portfolios through the filing of additional patent applications.
In April 2013, the Company, through its wholly owned subsidiary, IPAC, acquired the exclusive rights to license and enforce a patent portfolio relating to vinyl windows with integrated J-Channels, commonly used in modular buildings, mobile homes, and conventional, new home construction. Additionally, in April 2013 we acquired rights to license and enforce a patent portfolio relating to loyalty awards programs commonly provided by airlines, credit card companies, hotels, retailers, casinos, and others (“Loyalty Conversion Systems”). In September 2014, the United States District Court for the Eastern District of Texas invalidated two of our Loyalty Conversion Systems patents by ruling that they did not cover patentable subject matter, resulting in the dismissal of 7 of our Loyalty Conversion Systems’ lawsuits. On October 18, 2014, the Company terminated its Loyalty Conversion Systems patent assertion campaign. In November 2013, IPAC acquired two patent portfolios in the rapidly expanding area of unified communications relating to (i) the multicast delivery of streaming data, media, and other content, within the confines of specialized virtual private networks, and (ii) the integration of telephonic participation in web-based audio/video conferences by creating a gateway between the internet and cellular or traditional landline telephones. In June 2014, IPAC acquired the exclusive rights to license and enforce a patent portfolio covering enhanced presentation and cross selling technologies used by some of the world’s leading auction sites.
Patent Monetization and Patent Assertion
Patent monetization is the generation of revenue and proceeds from patents and patented technologies (“Patent Monetization”). Patent assertion is a specialized type of Patent Monetization where a patent owner, or a representative of the patent owner, seeks to prohibit or collect royalties from the unauthorized manufacture, sale, and use of the owner’s patented invention (“Patent Assertion”). The Company’s business model is Patent Monetization and Patent Assertion. We currently own or control 9 patent portfolios which we have identified for patent monetization: (i) Encrypted Mobile Communication; (ii) ePaper® Electrophoretic Display; (iii) Internet Telephonic Gateway; (iv) J-Channel Window Frame Construction; (v) Key Based Web Conferencing Encryption; (vi) Micro Electro Mechanical Systems Display; (vii) Nano Field Emission Display; (viii) VPN Multicast Communications; and (ix) Enhanced Auction Technologies.
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ITUS’s Patent Portfolios
Encrypted Mobile Communications
The Encrypted Mobile Communications patent portfolio covers hardware and software used to encrypt cellular phone calls and other mobile communications. With the increased use of mobile devices, and the increased concerns regarding privacy and the protection of personal information, we believe the demand for secure mobile communications is increasing for both businesses and consumers.
ePaper® Electrophoretic Display
The ePaper® Electrophoretic Display patent portfolio covers core electrophoretic technology that is used in the world’s most popular eReader devices such as the Nook® and the Kindle. The ePaper patents cover the underlying chemistry that is used to manufacture both the particles and the suspension, two of the key elements that are fundamental to the generation of the black and white eReader display. The Company’s ePaper patents also cover the manufacturing, assembly, and physical structure of the display unit itself, as well as the electronics and internal operation of the device.
Internet Telephonic Gateway
The internet telephonic gateway patent portfolio covers the integration of telephonic participation in web-based audio/video conferences by creating a gateway between the Internet, and cellular or traditional landline telephones. The end result is that participants can join and participate in online, audio/video conferences via a cellular or conventional telephone. This internet telephonic gateway technology is commonly used for web based audio/video events with broad based audience participation such as earnings calls, webinars, and virtual town hall meetings.
J-Channel Window Frame Construction
The J-Channel Window Frame Construction patent portfolio covers vinyl windows with an integrated frame, known in the industry as a “J-Channel”. Such windows are commonly used in modular buildings, mobile homes, and conventional, new home construction, resulting in easier and faster window installation.
Key Based Web Conferencing Encryption
The Key Based Web Conferencing Encryption patent portfolio covers the generation and management of encryption keys. This type of encryption technology is commonly used to encrypt web-based conferencing, email for regulatory compliance purposes, and personal information such as contracts.
Micro Electro Mechanical Systems Display
The Micro Electro Mechanical Systems Display patent portfolio covers vanadium dioxide coated pixels that electrically modulate light at extremely high speeds to form an image, as well as the use of electrostatic force to move pixel sized membranes that create a color image. These are emerging, low voltage, display technologies with numerous potential commercial applications.
Nano Field Emission Display
The Nano Field Emission Display patent portfolio covers a new type of flat panel display consisting of low voltage color phosphors, specially coated carbon nanotubes, nano materials to generate secondary electrons, and ionized noble gas, resulting in a bright, sharp, high contrast color image. This emerging technology could result in a flat panel display utilizing less power, with better picture quality and lower manufacturing costs than is currently found in the flat panel display industry.
VPN Multicast Communications
The VPN Multicast Communications patent portfolio covers the multicast, internet delivery of streaming data, media, and other content to large numbers of recipients, within the confines of specialized virtual private networks (“VPN’s). Multicasting is a commonly used content delivery protocol that enables several recipients to simultaneous receive content from a single internet transmission, greatly reducing Internet bandwidth costs. When combined with specialized VPN’s, the content and communications are protected from unwanted disclosure and piracy. Applications for these live, VPN multicast communications include videoconferences, online training and e-learning classes, internet television, web-based corporate events and strategy sessions, and other live transmissions of sensitive or protected content.
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Enhanced Auction Technologies
The Enhanced Auction Technologies patent portfolio covers enhanced presentation and cross selling technologies used by some of the world’s leading auction sites. The enhanced presentation tools covered by these patents enable auction sellers to cross sell and upsell additional items to interested buyers, resulting in incremental sales and higher yields per transaction.
Patent Monetization and Patent Assertion Activities
On January 28, 2013, the Company initiated a patent infringement lawsuit in the United States District Court for the Northern District of California against E Ink Corporation (“E Ink”), asserting U.S. Pat. Nos. 5,964,935; 6,113,810; and 6,194,488; covering the Company’s ePaper® Electrophoretic Display technology, which patents expire in 2017. The Company alleges that E Ink has infringed and continues to infringe such patents in connection with the manufacture, sale, use, and importation of electrophoretic displays. On January 28, 2013, the Company also filed a separate joint lawsuit against both AU Optronics Corp. (“AUO”) and E Ink, the AUO/E Ink Lawsuit (as defined below). In June of 2013, the Company and AUO agreed to arbitrate the Company’s charges in the AUO/E Ink Lawsuit. The Court also ordered E Ink to participate in the arbitration, for purposes of discovery. Because issues in the AUO/E Ink arbitration need to be resolved before the patent infringement case can proceed against E Ink, the Court dismissed the patent infringement case, without prejudice, meaning that the Company can re-file the patent infringement lawsuit, if necessary, following the arbitration. On November 21, 2014, the Company concluded a two week arbitration against AUO in connection with its ePaper Electrophoretic Display and Nano Field Emission display technologies. The arbitration panel requested post trial briefs which are due on January 15, 2015 and February 5, 2015, and a decision from the arbitration is pending.
On May 6, 2014, the Company’s wholly owned subsidiary, Encrypted Cellular Communications Corporation, filed a patent infringement lawsuit against AT&T in connection with its patented Encrypted Cellular Communications technology. The lawsuit was filed in the United States District Court for the Northern District of Texas, Dallas Division.
On September 3, 2014, the United States District Court for the Eastern District of Texas invalidated two of our Loyalty Conversion Systems patents by ruling that they did not cover patentable subject matter, resulting in the dismissal of 7 of our Loyalty Conversion Systems’ lawsuits. On October 18, 2014, the Company terminated its Loyalty Conversion Systems patent assertion campaign.
On September 8, 2014, the Company’s wholly owned subsidiary, Auction Acceleration Corporation, filed patent infringement lawsuits against Ebay, Vendio, and Auctiva, in connection with its Enhanced Auction Technologies patents. Vendio and Auctiva are part of Alibaba Group, one of the largest online and mobile commerce companies in the world. The patents cover presentation and cross selling technologies enabling auction sellers to cross-sell and upsell additional items to interested buyers, resulting in incremental sales, and higher yields per transaction. The lawsuits were filed in the United States District Court for the Northern District of California.
On September 18, 2014, the Company’s wholly owned subsidiary, Secure Web Conference Corporation, filed a patent infringement lawsuit in the U.S. District Court for the Eastern District of New York against Apple Inc., in connection with its patented Key Based Web Conferencing Encryption technology. Apple’s FaceTime video service debuted in 2010, and has been available via hundreds of millions of devices including iPhones (since the fourth generation iPhone), iPads (since the iPad 2), iPod Touches (since the fourth generation iPod), and all Macintosh desktop and laptop computers running OSX or later. The Company has already licensed the encryption patents to Logitech in connection with its LifeSize web conferencing service, and has a patent infringement lawsuit pending against Microsoft Corporation in connection with the SKYPE and Lync web conferencing services. A claims construction, or Markman hearing, in the Microsoft lawsuit convened on September 23, 2014.
27
On October 2, 2014, the US District Court for the Eastern District of New York the provided a claims construction ruling in Secure Web Conference Corporation’s Key Based Web Conferencing Encryption technology patent infringement lawsuit against Microsoft Corporation that was unfavorable to Secure Web Conference Corporation. Secure Web Conference Corporation is evaluating its options for appeal to the Federal Circuit, and in the interim, will suspend lawsuits against Apple and Citrix, as well as Encrypted Cellular Communications Corporation patent infringement lawsuit against AT&T, which also rely on the language construed by the Court.
On November 4, 2014, the Company’s wholly owned subsidiary, VPN Multicast Technologies, LLC, filed patent infringement lawsuits against AT&T, and Dimension Data LLC, in connection with its patented VPN Multicast Communications technology. The lawsuits were filed in the U.S. District Court for the Eastern District of Texas. The complaints allege infringement of United States Patent Number 8,477,778 entitled “Applying Multicast Protocols and VPN Tunneling Techniques to Achieve High Quality of Service for Real Time Media Transport Across IP Networks.”
The Company has engaged in and will continue to engage in patent infringement lawsuits in the ordinary course of its business operations. All litigation involves a significant degree of uncertainty, and we give no assurances as to the outcome or duration of any lawsuit.
Licensing Activity
During 2014, the Company has entered into 28 license and/or settlement agreements. We entered into license agreements with HWD Acquisition, Inc. in February 2014, PGT Industries, Inc. and MI Windows and Doors, Inc. in March 2014, YKK AP America Inc. in April 2014, Jeld-Wen, Inc., Atrium Windows and Doors, Inc., Pella Corporation, Ply Gem Industries, Inc., Simonton Building Products, Inc. and Quaker Window Products Co. Inc. in September 2014 and Silver Line Building Products LLC, American Builders & Contractors Supply Co., Inc., Deceuninck North America, LLC, VEKA, Inc., L.B. Plastics, Inc., Chelsea Building Products, Inc, Moss Supply Company, Vinylmax, LLC, Wincore Window Company, LLC, Associated Materials, LLC, Comfort View Products, LLC, Croft, LLC, Magnolia Windows & Doors, LLC, MGM Industries, Inc., Sun Windows, Inc., and West Window Corporation in October 2014, and Weather Shield Mfg., Inc.in November 2014, all in connection with our patented J-Channel Window Frame Construction technology. In April 2014, we entered into a license agreement with Logitech, Inc. in connection with our Key Based Web Conferencing Encryption technology. All of the aforementioned license agreements were entered into in connection with the settlement of patent infringement lawsuits, which lawsuits have been dismissed.
Agreements Relating to Previous Business Operations
AU Optronics Corp.
In May 2011, we entered into an Exclusive License Agreement (the “EPD License Agreement”) and a License Agreement (the “Nano Display License Agreement”) with AUO (together the “AUO License Agreements”). Under the EPD License Agreement, we provided AUO with an exclusive, non-transferable, worldwide license of our ePaper® Electrophoretic Display patents and technology, in connection with AUO jointly developing products with the Company. Under the Nano Display License Agreement, we provided AUO with a non-exclusive, non-transferable, worldwide license of our Nano Field Emission Display patents and technology, in connection with AUO jointly developing products with the Company.
On January 28, 2013, we terminated the AUO License Agreements due to numerous alleged material and continual breaches of the agreements by AUO. On January 28, 2013, we also filed a lawsuit in the United States District Court for the Northern District of California against AUO and E Ink in connection with the AUO License Agreements, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment, unfair business practices, attempted monopolization, and other charges, and we are seeking compensatory, punitive, and treble damages (the “AUO/E Ink Lawsuit”). In June of 2013, the Company and AUO agreed to arbitrate the Company’s charges, which we believe should result in a faster and more efficient adjudication. On November 21, 2014, the Company concluded a two week arbitration against AUO in connection with its ePaper Electrophoretic Display and Nano Field Emission display technologies. The arbitration panel requested post trial briefs which are due on January 15, 2015 and February 5, 2015, and a decision from the arbitration is pending.
28
For more details on the AUO/E Ink Lawsuit, please see “Legal Proceedings” below.
Videocon Industries Limited
On August 29, 2014, the Company ended its relationship with Videocon Industries Limited, terminating Videocon’s license to the Company’s patented Nano Field Emission Display technology.
Competition
The Company expects to encounter competition in the areas of patent acquisitions for the sake of enforcement from both private and publicly traded companies that engage in Patent Monetization and Patent Assertion. This includes competition from companies seeking to acquire the same patents and patent rights that we may seek to acquire. Entities such as Acacia Research Corporation, Intellectual Ventures, Wi-LAN, MOSAID, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc., Pendrell Corporation, and others derive all or a substantial portion of their revenue from Patent Assertion and we expect more entities to enter the market.
We also compete with venture capital firms, strategic corporate buyers and various industry leaders for patent and technology acquisitions and licensing opportunities. Many of these competitors have more financial and human resources than our company.
Research and Development
Research and development expenses were $-0-. $-0- and approximately $2,212,000 for the fiscal years ended October 31, 2014, 2013 and 2012, respectively. In accordance with the changes in the primary operations of the Company during the fourth quarter of fiscal year 2012, we are no longer incurring research and development expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and our Consolidated Financial Statements.
Employees
As of October 31, 2014, we had nine full-time employees.
Other
On September 2, 2014, the Company changed its name from CopyTele, Inc. to ITUS Corporation. The name change was approved by the Company’s Board of Directors on May 28, 2014 and was subsequently approved by the Company’s stockholders at the Annual Meeting of Stockholders on August 8, 2014.
On October 11, 2013, our stockholders’ approved an amendment to our certificate of incorporation to increase the number of shares of common stock we are authorized to issue from 300 million to 600 million.
We were incorporated on November 5, 1982 under the laws of the State of Delaware. From inception through end of fiscal year 2012, our primary operations involved licensing in connection with the development of patented technologies. Since that date, our primary operations include the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company or one of our wholly owned subsidiaries. Our principal executive offices are located at 900 Walt Whitman Road, Melville, New York 11747, our telephone number is 631-549-5900, and our Internet website address is www.ITUScorp.com. We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission (the “SEC”). Alternatively, you may also access our reports at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. and 3:00 p.m. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.
29
Description of Properties
We lease approximately 3,500 square feet of office facilities at 900 Walt Whitman Road, Melville, New York (our principal executive offices) from an unrelated party pursuant to a lease that expires January 31, 2015. Our base rent is approximately $7,000 per month and the lease provides an escalation clause for increases in certain operating costs. We also lease approximately 3,000 square feet of office space at 12100 Wilshire Boulevard, Los Angeles, California from an unrelated party pursuant to a lease that expires March 30, 2016. Our base rent is approximately $8,500 per month and the lease provides an escalation clause for increases in certain operating costs.
Legal Proceedings
On January 28, 2013, we filed a lawsuit in the United States Federal District Court for the Northern District of California against AUO and E Ink in connection with the EPD License Agreement and the Nano Display License Agreement, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment, unfair business practices, and other charges, and we are seeking compensatory, punitive, and treble damages. On November 21, 2014, the Company concluded a two week arbitration against AUO in connection with its ePaper Electrophoretic Display and Nano Field Emission display technologies. The arbitration panel requested post trial briefs which are due on January 15, 2015 and February 5, 2015, and a decision from the arbitration is pending.
Other than the foregoing and the suits we bring to enforce our patent rights, which are an integral part of our business plan, we are not a party to any material pending legal proceedings other than that which arise in the ordinary course of business. We believe that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.
30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the OTCQB market under the symbol “ITUS”. The high and low sales prices as reported by the OTCQB for each quarterly fiscal period during our fiscal years ended October 31, 2014 and 2013 have been as follows:
|
|
| Price Range | |||||
| Period |
| High |
|
| Low | ||
| Fiscal Year Ended October 31, 2013: |
|
|
|
|
|
|
|
| First Quarter |
| $ | 0.31 |
|
| $ | 0.11 |
| Second Quarter |
| $ | 0.28 |
|
| $ | 0.18 |
| Third Quarter |
| $ | 0.40 |
|
| $ | 0.20 |
| Fourth Quarter |
| $ | 0.23 |
|
| $ | 0.18 |
| Fiscal Year Ended October 31, 2014: |
|
|
|
|
|
|
|
| First Quarter |
| $ | 0.48 |
|
| $ | 0.16 |
| Second Quarter |
| $ | 0.40 |
|
| $ | 0.21 |
| Third Quarter |
| $ | 0.40 |
|
| $ | 0.22 |
| Fourth Quarter |
| $ | 0.27 |
|
| $ | 0.13 |
As of December 2, 2014, we had approximately 1,077 stockholders of record of our common stock and the closing price of our common stock was $0.15 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Dividend Policy
No cash dividends have been paid on our common stock since our inception. We have no present intention to pay any cash dividends in the foreseeable future.
31
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
General
In reviewing Management’s Discussion and Analysis of Financial Condition and Results of Operations, you should refer to our Consolidated Financial Statements and the notes related thereto which begin below on page F-1.
Results of Operations
Nine months ended July 31, 2014 compared to the nine months ended July 31, 2013
Revenue from Patent Assertion Activities
For the nine months ended July 31, 2014, we recorded revenue from patent assertion activities of $1,105,000, from 5 license agreements issued from our Key Based Web Conferencing Encryption and J-Channel Window Frame Construction patent portfolios. The license agreements provided for one-time, non-recurring, lump sum payments in exchange for a non-exclusive retroactive and future license, or covenant not to sue. Accordingly, the earning process from these licenses was complete and 100% of the revenue was recognized upon execution of the license agreements. There was no revenue from patent assertion activities in the nine months ended July 31, 2013.
As of July 31,2014. the Company owns or controls 10 patent portfolios. Since implementing our new business model in January of 2013, the Company has entered into a total of 14 revenue producing license and/or settlement agreements, and 3 of our 7 patent assertion campaigns have generated revenue. As of July 31,2014. the Company has 27 pending lawsuits in connection with its patented technologies. Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits.
Display Technology Development and License Fees
Based on our assessment as of July 31, 2014, we have determined that we have no further performance obligations under the AUO License Agreements and accordingly during the nine months ended July 31, 2014, we have recognized display technology development and license fee revenue of approximately $1,187,000, representing the balance of the initial $3 million payment received from AUO in fiscal year 2011. We did not record any display technology development and license fees during the nine months ended July 31, 2013.
Inventor Royalties and Contingent Legal Fees
Inventor royalties and contingent legal fees of approximately $465,000 during the nine months ended July 31, 2014 are attributable to our patent assertion activities initiated during fiscal 2013, and are expensed in the period that the related revenues are recognized. Inventor royalties and contingent legal fees, as a percentage of revenue from patent assertion activities, will vary between fiscal periods since the economic terms of patent agreements and contingent legal fee arrangements vary across the patent portfolios owned or controlled by our operating subsidiaries. We did not incur any inventor royalties or contingent legal fees during the nine months ended July 31, 2013, as we recognized no patent assertion revenues during this period.
Litigation and Licensing Expenses
Litigation and licensing expenses increased by approximately $245,000 to approximately $267,000 in the nine months ended July 31, 2014, from approximately $22,000 in the comparable prior year period. Litigation and licensing expenses other than contingent legal fees, which are attributable to our patent assertion activities initiated during fiscal 2013 and the AUO/E Ink Lawsuit, are expensed in the period incurred.
32
Amortization of Patents
Amortization of patents of approximately $233,000 in the nine months ended July 31, 2014 is related to patent portfolios acquired in the first quarter of fiscal 2014. We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. We did not incur any patent amortization expense during the nine months ended July 31, 2013.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses decreased by approximately $1,313,000 to approximately $4,807,000 in the nine months ended July 31, 2014, from approximately $6,120,000 in the comparable prior-year period. The decrease in marketing, general and administrative expenses was principally due to a decrease in legal and accounting fees of approximately $614,000, a decrease in rent expense of approximately $246,000, a decrease in shareholder relations expense of approximately $285,000, and a decrease in stock option expense for employees of approximately $556,000, which were partially offset by an increase in employee compensation and related costs, excluding stock option expense, of approximately $240,000, which was primarily attributable to employee bonuses, a bonus paid to the Company’s strategic advisor and a director of the Company of $100,000 and an increase in stock option expense for this strategic advisor and director of the Company of approximately $210,000.
Legal and accounting fees in 2013 included nonrecurring costs related to the Company’s restructuring, which commenced in the fourth quarter of the fiscal year 2012.
The decrease in rent expenses reflects the reduction in facilities requirements as a result of the Company’s restructuring. Marketing, general and administrative expense for the nine months ended July 31, 2014 and 2013 includes approximately $2,347,000 and $2,693,000, respectively, of non-cash stock option compensation expense.
Change in Value of Derivative Liability
Change in value of derivative liability was a loss of approximately $1,461,000 in the nine months ended July 31, 2014 compared to a gain of approximately $315,000 in the comparable prior year period. The derivative liability represents the bifurcated conversion features of the January 2013 Convertible Debentures through its conversion date and the November 2013 Convertible Debenture. An increase in the price of our common stock results in an increase in derivative liability and a loss from change in value of derivative liability. See Note 3 to the condensed consolidated financial statements for additional information.
Loss on Extinguishment of Debt
During the nine months ended July 31, 2014, holders of $1,240,000 of the Convertible Debentures due January 2015 converted their holdings into 8,267,080 shares of Common Stock and holders of $200,000 of principal of Convertible Debentures due January 2015 consented to prepayment of obligations to them. In connection with these conversions and prepayments, the Company recorded a loss on extinguishment of debt of approximately $483,000 in the nine months ended July 31, 2014. During the nine months ended July 31, 2013, holders of $325,000 of the Convertible Debentures due January 2015 converted their holdings into 2,166,775 shares of Common Stock. In connection with these conversions the Company recorded a loss on extinguishment of debt of approximately $344,000 in the nine months ended July 31, 2013. See Note 3 to the condensed consolidated financial statements for additional information.
Interest Expense
Interest expense increased by approximately $99,000 to approximately $1,082,000 in the nine months ended July 31, 2014 from approximately $983,000 in the prior year period. Interest expense in the nine months ended July 31, 2014 and 2013 includes approximately $575,000 and $195,000, respectively, of amortization of debt discount on convertible debentures, approximately $286,000 and $-0-, respectively, of amortized interest on our patent acquisition obligation and approximately $151,000 and $-0-, respectively, of accrued interest on the November 2013 convertible debentures and approximately $62,000 and $70,000 of common stock issued to pay interest. During the nine months ended July 31, 2013, the convertible debentures due September 2016 were converted into shares of common stock. The conversion of these debentures resulted in a charge to interest expense of approximately $717,000 during the nine months ended July 31, 2013. There was no charge to interest expense related to the conversion of debentures in the current fiscal period.
33
Dividend Income
Dividend income of approximately $48,000 received in the nine months ended July 31, 2014 was related to the Videocon global depository receipts (the “Videocon GDRs”) that we had received in connection with our agreement with Videocon. There was no dividend income received in the nine months ended July 31, 2013.
Interest Income
Interest income increased to approximately $5,000 in the nine months ended July 31, 2014 compared to approximately $-0- in the nine months ended July 31, 2013 due to the increased amount of short term investments during the current period.
Three months ended July 31, 2014 compared with three months ended July 31, 2013
Revenue from Patent Assertion Activities
As of July 31, 2014. the Company owns or controls 10 patent portfolios. Since implementing our new business model in January of 2013, the Company has entered into a total of 14 revenue producing license and/or settlement agreements, and 3 of our 7 patent assertion campaigns have generated revenue. As of July 31, 2014. the Company has 27 pending lawsuits in connection with its patented technologies. Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits.
Our license agreements primarily provide for one-time, non-recurring, lump sum payments in exchange for a non-exclusive retroactive and future license, or covenant not to sue. Accordingly, the earning process from these licenses is completed and 100% of the revenue is recognized upon execution of the license agreements. We did not enter into any license agreements during the three months ended July 31, 2014 and 2013 and we did not record any revenue from patent assertion activities during those periods.
Display Technology Development and License Fees
Based on our assessment as of July 31, 2014, we have determined that we have no further performance obligations under the AUO License Agreements and accordingly during the three months ended July 31, 2014, we have recognized display technology development and license fee revenue of approximately $1,187,000, representing the balance of the initial $3 million payment received from AUO in fiscal year 2011. We did not record any display technology development and license fees during the nine months ended July 31, 2013.
Inventor Royalties and Contingent Legal Fees
Inventor royalties and contingent legal fees are attributable to our patent assertion activities initiated during fiscal 2013, and are expensed in the period that the related revenues are recognized. Inventor royalties and contingent legal fees, as a percentage of revenue from patent assertion activities, will vary between fiscal periods since the economic terms of patent agreements and contingent legal fee arrangements vary across the patent portfolios owned or controlled by our operating subsidiaries. We did not incur any inventor royalties or contingent legal fees during the three months ended July 31, 2014 and 2013, as we recognized no patent assertion revenues during these periods.
Litigation and Licensing Expenses
Litigation and licensing expenses increased by approximately $148,000 to approximately $163,000 in the three months ended July 31 2014, from approximately $15,000 in the comparable prior year period. Litigation and licensing expenses other than contingent legal fees, which are attributable to our patent assertion activities initiated during fiscal 2013 and the AUO/E Ink Lawsuit, are expensed in the period incurred.
34
Amortization of Patents
Amortization of patents of approximately $81,000 in the three months ended July 31, 2014 is related to patent portfolios acquired in the first quarter of fiscal 2014. We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. We did not incur any patent amortization expense during the three months ended July 31, 2013.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses decreased by approximately $1,100,000 to approximately $1,103,000 in the three months ended July 31, 2014, from approximately $2,203,000 in the comparable prior-year period. The decrease in marketing, general and administrative expenses was principally due to a decrease in legal and accounting fees of approximately $163,000, a decrease in shareholder relations expense of approximately $172,000, decrease in stock option expense for employees of approximately $517,000, decrease in stock option expense for the Company’s strategic advisor and a director of the Company of approximately $251,000. Marketing, general and administrative expense for the three months ended July 31, 2014 and 2013 includes approximately $470,000 and $1,238,000, respectively, of non-cash stock option expense.
Change in Value of Derivative Liability
Change in value of derivative liability was a gain of approximately $850,000 in the three months ended July 31, 2014 compared to a gain of approximately $105,000 in the comparable prior year period. The derivative liability represents the bifurcated conversion features of the January 2013 Convertible Debentures through its conversion date and the November 2013 Convertible Debenture. An increase in the price of our common stock results in an increase in derivative liability and a loss from change in value of derivative liability. See Note 3 to the condensed consolidated financial statements for additional information.
Loss on Extinguishment of Debt
During the three months ended July 31, 2014 there was no extinguishment of debt. During the three months ended July 31, 2013, holders of $325,000 of the Convertible Debentures due January 2015 converted their holdings into 2,166,775 shares of Common Stock. In connection with these conversions the Company recorded a loss on extinguishment of debt of approximately $344,000 in the three months ended July 31, 2014. See Note 3 to the condensed consolidated financial statements for additional information.
Interest Expense
Interest expense increased by approximately $156,000 to approximately $281,000 in the three months ended July 31, 2014 from approximately $125,000 in the prior year period. Interest expense in the three months ended July 31, 2014 and 2013 includes approximately $129,000 and $92,000, respectively, of amortization of debt discount on convertible debentures, approximately $100,000 and $-0-, respectively, of amortized interest on our patent acquisition obligation and approximately $53,000 and $-0-, respectively, of accrued interest on the November 2013 convertible debentures.
Interest Income
Interest income increased to approximately $1,000 in the three months ended July 31, 2014 compared to approximately $-0- in the three months ended July 31, 2013 due to the increased amount of short term investments during the current period.
Liquidity and Capital Resources
Our primary sources of liquidity are cash, cash equivalents and short term investments on hand generated from our operating activities and proceeds from previous financing.
35
Based on currently available information, as of September 15, 2014. the Company believes that its then existing cash, cash equivalents, short-term investments, accounts receivable, and expected cash flows from patent licensing and enforcement, and other potential sources of cash flows will be sufficient to enable it to continue our patent licensing and enforcement activities for at least 12 months from September 15, 2014. However, our projections of future cash needs and cash flows may differ from actual results. If current cash on hand, short term investments and cash that may be generated from patent licensing and enforcement activities are insufficient to satisfy our liquidity requirements, we may seek to sell equity securities or obtain loans from various financial institutions where possible. The sale of additional equity securities or convertible debt could result in dilution to our shareholders. We can give no assurance that we will generate sufficient cash flows in the future (through licensing and enforcement of patents, or otherwise) to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available, if needed, on favorable terms or at all. If we cannot obtain such funding if needed or if we cannot sufficiently reduce operating expenses, we would need to curtail or cease some or all of our operations.
During the nine months ended July 31, 2014, cash used in operating activities was approximately $2,017,000. Cash used in investing activities during the nine months ended July 31, 2014 was approximately $2,554,000, which principally resulted from the purchase of certificates of deposit totaling $3,700,000 which was partially offset by the sale of certificates of deposit totaling $1,150,000. Our cash provided by financing activities during the nine months ended July 31, 2014 was approximately $7,324,000, which resulted from the net proceeds from the sale of 16,000,000 shares of the company’s common stock for approximately $3,673,000, the sale of convertible debentures in a private placement for $3,500,000, the proceeds from exercise of warrants to purchase common stock of approximately $300,000, and the proceeds from exercise of stock options of approximately $51,000 offset by the payment to redeem convertible debentures of $200,000. As a result, our cash, cash equivalents, and short-term investments at July 31, 2014 increased approximately $5,304,000 to approximately $6,202,000 from approximately $898,000 at the end of fiscal year 2013.
Accounts receivable at July 31, 2014 of approximately $133,000 are scheduled to be collected in the fourth quarter of fiscal 2014. The majority of royalties and contingent legal fees payable at July 31, 2014 of approximately $152,000 are scheduled to be paid in the fourth quarter of fiscal 2014.
In April 2013, the Company entered into a common stock purchase agreement (the “Stock Purchase Agreement”) with Aspire Capital, which provides that Aspire Capital is committed to purchase up to an aggregate of $10 million of shares of the Company’s common stock over the two-year term of the agreement. In order to sell shares under the Stock Purchase Agreement, the Company was required to have a registration statement covering the shares issued to Aspire Capital declared effective by the Securities and Exchange Commission (the “SEC”). Such registration statement was declared effective by the SEC in June 2013 and a post-effective amendment was declared effective by the SEC in February 2014. Under the Stock Purchase Agreement there are two ways that the Company can elect to sell shares of common stock to Aspire Capital. On any business day the Company can select: (1) through a regular purchase of up to 200,000 shares (but not to exceed $200,000) at a known price based on the market price of the Company’s common stock prior to the time of each sale, and (2) through a volume-weighted average price, or VWAP, purchase of a number of shares up to 30% of the volume traded on the purchase date at a price equal to the lesser of (i) the closing sale price on the purchase date or (ii) 95% of the VWAP for such purchase date. The Company can only require a VWAP purchase if the closing sale price for our Common Stock on the notice day for the VWAP purchase is higher than $0.50. The number of shares covered by and the timing of, each purchase notice are determined by the Company at its sole discretion. The Company cannot execute any sales under the Stock Purchase Agreement when the closing for our common stock is less than $0.15. Aspire Capital has no right to require any sales from us, but is obligated to make purchases as directed in accordance with the Stock Purchase Agreement. During fiscal year 2013, the Company sold 5,380,000 shares of our common stock to Aspire Capital for approximately $1,092,000. No shares of our common stock were sold to Aspire Capital during the nine months ended July 31, 2014.
On July 15, 2014, the Company, raised $4,000,000 of gross proceeds via a registered direct offering of its common stock to certain investors (the “Investors”) (the “Offering”). The Company sold an aggregate of 16,000,000 shares of common stock and warrants to purchase an aggregate of 8,000,000 shares of common stock. The purchase price of the common stock was $0.25 per share. The warrants are exercisable immediately as of the date of issuance at an exercise price of $0.40 per share and expire five years from the date of issuance. The exercise price of the warrants is subject to customary adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. Under certain circumstances, the Company has the right to call for cancellation all or any portion of each warrant for which a notice of exercise has not yet been delivered for consideration equal to $.001 per share. The Offering was effected as a takedown off the Company’s shelf registration statement on Form S-3, which became effective on April 25, 2014, pursuant to a prospectus supplement filed with the Securities and Exchange Commission.
36
The following table presents our expected cash requirements for contractual obligations outstanding as of July 31, 2014:
|
|
| Payments Due by Period | |||||||||||||
|
|
| Less than 1 year |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| 1-3 years |
| 3-5 years |
| After 5 years |
|
|
| |||||
| Contractual Obligations |
|
|
|
|
| Total | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Non-cancelable Operating Leases |
| $ | 60,092 |
| $ | - |
| $ | - |
| $ | - |
| $ | 60,092 |
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Convertible Debentures due 2016 (1) |
|
| - |
|
| 3,500,000 |
|
| - |
|
| - |
|
| 3,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Patent acquisition obligation |
|
| - |
|
| - |
|
| 3,136,513 |
|
| - |
|
| 3,136,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Secured Loan Obligation to Mars Overseas (1) |
|
| 5,000,000 |
|
| - |
|
| - |
|
| - |
|
| 5,000,000 |
| Total Contractual Cash Obligations |
| $ | 5,060,092 |
| $ | 3,500,000 |
| $ | 3,136,513 |
| $ | - |
| $ | 11,696,602 |
(1) See Note 2 to the condensed consolidated financial statements, Subsequent Events – for subsequent conversion of the convertible debenture and cancellation of the secured loan obligation to Mars Overseas Limited.
Critical Accounting Policies
The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.
We believe that, of the significant accounting policies discussed in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013, the following accounting policies require our most difficult, subjective or complex judgments:
· Revenue Recognition;
· Investment Securities;
· Stock-Based Compensation; and
· Convertible Debentures
Revenue Recognition
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.
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Patent Monetization and Patent Assertion
In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted are perpetual in nature, extending until the expiration of the related patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably assured, and when all other revenue recognition criteria have been met.
Display Technology Development and License Fees
We have assessed the revenue guidance of Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” (“ASC 605-25”) to determine whether multiple deliverables in our arrangements with AUO represent separate units of accounting. Under the AUO License Agreements, we received initial development and license fees of $3 million, of aggregate development and license fees of up to $10 million. The additional $7 million in development and license fees were to be payable upon completion of certain conditions for the respective technologies. We have determined that the transfer of the licensed patents and technology and the effort involved in completion of the conditions for the respective technologies represent a single unit of accounting for each technology. Accordingly, using a proportional performance method, during the third quarter of fiscal year 2011 we began recognizing the $3 million initial development and license fees over the estimated periods that we expected to complete the conditions for the respective technologies. We have not recognized any portion of the $7 million of additional development and license fees as either deferred revenue or revenue as it is considered contingent revenue. Each of the license agreements with AUO also provide for the basis for royalty payments on future production, if any, by AUO to the Company, which we have determined represent separate units of accounting. At each reporting period we assess our remaining performance obligations under the AUO License agreements and recognize display technology development and license fee revenue over the remaining estimated period that we expect to complete the conditions for the respective technologies.
Investment Securities
We classify our investment securities as available-for-sale. 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. 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. In evaluating our investment in Videocon GDR’s at October 31, 2013, we determined that based on both the duration and continuing magnitude of the market price decline compared to the carrying cost basis of approximately $5,382,000, and the uncertainty of its recovery we recorded a write-down of the investment of approximately of $1,185,000 and established a new cost basis of approximately $4,197,000. During the nine months ended July 31, 2014, we recorded an unrealized loss on our investment of approximately $46,000. On August 29, 2014, the Company ended its relationship with Videocon Industries Limited and exchanged its 1,495,845 Videocon GDR’s for 20,000,000 shares of Company common stock.
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Stock-Based Compensation
We account for stock options granted to employees and directors using the accounting guidance in ASC 718. We recognize compensation expense for stock option awards over the requisite or implied service period of the grant. We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $1,562,000 and $2,118,000 during the nine months ended July 31, 2014 and 2013, respectively, and approximately $573,000 and approximately $1,091,000 during the three months ended July 31 2014 and 2013, respectively. We account for stock options granted to consultants using the accounting guidance under ASC 505-50. We recognized stock-based compensation expense for stock options granted to non-employee consultants during the nine months ended July 31, 2014 and 2013, of approximately $784,000 and $574,000, respectively, and for the three months ended July 31, 2014 and 2013 of approximately $(103,000) and approximately $147,000, respectively.
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 term. If factors change and we employ different assumptions in the application of ASC 718 and ASC 505-50 in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. See Note 3 to the condensed consolidated financial statements for additional information.
Convertible Instruments
The Company accounts for hybrid contracts that feature conversion options in accordance with applicable generally accepted accounting principles (“GAAP”). ASC 815 “Derivatives and Hedging Activities,” (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.
The Company accounts for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”). Under ASC 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Effect of Recently Issued Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-11 (“ASU 2013-11”) which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. ASC 2013-11 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2013. The adoption of ASC 213-11 on November 1, 2014 is not expected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers”. The amendments in ASU 2014-9 create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 2014-09 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2016. The adoption of ASC 213-11 on November 1, 2017 is not expected to have a material effect on our consolidated financial statements.
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The following table sets forth certain information with respect to all of our directors and executive officers:
|
Name |
Position with the Company and Principal Occupation |
Age | Director and/or Executive Officer Since |
| Lewis H. Titterton Jr. | Chairman of the Board | 70 | 2010 |
| Robert A. Berman | Director, President and Chief Executive Officer | 51 | 2012 |
| Henry P. Herms | Chief Financial Officer and Vice President – Finance | 69 | 2000 |
| Dr. Amit Kumar | Director, Strategic Advisor | 50 | 2012 |
| Tisha Stender | Chief Operating Officer and Legal Counsel | 42 | 2014 |
| Bruce F. Johnson | Director | 72 | 2012 |
| Dr. Andrea Belz | Director | 42 | 2014 |
| Dale Fox | Director | 47 | 2014 |
We believe that our Board represents a desirable mix of backgrounds, skills, and experiences. The principal occupation and business experience during the last five years for our executive officers and directors and some of the specific experiences, qualifications, attributes or skills that led to the conclusion that each person should serve as one of our directors in light of our business and structure is as follows:
Lewis H. Titterton, 70, Chairman of the Board. Mr. Titterton has served as a director since August 16, 2010, the Chairman of the Board since July 20, 2012 and interim Chief Executive Officer from August 21, 2012 until September 19, 2012. Mr. Titterton is currently also Chairman of the Board of NYMED, Inc., a diversified health services company. His background is in high technology with an emphasis on health care and he has been with NYMED, Inc. since 1989. Mr. Titterton founded MedE America, Inc. in 1986 and was Chief Executive Officer of Management and Planning Services, Inc. from 1978 to 1986. Mr. Titterton also served as one of our Directors from July 1999 to January 2003. He holds a M.B.A. from the State University of New York at Albany, and a B.A. degree from Cornell University.
Robert A. Berman, 51, Director, President and Chief Executive Officer. Mr. Berman has served as our President and Chief Executive Officer since September 19, 2012 and was elected to our Board on November 30, 2012. Mr. Berman has experience in a broad variety of areas including finance, acquisitions, marketing, and the development, licensing, and monetization of intellectual property. He was recently the CEO of IP Dispute Resolution Corporation (“IPDR”), a consulting company focused on patent monetization, from March 2007 to September 2012. Prior to IPDR, Mr. Berman was the Chief Operating Officer and General Counsel of Acacia Research Corporation from 2000 to March 2007. Mr. Berman holds a J.D. from the Northwestern University School of Law and a B.S. in Entrepreneurial Management from the Wharton School of the University of Pennsylvania.
Henry P. Herms, 69, Director, Chief Financial Officer and Vice President – Finance. Mr. Herms has served as our Chief Financial Officer and Vice President – Finance since November 2000 and as one of our Directors since August 2001. Mr. Herms was also our Chief Financial Officer from 1982 to 1987. He is also a former audit manager and CPA with the firm of Arthur Andersen LLP. He holds a B.B.A. degree from Adelphi University. Mr. Herms has a deep understanding of the financial aspects of our business. He also has substantial experience as a public accountant, which is important to the Board’s ability to review our consolidated financial statements, assess potential financings and strategies and otherwise supervise and evaluate our business decisions.
Dr. Amit Kumar, 50, Director, Strategic Advisor. Dr. Kumar has served on our Board since November 30, 2012 and has been a strategic advisor to the Company since September 19, 2012. Dr. Kumar has been CEO of Geo Fossil Fuels LLC, an energy company, since December 2010. From September 2001 to June 2010, Dr. Kumar was President and CEO of CombiMatrix Corporation, a Nasdaq listed biotechnology company and also served as director from September 2000 to June 2012. Dr. Kumar was Vice President of Life Sciences of Acacia Research Corp., a publicly traded patent monetization company, from July 2000 to August 2007 and also served as a director from January 2003 to August 2007. Dr. Kumar has served as Chairman of the board of directors of Ascent Solar Technologies, Inc., a publicly-held solar energy company, since June 2007, and as a director of Aeolus Pharmaceuticals, Inc. since June 2004. Dr. Kumar holds an A.B. in Chemistry from Occidental College and Ph.D. from Caltech and completed his post doctoral training at Harvard University.
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Tisha Stender, 42, Chief Operating Officer and Legal Counsel. Prior to Ms. Stender’s employment with the Company, Ms. Stender served as Senior Vice president of Licensing of Acacia Research Corporation, a company involved in the monetization of patented inventions, from June 2005 through May 2014. At Acacia Research Corporation, Ms. Stender oversaw the licensing and enforcement of certain patent portfolios controlled by the subsidiaries of Acacia Research Corporation. Ms. Stender holds a J.D. and a Master’s of Science in Human Resources and Organizational Development from Loyola University Chicago and a Bachelor’s degree from the University of Illinois at Urbana-Champaign.
Bruce F. Johnson, 72, Director. Mr. Johnson has served on our Board since August 29, 2012. Mr. Johnson has been a commodity trader on the Chicago Mercantile Exchange for over 40 years. He has served as a member of the board of directors of CME Group Inc. since 1998. He had previously served as President, Director and part-owner of Packers Trading Company, a former futures commissions merchant/clearing firm at the CME from 1969 to 2003. He also serves on the board of directors of the Chicago Crime Commission. Mr. Johnson holds a B.S. in Marketing from Bradley University and a J.D. from John Marshall Law School.
Dr. Andrea Belz, 42, Director. Dr. Belz is an expert in technology commercialization, specializing in start-up and emerging companies whose core businesses frequently involve the licensing of patented technologies. Dr. Belz is currently on the faculty of the Greif Center for Entrepreneurial Studies at the University of Southern California Marshall School of Business and is the Academic Director of the Master of Science in Entrepreneurship and Innovation program. She has helped initiate spin-up and spinout efforts at some of the world’s leading sources of patented technologies, including Caltech, NASA’s Jet Propulsion Laboratory, BP, Occidental Petroleum, Avery Dennison, and UCLA. Dr. Belz is the Chairperson of the Los Angeles Chapter of the Licensing Executives Society, the pre-eminent organization for intellectual property professionals with chapters throughout the United States and Canada, and serves as a national trainer for courses on best practices in licensing. Dr. Belz is the President of the Belz Consulting Group, founded in 2002, and has been an Executive Committee Board Member at Caltech spinoff Ondax (privately held) since 2013. Dr. Belz holds a PhD in physics from the California Institute of Technology, an MBA in finance from the Pepperdine University Graziadio School of Business, and a BS in physics from the University of Maryland at College Park.
Dale Fox, 49, Director. Mr. Fox is an accomplished entrepreneur and innovator who has successfully launched many companies. He is currently the CEO of Tribogenics, a start-up company he co-founded in 2010 that develops portable, powerful X-ray devices based, in part, upon a technology conceived and licensed from the University of California, Los Angeles. Mr. Fox has raised numerous rounds of capital for many types of companies, including venture capital, strategic investments, and other financings. A master at networking, Mr. Fox has built world-class executive and advisory teams. He received a Bachelor of Business Administration degree from Southern Methodist University’s Cox School of Business. Since 2009, Mr. Fox has taught at the Founders Institute where he teaches classes on start-ups and continues to mentor young entrepreneurs.
Except for Dr. Kumar and Mr. Johnson, none of our current directors or executive officers has served as a director of another public company within the past five years.
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers.
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To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director or executive officer of the Company: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated; (5) being subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree or finding relating to an alleged violation of the federal or state securities, commodities, banking or insurance laws or regulations or any settlement thereof or involvement in mail or wire fraud in connection with any business entity not subsequently reversed, suspended or vacated and (6) being subject of, or a party to, any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.
Board of Directors and Corporate Governance
General
Our Board oversees the activities of our management in the handling of the business and affairs of our Company. As part of the Board’s oversight responsibility, it monitors developments in the area of corporate governance, including new SEC requirements, and periodically reviews and amends, as appropriate, our governance policies and procedures.
We are not currently subject to the listing requirements of any national securities exchange or inter-dealer quotation system which require that our Board be comprised of a majority of “independent” directors. Messrs. Titterton, Johnson and Fox and Dr. Belz meet the definition of “independent” as defined by the SEC.
Except for the period between August 21, 2012 and November 29, 2012, we have not had, and do not currently have, a separately-designated standing audit, nominating or compensation committee because we believed that, given the size of our Company, separate committees were unnecessary. The Board assumes the functions regularly held by an audit committee, compensation committee and stock option committee. Specifically, the Board oversees management’s conduct of our financial reporting process, including the selection of our independent auditors and the review of the financial reports and other financial information provided by us to any governmental or regulatory body, the public or other users thereof, our systems of internal accounting and financial controls, and the annual independent audit of our financial statements. Additionally, the Board has full authority for determination of executive and director compensation. The Board’s processes and procedures for the consideration and determination of executive and director compensation for fiscal year 2013 are described under the heading “Compensation Discussion and Analysis.” Further, the Board administers stock option plans.
Board Leadership Structure and Role in Risk Oversight
Although we do not require separation of the offices of the Chairman of the Board and Chief Executive Officer, we currently have a different person serving in each such role — Mr. Titterton is our Chairman of the Board and Mr. Berman is our President and Chief Executive Officer. The decision whether to combine or separate these positions depends on what our Board deems to be in the long term interest of stockholders in light of prevailing circumstances. Mr. Titterton has served as our Chairman since July 20, 2012. Mr. Berman has served as our Chief Executive Officer since September 19, 2012. This arrangement has allowed our Chairman to lead the Board, while our Chief Executive Officer has focused primarily on managing the daily operations of the Company. The separation of duties provides strong leadership for the Board while allowing the Chief Executive Officer to be the leader of the Company, focusing on its employees and operations.
Our Board currently consists of six directors. The Board has not appointed a lead independent director. Due to the size of the Board, the independent directors are able to closely monitor the activities of our Company. In addition, the independent directors are able to meet independently with the Company’s independent registered public accounting firm without management to discuss the Company’s financial statements and related audits. Therefore, the Board has determined that a lead independent director is not necessary at this time. To the extent the composition of the Board changes and/or grows in the future, the Board may reevaluate the need for a lead independent director.
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Management is responsible for the day-to-day management of risks the Company faces, while the Board as a whole has ultimate responsibility for the Company’s oversight of risk management. Our Board takes an enterprise-wide approach to risk oversight, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. A fundamental part of risk oversight is not only understanding the risks a Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. As a critical part of this risk management oversight role, our Board encourages full and open communication between management and the Board. Our Board regularly reviews material strategic, operational, financial, compensation and compliance risks with management. In addition our management team regularly reports to the full Board regarding their areas of responsibility and a component of these reports is risk within the area of responsibility and the steps management has taken to monitor and control such exposures. Additional review or reporting on risk is conducted as needed or as requested by our Board.
On May 28, 2014, the Board approved the creation of an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board has not yet filled the vacancies in each of these committees.
Code of Ethics
We have adopted a formal code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. We will provide a copy of our code of ethics to any person without charge, upon request. For a copy of our code of ethics write to Secretary, ITUS Corporation, 900 Walt Whitman Road, Melville, NY 11747.
Transactions with Related Persons
On January 25, 2013, we completed a private placement of $1,765,000 principal amount of 8% Convertible Debentures due 2015 and warrants to purchase 5,882,745 shares of Common Stock. We had the option to pay any interest on the debentures in Common Stock based on the average of the closing prices of our Common Stock for the 10 trading days immediately preceding the interest payment date. During June and July 2013, $325,000 principal amount of these debentures were converted into 2,166,775 shares of Common Stock. During 2014, an aggregate of $1,240,000 principal amount of these debentures were converted into 8,267,080 shares of Common Stock. The principal amount outstanding of these debentures of $200,000 was paid in full during April 2014. Robert A. Berman, the Company’s President, Chief Executive Officer and a director, Dr. Amit Kumar, a consultant and director of the Company, and Bruce Johnson, a director of the Company, purchased $50,000, $100,000, and $100,000, respectively, of securities in this offering. Mr. Berman, Dr. Kumar and Mr. Johnson received 333,350 shares, 666,700 shares and 666,700 shares, respectively, upon conversion of the debentures and 21,495 shares, 42,991 shares and 42,991 shares, respectively, in payment of interest on the debentures. Jeffery Titterton and Christopher Titterton, the adult sons of Lewis H. Titterton, Jr. our Chairman of the Board, purchased $25,000 and $25,000, respectively, of securities in this offering. Jeffery Titterton and Christopher Titterton have received 166,675 shares and 166,675 shares, respectively, upon conversion of the debentures and 10,748 shares and 8,451 shares, respectively, in payment of interest on the debentures.
As more fully described in “Executive Compensation - Employment and Consulting Agreements,” on September 19, 2012, we entered into employment or consulting agreements with each of Robert A. Berman, the Company’s President, Chief Executive Officer and a director, and Dr. Amit Kumar, a consultant and director of the Company, and concurrently issued to them options to purchase 16,000,000 shares of the Company’s common stock each. Additionally, on July 8, 2014, we entered into an employment agreement with Tisha Stender, the Company’s Chief Operating Officer and Legal Counsel, and issued to her options to purchase 4,000,000 shares of the Company’s common stock.
Related Person Transaction Approval Policy
While we have no written policy regarding approval of transactions between us and a related person, our Board, as matter of appropriate corporate governance, reviews and approves all such transactions, to the extent required by applicable rules and regulations. Generally, management would present to the Board for approval at the next regularly scheduled Board meeting any related person transactions proposed to be entered into by us. The Board may approve the transaction if it is deemed to be in the best interests of our stockholders and the Company.
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Executive Compensation
The following table sets forth certain information for fiscal year ended October 31, 2014, with respect to compensation awarded to, earned by or paid to our current Chief Executive Officer, our Chief Operating Officer and Legal Counsel and our Chief Financial Officer (the “Named Executive Officers”). No other executive officer received total compensation in excess of $100,000 during fiscal year 2014.
| SUMMARY COMPENSATION TABLE | ||||||
|
Name and Principal Position |
Year |
Salary ($) |
Bonus ($) | Option Awards ($) (2) | All Other Compensation ($) (3) | Total Compensation ($) |
| Robert A. Berman (1) Chief Executive Officer and Director | 2014 2013 2012 | $ 300,000 $ 290,000 $ 32,223 | $ 200,000 $ 50,000 $ - | $ 254,480 $ - $2,882,667 | $ 8,320 $ - $ - | $ 762,800 $ 340,000 $ 2,914,890 |
| Tisha Stender | 2014 | $ 112,826 | $ - | $ 850,200 | $ - | $ 963,026 |
| Henry P. Herms Chief Financial Officer, Vice President- Finance and former Director | 2014 2013 2012 | $ 168,000 $ 150,000 $ 150,000 | $ - $ - $ - | $ 92,455 $ - $ 69,219 | $ - $ 16,665 $ 15,033 | $ 260,455 $ 166,665 $ 234,252 |
(1) A portion of Robert A. Berman’s salary and bonus, which has been earned and accrued, has been deferred.
(2) Amounts in the Option Awards column represent the aggregate grant date fair value of stock option awards made during the fiscal years ended October 31, 2014, 2013 and 2012 for each Named Executive Officer in accordance with Accounting Standards Codification (“ASC”) 718 and also reflects the amendment of certain options on November 8, 2013 and the repricing of certain options on September 5, 2012. A discussion of assumptions used in valuation of option awards may be found in Note 2 to our Consolidated Financial Statements for fiscal year ended October 31, 2013 in our Annual Report on Form 10-K.
(3) Amounts in the All Other Compensation column reflect, for each Named Executive Officer, the sum of the incremental cost to us of all perquisites and personal benefits, which consisted solely of life insurance premiums for the fiscal year ended October 31, 2014 and auto allowance and related expenses for fiscal years ended October 31, 2013 and 2012.
Employment Agreements
Employment Agreement with Robert Berman
On September 19, 2012, the Company entered into an Employment Agreement with Mr. Berman (the “Berman Agreement”) to serve as President and Chief Executive Officer of the Company. Pursuant to the Berman Agreement, Mr. Berman was to receive an annual base salary of $290,000, provided, however that payment of his salary was to be deferred until the Cash Milestone (as described below) was achieved. In February 2013, the Board elected to commence paying Mr. Berman his salary effective February 1, 2013, but his deferred salary, which has been earned and accrued, has not yet been paid. In August 2013, the Cash Milestone was achieved.
In addition to his base salary, Mr. Berman was entitled to a cash bonus of $50,000, if the Company generates aggregate cash payments in excess of a specified amount (the “Cash Milestone”) prior to September 19, 2013. The Cash Milestone bonus, which has been earned and accrued, has not yet been paid. Mr. Berman was also entitled to two additional cash bonuses of $50,000 if the average trading price of the Company’s Common Stock exceeds two separate price targets (the “Stock Price Targets”) prior to September 19, 2013, which Stock Price Targets were not achieved prior to September 19, 2013.
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The Company also granted Mr. Berman options to purchase 16,000,000 shares of the Company’s Common Stock, with an exercise price equal $0.2175 (the average of the high and the low sales price of the Common Stock on the trading day immediately preceding the approval of such options by the Board). Half of the options vest in 36 equal monthly installments commencing on October 31, 2012, provided that if the Berman Agreement is terminated or constructively terminated by the Company without cause (as defined below), an additional 12 months of vesting will be accelerated and such accelerated options will become immediately exercisable. The balance of the options vest in three equal installments upon achievement of the Cash Milestone (which Cash Milestone has been achieved) and the Stock Price Targets (without regard to the 12 month period). The vesting conditions of the Stock Price Target options have been amended as described below. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan (as defined below).
If Mr. Berman’s employment is terminated by the Company or he terminates his employment for any reason or no reason, the Company shall be obligated to pay to Mr. Berman only any earned compensation and/or bonus due under the Berman Agreement, any unpaid reasonable and necessary expenses, and any accrued and unpaid benefits due to him in accordance with the terms and conditions of the Company’s benefit plans and policies including any accrued but unpaid vacation up to the cap of 20 days through the date of termination. All such payments shall be made in a lump sum immediately following termination as required by law.
“Cause” means (i) commission of or entrance of a plea of guilty or nolo contendere to a felony; (ii) conviction for engaging or having engaged in fraud, breach of fiduciary duty, a crime of moral turpitude, dishonesty, or other acts of willful misconduct or gross negligence in connection with the business affairs of the Company or its affiliates; (iii) a conviction for theft, embezzlement, or other intentional misappropriation of funds by employee from the Company or its affiliates; (iv) a conviction in connection with the willful engaging by employee in conduct which is demonstrably and materially injurious to the Company or its affiliates, monetarily or otherwise.
Amendment to Employment and Stock Option Agreements
Robert A. Berman’s employment agreement includes the grant of certain stock options. On November 8, 2013, in light of the cost and expense of valuing the unvested portion of the options on a quarterly basis for financial reporting purposes, the Board approved an amendment to the Stock Price Target stock options awarded on September 19, 2012 (the “Option Awards”) to Mr. Berman. The amendment modifies the Option Awards’ vesting conditions to provide that the unvested portion of the stock options will vest in 23 consecutive monthly installments, commencing on November 30, 2013 through September 30, 2015. Prior to the amendment, the Option Awards had provided that the stock options would vest if certain milestone targets were met. All the other terms and conditions of the Option Awards remain unchanged.
Employment Agreement with Tisha Stender
On July 8, 2014, the Company entered into an Employment Agreement with Ms. Stender (the “Stender Agreement”) to serve as Chief Operating Officer and Legal Counsel of the Company. Pursuant to the Stender Agreement, Ms. Stender is to receive an annual base salary of $277,000 (effective August 4, 2014). In addition to her base salary, Ms. Stender is entitled to receive one or more cash bonuses at the reasonable discretion of Mr. Berman.
The Company also granted Ms. Stender options to purchase 4,000,000 shares of the Company’s common stock, with an exercise price equal $0.25 per share (the average of the high and the low sales price of the common stock on the trading day immediately preceding the approval of such options by the Board). Half of the options vest in 36 equal monthly installments commencing on August 31, 2014. The balance of the options vest in two equal installments upon achievement of the certain Company milestones.
If Ms. Stender’s employment is terminated by the Company or she terminates her employment for any reason or no reason, the Company shall be obligated to pay to Ms. Stender only any earned compensation and/or bonus due under the Stender Agreement, any unpaid reasonable and necessary expenses, and any accrued and unpaid benefits due to her in accordance with the terms and conditions of the Company’s benefit plans and policies including any accrued but unpaid vacation up to the cap of 20 days through the date of termination. All such payments shall be made in a lump sum immediately following termination as required by law.
45
“Cause” means (i) commission of or entrance of a plea of guilty or nolo contendere to a felony; (ii) conviction for engaging or having engaged in fraud, breach of fiduciary duty, a crime of moral turpitude, dishonesty, or other acts of willful misconduct or gross negligence in connection with the business affairs of the Company or its affiliates; (iii) a conviction for theft, embezzlement, or other intentional misappropriation of funds by employee from the Company or its affiliates; (iv) a conviction in connection with the willful engaging by employee in conduct which is demonstrably and materially injurious to the Company or its affiliates, monetarily or otherwise.
Stock Options
The following table sets forth certain information with respect to unexercised stock options held by the Named Executive Officers outstanding on October 31, 2014:
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE | ||||
| Option Awards | ||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Un -Exercisable | Option Exercise Price ($) | Option Expiration Date |
| Robert A. Berman | 5,555,558(1) 2,666,667(2) 2,782,609(3) 305,550(4) | 2,444,442(1)
2,550,724(3) 694,450(4)
| $0.2175 $0.2175 $0.2175 $0.2000 | 9/19/2022 9/19/2022 9/19/2022 11/8/2023 |
| Henry P. Herms | 100,000 100,000 50,000 50,000 75,000 100,000 100,000 208,337(5) 168,050(6) |
91,663(5) 381,950(6) | $0.650 $0.520 $0.145 $0.700 $0.145 $0.145 $0.370 $0.235 $0.200 | 2/17/2015 10/30/2015 5/31/2016 11/20/2016 11/11/2017 10/7/2019 6/01/2021 9/19/2022 11/8/2018 |
| Tisha Stander | 166,685(7) – | 1,833,315(7) 2,000,000(8) | $0.25 $0.25 | 7/16/2024 7/16/2024 |
(1) Options vest and became exercisable in 36 consecutive monthly installments, beginning October 31, 2012 and continuing through September 30, 2015.
(2) Options vested upon achievement of the Cash Milestone.
(3) Options were to vest in two equal installments upon achievement of the Stock Price Targets. On November 8, 2013, the vesting conditions were modified by the Board to provide that the unvested portion of the stock options will vest in 23 consecutive monthly installments, commencing on November 30, 2013 through September 30, 2015.
(4) Options vest and became exercisable in 36 consecutive monthly installments, beginning December 31, 2013 and continuing through November 30, 2016.
(5) Options vest and became exercisable in 36 consecutive monthly installments, beginning October 31, 2012 and continuing through September 30, 2015.
(6) Options vest and became exercisable in 36 consecutive monthly installments, beginning December 31, 2013 and continuing through November 30, 2016.
(7) Options vest and became exercisable in 36 consecutive monthly installments, beginning August 31, 2014 and continuing through July 3, 2017.
(8) Options vest in two equal installments upon achievement of certain Company milestones.
The following table sets forth certain information with respect to grants of stock options to the Named Executive Officers during fiscal year 2014:
46
| GRANTS OF PLAN BASED AWARDS TABLE | ||||
| Name | Grant Date | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise Price of Option Awards ($/Sh) | Grant Date Fair Value ($) (1) |
| Tisha Stender | 7/16/2014(2) | 4,000,000 | $0.25(3) | $850,200 |
(1) Represent the grant date fair value of stock option awards in accordance with Accounting Standards Codification (“ASC”) 718.
(2) Reflects options granted to Ms. Stender under the Stender Agreement.
(3) The exercise price was determined by calculating the average of the high and the low sales price of the common stock on the trading day immediately preceding the approval of such options by the Board.
The following table summarizes the exercise of stock options during fiscal 2014 by Named Executives:
| OPTION EXERCISES AND STOCK VESTED TABLE | ||
| Name | Option Awards | |
| Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) (1) | |
| Henry P. Herms | 75,000 | $2,482 |
(1) The value realized on exercise is calculated based on the difference between the exercise price of the options and the market price of the stock at the time of exercise.
Potential Payments upon Termination or Change in Control
Robert A. Berman
As more fully described in “Employment Agreement with Robert Berman,” if Mr. Berman is terminated without cause, an additional 12 months of vesting of his options will be accelerated and such accelerated options will become immediately exercisable. The intrinsic value of such options would be $-0-, which was calculated by multiplying (a) 2,666,664 options (being the number of options granted to him on September 19, 2012 that would be accelerated) (b) an amount equal to the excess of the (x) our closing share price on October 31, 2014 of $0.20 and (y) the options’ exercise price of $0.2175 per share.
Options granted Mr. Berman on November 8, 2013 provide for the vesting of the unvested portion of his options to be accelerated and such accelerated options to become immediately exercisable if Mr. Berman is terminated without cause. The intrinsic value of such options would be $-0-, which was calculated by multiplying (a) 694,450 options (being the number of options granted to him on November 8, 2013 that would be accelerated) (b) an amount equal to the excess of the (x) our closing share price on October 31, 2014 of $0.20 and (y) the options’ exercise price of $0.20 per share.
In addition to the acceleration of the options, if Mr. Berman’s employment is terminated by the Company or he terminates his employment for any reason or no reason, the Company shall be obligated to pay to Mr. Berman only any earned compensation and/or bonus due under the Berman Agreement, any unpaid reasonable and necessary expenses, and any accrued and unpaid benefits due to him in accordance with the terms and conditions of the Company’s benefit plans and policies including any accrued but unpaid vacation up to the cap of 20 days through the date of termination (which accrued and unpaid benefits would have a maximum value of $23,077).
47
If Ms. Stender’s employment is terminated by the Company or she terminates her employment for any reason or no reason, the Company shall be obligated to pay to Ms. Stender only any earned compensation and/or bonus due under the Stender Agreement, any unpaid reasonable and necessary expenses, and any accrued and unpaid benefits due to him in accordance with the terms and conditions of the Company’s benefit plans and policies including any accrued but unpaid vacation up to the cap of 20 days through the date of termination (which accrued and unpaid benefits would have a maximum value of $21,308).
Henry P. Herms
Mr. Herms’ outstanding unvested stock option awards granted under the 2010 Share Incentive Plan would immediately vest and become exercisable upon a change in control as defined below. The intrinsic value of Mr. Herms’ outstanding options granted on September 19, 2012 would be $-0-, which was calculated by multiplying (a) 91,663 options (being the unvested portion of options granted to him on September 19, 2012 that he held on October 31, 2014) by (b) an amount equal to the excess of the (x) our closing share price on October 31, 2014 of $0.20 and (y) the options’ exercise price of $0.235 per share. The intrinsic value of Mr. Herms’ outstanding options granted on November 8, 2013 would be $-0-, which was calculated by multiplying (a) 381,950 options (being the unvested portion of options granted to him on November 8, 2014 that he held on October 31, 2014) by (b) an amount equal to the excess of the (x) our closing share price on October 31, 2014 of $0.20 and (y) the options’ exercise price of $0.235 per share.
Under the 2010 Share Incentive Plan, “change in control” means:
· Change in Ownership: A change in ownership of the Company occurs on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company, excluding the acquisition of additional stock by a person or more than one person acting as a group who is considered to own more than 50% of the total fair market value or total voting power of the stock of the Company.
· Change in Effective Control: A change in effective control of the Company occurs on the date that either:
o Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company; or
o A majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; provided, that this paragraph will apply only to the Company if no other corporation is a majority shareholder.
It is the intent that this definition be construed consistent with the definition of “Change of Control” as defined under Code Section 409A and the applicable treasury regulations, as amended from time to time.
48
There is no present arrangement for cash compensation of directors for services in that capacity. Consistent with the non-employee director compensation approved on March 28, 2013 for calendar year 2013, on November 8, 2013, the Board approved an amendment to the 2010 Share Incentive Plan to provide that on January 1st of each year commencing on January 1, 2014, each non-employee director (a “Director Participant”) of the Company at that time shall automatically be granted a 10 year nonqualified stock option to purchase 300,000 shares of Common Stock (or 400,000 in the case of the Chairman of the Board to the extent he qualifies as a Director Participant), with an exercise price equal to the closing price on the date of grant, that will vest in four equal quarterly installments in the year of grant. In addition, each person who is a Director Participant and joins the Board after January 1 of any year, shall be granted on the date such person joins the Board, a nonqualified stock option to purchase 300,000 shares of Common Stock (or 400,000 in the case of the Chairman of the Board) pro-rated based upon the number of calendar quarters remaining in the calendar year in which such person joins the Board (rounded up for partial quarters).
Our employee director, Robert A. Berman and former employee director Henry P. Herms, did not receive any additional compensation for services provided as a director during fiscal year 2014. The following table sets forth compensation of Lewis H. Titterton, Brice F. Johnson, Dr. Andrea Belz and Dale Fox, our non-employee directors and Kent B. Williams, our former non-employee director, for fiscal year 2014:
| DIRECTORS COMPENSATION | |||
| Name | Option Awards ($) (1) |
Bonus ($) | All Other Compensation ($) |
| Lewis H. Titterton Jr. | $567,580 | - | - |
| Bruce F. Johnson | $ 47,460 | - | - |
| Kent B. Williams | $118,590 | - | - |
| Dr. Andrea Belz | $30,482 | - | - |
| Dale Fox | $30,482 | - | - |
(1) Amounts in the Option Awards column represent the aggregate grant date fair value of stock option awards made during the fiscal year ended October 31, 2014, in accordance with ASC 718. A discussion of assumptions used in valuation of option awards may be found in Note 2 to our Consolidated Financial Statements for fiscal year ended October 31, 2013 included in our Annual Report on Form 10-K. At October 31, 2014, Lewis H. Titterton, Brice F. Johnson, Dr. Andrea Belz and Dale Fox held unexercised stock options to purchase 5,610,000, 720,000, 150,000 and 150,000 shares respectively, of our Common Stock.
Compensation Committee Interlocks and Insider Participation
The Board is primarily responsible for overseeing our compensation and employee benefit plans and practices. We do not have a compensation committee or other Board committee that performs equivalent functions. During the last fiscal year, no officer or employee of the Company (other than officers who are also directors of the Company), nor any former officer of the Company, participated in deliberations of the Company’s Board concerning executive compensation.
49
Beneficial Ownership of Principal Stockholders, Officers and Directors
The following table sets forth information regarding the beneficial ownership of our common stock as of December 2, 2014, by (i) each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (ii) each person known by us to be the beneficial owner of more than 5% of our outstanding shares of commons stock; each of our named executive officers and directors; and all of our executive officers and directors as a group.
|
|
Percent of Class (6) | ||
| Name and Address of Beneficial Owner | |||
| Lewis H. Titterton Jr. 900 Walt Whitman Road Melville, NY 11747 | 6.24% | ||
| Robert A. Berman 900 Walt Whitman Road Melville, NY 11747 | 5.78% | ||
| Dr. Amit Kumar 900 Walt Whitman Road Melville, NY 11747 | 6.24% | ||
| Bruce F. Johnson 900 Walt Whitman Road Melville, NY 11747 | 3.90% | ||
| Tisha Stender 900 Walt Whitman Road Melville, NY 11747 | * | ||
| Henry P. Herms 900 Walt Whitman Road Melville, NY 11747 | * | ||
| Dr. Andrea Belz 900 Walt Whitman Road Melville, NY 11747
| * | ||
| Dale Fox 900 Walt Whitman Road Melville, NY 11747
| * | ||
| All Directors and Executive Officers as a Group (8 persons) | 21.37% | ||
|
|
| ||
|
| * | Less than 1%. |
|
50
(1) A beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security or has the right to obtain such voting power and/or investment power within sixty (60) days. Except as otherwise noted, each designated beneficial owner in this proxy statement has sole voting power and investment power with respect to the shares of Common Stock beneficially owned by such person.
(2) Includes 1,626,674 shares, 388,884 shares, 388,884 shares, 420,000 shares, 1,022,220 shares, 333,350 shares, 150,000 shares, 150,000 shares and 4,480,012 shares which Lewis H. Titterton Jr., Robert A. Berman, Dr. Amit Kumar, Bruce F. Johnson, Henry P. Herms, Tisha Stender, Dr. Andrea Belz, Dale Fox and all directors and executive officers as a group, respectively, have the right to acquire within 60 days upon exercise of options granted pursuant to the 2003 Share Incentive Plan and/or the 2010 Share Incentive Plan.
(3) Includes 166,650 shares, 333,300 shares, 333,300 shares and 833,250 shares that Robert A. Berman, Dr. Amit Kumar, Bruce F. Johnson and all directors and executive officers as a group, respectively, have the right to acquire within 60 days upon exercise of warrants purchased by them in the private placement on January 25, 2013.
(4) Includes 50,000 shares, 50,000 shares, 400,000 shares and 500,000 shares that Lewis H. Titterton Jr., Dr. Amit Kumar, Tisha Stender and all directors and executive officers as a group, respectively, have the right to acquire within 60 days upon exercise of warrants purchased by them in the registered direct offering on July 15, 2014.
(5) Includes 1,816,667 shares, 12,367,152 shares, 12,367,152 shares, 300,000 shares and 26,850,971 shares which Lewis H. Titterton Jr., Robert A. Berman, Dr. Amit Kumar, Bruce F. Johnson and all directors and executive officers as a group, respectively, respectively, have the right to acquire within 60 days pursuant to option agreements with the Company.
(6) Based on 219,712,190 shares of Common Stock outstanding as of December 2, 2014.
Equity Compensation Plan Information
The following is information as of October 31, 2013 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under all equity compensation plans in effect as of that date, including our 2003 Share Incentive Plan and our 2010 Share Incentive Plan. See Note 7 to Consolidated Financial Statements for more information on these plans.
| Plan category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted average exercise price of outstanding options, warrants and rights |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
|
|
| (a) |
|
|
|
|
| Equity compensation plans not approved by security holders (1)(2)(3)(4)(5)(6)(7) |
| 63,122,845 |
| $0.3429 |
| 1,075,020 |
(1) On April 23, 2003 the Board adopted the 2003 Share Incentive Plan. Officers, key employees and non-employee directors of, and consultants to, the Company or any of its subsidiaries and affiliates are eligible to participate in the 2003 Share Incentive Plan. The 2003 Share Incentive Plan provides for the grant of stock options, stock appreciation rights, stock awards, performance awards and stock units (the “2003 Benefits”).
51
The maximum number of shares of common stock available for issuance under the 2003 Share Incentive Plan initially was 15,000,000 shares. On October 8, 2004, February 9, 2006, August 22, 2007 and December 3, 2008, the 2003 Share Incentive Plan was amended by our Board 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. The 2003 Share Incentive Plan was administered by the Stock Option Committee through June 2004, from June 2004 through July 2010 by the Board, from July 2010 through August 2012, by the Stock Option Committee, from August 2012 through November 2012, by the Executive Committee of the Board and since November 2012 by the Board, which determines the option price, term and provisions of the Benefits. The 2003 Share Incentive Plan contains provisions for equitable adjustment of the 2003 Benefits in the event of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, spinoff, combination of shares, exchange of shares, dividends in kind or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company. The 2003 Share Incentive Plan terminates with respect to additional grants on April 21, 2013. The Board of Directors may amend, suspend or terminate the 2003 Share Incentive Plan at any time.
(2) On July 14, 2010 the Board adopted the 2010 Share Incentive Plan. Officers, key employees and non-employee directors of, and consultants to, the Company or any of its subsidiaries and affiliates are eligible to participate in the 2010 Share Incentive Plan. The 2010 Share Incentive Plan provides for the grant of stock options, stock appreciation rights, stock awards, and performance awards and stock units (the “2010 Benefits”). The maximum number of shares of common stock available for issuance under the 2010 Share Incentive Plan was initially 15,000,000 shares. On July 6, 2011 and August 29, 2012, the 2010 Share Incentive Plan was amended by our Board to increase the maximum number of shares of common stock that may be granted to 27,000,000 and 30,000,000 shares, respectively. On November 8, 2013, the Board approved an amendment to provide that effective and following November 8, 2013, the maximum aggregate number of shares available for issuance will be 20,000,000 shares. Additionally, commencing on the first business day in 2014 and on the first business day of each calendar year thereafter, the maximum aggregate number of shares available for issuance shall be replenished such that, as of such first business day, the maximum aggregate number of shares available for issuance shall be 20,000,000 shares. Current and future non-employees directors are automatically granted a 10 year nonqualified stock option to purchase 300,000 shares of Common Stock (or 400,000 in the case of the Chairman of the Board) on January 1st of each year that will vest in four equal quarterly installments. The 2010 Share Incentive Plan was administered by the Stock Option Committee through August 2012, by the Stock Option Committee, from August 2012 through November 2012, by the Executive Committee of the Board and since November (1) 2012 by the Board of Directors, which determines the option price, term and provisions of each option. The 2010 Share Incentive Plan terminates which respect to additional grants on July 14, 2020. The Board may amend, suspend or terminate the 2010 Share Incentive Plan at any time.
(3) On September 19, 2012, the Company granted to Messrs. Berman, Kumar and Roop options to purchase 16,000,000 shares, 16,000,000 shares, and 8,000,000 shares, respectively, of the Company’s common stock, with an exercise price equal $0.2175 (the average of the high and the low sales price of the common stock on the trading day immediately preceding the approval of such options by the Board). Half of the options granted to each of them vest in 36 equal monthly installments commencing on October 31, 2012, provided that if such person is terminated or constructively terminated by the Company without cause (as defined in the applicable employment or consulting agreement with the Company), an additional 12 months of vesting will be accelerated and such accelerated options will become immediately exercisable. The balance of the options vest in three equal installments if the Company generates aggregate cash payments in excess of a specified amount (the “Cash Milestone”), which Cash Milestone has been achieved, and if the average trading price of the Company’s common stock for a period of 15 trading days exceeds two separate price targets (the “Stock Price Targets”). On November 8, 2013, in light of the cost and expense of valuing the unvested portion of the options on a quarterly basis for financial reporting purposes, the Board approved an amendment to the Stock Price Target stock options modifying the vesting conditions to provide that the unvested portion of the stock options will vest in 23 consecutive monthly installments, commencing on November 30, 2013 through September 30, 2015. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
52
(4) On September 19, 2012, the Board approved a grant to Lewis H. Titterton of a stock option to purchase 750,000 shares of Company common stock in compensation for his service as interim Chief Executive Officer of the Company and as compensation for his prior service as a Director of the Company and also approved a grant to Kent Williams of a stock option to purchase 750,000 shares of Company common stock in compensation for his service in bringing on the Company’s new management team. All of these stock options have an exercise price of $0.2225 (the average of the high and low sales price on September 21, 2012), vest in 3 equal annual installments of 250,000 commencing on September 21, 2012 and have an expiration date of September 19, 2022. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
(5) On November 30, 2012, the Board approved a grant to Kent B. Williams of a stock option to purchase 1,000,000 shares of Company common stock in compensation for his service in recruiting the Company’s new management team. These options have an exercise price of $0.211 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing November 30, 2013. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
(6) On February 15, 2013, the Board approved a grant to Lewis H. Titterton Jr. of a stock option to purchase 1,000,000 shares of Company common stock in compensation for his service as Chairman of the Board. These stock options have an exercise price of $0.235 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing February 15, 2014. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
(7) On March 28, 2013, the Board approved a grant to Lewis H. Titterton Jr., Bruce F. Johnson and Kent B. Williams of a stock option to purchase 400,000 shares, 300,000 shares and 300,000 shares, respectively, of Company common stock as additional compensation as outside directors. Each of these stock options has an exercise price of $0.195 (the average of the high and low sales price on date of grant) and vest in four equal quarterly installments. The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
53
The consolidated financial statements of ITUS Corporation and subsidiaries as of October 31, 2012 and 2013, and for each of the years in the two-year period ended October 31, 2013, have been included in the registration statement in reliance upon the report of Haskell & White LLP, independent registered public accounting firm, and upon the authority of said firm as experts in accounting and auditing.
The validity of the common stock being offered pursuant to this registration statement have been passed upon for us by Ellenoff Grossman & Schole LLP located at 1345 Avenue of the Americas, New York, NY 10105.
DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our directors and officers are indemnified to the fullest extent permitted under Delaware law. We may also purchase and maintain insurance which protects our officers and directors against any liabilities incurred in connection with their service in such a capacity, and such a policy may be obtained by us in the future.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, which registers certain of our shares of common stock for public resale. This prospectus, which is part of such registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information pertaining to us and our common stock, reference is made to the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents referred to in this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.
We file reports, proxy statements and other information with the SEC. Information filed with the SEC by us can be inspected and copied at the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of this information by mail from the Public Reference Section of the SEC at prescribed rates. Further information on the operation of the SEC’s Public Reference Room in Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is www.sec.gov.
54
COPYTELE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2013
Additional information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CopyTele, Inc.
We have audited the accompanying consolidated balance sheets of CopyTele, Inc. (the “Company”) as of October 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficiency, and cash flows for each of the years ended October 31, 2013 and 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the years ended October 31, 2013 and 2012, in conformity with accounting principles generally accepted in the United States.
/s/ Haskell & White LLP
HASKELL & WHITE LLP
Irvine, California
January 16, 2014
F-1
|
| October 31, 2013 |
| October 31, 2012 | ||
|
|
| ||||
| ASSETS |
|
|
|
|
|
| Current assets: |
|
|
|
|
|
| Cash and cash equivalents | $ | 898,172 |
| $ | 339,693 |
| Short–term investments in certificates of deposit |
| - |
|
| 500,000 |
| Accounts receivable |
| 175,000 |
|
| - |
| Prepaid expenses and other current assets |
| 160,646 |
|
| 82,326 |
| Total current assets |
| 1,233,818 |
|
| 922,019 |
| Investment in Videocon Industries Limited global depository receipts, at fair value |
| 4,197,341 |
|
| 4,728,367 |
| Property and equipment, net of accumulated depreciation of $45,654 and $2,185,525, respectively |
| 8,379 |
|
| 10,290 |
| Total assets | $ | 5,439,538 |
| $ | 5,660,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ DEFICIENCY |
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
| Accounts payable and accrued expenses | $ | 1,276,470 |
| $ | 635,139 |
| Royalties and contingent legal fees payable |
| 207,743 |
|
| - |
| Derivative liability, at fair value |
| 540,000 |
|
| - |
| Deferred revenue, nonrefundable development and license fee |
| 1,187,320 |
|
| 1,187,320 |
| Total current liabilities |
| 3,211,533 |
|
| 1,822,459 |
|
|
|
|
|
|
|
| Convertible debentures due September 2016, net of discount of $717,727 (Note 6) |
| - |
|
| 32,273 |
|
|
|
|
|
|
|
| Convertible debentures due January 2015, net of discount of $891,402 (Note 6) |
| 548,598 |
|
| - |
|
|
|
|
|
|
|
| Loan payable by CopyTele International Ltd. to related party, secured by Videocon Industries Limited global depository receipts (Note1) |
| 5,000,000 |
|
| 5,000,000 |
|
|
|
|
|
|
|
| Commitments and contingencies (Notes 8 and 11) |
|
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ deficiency: |
|
|
|
|
|
| Preferred stock, par value $100 per share; 500,000 shares authorized; no shares issued or outstanding |
| - |
|
| - |
| Common stock, par value $.01 per share; 600,000,000 and 240,000,000 shares authorized, respectively; 209,276,745 and 184,979,037 shares issued and outstanding, respectively |
| 2,092,767 |
|
| 1,849,790 |
| Additional paid-in capital |
| 134,750,048 |
|
| 127,693,160 |
| Loan receivable from related party (Note 1) |
| (5,000,000) |
|
| (5,000,000) |
| Accumulated deficit |
| (135,163,408) |
|
| (125,083,322) |
| Accumulated other comprehensive loss |
| - |
|
| (653,684) |
| Total shareholders’ deficiency |
| (3,320,593) |
|
| (1,194,056) |
| Total liabilities and shareholders’ deficiency | $ | 5,439,538 |
| $ | 5,660,676 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| For the years ended October 31, | ||||
|
| 2013 |
| 2012 | ||
| Revenue: |
|
|
|
| |
| Revenue from patent assertion activities | $ | 388,850 |
| $ | - |
| Amortization of display technology development and license fees received from AU Optronics Corp. in fiscal year 2011 |
| - |
|
| 940,010 |
| Total revenue |
| 388,850 |
|
| 940,010 |
|
|
|
|
|
|
|
| Operating costs and expenses: |
|
|
|
|
|
| Inventor royalties and contingent legal fees |
| 207,743 |
|
| - |
| Litigation and licensing expenses |
| 108,915 |
|
| - |
| Research and development expenses (including non-cash stock option compensation expense of $233,233) |
| - |
|
| 2,211,506 |
| Marketing, general and administrative expenses (including non-cash stock option compensation expense of $3,798,139 and $492,032, respectively) |
| 7,989,846 |
|
| 2,863,060 |
| Total operating costs and expenses |
| 8,306,504 |
|
| 5,074,566 |
| Loss from operations |
| (7,917,654) |
|
| (4,134,556) |
|
|
|
|
|
| |
| Impairment in value of Videocon Industries Limited global depository receipts |
| (1,184,710) |
|
| - |
|
|
|
|
|
|
|
| Impairment in value of investment in Volga–Svet Ltd. |
| - |
|
| (127,500) |
|
|
|
|
|
|
|
| Change in value of derivative liability |
| 475,189 |
|
| - |
|
|
|
|
|
|
|
| Loss on extinguishment of debt |
| (343,517) |
|
| - |
|
|
|
|
|
|
|
| Interest expense |
| (1,109,519) |
|
| (7,664) |
|
|
|
|
|
|
|
| Dividend income |
| - |
|
| 13,463 |
|
|
|
|
|
|
|
| Interest income |
| 125 |
|
| 3,458 |
|
|
|
|
|
|
|
| Loss before income taxes |
| (10,080,086) |
|
| (4,252,799) |
|
|
|
|
|
|
|
| Provision for income taxes (Note 10) |
| - |
|
| - |
|
|
|
|
|
|
|
| Net loss | $ | (10,080,086) |
| $ | (4,252,799) |
|
|
|
|
|
|
|
| Net loss per share: |
|
|
|
|
|
| Basic and diluted | $ | (0.05) |
| $ | (0.02) |
|
|
|
|
|
|
|
| Weighted average common shares outstanding: |
|
|
|
|
|
| Basic and diluted |
| 196,645,962 |
|
| 181,677,334 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| For the years ended October 31, | ||||
|
| 2013 |
| 2012 | ||
| Net loss | $ | (10,080,086) |
| $ | (4,252,799) |
| Other comprehensive income (loss): |
|
|
|
|
|
| Reversal of unrealized (loss) as of October 31, 2012, on investment in Videocon Industries Limited global depository receipts |
| 653,684 |
|
| - |
| Unrealized (loss) on investment in Videocon Industries Limited global depository receipts |
| - |
|
| (653,684) |
| Comprehensive loss | $ | (9,426,402) |
| $ | (4,906,483) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-4
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIENCY
FOR THE YEARS ENDED OCTOBER 31, 2013 and 2012
|
|
|
|
|
|
| Additional Paid-in Capital |
| Loan Receivable From Related Party |
|
Accumulated Deficit |
| Accumulated Other Comprehensive Income(Loss) |
|
Total Shareholders’ Deficiency | |||||
|
| Common Stock |
|
|
|
|
| |||||||||||||
|
| Shares |
| Par Value |
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, October 31, 2011 | 176,131,047 |
| $ | 1,761,310 |
| $ | 125,127,246 |
| $ | (5,000,000) |
| $ | (120,830,523) |
| $ | - |
| $ | 1,058,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock option compensation to employees | - |
|
| - |
|
| 614,914 |
|
| - |
|
| - |
|
| - |
|
| 614,914 |
| Stock option compensation to consultants | - |
|
| - |
|
| 110,351 |
|
| - |
|
| - |
|
| - |
|
| 110,351 |
| Common stock issued upon exercise of stock options | 1,290,000 |
|
| 12,900 |
|
| 195,550 |
|
| - |
|
| - |
|
| - |
|
| 208,450 |
| Common stock issued to employees pursuant to stock incentive plans | 7,100,818 |
|
| 71,008 |
|
| 856,348 |
|
| - |
|
| - |
|
| - |
|
| 927,356 |
| Common stock issued to consultants | 457,172 |
|
| 4,572 |
|
| 71,360 |
|
| - |
|
| - |
|
| - |
|
| 75,932 |
| Discount on convertible debentures | - |
|
| - |
|
| 717,391 |
|
| - |
|
| - |
|
| - |
|
| 717,391 |
| Unrealized loss on investment in Videocon Industries Limited global depository receipts | - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (653,684) |
|
| (653,684) |
| Net loss | - |
|
| - |
|
| - |
|
| - |
|
| (4,252,799) |
|
| - |
|
| (4,252,799) |
| Balance, October 31, 2012 | 184,979,037 |
|
| 1,849,790 |
|
| 127,693,160 |
|
| (5,000,000) |
|
| (125,083,322) |
|
| (653,684) |
|
| (1,194,056) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock option compensation to employees | - |
|
| - |
|
| 2,693,121 |
|
| - |
|
| - |
|
| - |
|
| 2 ,693,121 |
| Stock option compensation to consultants | - |
|
| - |
|
| 1,105,018 |
|
| - |
|
| - |
|
| - |
|
| 1,105,018 |
| Common stock issued upon exercise of stock options | 146,000 |
|
| 1,460 |
|
| 24,150 |
|
| - |
|
| - |
|
| - |
|
| 25,610 |
| Common stock issued to consultants | 1,345,000 |
|
| 13,450 |
|
| 291,235 |
|
| - |
|
| - |
|
| - |
|
| 304,685 |
| Common stock issued upon conversion of convertible debentures | 10,318,945 |
|
| 103,189 |
|
| 1,250,175 |
|
| - |
|
| - |
|
| - |
|
| 1,353,364 |
| Common stock issued in lieu of interest on convertible debentures | 480,270 |
|
| 4,803 |
|
| 93,936 |
|
| - |
|
| - |
|
| - |
|
| 98,739 |
| Sale of common stock to Aspire Capital Fund, LLC net of expense | 5,380,000 |
|
| 53,800 |
|
| 996,605 |
|
| - |
|
| - |
|
| - |
|
| 1,050,405 |
| Common stock issued to Aspire Capital Fund LLC, as consideration | 3,500,000 |
|
| 35,000 |
|
| (35,000) |
|
| - |
|
| - |
|
| - |
|
| - |
| Warrants issued in connection with issuance of convertible debentures | - |
|
| - |
|
| 221,985 |
|
| - |
|
| - |
|
| - |
|
| 221,985 |
| Common stock issued upon exercise of warrants | 2,927,493 |
|
| 29,275 |
|
| 351,525 |
|
| - |
|
| - |
|
| - |
|
| 380,800 |
| Common stock issued to acquire patent license | 200,000 |
|
| 2,000 |
|
| 40,000 |
|
| - |
|
| - |
|
| - |
|
| 42,000 |
| Proceeds on sale of common stock held by ZQX Advisors, LLC | - |
|
| - |
|
| 24,138 |
|
| - |
|
| - |
|
| - |
|
| 24,138 |
| Reversal of unrealized loss as of October 31, 2012 on investment in Videocon Industries Limited global depository receipts | - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 653,684 |
|
| 653,684 |
| Net loss | - |
|
| - |
|
| - |
|
| - |
|
| (10,080,086) |
|
| - |
|
| (10,080,086) |
| Balance, October 31, 2013 | 209,276,745 |
| $ | 2,092,767 |
| $ | 134,750,048 |
| $ | (5,000,000) |
| $ | (135,163,408) |
| $ | - |
| $ | (3,320,593) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| For the years ended October 31, | ||||
|
| 2013 |
| 2012 | ||
| Cash flows from operating activities: |
|
|
|
|
|
| Payments to suppliers, employees and consultants | $ | (3,401,499) |
| $ | (3,164,613) |
| Cash received from patent monetization and patent assertion |
| 213,850 |
|
| 7,075 |
| Dividends and interest received |
| 851 |
|
| 16,790 |
| Net cash used in operating activities |
| (3,186,798) |
|
| (3,140,748) |
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
| Disbursements to acquire short-term investments in certificates of deposit |
| (250,000) |
|
| (1,200,000) |
| Proceeds from maturities of short-term investments in U.S. government securities and certificates of deposit |
| 750,000 |
|
| 2,948,551 |
| Other |
| (676) |
|
| (600) |
| Net cash provided by investing activities |
| 499,324 |
|
| 1,747,951 |
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
| Proceeds from issuance of convertible debentures |
| 1,765,000 |
|
| 750,000 |
| Proceeds from sale of common stock, net of expense |
| 1,050,405 |
|
| - |
| Proceeds from exercise of warrants to purchase common stock |
| 380,800 |
|
| - |
| Proceeds from exercise of stock options |
| 25,610 |
|
| 208,450 |
| Proceeds received on sale of common stock held by ZQX Advisors, LLC |
| 24,138 |
|
| - |
| Net cash provided by financing activities |
| 3 ,245,953 |
|
| 958,450 |
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
| 558,479 |
|
| (434,347) |
| Cash and cash equivalents at beginning of year |
| 339,693 |
|
| 774,040 |
| Cash and cash equivalents at end of year | $ | 898,172 |
| $ | 339,693 |
|
|
|
|
|
|
|
| Reconciliation of net loss to net cash used in operating activities: |
|
|
|
|
|
| Net loss | $ | (10,080,086) |
| $ | (4,252,799) |
| Stock option compensation to employees |
| 2,693,121 |
|
| 614,914 |
| Stock option compensation to consultants |
| 1,105,018 |
|
| 110,351 |
| Common stock issued to employees pursuant to stock incentive plans |
| - |
|
| 927,356 |
| Common stock issued to consultants |
| 304,685 |
|
| 75,932 |
| Common stock issued to acquire patent license |
| 42,000 |
|
| - |
| Common stock issued to pay interest on convertible debentures |
| 98,739 |
|
| - |
| Change in value of derivative liability |
| (475,189) |
|
| - |
| Loss on extinguishment of debt |
| 343,517 |
|
| - |
| Amortization of convertible debenture discount to interest expense |
| 991,180 |
|
| - |
| Impairment in value of investment in Videocon Industries Limited GDR’s |
| 1,184,710 |
|
| - |
| Impairment in value of investment in Volga-Svet Ltd. |
| - |
|
| 127,500 |
| Other |
| 9,753 |
|
| 7,956 |
| Change in operating assets and liabilities: |
|
|
|
|
|
| Accounts receivable |
| (175,000) |
|
| - |
| Prepaid expenses and other current assets |
| (78,320) |
|
| 13,382 |
| Accounts payable and accrued expenses |
| 641,331 |
|
| 174,670 |
| Royalties and contingent legal fees payable |
| 207,743 |
|
| - |
| Deferred revenue |
| - |
|
| (940,010) |
| Net cash used in operating activities | $ | (3,186,798) |
| $ | (3,140,748) |
|
|
|
|
|
|
|
| Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
| Common stock issued upon conversion of debentures | $ | 1,075,000 |
| $ | - |
| Fair value of debenture embedded conversion feature | $ | 1,180,000 |
| $ | - |
| Relative fair value of convertible debenture warrant | $ | 215,819 |
| $ | - |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FUNDING
Description of Business
As used herein, “we,” “us,” “our,” the “Company”, “CopyTele” or “CTI” means CopyTele, Inc. and its wholly-owned subsidiaries. While in the past, the primary operations of the Company involved licensing in connection with the development of patented technologies, our principal operations are now the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company. The Company currently owns or controls 9 patent portfolios. As part of our patent assertion activities and in the ordinary course of our business, the Company has initiated and will likely continue to initiate patent infringement lawsuits, and engage in patent infringement litigation. Since implementing our new business model in January of 2013, the Company has initiated 41 lawsuits in connection with 5 of our patent portfolios. Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits. In fiscal year 2013, we entered into 4 revenue producing licenses from 2 of our patent portfolios. In addition to continuing to mine and monetize our existing patents, our wholly owned subsidiary, CTI Patent Acquisition Corporation, will continue to acquire patents and the exclusive rights to license and enforce patents from third parties.
Due to arrangements previously entered into by the Company, certain of our patents contain encumbrances which may negatively impact our patent monetization and patent assertion activities. Where we are able, we will take the steps necessary to remove any encumbrances that may inhibit our patent monetization and patent assertion activities. We have obtained and will continue to obtain the rights to license and enforce additional patents from third parties, and when necessary, will assist such parties in the further development of their patent portfolios through the filing of additional patent applications.
In April 2013, CopyTele, through its wholly owned subsidiary, CTI Patent Acquisition Corporation, acquired the exclusive rights to license and enforce patent portfolios relating to (i) loyalty awards programs commonly provided by airlines, credit card companies, hotels, retailers, casinos, and others, and (ii) vinyl windows with integrated J-Channels, commonly used in modular buildings, mobile homes, and conventional, new construction. In exchange, the respective licensors will receive a percentage of all net amounts received from the licensing and enforcement of each patent portfolio.
In November 2013, CTI Patent Acquisition Corporation acquired 2 patent portfolios in the rapidly expanding area of unified communications relating to (i) the multicast Internet delivery of streaming data, media, and other content, within the confines of specialized virtual private networks, and (ii) the integration of telephonic participation in web-based audio/video conferences by creating a gateway between the Internet and cellular or traditional landline telephones.
We currently own or control 9 patent portfolios which we have identified for patent monetization: Encrypted Mobile Communication; ePaper® Electrophoretic Display; Internet Telephonic Gateway; J-Channel Window Frame Construction; Key Based Web Conferencing Encryption; Loyalty Conversion Systems; Micro Electro Mechanical Systems Display; Nano Field Emission Display; and VPN Multicast Communications.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 28, 2013, CTI initiated a patent infringement lawsuit in the United States District Court for the Northern District of California against E Ink Corporation (“E INK”), regarding certain patents owned by CTI pertaining to CTI’s ePaper® Electrophoretic Display technology. CTI alleges that E Ink has infringed and continues to infringe such patents in connection with the manufacture, sale, use, and importation of electrophoretic displays. On January 28, 2013, CTI filed a separate lawsuit against AU Optronics Corp. (“AUO”) and E Ink, the AUO/E Ink Lawsuit (as defined below). In June of 2013, CTI and AUO agreed to arbitrate CTI’s charges in the AUO/E Ink Lawsuit. The Court also ordered E Ink to participate in the arbitration, for purposes of discovery. Because issues in the AUO/E Ink arbitration need to be resolved before the patent infringement case can proceed against E Ink, the Court dismissed the patent infringement case, without prejudice, meaning that CTI can re-file the patent infringement lawsuit, if necessary, following the arbitration.
On May 1, 2013, CTI’s wholly owned subsidiary, Secure Web Conference Corporation, initiated a patent infringement lawsuit in the United States District Court for the Eastern District of New York against Microsoft Corporation, with respect to encryption technology utilized by Microsoft’s SKYPE video conferencing service. On July 8, 2013, Secure Web Conference Corporation initiated similar lawsuits in the United States District Court for the Eastern District of New York against Citrix Systems and Logitech International.
On August 7, 2013, CTI’s wholly owned subsidiary, J-Channel Industries Corporation, filed 8 separate patent infringement lawsuits in the United States District Court for the Eastern District of Tennessee, against Lowe’s Companies, Clayton Homes, Pella Corporation, Jeld-Wen, Atrium Windows and Doors, Ply Gem Industries, RGF Industries, Tafco Corporation, Kinro Manufacturing, and Elixir Industries, all in connection with our patented J-Channel Window Frame Construction technology.
On August 20, 2013, CTI’s wholly owned subsidiary, Loyalty Conversion System Corporation, filed 10 separate patent infringement lawsuits in the United States District Court for the Eastern District of Texas, against Alaska Airlines, American Airlines, Delta Airlines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines, United Airlines, and U.S. Airways, all in connection with our Loyalty Conversion Systems patent portfolio.
On October 9, 2013, CTI’s wholly owned subsidiary, J-Channel Industries Corporation, filed 19 patent infringement lawsuits in the Federal District Court for the Eastern District of Tennessee, in connection with its patented J-Channel Window Frame Construction technology. Defendants in the lawsuits consist of retailers and window manufacturers, including: Home Depot U.S.A., Inc.; Anderson Corporation; American Builders & Contractors Supply Co., Inc. (ABC Supply); Comfort View Products, LLC; Croft, LLC; Moss Supply Company; Wincore Window Company LLC; Vinylmax, LLC; Simonton Building Products, Inc.; HWD Acquisition, Inc. (Hurd Windows); Magnolia Windows and Doors, LLC; MGM Industries, Inc., MI Windows and Doors LLC; PGT Industries, Inc.; Quaker Window Products Co.; Sun Windows, Inc.; Weather Shield Manufacturing, Inc.; West Window Corporation; Woodgrain Millwork, Inc.; and YKK-AP American Inc.
The Company has engaged in and will continue to engage in patent infringement lawsuits in the ordinary course of its business operations. All litigation involves a significant degree of uncertainty, and we give no assurances as to the outcome of any lawsuit or lawsuits.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the change in our operations, during fiscal year 2013 we disposed of approximately $2,144,000 of fully depreciated assets, which primarily related to research and development activities, and reduced our employee count from 19 to 7. In addition, we have vacated and returned a substantial portion of our facilities to the landlord for re-letting.
Agreements Relating to Previous Business Operations
AU Optronics Corp.
In May 2011, we entered into an Exclusive License Agreement (the “EPD License Agreement”) and a License Agreement (the “Nano Display License Agreement”) with AUO (together the “AUO License Agreements”). Under the EPD License Agreement, we provided AUO with an exclusive, non-transferable, worldwide license of our ePaper® Electrophoretic Display patents and technology, in connection with AUO jointly developing products with CopyTele. Under the Nano Display License Agreement, we provided AUO with a non-exclusive, non-transferable, worldwide license of our Nano Field Emission Display patents and technology, in connection with AUO jointly developing products with CopyTele.
Under the AUO License Agreements, AUO had agreed to pay CopyTele an aggregate development and license fee of up to $10 million, of which $3 million was paid by AUO in June 2011 and the remaining $7 million would have been payable upon completion of certain conditions for the respective technologies, in each case subject to a 20% foreign withholding tax. Accordingly, in June 2011 we received a payment from AUO, net of the withholding tax, of $2.4 million. In addition, the AUO License Agreements also provided for the basis for royalty payments by AUO to CopyTele.
On January 28, 2013, we terminated the AUO License Agreements due to numerous alleged material and continual breaches of the agreements by AUO. On January 28, 2013, we also filed a lawsuit in the United States District Court for the Northern District of California against AUO and E Ink Corporation (“E Ink”) in connection with the AUO License Agreements, alleging breach of contract and other charges, and we are seeking compensatory, punitive, and treble damages (the “AUO/E Ink Lawsuit”). In June of 2013, CopyTele and AUO agreed to arbitrate CopyTele’s charges, which we believe should result in a faster and more efficient adjudication. The Court also ordered E Ink to participate in the arbitration, for purposes of discovery. For more details on the AUO/E Ink Lawsuit, please see Note 8, “Commitments and Contingences – Litigation Matters” herein. We can give no assurance as to the outcome of this litigation.
Videocon Industries Limited and Transactions with Related Parties
In November 2007, we entered into a license agreement (the “Videocon License agreement”) with Videocon Industries Limited (“Videocon”). Under the agreement, we provided Videocon with a non-transferable, worldwide license of our Nano Field Emission Display patented technology and were scheduled to receive a license fee of $11 million from Videocon, payable in installments over a 27 month period and an agreed upon royalty from Videocon based on display sales by Videocon. As of October 31, 2012, we have received aggregate license fee payments from Videocon of $3.2 million and $7.8 million remains owed to us. No such license fee payments were received from Videocon during the fiscal years ended October 31, 2011 and 2012, and no additional license fee payments are anticipated. We are not presently involved in development efforts with Videocon and it is not anticipated that such efforts will be resumed in the future. We have entered into discussions with Videocon regarding the disposition of the Videocon License Agreement.
F-9
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the same time we entered into the Videocon License Agreement in November 2007, we also entered into a Share Subscription Agreement (the “Share Subscription Agreement”) with Mars Overseas Limited, an affiliate of Videocon (“Mars Overseas”). Under the Share Subscription Agreement, Mars Overseas purchased 20,000,000 unregistered shares of our common stock (the “CopyTele Shares”) from us for an aggregate purchase price of $16,200,000. Also in November 2007, our wholly-owned subsidiary, CopyTele International Ltd. (“CopyTele International”), entered into a GDR Purchase Agreement with Global EPC Ventures Limited (“Global”), for CopyTele International to purchase from Global 1,495,845 global depository receipts of Videocon (the “Videocon GDRs”) for an aggregate purchase price of $16,200,000.
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 the 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 the principal amount of $5,000,000 from CopyTele International to Mars Overseas. The loan payable to Mars Overseas is solely a liability of CopyTele International without recourse to CopyTele, Inc., its parent company. The loans are for a period of seven years, do not bear interest, and provide for customary events of default, which may result in forfeiture of the Securities by the defaulting party, and 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 in respect of the Securities. The loan receivable from Mars Overseas is classified as a contra-equity amount under shareholders’ deficiency in the accompanying consolidated balance sheets because the loan receivable is secured by the CopyTele Shares and the Share Subscription Agreement and Loan and Pledge Agreement were entered into concurrently. We have entered into discussions with Videocon regarding the disposition of the Subscription Agreement, GDR Purchase Agreement, and Loan and Pledge Agreements. The outcome of these discussions and the disposition of the related assets and liabilities may have a material effect on our financial statements. We cannot presently estimate the timing or impact of any such resolution. However, as of October 31, 2013, if Mars Overseas and the Company each defaulted on its $5,000,000 loans that are due in November 2014 and each party foreclosed on the Securities, the fair value of the CopyTele Shares that the Company would acquire approximates the fair value of the Videocon GDRs that it would surrender.
Funding and Management’s Plans
In September 2012, we received aggregate gross proceeds of $750,000 from the issuance of 8% convertible debentures due September 12, 2016 in a private placement. During the second quarter of fiscal 2013, the entire principal amount of these debentures was converted into 8,152,170 shares of common stock. For more details on these debentures, please see Note 6, “Convertible Debentures” herein.
In January 2013, we received aggregate gross proceeds of $1,765,000 from the issuance of 8% convertible debentures due January 25, 2015 in a private placement. During the third quarter of fiscal 2013, $325,000 principal amount of these debentures were converted into 2,166,775 shares of our common stock. For more details on these debentures, please see Note 6, “Convertible Debentures” herein.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 23, 2013, we entered into a common stock purchase agreement (the “Stock Purchase Agreement”) with Aspire Capital Fund LLC (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of $10 million of shares of our common stock over the two-year term of the agreement. In consideration for entering into the Stock Purchase Agreement, concurrently with the execution of the agreement, we issued to Aspire Capital 3,500,000 shares of our common stock with a fair value of $700,000 as a commitment fee. Upon execution of the Stock Purchase Agreement, Aspire Capital purchased 2,500,000 shares for $500,000. In order to sell any additional shares under the Stock Purchase Agreement, we were required to have a registration statement covering the shares issued to Aspire Capital declared effective by the Securities and Exchange Commission (the “SEC”). Such registration statement was declared effective by the SEC in June 2013.
Under the Stock Purchase Agreement there are two ways that we can elect to sell shares of common stock to Aspire Capital. On any business day we can select: (1) through a regular purchase of up to 200,000 shares (but not to exceed $200,000) at a known price based on the market price of our common stock prior to the time of each sale, and (2) through a volume-weighted average price, or VWAP, purchase of a number of shares up to 30% of the volume traded on the purchase date at a price equal to the lesser of (i) the closing sale price on the purchase date or (ii) 95% of the VWAP for such purchase date. The Company can only require a VWAP purchase if the closing sale price for our Common Stock on the notice day for the VWAP purchase is higher than $0.50. During the third and fourth quarters of fiscal year 2013 we sold an additional 2,880,000 shares of our common stock to Aspire Capital for approximately $592,000.
The number of shares covered by and the timing of, each purchase notice are determined by us, at our sole discretion. The Company cannot execute any sales under the Stock Purchase Agreement when the closing price of our common stock is less than $0.15 per share. Aspire Capital has no right to require any sales from us, but is obligated to make purchases as directed in accordance with the Stock Purchase Agreement. The Stock Purchase Agreement may be terminated by us at any time, at our discretion, without any cost or penalty. We incurred expenses of approximately $42,000 in connection with the execution of the Stock Purchase Agreement in addition to the 3,500,000 shares of our common stock we issued as a commitment fee.
On May 29, 2013, the Company offered the holders of the warrants issued in our February 2011 private placement, exercisable at a purchase price of $0.178 per share, the opportunity to exercise the warrants at a reduced exercise price of $0.16 per share (payable in cash) during the period ended July 15, 2013. In connection therewith, our Chairman, our Chief Financial Officer and director, and one other director of the Company exercised warrants to purchase 2,380,000 shares of our Common Stock and we received gross proceeds of approximately $381,000. Utilizing the Black-Scholes option-pricing model, the Company determined that the aggregate incremental fair value of the repriced warrants was immaterial and no charge was recorded. In addition, we issued 547,493 shares of our common stock upon the exercise, on a “cashless” basis, of warrants to purchase 1,400,000 shares at a purchase price of $0.178 per share.
In November 2013, we received aggregate gross proceeds of $3,500,000 from the issuance of a 6% convertible debenture due November 11, 2016 in a private placement, to a single institutional investor. The debenture pays interest quarterly and is convertible into shares of our common stock at a conversion price of $0.1892 per share on or before November 11, 2016. In conjunction with the issuance of the debenture, we issued a warrant to purchase 9,249,472 unregistered shares of our common stock. The warrant grants the holder the right to purchase one share of our common stock at the purchase price of $0.3784 per share on or before November 11, 2016. The debenture contains a beneficial conversion feature and a down round provision which we will evaluate in the first quarter of fiscal year 2014.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 2013, cash used in operating activities was approximately $3,187,000. This resulted from payments to suppliers, employees and consultants of approximately $3,402,000, which was offset by cash of approximately $214,000 received from collections of accounts receivable related to patent licensing and enforcement, and approximately $1,000 of interest income received. Cash provided from investing activities during fiscal year 2013 was approximately $499,000, which primarily resulted from net proceeds from the maturities of short-term investments consisting of certificates of deposit of approximately $500,000. Our cash provided by financing activities during fiscal year 2013 was approximately $3,246,000, which resulted from cash of $1,765,000 received from the sale of convertible debentures in a private placement and approximately $1,050,000, net of expenses, received upon the sale of common stock, cash received from the exercise of warrants issued in February 2011 of approximately $381,000, proceeds received from ZQX Advisors, LLC (“ZQX”) ( in which CopyTele has a 19.5% ownership interest) from the sale by ZQX of CopyTele common stock held by ZQX of approximately $24,000 and cash received upon the exercise of employee stock options of approximately $26,000. As a result, our cash, cash equivalents, and short-term investments at October 31, 2013 increased $58,000 to approximately $898,000 from approximately $840,000 at the end of fiscal year 2012.
Total employee compensation expense during fiscal years 2013 and 2012 was approximately $4,072,000 and $3,001,000, respectively, including in fiscal year 2012 approximately $74,000 of expense relating to severance payments to terminated employees. During fiscal year 2013 and 2012, a significant portion of employee compensation consisted of the issuance of stock and stock options to employees in lieu of cash compensation. During the fourth quarter of fiscal 2012, management discontinued compensating employees through the issuance of stock. We recorded compensation expense for the fiscal years ended October 31, 2013 and 2012 of approximately $-0- and $927,000, respectively, for shares of common stock issued to employees. We recorded approximately $2,693,000 and $615,000 of stock-based compensation expense, related to stock options granted to employees and directors, during the fiscal years ended October 31, 2013 and 2012, respectively.
Based on currently available information, we believe that our existing cash and cash equivalents, together with expected cash flows from the Stock Purchase Agreement with Aspire Capital and expected cash flows from patent licensing and enforcement, and other potential sources of cash flows will be sufficient to enable us to continue our patent licensing and enforcement activities for at least 12 months. However, our projections of future cash needs and cash flows may differ from actual results. If current cash on hand and cash that may be generated from the Stock Purchase Agreement and from patent licensing and enforcement activities are insufficient to satisfy our liquidity requirements, we may seek to sell equity securities or obtain loans from various financial institutions where possible. The sale of additional equity securities or convertible debt could result in dilution to our shareholders. We can give no assurance that we will generate sufficient cash flows in the future (through licensing and enforcement of patents, or otherwise) to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available, if needed, on favorable terms or at all. We can also give no assurance that we will have sufficient funds to repay our outstanding indebtedness. If we cannot obtain such funding if needed or if we cannot sufficiently reduce operating expenses, we would need to curtail or cease some or all of our operations.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of CopyTele, Inc. and its wholly owned subsidiaries. All intercompany transactions have been eliminated.
Revenue Recognition
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.
Patent Monetization and Patent Assertion
In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted are perpetual in nature, extending until the expiration of the related patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably assured, and when all other revenue recognition criteria have been met.
Display Technology Development and License Fees
We have assessed the revenue guidance of Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” (“ASC 605-25”) to determine whether multiple deliverables in our arrangements with AUO represent separate units of accounting. Under the AUO License Agreements, we received initial development and license fees of $3 million, of aggregate development and license fees of up to $10 million. The additional $7 million in development and license fees were payable upon completion of certain conditions for the respective technologies. We have determined that the transfer of the licensed patents and technology and the effort involved in completion of the conditions for the respective technologies represent a single unit of accounting for each technology. Accordingly, using a proportional performance method, during the third quarter of fiscal year 2011 we began recognizing the $3 million initial development and license fees over the estimated periods that we expected to complete the conditions for the respective technologies. We have not recognized any portion of the $7 million of additional development and license fees as either deferred revenue or revenue as it is considered contingent revenue. The AUO License Agreements also provided for the basis for royalty payments on future production, if any, by AUO to CopyTele, which we have determined represent separate units of accounting. We have not recognized any royalty income under the AUO License Agreements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to initiation of the AUO/E Ink Lawsuit, at each reporting period we assessed the progress in completing our performance obligations under the AUO License Agreements and recognized development and license fee revenue over the remaining estimated period that we expected to complete the conditions for the respective technologies. Commencing in the fourth quarter of fiscal year 2012, revenue recognition under the AUO License Agreements was suspended pending resolution of the AUO/E Ink Lawsuit. For more details on the AUO/E Ink Lawsuit, please see Note 8, “Commitments and Contingencies – Litigation Matters” herein.
During the fiscal years ended October 31, 2013 and 2012, we recognized approximately $-0- and $940,000, respectively, of development and license fee revenue from AUO. Development and license fee payments received from AUO which are in excess of the amounts recognized as revenue (approximately $1,187,000 as of October 31, 2013 and 2012) are recorded as non-refundable deferred revenue on the accompanying consolidated balance sheets.
Inventor Royalties and Contingent Legal Fees
Inventor royalties and contingent legal fees are expensed in the consolidated statements of operations in the period that the related revenues are recognized.
Fair Value Measurements
ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. In accordance with ASC 820, we have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. 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 and liabilities recorded in the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 - Financial instruments 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.
Level 2 - Financial instruments 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.
Level 3 – Financial instruments 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 instrument.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2013:
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
|
|
|
|
|
|
|
| ||||
| Money market funds – Cash and cash equivalents | $ | 898,172 |
| $ | - |
| $ | - |
| $ | 898,172 |
| Videocon Industries Limited global depository receipts |
| 4,197,341 |
|
| - |
|
| - |
|
| 4,197,341 |
| Total financial assets | $ | 5,095,513 |
| $ | - |
| $ | - |
| $ | 5,095,513 |
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2012:
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
|
|
|
|
|
|
|
|
| |||
| Money market funds – Cash and cash equivalents | $ | 339,693 |
| $ | - |
| $ | - |
| $ | 339,693 |
| Certificates of deposit– Short-term investments |
| 500,000 |
|
| - |
|
| - |
|
| 500,000 |
| Videocon Industries Limited global depository receipts |
| 4,728,367 |
|
| - |
|
| - |
|
| 4,728,367 |
| Total financial assets | $ | 5,568,060 |
| $ | - |
| $ | - |
| $ | 5,568,060 |
We did not have any financial liabilities that were required to be measured at fair value on a recurring basis as of October 31, 2012. The following table presents the hierarchy for our financial liabilities measured at fair value on a recurring basis as of October 31, 2013:
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative liability | $ | - |
| $ | - |
| $ | 540,000 |
| $ | 540,000 |
F-15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
|
| For the Year Ending October 31, 2013 | |
|
|
|
|
| Beginning balance | $ | - |
| Fair value of bifurcated conversion feature issued |
| 1,180,000 |
| Change in fair value of bifurcated conversion feature |
| (475,189) |
| Reduction in value of bifurcated conversion feature upon Conversion of debenture |
| (164,811) |
| Ending balance | $ | 540,000 |
The bifurcated conversion feature is accounted for as a derivative liability and is measured at fair value using a Monte Carlo simulation model and is classified within Level 3 of the valuation hierarchy.
The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the Company’s derivative financial instrument are discussed in Note 6, “Convertible Debentures”. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Principal Financial Officer with support from the Company’s consultants.
In accordance with the provisions of ASC 815, the Company presents the bifurcated conversion feature liability at fair value in its consolidated balance sheet, with the corresponding changes in fair value, if any, recorded in the Company’s consolidated statements of operations for the applicable reporting periods. As disclosed in Note 6, the Company computed the fair value of the derivative liability at the date of issuance and the reporting date of October 31, 2013 using the Monte Carlo simulation model.
The Company developed the assumptions that were used as follows: The stock price on the valuation date of the Company’s common stock was derived from the trading history of the Company’s common stock. The stock premium for liquidity was computed as the premium required to adjust for the effect of the additional time that it would be expected to take for the market to absorb the converted shares and warrant exercises, given the Company’s current trading volume. The term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s historical volatility; the risk free interest rate was obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future.
Our non-financial assets that are measured on a non-recurring basis include our property and equipment which are measured using fair value techniques whenever events or changes in circumstances indicate a condition of impairment exists. The estimated fair value of accounts payable and accrued expenses approximates their individual carrying amounts due to the short term nature of these measurements. It is impractical to determine the fair value of the loan receivable and loan payable to the related party given the nature of these loans. The convertible debentures have been reported net of the discount for the beneficial conversion features and related warrants. Cash and cash equivalents are stated at carrying value which approximates fair value.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash equivalents consists of highly liquid, short term investments with original maturities of three months or less when purchased.
Short-term Investments
At October 31, 2013, we did not have any short-term investments. At October 31, 2012, we had certificates of deposit with maturities greater than 90 days when acquired of $500,000 that were classified as short-term investments and reported at fair value.
We classify our investment securities as available-for-sale. 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. 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. In evaluating our investment in Videocon GDRs at October 31, 2013, we determined that, based on both the duration and the continuing magnitude of the market price decline, there was an other than temporary impairment in our investment in Videocon GDRs. In evaluating our investment in Volga-Svet Ltd. (“Volga”) at October 31, 2013, we determined that, the discontinuation of funding from CopyTele for contract research and development work and the lack of available financial information from Volga, impaired the value of our investment in Volga. We will record an additional impairment charge if and when we believe any such investments have experienced an additional decline that is other than temporary. See Note 4 for further discussion.
Convertible Instruments
The Company accounts for hybrid contracts that feature conversion options in accordance with applicable generally accepted accounting principles (“GAAP”). ASC 815 “Derivatives and Hedging Activities,” (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
F-17
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.
The Company accounts for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”). Under ASC 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
The conversion feature of the convertible debenture issued on January 25, 2013 qualified as an embedded derivative instrument and was bifurcated from the host convertible debenture. Accordingly, this instrument has been classified as a derivative liability in the accompanying consolidated balance sheet as of October 31, 2013. Derivative liabilities are initially recorded at fair value and are then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period.
Common Stock Purchase Warrants
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 "Contracts in Entity's Own Equity". The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
Research and Development Expenses
Research and development expenses are expensed in the period incurred. We discontinued all research and development activity during the fourth quarter of fiscal year 2012.
Income Taxes
We recognize deferred tax assets and liabilities for the estimated future tax effects of events that have been recognized in our financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
During the fourth quarter of fiscal year 2012, the Company decreased the option price for options to purchase 1,840,000 shares from the original exercise price to $0.145 per share for eleven individuals and recorded stock-based compensation expense related to this re-pricing of approximately $85,000. Such compensation expense is included in the accompanying statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such employees and directors.
We account for stock options granted to employees and directors using the accounting guidance in ASC 718 “Stock Compensation” (“ASC 718”). In accordance with ASC 718, we estimate the fair value of service based options and performance based options on the date of grant, using the Black-Scholes pricing model. For options vesting if the trading price of the Company’s common stock exceeds two separate price targets we use a Monte Carlo Simulation in estimating the fair value at grant date. We recognize compensation expense for stock option awards over the requisite or implied service period of the grant. With respect to performance based awards, compensation expense is recognized when the performance target is deemed probable. We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $2,693,000 and $615,000, during the twelve months ended October 31, 2013 and 2012, respectively.
Included in stock-based compensation cost for employees and directors during the twelve months ended October 31, 2013 and 2012 was approximately $2,314,000 and $7,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but not yet vested. As of October 31, 2013, there was unrecognized compensation cost related to non-vested share-based compensation arrangements for stock options granted to employees and directors, related to service based options of approximately $1,705,000 which will be recognized over a weighted-average period of 1.8 years and related to options subject to market conditions of approximately $647,000 which will be recognized over a weighted-average period of 1.0 year.
We account for stock options granted to consultants using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). In accordance with ASC 505-50, we estimate the fair value of service based options and performance based options at each reporting period using the Black-Scholes pricing model. For options vesting if the trading price of the Company’s common stock exceeds two separate price targets, we estimate the fair value at each reporting period using a Monte Carlo Simulation. We recognize compensation expense for service based options and options vesting if the trading price of the Company’s common stock exceeds two separate price targets, over the requisite or implied service period of the grant. For performance based options we recognize compensation expense upon achievement of performance. We recorded stock-based compensation expense for stock options granted to consultants during the years ended October 31, 2013 and 2012 of approximately $1,105,000 and $110,000, respectively.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in stock-based compensation cost for consultants during the twelve months ended October 31, 2013 and 2012 was approximately $1,105,000 and $7,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but not yet vested. As of October 31, 2013, there was unrecognized consulting expense related to non-vested share-based compensation arrangements for stock options granted to consultants, related to service based options of approximately $849,000 which will be recognized over a weighted-average period of 1.9 years and related to options subject to market conditions of approximately $522,000 which will be recognized over a weighted-average period of 2.3 years
Fair Value Determination
In September 2012 we instituted changes to our operations as more fully described in Note 1. Prior to that date we separated the individuals we granted 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 took a weighted average of the assumptions used for each of these groups. Subsequent to that date individuals are included in a single group. The fair value of stock options granted to consultants is determined on an individual basis. The stock options we granted during the year ended October 31, 2013 consisted of awards of options with 5-year terms, which vest over one year and options with 10-year terms which vest in three annual installments commencing on the date of grant or over a nine month period. The stock options we granted during the year ended October 31, 2012 consisted of awards of options with either 5-year terms, which vest over one year or 10-year terms which vested immediately, over periods up to three years or upon achievement of a cash milestone or stock price targets.
The following weighted average assumptions were used in estimating the fair value of stock options granted during the years ended October 31, 2013 and 2012.
|
| For the Year Ended October 31, | ||||
|
| 2013 |
| 2012 | ||
| Weighted average fair value at grant date | $ | 0.17 |
| $ | 0.18 |
| Valuation assumptions: |
|
|
|
|
|
| Expected life ( years) |
| 5.26 |
|
| 5.75 |
| Expected volatility |
| 116.50% |
|
| 109% |
| Risk-free interest rate |
| .73% |
|
| 1.16% |
| Expected dividend yield |
| 0 |
|
| 0 |
We use the Black-Scholes pricing model in estimating the fair value of stock options which vest over a specific period of time or upon achieving performance targets. The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. For options granted prior to the change in our operations in September 2012, actual historical performance was used for awards exercised or cancelled. For awards that remained unexercised and outstanding, even exercise over the remaining contractual term was assumed. Each category was weighted for its relative size in the population and was then multiplied by the indicated expected term for each category to arrive at the expected term for the population. For options granted subsequent to the changes in our operations during the fourth quarter of fiscal 2012, we used the simplified method to determine expected term. The simplified method was adopted since we do not believe that historical experience is representative of future performance because of the impact of the changes in our operations and the change in terms from historical options which vested immediately to terms including vesting periods of up to three years.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Black-Scholes pricing model 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 term of the options. We estimated the risk-free interest rate based on the implied yield available on the applicable grant date of a U.S. Treasury note with a term equal to the expected term of the underlying grants. We made the dividend yield assumption based on our history of not paying dividends and our expectation not to pay dividends in the future.
For options vesting if the trading price of the Company’s common stock exceeds two separate price targets we used a Monte Carlo Simulation in estimating the fair value.
Under ASC 718, the amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. Accordingly, if deemed necessary, we reduce the fair value of the stock option awards for expected forfeitures, which are forfeitures of the unvested portion of surrendered options. Based on our historical experience we have not reduced the amount of stock-based compensation expenses for anticipated forfeitures.
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. If factors change and we employ different assumptions in the application of ASC 718 in future periods, the compensation expense that we record under ASC 718 may differ significantly from what we have recorded in the current period.
Net Loss Per Share of Common Stock
In accordance with ASC 260, “Earnings Per Share”, basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding. Diluted EPS for all years 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 years ended October 31, 2013 and 2012, were options to purchase 63,122,845 shares and 60,670,045 shares, respectively, warrants to purchase 9,878,759 shares and 7,500,000 shares, respectively, and debentures convertible into 9,60,4820 shares and 8,152,170 shares respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are used for, but not limited to, determining stock-based compensation, asset impairment evaluations, tax assets and liabilities, license fee revenue, the allowance for doubtful accounts, depreciation lives and other contingencies. Actual results could differ from those estimates.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effect of Recently Issued Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-12 (“ASU 2011-12”), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This amendment defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. ASU 2011-12 is effective at the same time as Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that this ASU 2011-12 is deferring. ASUs 2011-12 and 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASUs 2011-05 and 2011-12 on November 1, 2012. The adoption of these new disclosure requirements did not have a material impact on our disclosures or consolidated financial statements.
In October 2012, the FASB issued Accounting Standards Update 2012-04 (“ASU 2012-04”), Technical Corrections and Improvements. The amendments in this update cover a wide range of topics and include technical corrections and improvements to the Accounting Standards Codification. The amendments in ASU 2012-04 will be effective for interim and annual reporting periods beginning after December 15, 2012. The Company adopted ASU 2012-04 on February 1, 2013.The adoption of ASU 2012-04 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In October 2012, the FASB issued Accounting Standards Update 2012-03 (“ASU 2012-03”), Technical Amendments and Corrections to SEC Sections. ASU 2012-03 is issued to amend certain SEC paragraphs in the FASB Accounting Standards Codification, including Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin, Technical Amendments, and Corrections Related to FASB Accounting Codification. The amendments in ASU 2012-03 will be effective for interim and annual reporting periods beginning after December 15, 2012. The Company adopted ASU 2012-03 on February 1, 2013. The adoption of ASU 2012-03 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit risk consist principally of accounts receivable.Management reviews our accounts receivable and other receivables for potential doubtful accounts and maintains an allowance for estimated uncollectible amounts. Our policy is to write-off uncollectable amounts at the time it is determined that collection will not occur. One licensee accounted for 90% of revenue during fiscal year 2013 and 100% of accounts receivable at October 31, 2013. During fiscal year 2012, one licensee accounted for 100% of revenue.
F-22
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
Short-term Investments
At October 31, 2013 we had $-0- of certificates of deposits. At October 31, 2012 we had of certificates of deposit of $500,000.
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 component of accumulated other comprehensive income (loss) in shareholders’ equity. The original cost basis of $16,200,000 was 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.
ASC 320 “Investments-Debt and Equity Securities” (“ASC 320”) and SEC guidance on other than temporary impairments of certain investments in 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 carrying cost of the investment, an other than temporary impairment should be recorded. At each reporting period we assess our investment in Videocon to determine if a decline that is other than temporary has occurred. In evaluating our investment in Videocon at October 31, 2013, we determined that based on both the duration and the continuing magnitude of the market price decline compared to the carrying cost basis of approximately $5,382,000, and the uncertainty of its recovery, a write-down of the investment of approximately $1,185,000 should be recorded as of October 31, 2013, and a new cost basis of approximately $4,197,000 should be established. An other than temporary impairment of approximately $12,003,000, on a cumulative basis, has been recorded as of October 31, 2013. The fair value of investment in Videocon as of October 31, 2013 and 2012, the other than temporary impairment for the year ended October 31, 2013, and unrealized loss as of October 31, 2012, are as follows:
|
| Investment in Videocon | |
|
|
|
|
| Fair Value as of October 31, 2011 | $ | 5,382,051 |
| Unrealized loss |
| (653,684) |
| Fair Value as of October 31, 2012 | $ | 4,728,367 |
| Reversal of unrealized loss as of October 31, 2012 |
| 653,684 |
| Other than temporary impairment |
| (1,184,710) |
| Fair Value as of October 31, 2013 | $ | 4,197,341 |
Investment in and Related Party Transactions with Volga-Svet, Ltd
In September 2009, we entered into the Volga License Agreement to produce and market our thin, flat, low voltage phosphor displays in Russia. In addition, in September 2009, we acquired a 19.9% ownership interest in Volga in exchange for 150,000 unregistered shares of our common stock. As we do not believe that we can exercise significant influence over Volga, our investment in Volga as of October 31, 2011 was recorded at cost of approximately $128,000 based on the closing price of our common stock at the time of the acquisition. During fiscal 2012, we discontinued utilizing Volga for contract research and development work. In evaluating our investment in Volga at October 31, 2012, we determined that the discontinuation of funding by CopyTele and the lack of available financial information from Volga has impaired the value of our investment in Volga and accordingly, a write-off of our investment of approximately $128,000 was recorded as of October 31, 2012.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and development expenses in the accompanying consolidated statements of operations include payments to Volga for the year ended October 31, 2012 of approximately $326,000.
Investment in ZQX Advisors, LLC
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. Concurrently with entering into the Engagement Agreement, we acquired a 19.5% ownership interest in ZQX. On January 21, 2013, we terminated the Engagement Agreement with ZQX, but currently retain our 19.5% interest in ZQX. We have classified our interest in ZQX of approximately $48,000 as a reduction of additional paid-in capital within shareholders’ deficiency since this investment in ZQX consists entirely of our equity securities. During the year ended October 31, 2013, we received approximately $24,000 representing our share of the proceeds from the sale of CopyTele common stock by ZQX.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following as of:
|
| October 31, | ||||
|
| 2013 |
| 2012 | ||
| Accounts payable | $ | 527,208 |
| $ | 304,523 |
| Payroll and related expenses |
| 345,484 |
|
| 103,451 |
| Accrued litigation expense, consulting and other professional fees |
| 248,730 |
|
| 177,408 |
| Accrued other |
| 155,048 |
|
| 49,757 |
|
| $ | 1,276,470 |
| $ | 635,139 |
6. CONVERTIBLE DEBENTURES
Convertible Debenture due September 2016
In September 2012, the Company received aggregate gross proceeds of $750,000 from the issuance of 8% convertible debentures due September 12, 2016 in a private placement, of which $300,000 was sold to the Company’s current Chairman and then Chief Executive Officer and one other director of the Company. The debentures paid interest quarterly and were convertible into shares of our common stock at a conversion price of $0.092 per share on or before September 12, 2016. The Company recorded a discount to the carrying amount of the debentures of approximately $717,000 related to the debentures’ beneficial conversion feature. The Company was permitted to prepay the debentures at any time without penalty upon 30 days prior notice. The Company also had the option to pay interest on the debentures in common stock. During the second quarter of fiscal 2013, the entire $750,000 principal amount of these debentures were converted into 8,152,170 shares of common stock and an additional 100,725 shares were issued in payment of approximately $9,300 of accrued interest through the conversion date. The conversion of the debentures resulted in a charge to interest expense of approximately $717,000 during the second quarter of fiscal 2013.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Debenture due January 2015
In January 2013, the Company received aggregate gross proceeds of $1,765,000 from the issuance of 8% convertible debentures due January 25, 2015 (“Convertible Debenture due January 2015”), of which $250,000 was received from our current President, Chief Executive Officer and director, and two other directors of the Company. The debentures pay interest quarterly and are convertible into shares of our common stock at a conversion price of $0.15 per share on or before January 25, 2015. The embedded conversion feature has certain weighted average anti-dilution protection provisions which would be triggered if the Company issues its common stock, or certain common stock equivalents, (as defined) at a price below $0.15 per share. The Company has the option to pay any interest on the debentures in common stock based on the average of the closing prices of our common stock for the 10 trading days immediately preceding the interest payment date. The Company also has the option to pay any interest on the debentures with additional debentures. The Company may prepay the debentures at any time without penalty upon 30 days prior notice but only if the sales price of the common stock is at least $.30 for 20 trading days in any 30-day trading period ending no more than 15 days before the Company’s prepayment notice. In conjunction with the issuance of the debentures, the Company issued warrants (the “Convertible Debenture Warrant”) to purchase 5,882,745 shares of its common stock. Each warrant grants the holder the right to purchase one share of the Company’s common stock at the purchase price of $0.30 per share on or before January 25, 2016. The Convertible Debenture Warrant may be exercised on a cashless basis only if there is not an effective registration statement covering such shares.
The Company determined, based upon authoritative guidance, that the conversion feature embedded within the Convertible Debenture due January 2015 should be valued separately and bifurcated from the host instrument and accounted for as a free-standing derivative liability and that the Convertible Debenture Warrant should also be valued and accounted for separately as an equity instrument.
The Company determined the fair value of each of the three elements included within the Convertible Debenture due January 2015. The debenture portion (without the conversion feature) bearing interest at 8% was determined to be a debt instrument with a fair value of $1,490,000. The embedded conversion feature was determined to be a derivative liability with a fair value of $1,180,000. The Convertible Debenture Warrant was determined to be an equity instrument with a fair value of $370,000. The Company determined the fair value of each of these instruments based upon the assumptions and methodologies as discussed below.
Since the Convertible Debenture Warrant was determined to be an equity instrument, the Company first computed the relative fair value of the Convertible Debenture due January 2015 (including the value of its conversion feature) with a fair value of $2,670,000 and the Convertible Debenture Warrant with a fair value of $370,000. Accordingly, the relative fair value of the Convertible Debenture Warrant and the Convertible Debenture due January 2015 (including the value of its conversion feature) was determined to be $214,819 and $1,550,181, respectively. Then, from the relative fair value of the Convertible Debenture due January 2015, the Company deducted in full the fair value of the embedded conversion feature of $1,180,000. The discount of $1,394,819 applied to the face value of the Convertible Debenture due January 2015 consists of the sum of the relative fair value of the Convertible Debenture Warrant of $214,819 and the full value of the bifurcated conversion option derivative liability of $1,180,000. The Convertible Debenture due January 2015 was recorded at a net value of $370,181, representing its face value of $1,765,000, less aggregate discounts for the derivative liability and warrant of $1,394,819, as summarized in the table below.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
| |
|
|
|
| $ | 1,765,000 | |
| Face value of Convertible Debenture due January 2015 |
|
|
|
| |
| Fair value of embedded conversion feature | $ | 1,180,000 |
|
| |
| Relative fair value of Convertible Debenture Warrant |
| 214,819 |
|
| |
| Discount | $ | 1,394,819 |
| (1,394,819) | |
| Proceeds attributable to the Convertible Debenture due January 2015 |
|
| $ | 370,181 |
Accordingly, the Company accounted for the full amount of the discount as an offset to the Convertible Debenture due January 2015, amortizable under the effective interest method over the term of the debenture.
The Company calculated the fair value of the embedded conversion feature of the Convertible Debenture due January 2015 using a Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels of trading and liquidity of the Company stock, probability of default of the host instrument, and loss severity in the event of such default. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement.
|
| As of January 25, 2013 | |
|
| ||
| Stock price on valuation date | $ | 0.21 |
| Conversion price | $ | 0.15 |
| Stock premium for liquidity |
| 57% |
| Term (years) |
| 2.00 |
| Expected volatility |
| 110% |
| Weighted average risk-free interest rate |
| 0.3% |
| Trials |
| 100,000 |
| Aggregate fair value | $ | 1,180,000 |
|
|
|
|
The Company calculated the fair value of the Convertible Debenture Warrant issued on January 25, 2013 using the Black-Scholes option pricing model with the following assumptions:
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| As of January 25, 2013 | |
|
| ||
| Stock price on valuation date | $ | 0.21 |
| Exercise price | $ | 0.30 |
| Stock premium for liquidity |
| 38% |
| Term (years) |
| 3.00 |
| Warrant exercise trigger price |
| 41% |
| Expected volatility |
| 95% |
| Weighted average risk-free interest rate |
| 0.4% |
| Number of warrants |
| 5,882,745 |
| Aggregate fair value | $ | 370,000 |
|
|
|
|
The Company determined the fair value of the Convertible Debenture due January 2015 by preparing an analysis of discounted cash flows, using a discount rate of 18.6%, which the Company deemed appropriate given the Company’s current risk scenarios.
The derivative liability related to the embedded conversion feature is revalued at each reporting period as well as on the date of all conversions, as discussed, below. As of October 31, 2013, the Company determined the fair value of the derivative liability to be $540,000, and accordingly, during the year ended October 31, 2013, the Company recorded a gain on the change in the fair value of the derivative liability of approximately $475,000.
As of October 31, 2013, the Company calculated the fair value of the embedded conversion feature of the Convertible Debenture due January 2015 using a Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels of trading and liquidity of the Company stock, probability of default of the host instrument, and loss severity in the event of such default. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement.
|
| As of October 25, 2013 | |
|
| ||
| Stock price on valuation date | $ | 0.195 |
| Conversion price | 0.15 | |
| Stock premium for liquidity | 42% | |
| Term (years) | 1.25 | |
| Expected volatility | 115% | |
| Weighted average risk-free interest rate | 0.3% | |
| Trials | 100,000 | |
| Aggregate fair value | $ | 540,000 |
|
|
| |
The amortization of debt discount related to the Convertible Debenture due January 2015 was approximately $273,000 for the year ended October 31, 2013.
During the year ended October 31, 2013, holders of $325,000 and $5,878 of principal and interest, respectively, of the Convertible Debenture due January 2015, converted their holdings into an aggregate of 2,166,775 and 20,125 shares of Common Stock. In connection with this conversion, the Company recorded a loss on extinguishment of debt in the amount of $343,517. This loss represents the excess of the fair value of Common Stock on the date of conversion over the net book value of the debt on the date of conversion. Since the conversion feature on the Convertible Debenture due January 2015 was determined to be a derivative liability, the net book value includes both the value of the debt, net of discount, and the portion of the derivative liability related to its conversion feature.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loss on extinguishment of debt was calculated as follows:
|
| Year Ended October 31, 2013 | |
|
| ||
|
|
|
|
| Face value of debt converted | $ | 325,000 |
| Less: discount |
| (229,964) |
| Plus: value of derivative liability |
| 164,811 |
| Net book value of debt converted | $ | 259,847 |
| Fair value of common stock issued |
| 603,364 |
| Loss on extinguishment of debt | $ | 343,517 |
In connection with the issuance of the Convertible Debenture due January 2015, the Company provided compensation to the placement agent consisting of a cash fee of $41,400 and a warrant for the purchase of 276,014 shares of the Company’s common stock (“Placement Agent Warrant”). The terms of the Placement Agent Warrant are identical to the terms of the Convertible Debenture Warrant, and using Black-Scholes, upon issuance, was determined to have a fair value of $17,360. Assumptions for the valuation of the Placement Agent Warrant were identical to those provided above for the Convertible Debenture Warrant. In addition, issuance costs included legal fees of approximately $25,000.
The sum of the issuance costs was $83,760, and this cost was allocated as provided below:
| Attributable to: |
| Accounting Treatment |
| Amount | |
|
|
|
|
|
|
|
| The embedded conversion feature (derivative) |
| Expensed as incurred |
| $ | 55,999 |
| The 8% Convertible Debenture Warrant |
| Charged to additional paid-in capital |
|
| 10,194 |
|
|
|
|
|
|
|
| The 8% Convertible Debenture |
| Recorded as deferred issuance costs and amortized under the interest method over the term of the 8% Convertible Debenture |
|
| 17,567 |
| Total |
|
|
| $ | 83,760 |
In connection with the issuance of the Convertible Debenture due January 2015, on April 24, 2013, the Company prepared and filed a registration statement registering for resale the shares of its common stock which may be issued upon the conversion of the debenture consistent with the terms and conditions of the registration rights agreement the Company entered into with the holders of the registrable shares listed above. The registration statement was declared effective by the SEC on June 19, 2013.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has agreed to maintain the effectiveness of the registration statement through the earlier of three years from the date of the issuance of the Convertible Debenture due January 2015 or until Rule 144 of the Securities Act is available to the holders to allow them to sell all of their registrable securities thereunder.
7. SHAREHOLDERS’ EQUITY
In November 2012, our shareholders approved an amendment to our certificate of incorporation to increase the authorized number of shares of common stock from 240,000,000 to 300,000,000, and in October 2013, our shareholders approved an amendment to our certificate of incorporation to increase the authorized number of shares of common stock from 300,000,000 to 600,000,000.
Common Stock Issuances
We account for stock awards granted to employees and consultants based on their grant date fair value. During the years ended October 31, 2013 and 2012, we issued -0- shares and 7,100,818 shares, respectively, of common stock to certain employees for services rendered, principally in lieu of cash compensation, pursuant to the CopyTele, Inc. 2003 Share Incentive Plan (the “2003 Share Plan”) and the CopyTele, Inc. 2010 Share Incentive Plan (the “2010 Share Plan”). We recorded compensation expense for the years ended October 31, 2013 and 2012 of approximately $-0- and $927,000, respectively, for shares of common stock issued to employees. In addition during fiscal years 2013 and 2012, we issued 1,345,000 shares and 457,172 shares, respectively, of common stock to consultants for services rendered, including -0- shares and 457,172 shares pursuant to the 2003 Share Plan and 2010 Share Plan. We recorded consulting expense for the years ended October 31, 2013 and 2012 of approximately $305,000 and $76,000, respectively, for shares of common stock issued to consultants.
Preferred Stock
In May 1986, our shareholders authorized 500,000 shares of preferred stock with a par value of $100 per share. The shares of preferred stock may be issued in series at the direction of the Board of Directors, and the relative rights, preferences and limitations of such shares will all be determined by the Board of Directors. As of October 31, 2013 and 2012, there was no preferred stock issued and outstanding.
Stock Option Plans
As of October 31, 2013, we have two stock option plans: the 2003 Share Plan and the 2010 Share Plan which were adopted by our Board of Directors on April 21, 2003 and July 14, 2010, respectively.
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. The maximum number of shares of common stock available for issuance under the 2003 Share Plan is 70,000,000 shares. The 2003 Share Plan was administered by the Stock Option Committee through June 2004, from June 2004 through July 2010, by the Board of Directors, from July 2010 through August 2012, by the Stock Option Committee, from August 2012 through November 2012, by the Executive Committee of the Board of Directors and since November 2012, by the Board of Directors, which determines the option price, term and provisions of each option. The exercise price with respect to all of the options granted under the 2003 Share Plan since its inception was equal to the fair market value of the underlying common stock at the grant date. In accordance with the provisions of the 2003 Share Plan, the plan terminated with respect to the grant of future options on April 21, 2013.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the 2003 Share Plan for the two years ended October 31, 2013 is as follows:
|
|
|
| Current Weighted Average Exercise Price Per Share |
|
|
|
|
|
|
| Aggregate Intrinsic Value | |
|
| Shares |
|
| ||
|
|
|
|
|
|
|
| Options Outstanding at October 31, 2011 | 17,552,045 |
| $0.81 |
|
|
| Granted | 60,000 |
| $0.07 |
|
|
| Forfeited | (195,000) |
| $0.89 |
|
|
| Cancelled | (1,067,000) |
| $0.86 |
|
|
| Options Outstanding and Exercisable at October 31, 2012 | 16,350,045 |
| $0.72 |
|
|
| Exercised | (130,000) |
| $0.18 |
|
|
| Forfeited | (581,200) |
| $0.74 |
|
|
| Options Outstanding and Exercisable at October 31, 2013 | 15,638,845 |
| $0.72 |
| $95,000 |
The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of October 31, 2013:
| Range of Exercise Prices |
| Number Outstanding |
| Weighted Average Remaining Contractual Life |
| Weighted Average Exercise Price |
|
|
|
| ||||
|
|
|
|
|
|
|
|
| $0.072- $0.37 |
| 1,860,000 |
| 3.20 |
| $0.15 |
| $0.43 - $0.70 |
| 5,384,770 |
| 1.95 |
| $0.60 |
| $0.74 - $0.92 |
| 6,139,075 |
| 2.81 |
| $0.85 |
| $1.04 - $1.46 |
| 2,255,000 |
| 2.24 |
| $1.10 |
During the fourth quarter of fiscal 2012 the Company decreased the option price for options to purchased 1,840,000 shares from the original exercise price to $0.145 per share for eleven employees and recorded stock-based compensation expense related to this re-pricing of approximately $85,000. Such compensation expense is included in the accompanying statements of operations in either research and development expenses or selling, general and administrative expenses, as applicable based on the functions performed by such employees and directors.
F-30
|
|
|
| Weighted Average Exercise Price Per Share |
| Aggregate Intrinsic Value |
|
| Shares |
|
| ||
|
|
|
|
|
|
|
| Options Outstanding at October 31, 2011 | 1,050,000 |
| $0.31 |
|
|
| Granted | 3,060,000 |
| $0.19 |
|
|
| Exercised | (1,290,000) |
| $0.16 |
| |
| Options Outstanding at October 31, 2012 | 2,820,000 |
| $0.25 |
|
|
| Granted | 180,000 |
| $0.20 |
|
|
| Exercised | (16,000) |
| $0.16 |
|
|
| Options Outstanding at October 31, 2013 | 2,984,000 |
| $0.245 |
| $16,290 |
| Options Exercisable at October 31, 2013 | 2,257,750 |
| $0.254 |
| $16,290 |
The following table summarizes information about stock options outstanding under the 2010 Share Plan as of October 31, 2013:
|
| Options Outstanding |
| Options Exercisable | ||||
|
|
| Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
| Range of Exercise Prices | Number Outstanding |
| Number Exercisable | ||||
|
| |||||||
|
|
|
|
|
|
|
|
|
| $0.12 - $0.37 | 2,984,000 | 5.73 | $0.245 |
| 2,257,750 | 5.10 | $0.254 |
In addition to options granted under the 2003 Share Plan and the 2010 Share Plan, in September 2012, the Board of Directors approved the grant of stock options to purchase 41,500,000 shares and, during year ended October 31, 2013, the Board of Directors approved the grant of stock options to purchase 3,000,000 shares.
Of the stock options granted in September 2012, nonqualified options to purchase 40,000,000 shares were issued to our new executive team, consisting of 16,000,000 stock options issued to our new President and Chief Executive Officer, 8,000,000 stock options issued to our new Senior Vice President of Engineering and 16,000,000 stock options issued to a new strategic advisor to the Company who is also a Director. These stock options have an exercise price of $0.2175 (the average of the high and the low sales price of the common stock on the trading day immediately preceding the approval of such options by the Board of Directors) and have a term of ten years. Half of these stock options vest in 36 equal monthly installments commencing on October 31, 2012, provided that if the grantees are terminated by the Company without cause, an additional 12 months of vesting will be accelerated and such accelerated options will become immediately exercisable. The balance of the stock options will vest in three equal installments upon achievement of a cash milestone, which was satisfied in the fourth quarter of fiscal year 2013, and two stock price targets, which were not achieved as of October 31, 2013 and 2012. As of October 31, 2013, the outstanding options to purchase 40,000,000 shares had an intrinsic value of $-0-. As of October 31, 2013, 13,888,889 of these stock options were exercisable with an aggregate intrinsic value of approximately $-0-. These stock options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The remaining nonqualified stock options granted in September 2012 to purchase 1,500,000 shares consisted of grants of 750,000 stock options to our Chairman in compensation for his service as interim Chief Executive Officer of the Company and as compensation for his prior service as a director, and 750,000 stock options to a director in compensation for his service in recruiting the Company’s new management team. These stock options have an exercise price of $0.2225 (the average of the high and low sales price on September 21, 2012) and an intrinsic value as of July 31, 2013 of $-0-. The options vest in 3 equal annual installments of 250,000 commencing on September 21, 2012 and have a term of ten years. As of October 31, 2013, 1,000,000 options were exercisable with an aggregate intrinsic value of $-0-. These stock options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
During the year ended October 31, 2013, nonqualified stock options to purchase 3,000,000 shares were granted to our outside directors for service rendered to our Company. Of these options,
(a) In November 2012, nonqualified stock options to purchase 1,000,000 shares were issued to one of our directors as additional compensation for service in recruiting the Company’s new management team. These options have an exercise price of $0.211 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing November 30, 2013.
(b) In February 2013, nonqualified stock options to purchase 1,000,000 shares were issued to the Chairman of the Board. These stock options have an exercise price of $0.235 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing February 15, 2014.
(c) In March 2013, nonqualified stock options to purchase an aggregate of 1,000,000 shares were granted to the Company’s three outside directors. Each of these stock options has an exercise price of $0.195 (the average of the high and low sales price on date of grant) and vest in four equal quarterly installments.
As of October 31, 2013, the options to purchase 3,000,000 shares had an intrinsic value of $-0-, and the portion exercisable of 1,416,668 shares had an intrinsic value of approximately $-0-. These options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
The following table summarizes information about the above stock options outstanding that were not granted under the 2003 Share Plan or the 2010 Share Plan as of October 31, 2013:
|
| Options Outstanding |
| Options Exercisable | ||||
|
|
| Weighted Average Remaining Contractual Life (in years) |
|
|
| Weighted Average Remaining Contractual Life (in years) |
|
|
|
| Weighted Average Exercise Price |
|
| Weighted Average Exercise Price | ||
| Range of Exercise Prices | Number Outstanding |
| Number Exercisable | ||||
|
| |||||||
|
|
|
|
|
|
|
|
|
| $0.195- $0.235 | 44,500,000 | 8.91 | $0.22 |
| 16,305,557 | 8.92 | $0.22 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
Leases
We lease space at our principal location for office facilities. The current lease is for approximately 7,500 square feet and expires on November 30, 2014. During the first quarter of fiscal 2013 we began to vacate and return a substantial portion of our facilities to the landlord. At October 31, 2013 a portion of our prior facilities have been leased to new tenants. As of October 31, 2013 our non-cancelable operating lease commitments for the years ending October 31, 2014 and 2015 were approximately $228,000 and $19,000, respectively. Rent expense for the years ended October 31, 2013 and 2012, was approximately $360,000 and $305,000, respectively. At October 31, 2013 we have accrued an expense of approximately $65,000 related to future rents of unused leased facilities.
Litigation Matters
On January 28, 2013, we filed a lawsuit in the United States Federal District Court for the Northern District of California against AUO and E Ink in connection with the AUO License Agreements, alleging breach of contract and other charges, and are seeking compensatory, punitive, and treble damages. In addition to numerous material breaches by AUO of the AUO License Agreements, the Complaint alleges that AUO and E Ink conspired to obtain rights to CopyTele’s ePaper® Electrophoretic Display technology, and CopyTele’s Nano Field Emission Display technology. CopyTele alleges that such activities violated several State and Federal anti-trust and unfair competition statutes for which punitive and/or treble damages are applicable. We can give no assurance as to the potential outcome of this litigation. However, it is reasonably possible that the Company will not prevail on its damages claims in arbitration. Pursuant to the terms of the related arbitration agreement, the Company may be liable for AUO’s attorney’s fees, which may exceed $1 million, if the Company does not prevail.
Commencing in the fourth quarter of fiscal year 2012 the operations of the Company involved patent licensing and enforcement in connection with the unauthorized use of patented technologies. In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or award attorney's fees and/or expenses to a defendant(s), which could be material.
Other than the foregoing, we are not a party to any material pending legal proceedings. We are party to claims and complaints that arise in the ordinary course of business. We believe that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.
F-33
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EMPLOYEE PENSION PLAN
We adopted a qualified noncontributory defined contribution pension plan, effective November 1, 1983, covering all of our employees. Contributions, which were made to a trust and funded on a current basis, were based upon specified percentages of compensation, as defined in the plan. During fiscal year 2001, we amended the plan to suspend benefit accruals as of November 1, 2000. The plan was terminated as of December 31, 2011 and the individual employee account balances will be distributed upon acceptance of termination filings with the Internal Revenue Service. Accordingly, we did not incur any pension expense for the fiscal years ended October 31, 2013 and 2012.
10. INCOME TAXES
Income tax provision (benefit) consists of the following:
|
| Year Ended October 31, | ||||
|
| 2013 |
| 2012 | ||
| Federal: |
|
|
|
|
|
| Current | $ | - |
| $ | - |
| Deferred |
| (2,489,000) |
|
| 992,000 |
| State: |
|
|
|
|
|
| Current |
| - |
|
| - |
| Deferred |
| 3,000 |
|
| 32,000 |
| Foreign: |
|
|
|
|
|
| Current |
| - |
|
| - |
| Adjustment to valuation allowance related to net deferred tax assets |
| 2,486,000 |
|
| (1,024,000) |
|
| $ | - |
| $ | - |
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset, net, at October 31, 2013 and 2012, are as follows:
|
| 2013 |
| 2012 | ||
| Long-term deferred tax assets: |
|
|
|
|
|
| Federal and state NOL and tax credit carryforwards | $ | 25,689,000 |
| $ | 24,284,000 |
| Deferred Compensation |
| 3,484,000 |
|
| 2,255,000 |
| Deferred Revenue |
| 404,000 |
|
| 404,000 |
| Other |
| 300,000 |
|
| 448,000 |
| Subtotal |
| 29,877,000 |
|
| 27,391,000 |
| Less: valuation allowance |
| (29,877,000) |
|
| (27,391,000) |
| Deferred tax asset, net | $ | - |
| $ | - |
As of October 31, 2013, we had tax net operating loss and tax credit carryforwards of approximately $73,957,000 and $1,198,000, respectively, available, within statutory limits (expiring at various dates between 2014 and 2033), to offset any future regular Federal corporate taxable income and taxes payable. If the tax benefits relating to deductions of option holders’ income are ultimately realized, those benefits will be credited directly to additional paid-in capital. Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year.
F-34
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We had tax net operating loss and tax credit carryforwards of approximately $73,834,000 and $13,000, respectively, as of October 31, 2013, available, within statutory limits, to offset future New York State corporate taxable income and taxes payable, if any, under certain computations of such taxes. The tax net operating loss carryforwards expire at various dates between 2014 and 2033 and the tax credit carryforwards expire between 2014 and 2028.
We have provided a valuation allowance against our deferred tax asset due to our current and historical pre-tax losses and the uncertainty regarding their realizability. The primary differences from the Federal statutory rate of 34% and the effective rate of 0% is attributable to certain permanent differences and a change in the valuation allowance. The following is a reconciliation of income taxes at the Federal statutory tax rate to income tax expense (benefit):
|
| Year Ended October 31, | ||||||
|
| 2013 |
| 2012 | ||||
|
|
|
|
|
|
|
| |
| Income tax benefit at U.S.Federal statutory income tax rate | $ | (3,427,000) | (34.00%) |
| $ | (1,446,000) | (34.00%) |
| State income taxes |
| (6,000) | (.06%) |
|
| (2,000) | (.06%) |
| Permanent differences |
| 294,000 | 2.92% |
|
| 8,000 | 0.19% |
| Credits |
| - | - |
|
| (63,000) | (1.48%) |
| Expiring net operating losses, credits and other |
| 250,000 | 2.48% |
|
| 2,527,000 | 59.44% |
| Foreign rate difference on impairment |
| 403,000 | 4.00 |
|
| - | - |
| Change in valuation allowance |
| 2,486,000 | 24.66% |
|
| (1,024,000) | (24.09%) |
| Income tax provision | $ | - | 0% |
| $ | - | 0% |
|
|
|
|
|
|
|
|
|
During the two fiscal years ended October 31, 2013, we incurred no Federal and no State income taxes. We have no unrecognized tax benefits as of October 31, 2013 and 2012 and we account for interest and penalties related to income tax matters in marketing, general and administrative expenses. Tax years to which our net operating losses relate remain open to examination by Federal authorities and other jurisdictions to the extent which the net operating losses have yet to be utilized.
11. SUBSEQUENT EVENT
In connection of the acquisition of patents in November 2013, we incurred an obligation, due in November 2017, in the amount of $5,000,000, payable in cash or our common stock, which amount will be reduced by the aggregate of royalty payments during the period, if any.
12. SEGMENT INFORMATION
We follow the accounting guidance of ASC 280 “Segment Reporting” (“ASC 280”). Reportable operating segments are determined based on management’s approach. The management approach, as defined by ASC 280, is based on the way that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. In the past, the primary operations of the Company involved licensing in connection with and the development of patented technologies. Commencing in the fourth quarter of fiscal 2012, the primary operations of the Company involved patent licensing in connection with the unauthorized use of patented technologies and patent enforcement. Prior to the change in the primary operations of the Company, the chief operating decision-maker managed the enterprise in two segments: (i) Display Technology and (ii) Encryption Products and Services. Subsequent to the change, chief operating decision-maker manages the enterprise as a single segment which includes the licensing and enforcement of patents from both of the previous segments.
F-35
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
We have generated revenue both domestically (United States) and internationally. International revenue is based on the country in which the licensee is located. For the years ended October 31, 2013 and 2012, revenue by geographic area are as follows:
| Geographic Data |
| 2013 |
| 2012 | ||
|
|
|
|
|
|
|
|
| Net revenue: |
|
|
|
|
|
|
| United States |
| $ | 388,830 |
| $ | - |
| Taiwan |
|
| - |
|
| 940,010 |
|
| $ | 388,830 |
| $ | 940,010 | |
Accounts receivable at October 31, 2013 are from a United States licensee.
F-36
ITUS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| (Unaudited) |
| (Unaudited) |
|
|
| ||
|
| July 31, 2014 |
| Pro forma at July 31, 2014 (1) |
|
October 31, 2013 | |||
|
|
|
| ||||||
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents | $ | 3,651,564 |
| $ | 3,651,564 |
| $ | 898,172 |
| Short-term investments in certificates of deposit |
| 2,550,000 |
|
| 2,550,000 |
|
| - |
| Accounts receivable |
| 133,333 |
|
| 133,333 |
|
| 175,000 |
| Prepaid expenses and other current assets |
| 100,580 |
|
| 100,580 |
|
| 160,646 |
| Total current assets |
| 6,435,477 |
|
| 6,435,477 |
|
| 1,233,818 |
|
|
|
|
|
|
|
| ||
| Investment in Videocon Industries Limited global depository receipts, at fair value |
| 4,150,970 |
|
| - |
|
| 4,197,341 |
| Patents, net of accumulated amortization of $233,129 |
| 2,802,982 |
|
| 2,802,982 |
|
| - |
| Property and equipment, net of accumulated depreciation of $47,925 and $45,654, respectively |
| 9,906 |
|
| 9,906 |
|
| 8,379 |
| Total assets | $ | 13,399,335 |
| $ | 9,248,365 |
| $ | 5,439,538 |
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable and accrued expenses | $ | 1,304,571 |
| $ | 1,153,488 |
| $ | 1,276,470 |
| Royalties and contingent legal fees payable |
| 152,400 |
|
| 152,400 |
|
| 207,743 |
| Derivative liability, at fair value |
| 1,900,000 |
|
| - |
|
| 540,000 |
| Loan payable to related party |
| 5,000,000 |
|
| - |
|
| - |
| Deferred revenue, non-refundable license fees |
| - |
|
| - |
|
| 1,187,320 |
| Total current liabilities |
| 8,356,971 |
|
| 1,305,888 |
|
| 3,211,533 |
|
|
|
|
|
|
|
|
|
|
| Contingencies (Note 12) |
|
|
|
|
|
|
|
|
| Convertible debentures due November 2016, net of discount of $1,743,858 |
| 1,756,142 |
|
| - |
|
| - |
| Convertible debentures due January 2015, net of discount of $891,402 |
| - |
|
| - |
|
| 548,598 |
| Patent acquisition obligation |
| 3,136,513 |
|
| 3,136,513 |
|
| - |
| Loan payable to related party |
| - |
|
| - |
|
| 5,000,000 |
| Total liabilities |
| 13,249,626 |
|
| 4,442,401 |
|
| 8,760,131 |
| Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Preferred stock, par value $100 per share; 500,000, 496,500 and 500,000 shares authorized; no shares issued or outstanding at July 31, 2014, July 31, 2014 pro forma and October 31, 2013, respectively |
| - |
|
| - |
|
| - |
| Series A convertible preferred stock, par value $100 per share; 0, 3,500 and 0 shares issued and outstanding at July 31, 2014, July 31, 2014 pro forma and October 31, 2013, respectively |
| - |
|
| 350,000 |
|
| - |
| Common stock, par value $.01 per share; 600,000,000 shares authorized; 236,822,190, 219,342,190 and 209,276,745 shares issued and outstanding at July 31, 2014, July 31, 2014 pro forma and October 31, 2013, respectively |
| 2,368,222 |
|
| 2,193,422 |
|
| 2,092,767 |
| Additional paid-in capital |
| 144,444,136 |
|
| 144,989,691 |
|
| 134,750,048 |
| Loan receivable from related party |
| (5,000,000) |
|
| - |
|
| (5,000,000) |
| Accumulated deficit |
| (141,616,278) |
|
| (142,727,149) |
|
| (135,163,408) |
| Accumulated other comprehensive (loss) |
| (46,371) |
|
| - |
|
| - |
| Total shareholders’ equity |
| 149,709 |
|
| 4,805,964 |
| $ | (3,320,593) |
| Total liabilities and shareholders’ equity | $ | 13,399,335 |
| $ | 9,248,365 |
| $ | 5,439,538 |
(1) Pro forma explanation:
On August 29, 2014, the Company (as defined below) terminated its business relationship with Videocon Industries Limited and its affiliates (collectively “Videocon”). The unaudited pro forma balance sheet as of July 31, 2014 gives effect to the termination, including the cancellation of loans receivable and payable of $5,000,000 and the exchange of 1,495,845 global depository receipts formerly held by the Company and 20,000,000 shares of ITUS Corporation common stock formerly held by Videocon, as if all such transactions were effected on on July 31, 2014. The Company thereupon recorded the retirement of the 20,000,000 shares of its common stock.
On September 9, 2014, the Company and the holder of a $3,500,000 Convertible Debenture due November 2016 agreed to a transaction resulting in the conversion of the principal and accrued interest of the Convertible Debenture into 18,498,943 shares of the Company’s common stock, and the conversion of 15,978,943 shares of common stock into 3,500 shares of Series A Convertible Preferred Stock. In addition, a warrant to purchase 9,249,472 shares of common stock, initially issued with the Convertible Debenture and with an exercise price of $0.3784 per share, was exchanged for a new warrant with an exercise price of $0.31 per share and with substantially the same terms and exercisable for the same number of shares. The unaudited pro forma balance sheet as of July 31, 2014 shows a positive adjustment to shareholder’s equity of approximately $3,807,000, giving effect to the conversion of the Convertible Debenture, the extinguishment of the related accrued interest and derivative liability, in exchange for the issuance of shares of common stock and shares of Series A Convertible Preferred Stock, as if all such transactions were effected on on July 31, 2014.
See Note 2, Subsequent Events – for additional information regarding these subsequent events.
The accompanying notes are an integral part of these condensed consolidated financial statements.
ITUS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
|
| For the Nine Months Ended July 31, | ||||
|
| |||||
|
| 2014 |
| 2013 | ||
|
|
|
|
|
|
|
| Revenue from patent assertion activities | $ | 1,105,000 |
| $ | - |
| Display technology development and license fees |
| 1,187,320 |
|
| - |
| Total revenue |
| 2,292,320 |
|
| - |
|
|
|
|
|
|
|
| Operating costs and expenses: |
|
|
|
|
|
| Inventor royalties and contingent legal fees |
| 465,095 |
|
| - |
| Litigation and licensing expenses |
| 266,537 |
|
| 21,955 |
| Amortization of patents |
| 233,129 |
|
| - |
| Marketing, general and administrative expenses (including non-cash stock option compensation expense of $2,346,587 and $2,692,798, respectively) |
| 4,807,154 |
|
| 6,120,474 |
| Total operating costs and operating expenses |
| 5,771,915 |
|
| 6,142,429 |
|
|
|
|
|
|
|
| Loss from operations |
| (3,479,595) |
|
| (6,142,429) |
|
|
|
|
|
|
|
| Change in value of derivative liabilities |
| (1,460,704) |
|
| 315,189 |
|
|
|
|
|
|
|
| Loss on extinguishment of debt |
| (482,915) |
|
| (343,517) |
|
|
|
|
|
|
|
| Interest expense |
| (1,082,041) |
|
| (982,688) |
|
|
|
|
|
|
|
| Dividend income |
| 47,568 |
|
| - |
|
|
|
|
|
|
|
| Interest income |
| 4,817 |
|
| 113 |
|
|
|
|
|
|
|
| Loss before income taxes |
| (6,452,870) |
|
| (7,153,332) |
|
|
|
|
|
|
|
| Provision for income taxes |
| - |
|
| - |
|
|
|
|
|
|
|
| Net loss | $ | (6,452,870) |
| $ | (7,153,332) |
|
|
|
|
|
|
|
| Other comprehensive (loss) income: |
|
|
|
|
|
| Unrealized (loss) gain on investment in Videocon Industries Limited global depository receipts |
| (46,371) |
|
| (459,226) |
| Total comprehensive loss | $ | (6,499,241) |
| $ | (7,612,558) |
|
|
|
|
|
|
|
| Net loss per share: |
|
|
|
|
|
| Basic and diluted | $ | (0.03) |
| $ | (0.04) |
|
|
|
|
|
|
|
| Weighted average common shares outstanding: |
|
|
|
|
|
| Basic and diluted |
| 215,496,115 |
|
| 192,889,045 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-38
ITUS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
|
| For the Three Months Ended July 31, | ||||
|
| |||||
|
| 2014 |
| 2013 | ||
| Revenue from patent assertion activities | $ | - |
| $ | - |
| Display technology development and license fees |
| 1,187,320 |
|
| - |
| Total revenue |
| 1,187,320 |
|
| - |
|
|
|
|
|
|
|
| Operating costs and expenses: |
|
|
|
|
|
| Inventor royalties and contingent legal fees |
| - |
|
| - |
| Litigation and licensing expenses |
| 162,520 |
|
| 15,205 |
| Amortization of patents |
| 81,289 |
|
| - |
| Marketing, general and administrative expenses (including non-cash stock option compensation expense of $469,481 and $1,237,838, respectively) |
| 1,103,094 |
|
| 2,203,400 |
| Total operating costs and operating expenses |
| 1,346,903 |
|
| 2,218,605 |
|
|
|
|
|
|
|
| Loss from operations |
| (159,583) |
|
| (2,218,605) |
|
|
|
|
|
|
|
| Change in value of derivative liabilities |
| 850,000 |
|
| 105,189 |
|
|
|
|
|
|
|
| Loss on extinguishment of debt |
| - |
|
| (343,517) |
|
|
|
|
|
|
|
| Interest expense |
| (280,913) |
|
| (125,035) |
|
|
|
|
|
|
|
| Interest income |
| 1,497 |
|
| 76 |
|
|
|
|
|
|
|
| Income (loss) before income taxes |
| 411,001 |
|
| (2,581,892) |
|
|
|
|
|
|
|
| Provision for income taxes |
| - |
|
| - |
|
|
|
|
|
|
|
| Net income (loss) | $ | 411,001 |
| $ | (2,581,892) |
|
|
|
|
|
|
|
| Other comprehensive (loss) income: |
|
|
|
|
|
| Unrealized (loss) gain on investment in Videocon Industries Limited global depository receipts |
| 173,518 |
|
| (1,751,636) |
|
|
|
|
|
|
|
| Total comprehensive income (loss) | $ | 584,519 |
| $ | (4,333,528) |
|
|
|
|
|
|
|
| Net loss per share: |
|
|
|
|
|
| Basic and diluted | $ | 0.00 |
| $ | (0.01) |
| Weighted average common shares outstanding: |
|
|
|
|
|
| Basic and diluted |
| 223,251,755 |
|
| 201,965,186 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-39
ITUS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIENCY
FOR THE NINE MONTHS ENDED JULY 31, 2014 (UNAUDITED)
|
|
Common Stock |
| Additional Paid-in Capital |
| Loan Receivable From Related Party |
|
Accumulated Deficit |
| Accumulated Other Comprehensive (Loss) |
| Total Shareholders’ Deficiency | ||||||||
|
|
|
|
|
|
| ||||||||||||||
|
| Shares |
| Par Value |
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, October 31, 2013 | 209,276,745 |
| $ | 2,092,767 |
| $ | 134,750,048 |
| $ | (5,000,000) |
| $ | (135,163,408) |
| $ | - |
| $ | (3,320,593) |
| Stock option compensation to employees | - |
|
| - |
|
| 1,562,350 |
|
| - |
|
| - |
|
| - |
|
| 1,562,350 |
| Stock option compensation to consultants | - |
|
| - |
|
| 784,237 |
|
| - |
|
| - |
|
| - |
|
| 784,237 |
| Common stock issued to consultants | 130,000 |
|
| 1,300 |
|
| 39,448 |
|
| - |
|
| - |
|
| - |
|
| 40,748 |
| Common stock issued upon exercise of stock options | 345,000 |
|
| 3,450 |
|
| 47,775 |
|
| - |
|
| - |
|
| - |
|
| 51,225 |
| Warrants issued in connection with the issuance of convertible debentures | - |
|
| - |
|
| 513,112 |
|
| - |
|
| - |
|
| - |
|
| 513,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock issued upon exercise of warrants | 1,339,950 |
|
| 13,400 |
|
| 286,609 |
|
| - |
|
| - |
|
| - |
|
| 300,009 |
| Sale of common stock, net of expenses of $326,865 | 16,000,000 |
|
| 160,000 |
|
| 3,513,135 |
|
| - |
|
| - |
|
| - |
|
| 3,673,135 |
| Common stock issued upon conversion of convertible debentures | 8,267,080 |
|
| 82,671 |
|
| 2,652,678 |
|
| - |
|
| - |
|
| - |
|
| 2,735,349 |
| Common stock issued in payment of interest on convertible debentures | 263,415 |
|
| 2,634 |
|
| 59,144 |
|
| - |
|
| - |
|
| - |
|
| 61,778 |
| Common stock issued to acquire patent license | 1,200,000 |
|
| 12,000 |
|
| 235,600 |
|
| - |
|
| - |
|
| - |
|
| 247,600 |
| Unrealized loss on investment in Videocon Industries Limited global depository receipts | - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (46,371) |
|
| (46,371) |
| Net loss | - |
|
| - |
|
| - |
|
| - |
|
| (6,452,870) |
|
| - |
|
| (6,452,870) |
| Balance, July 31, 2014 | 236,822,190 |
| $ | 2,368,222 |
| $ | 144,444,136 |
| $ | (5,000,000) |
| $ | (141,616,278) |
| $ | (46,371) |
| $ | 149,709 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ITUS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| For the nine months ended July 31, | ||||
|
| 2014 |
| 2013 | ||
| Reconciliation of net loss to net cash used in operating activities: |
|
|
|
|
|
| Net loss | $ | (6,452,870) |
| $ | (7,153,332) |
| Stock option compensation to employees |
| 1,562,350 |
|
| 2,118,424 |
| Stock option compensation to consultants |
| 784,237 |
|
| 574,374 |
| Common stock issued to consultants |
| 40,748 |
|
| 168,475 |
| Common stock issued to pay interest on convertible debentures |
| 61,778 |
|
| 69,939 |
| Amortization of patents |
| 233,129 |
|
| - |
| Amortized interest on patent acquisition obligations to interest expense |
| 286,002 |
|
| - |
| Amortization of convertible debenture discount to interest expense |
| 575,210 |
|
| 893,149 |
| Loss on extinguishment of debt |
| 482,915 |
|
| 343,517 |
| Change in value of derivative liability |
| 1,460,704 |
|
| (315,189) |
| Common stock issued to acquire patent license |
| 62,000 |
|
| 42,000 |
| Other |
| (553) |
|
| 35,490 |
| Change in operating assets and liabilities: |
|
|
|
|
|
| Accounts receivable |
| 41,667 |
|
| - |
| Prepaid expenses and other current assets |
| 60,066 |
|
| 8,574 |
| Accounts payable and accrued expenses |
| 28,101 |
|
| 572,180 |
| Royalties and contingent legal fees payable |
| (55,343) |
|
| - |
| Deferred revenue |
| (1,187,320) |
|
| - |
| Net cash used in operating activities |
| (2,017,179) |
|
| (2,642,399) |
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
| Disbursements to acquire short-term investments in certificates of deposit |
| (3,700,000) |
|
| - |
| Proceeds from sales of short-term investments in certificates of deposit |
| 1,150,000 |
|
| 500,000 |
| Other |
| (3,798) |
|
| (676) |
| Net cash (used in) provided by investing activities |
| (2,553,798) |
|
| 499,324 |
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
| Proceeds from issuance of convertible debentures |
| 3,500,000 |
|
| 1,765,000 |
| Proceeds from sale of common stock, net |
| 3,673,135 |
|
| 589,865 |
| Proceeds from exercise of warrants to purchase common stock |
| 300,009 |
|
| 380,800 |
| Proceeds from exercise of employee stock options |
| 51,225 |
|
| 25,610 |
| Proceeds from sale of common stock held by ZQX Advisors LLC |
| - |
|
| 24,138 |
| Payments to redeem convertible debentures |
| (200,000) |
|
| - |
| Net cash provided by financing activities |
| 7,324,369 |
|
| 2,785,413 |
|
|
|
|
|
|
|
| Net increase in cash and cash equivalents |
| 2,753,392 |
|
| 642,338 |
| Cash and cash equivalents at beginning of year |
| 898,172 |
|
| 339,693 |
| Cash and cash equivalents at end of period | $ | 3,651,564 |
| $ | 982,031 |
|
|
|
|
|
|
|
| Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
| Non-cash patent acquisition | $ | 3,036,111 |
| $ | - |
| Common stock to acquire patent license | $ | 247,600 |
| $ | 42,000 |
| Common stock issued upon conversion of convertible debentures | $ | 2,735,349 |
| $ | 1,353,364 |
| Fair value of debenture embedded conversion feature at date of issuance | $ | 1,570,000 |
| $ | 1,180,000 |
| Relative fair value of warrants issued with convertible debentures | $ | 513,112 |
| $ | 214,819 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-41
ITUS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND FUNDING
Description of Business
As used herein, “we,” “us,” “our,” the “Company”, or “ITUS” means ITUS Corporation and its wholly-owned subsidiaries, unless otherwise indicated. The primary operations of the Company involve the development, acquisition, licensing, and enforcement of patented technologies that are either owned or controlled by the Company. In June 2014, ITUS Patent Acquisition Corporation acquired the exclusive rights to license and enforce our 10th patent portfolio called Enhanced Auction Technologies, which covers enhanced presentation and cross selling technologies used by some of the world’s leading auction sites. The Company currently owns or controls 10 patent portfolios including Encrypted Mobile Communication; Enhanced Auction Technologies: ePaper® Electrophoretic Display; Internet Telephonic Gateway; J-Channel Window Frame Construction; Key Based Web Conferencing Encryption; Loyalty Conversion Systems; Micro Electro Mechanical Systems Display; Nano Field Emission Display; and VPN Multicast Communications.
As part of our patent assertion activities and in the ordinary course of our business, the Company has initiated and will likely continue to initiate patent infringement lawsuits, and engage in patent infringement litigation. In September of 2014, the Company initiated its seventh patent assertion campaign, bringing the total number of lawsuits since we implemented our patent monetization business model in January of 2013 to 44.
Our primary source of revenue will come from licenses resulting from the unauthorized use of our patented technologies, including the settlement of patent infringement lawsuits. During the nine months ended July 31, 2014, we entered into 5 license and/or settlement agreements including agreements in connection with our patented Key Based Web Encryption technology and our patented J-Channel Window Frame Construction technology. In September 2014, we entered into 5 additional license and/or settlement agreements with Jeld-Wen, Inc., Atrium Windows and Doors, Inc., Pella Corporation, Ply Gem Industries, Inc. and Simonton Building Products, Inc., all in connection with our patented J-Channel Window Frame Construction technology. These licenses resolved lawsuits that were pending against the aforementioned companies. Since implementing our new business model in January of 2013, the Company has entered into a total of 14 revenue producing license and/or settlement agreements, and 3 of our 7 patent assertion campaigns have now generated revenue.
On August 29, 2014, the Company ended its relationship with Videocon Industries Limited, terminating Videocon’s license to the Company’s patented Nano Field Emission Display technology. On September 3, 2014, the United States District Court for the Eastern District of Texas invalidated two of our Loyalty Conversion Systems patents by ruling that they did not cover patentable subject matter, resulting in the dismissal of 7 of our Loyalty Conversion Systems Corporation’s lawsuits. On September 8, 2014, the Company filed patent infringement lawsuits against Ebay, Vendio, and Auctiva in connection with our patented Enhanced Auction Technologies. The Company currently has 27 pending lawsuits in connection with its patented technologies.
F-42
In addition to continuing to mine and monetize our existing patents, our wholly owned subsidiary, ITUS Patent Acquisition Corporation, will continue to acquire patents and the exclusive rights to license and enforce patents from third parties. When necessary, we will assist such parties in the further development of their patent portfolios through the filing of additional patent applications.
Due to arrangements previously entered into by the Company, certain of our patents contain encumbrances which may negatively impact our patent monetization and patent assertion activities. Where we are able, we will take the steps necessary to remove any encumbrances that may inhibit our patent monetization and patent assertion activities.
Name Change
On September 2, 2014, the Company changed its name to ITUS Corporation. The Name Change was approved by the Company’s Board of Directors on May 28, 2014 and was subsequently approved by the Company’s stockholders at the Annual Meeting of Stockholders on August 8, 2014. In Greek mythology, ITUS was the God of Protection. The Name Change better aligns the Company’s corporate name with its current business and mission to develop, acquire, license and enforce of patented technologies that are either owned or controlled by the Company or one of its wholly owned subsidiaries.
Funding and Management’s Plans
In January 2013, we received aggregate gross proceeds of $1,765,000 from the issuance of 8% convertible debentures due January 25, 2015 in a private placement. During the third quarter of fiscal 2013, $325,000 of the principal amount of these debentures were converted into 2,166,775 shares of our common stock. During the second quarter of fiscal 2014, $1,240,000 of the principal amount of the convertible debentures were converted into 8,267,080 of shares of our common stock, and the remaining $200,000 of convertible debt was repaid in cash.
In November 2013, the Company completed a private placement with a single institutional investor, pursuant to which the Company issued a $3,500,000 principal amount 6% convertible debenture due November 11, 2016. For details of this debenture, please see Note 3, Convertible Debentures herein.
In July 2014, the Company completed the sale of 16,000,000 shares of its common stock at the offering price of $0.25 per share. The net proceeds from this sale totaled approximately $3,673,000. See Note 4, Sale of Common Stock – for additional information regarding this transaction.
F-43
During the nine months ended July 31, 2014, cash used in operating activities was approximately $2,017,000. Cash used in investing activities during the nine months ended July 31, 2014 was approximately $2,554,000, which principally resulted from the purchase of certificates of deposit totaling $3,700,000 which was partially offset by the sale of certificates of deposit totaling $1,150,000. Our cash provided by financing activities during the nine months ended July 31, 2014 was approximately $7,324,000, which resulted from the net proceeds from the sale of 16,000,000 shares of the Company’s common stock for approximately $3,673,000, the sale of convertible debentures in a private placement for $3,500,000, the proceeds from exercise of warrants to purchase common stock of approximately $300,000, and the proceeds from exercise of stock options of approximately $51,000 offset by the payment to redeem convertible debentures of $200,000. As a result, our cash, cash equivalents, and short-term nvestments at July 31, 2014 increased approximately $5,304,000 to approximately $6,202,000 from approximately $898,000 at the end of fiscal year 2013.
Based on currently available information, the Company believes that its existing cash, cash equivalents, short-term investments, accounts receivable, and expected cash flows from patent licensing and enforcement, and other potential sources of cash flows will be sufficient to enable it to continue our patent licensing and enforcement activities for at least 12 months. However, our projections of future cash needs and cash flows may differ from actual results. If current cash on hand, short term investments and cash that may be generated from patent licensing and enforcement activities are insufficient to satisfy our liquidity requirements, we may seek to sell equity securities or obtain loans from various financial institutions where possible. The sale of additional equity securities or convertible debt could result in dilution to our shareholders. We can give no assurance that we will generate sufficient cash flows in the future (through licensing and enforcement of patents, or otherwise) to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available, if needed, on favorable terms or at all. If we cannot obtain such funding if needed or if we cannot sufficiently reduce operating expenses, we would need to curtail or cease some or all of our operations.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain information and footnotes required by generally accepted accounting principles in annual financial statements have been omitted or condensed. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended October 31, 2013, as reported by us in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on January 16, 2014. The year-end consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of July 31, 2014, and results of operations and cash flows for the interim periods represented. The results of operations for the three and nine months ended July 31, 2014 are not necessarily indicative of the results to be expected for the entire year.
F-44
Revenue Recognition
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectability of amounts is reasonably assured.
Patent Monetization and Patent Assertion
In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted are perpetual in nature, extending until the expiration of the related patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably assured, and when all other revenue recognition criteria have been met.
Display Technology Development and License Fees
We have assessed the revenue guidance of Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” (“ASC 605-25”) to determine whether multiple deliverables in our arrangements with AUO represent separate units of accounting. Under the AUO License Agreements, we received initial development and license fees of $3 million, of aggregate development and license fees of up to $10 million. The additional $7 million in development and license fees were to be payable upon completion of certain conditions for the respective technologies. We have determined that the transfer of the licensed patents and technology and the effort involved in completion of the conditions for the respective technologies represent a single unit of accounting for each technology. Accordingly, using a proportional performance method, during the third quarter of fiscal year 2011 we began recognizing the $3 million initial development and license fees over the estimated periods that we expected to complete the conditions for the respective technologies. We have not recognized any portion of the $7 million of additional development and license fees as either deferred revenue or revenue as it is considered contingent revenue. Each of the license agreements with AUO also provide for the basis for royalty payments on future production, if any, by AUO to CopyTele, which we have determined represent separate units of accounting. We have not recognized any royalty income under the AUO License Agreements.
F-45
At each reporting period we assess our remaining performance obligations under the AUO License agreements and recognize display technology development and license fee revenue over the remaining estimated period that we expect to complete the conditions for the respective technologies. Development and license fee payments received from AUO which are in excess of the amounts recognized as revenue (approximately $1,187,000 as of October 31, 2013) are recorded as non-refundable deferred revenue on the accompanying condensed consolidated balance sheet. As a result of the AUO/E Ink Lawsuit described below we have not recorded any display technology development and license fee revenue during the period from the fourth quarter of fiscal 2012 through the second quarter of this fiscal year due to uncertainty as to our remaining performance obligations, if any. Based on our assessment for the three month period ended July 31, 2014, we have determined that we have no further performance obligations under the AUO License Agreements and accordingly we have recognized display technology development and license fee revenue of approximately $1,187,000, representing the balance of the initial $3 million payment received from AUO.
Patents
Our only identifiable intangible assets are patents and patent rights. We capitalize patent and patent rights acquisition costs and amortize the cost over the estimated economic useful life. Patent acquisition costs capitalized during the nine months ended July 31, 2014 and 2013, was approximately $3,036,000 and $-0-, respectively, and none during the three months ended July 31, 2014 and 2013, respectively. We recorded patent amortization expense of approximately $233,000 and $-0- during the nine months ended July 31, 2014 and 2013, respectively, and approximately $81,000 and $-0- during the three months ended July 31, 2014 and 2013, respectively.
2. SUBSEQUENT EVENTS
Unwinding of Business Relationship and Interests with Videocon
On August 29, 2014, the Company and CopyTele International Ltd., a wholly-owned subsidiary of the Company (the “Subsidiary”), terminated their business relationship (the “Business Relationship”) with Videocon Industries Limited (“Videocon”) and Mars Overseas Limited, an affiliate of Videocon (“Mars” and together with the Company, the Subsidiary and Videocon, the “Parties”). The Business Relationship began in November 2007 and related to a proposed joint development effort between the Company and Videocon to develop a certain Nano Field Emission Display technology (the “Technology”). In connection with the proposed joint venture, (i) the Company granted a non-transferable, worldwide license to Videocon for the Technology (the “License”), (ii) the Subsidiary made a $5 million dollar loan to Mars (the “Subsidiary Loan”), (iii) Mars made an identical $5 million dollar loan to the Subsidiary (the “Mars Loan” and together with the Subsidiary Loan, the “Loans”), (iv) the Company sold to Mars 20 million shares of the Company’s common stock (the “Shares”) and (v) Global EPC Ventures Limited sold to the Company 1,495,845 global depository receipts of Videocon (the “GDRs”). The Shares and GDRs were subsequently used to secure the Loans.
F-46
Because Videocon was unable to continue with its joint development responsibilities, the Technology was not jointly developed by the Parties, and Videocon introduced the Company to AU Optronics Corp. to jointly develop the Technology with the Company. Because the Company entered into a separate agreement with AU Optronics Corp. to jointly develop the Technology, the Business Relationship with Videocon became immaterial to the Company. Accordingly, the Company and Videocon agreed to terminate the Business Relationship. In order to terminate the Business Relationship, the Parties entered into several agreements whereby: (i) the License was terminated, (ii) both of the Loans were canceled and (iii) the Shares and GDRs were exchanged for each other (collectively, the “Termination Transactions”). The result of these Termination Transactions was to undo the initial transactions between the Parties that set forth the Business Relationship. Aside from this business relationship there is no other material relationship between the Parties. In accounting for the unwinding of this business relationship, the Company offset the two loans and then recorded its repurchased shares of common stock at the then current fair value of the GDRs and then retired and cancelled those shares.
Preferred Stock
On September 9, 2014, the Company designated 3,500 shares of Series A Convertible Preferred Stock, par value $100 per share, in accordance with the Certificate of Designation of Series A Convertible Preferred Stock filed with the Secretary of State of the State of Delaware on September 9, 2014 (the “Series A Convertible Preferred Stock”). On September 9, 2014, 3,500 shares of Series A Convertible Preferred Stock were issued in connection with the conversion of the Convertible Debenture due November 2016, as discussed further, below.
Ranking
The Series A Convertible Preferred Stock ranks senior to the Company’s common stock, to all series of any other classes of equity which may be issued and to any indebtedness, unless the Company has obtained the prior written consent of the Series A Convertible Preferred Stock holder.
Optional Conversion
Holders of the Series A Convertible Preferred Stock may at any time convert their shares of Series A Convertible Preferred Stock into such number of shares of the Company’s common stock in such an amount equal to (a) the stated value (initially $1,000) of the shares of Series A Convertible Preferred Stock being converted (the “Stated Value”), divided by the conversion price (initially $0.1892) ( the “Series A Conversion Price”), multiplied by (b) the number of shares of Series A Preferred Stock being converted. In the event the Series A Convertible Preferred Stock is converted in part, the Company shall deliver a new certificate of like tenor in the amount equal to the remaining balance of the Series A Convertible Preferred Stock after giving effect to such partial conversion.
The holder shall not have the right to convert any portion of the Series A Convertible Preferred Stock if after giving effect to such conversion, the holder, together with any affiliate thereof, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion.
The embedded conversion option has certain anti-dilution protection provisions which would be triggered if the Company issues its common stock, or certain common stock equivalents, (as defined) at a price below $0.142 per share.
F-47
Mandatory Conversion
At any time after November 11, 2016, if and only if the average of the high and low trading prices of the Company’s common stock for any 10 out of 20 consecutive trading days (the “Measurement Period,”) exceeds the then Series A Conversion Price, as adjusted, the Company may convert any then outstanding shares of Series A Convertible Preferred Stock into shares of common stock (a “Mandatory Conversion”), provided, however, that any such Mandatory Conversion shall not require a holder to convert a number of shares of Series A Convertible Preferred Stock into an amount of Common Stock that would exceed 50% of the daily average trading volume of the common stock during the Measurement Period. Following November 11, 2016 and subject to the price and volume limitations set forth above, the Company may require such number of successive Mandatory Conversions as are necessary to convert all then outstanding Series A Convertible Preferred Stock.
Redemption
At any time on or after November 11, 2016 (the “Redemption Date”), and upon at least 60 days prior written notice to the Company (a “Redemption Notice”), any holder of the Series A Convertible Preferred Stock shall have a one-time right to require the Company to redeem all or some of its shares of Series A Convertible Preferred Stock (a “Redemption”), for cash generated from a subsequent sale of the Company’s equity securities. The redemption price shall be equal to the Stated Value for each share of Series A Convertible Preferred Stock (the “Redemption Purchase Price”). Upon receipt of a Redemption Notice, the Company shall complete a sale or sales of its equity securities for the purpose of accumulating net proceeds sufficient to pay the Redemption Purchase Price (it being understood by the holder of the Series A Convertible Preferred Stock that the Company may only redeem shares of Series A Convertible Preferred Stock with the proceeds from the sale of the Company’s equity securities).
Board and Observer Rights
Each holder of Series A Convertible Preferred Stock shall have the right, upon 10 days' prior written notice, to designate one representative, reasonably acceptable to the Company, who shall be entitled to attend and observe meetings of the Company’s Board of Directors in a non-voting observer capacity (the “Observer”).
Accounting for the Series A Convertible Preferred Stock
The Company determined that the economic characteristics and risks of the conversion feature and the preferred stock instrument were clearly and closely related as equity instruments and accordingly, the conversion feature would not require separate accounting. In addition, the redemption feature is contingent upon Series A Convertible Preferred Stock not being converted into common stock and upon the holders delivering a redemption notice to the Company. Further, the redemption purchase price may only be paid from the proceeds of a subsequent sale of equity securities. Accordingly, the Series A Convertible Preferred Stock was accounted for as an equity instrument.
F-48
Conversion of the Convertible Debenture due November 2016
On September 9, 2014, holders of $3,500,000 and approximately $173,000 of principal and interest, respectively, of the Convertible Debenture due November 2016, converted their holdings into an aggregate of 18,498,943 shares of common stock the (“Conversion Common Stock”). In addition, the Company exchanged and reissued the warrant for the purchase of 9,249,472 shares of common stock, and upon the reissuance, lowered the exercise price to $0.31 per share. There was no change to the term of the warrant.
In connection with this conversion, the Company recorded a loss on conversion/exchange of approximately $1,580,000, as summarized below. This loss represents the excess of the fair value of common stock issued on the date of the conversion over the net book value of the debt on the date of conversion. Since the conversion feature on the Convertible Debenture due November 2016 was determined to be a derivative liability, the net book value includes the value of the debt, net of discount, the derivative liability related to the conversion feature (after being marked to market on the conversion date, and the change in the fair value of the warrant on the date of the conversion.
The loss on extinguishment of debt was determined as follows:
|
| Conversion Common Stock | |
| Securities extinguished: | ||
| Face value of convertible debenture converted | $ | 3,500,000 |
| Less: debt discount |
| (1,693,785) |
| Plus: accrued interest |
| 173,521 |
| Plus: fair value of derivative liability |
| 1,032,241 |
| Plus: fair value of warrant exchanged in connection with the conversion |
| 1,270,000 |
| Net book value of converted debenture, accrued interest, derivative liability and warrant exchanged |
| 4,281,977 |
| Securities issued in conversion/exchange: |
|
|
| Fair value of common stock issued |
| 4,532,241 |
| Fair value of warrant issued September 9, 2014 |
| 1,332,000 |
| Subtotal of securities issued in conversion/exchange |
| 5,864,241 |
| (Loss) on conversion/exchange | $ | (1,582,264) |
F-49
On September 9, 2014, the Convertible Debenture due November 2016 was extinguished in full. However, the Company needed to determine the fair value of the derivative liability for the embedded conversion feature immediately prior to the conversion, in order to determine the change in the fair value of the derivative for the period. The Company determined to measure the derivative immediately prior to the conversion at its intrinsic value, since this method most fairly measured the value of the derivative liability. The intrinsic value computation is provided below.
|
| On September 9, 2014 | |
|
|
| |
| Stock price used for valuation | $ | 0.25 |
|
|
| 5,285 shares issued per $1,000 face value |
| Aggregate gross intrinsic value of the $3,500,000 of principal outstanding on September 8, 2014, immediately prior to conversion |
| 4,532,241 |
| Less the face value of the convertible debenture |
| (3,500,000) |
| Intrinsic value of the derivative conversion feature | $ | 1,032,241 |
|
|
|
|
Immediately after the conversion, the holders exchanged 15,978,943 shares of the Conversion Common Stock into 3,500 shares of Series A Convertible Preferred Stock. Shortly thereafter, the Company retired and cancelled the 15,978,943 shares of common stock received in the exchange.
3. CONVERTIBLE DEBENTURES
Convertible Debenture due January 2015
In January 2013, the Company received aggregate gross proceeds of $1,765,000 from the issuance of 8% convertible debentures due January 25, 2015 (“Convertible Debenture due January 2015”), of which $250,000 was received from our current President, Chief Executive Officer and director, and two other directors of the Company. The debentures paid interest quarterly and were convertible into shares of our common stock at a conversion price of $0.15 per share on or before January 25, 2015. The embedded conversion feature had certain weighted average anti-dilution protection provisions which would be triggered if the Company issues its common stock, or certain common stock equivalents, (as defined) at a price below $0.15 per share. The Company had the option to pay any interest on the debentures in common stock based on the average of the closing prices of our common stock for the 10 trading days immediately preceding the interest payment date. The Company also had the option to pay any interest on the debentures with additional debentures. The Company had the right to prepay the debentures at any time without penalty upon 30 days prior notice but only if the sales price of the common stock is at least $.30 for 20 trading days in any 30-day trading period ending no more than 15 days before the Company’s prepayment notice. In conjunction with the issuance of the debentures, the Company issued warrants (the “Convertible Debenture Warrant”) to purchase 5,882,745 shares of its common stock. Each warrant grants the holder the right to purchase one share of the Company’s common stock at the purchase price of $0.30 per share on or before January 25, 2016. The Convertible Debenture Warrant may be exercised on a cashless basis only if there is not an effective registration statement covering such shares.
F-50
The Company determined, based upon authoritative guidance, that the conversion feature embedded within the Convertible Debenture due January 2015 should be valued separately and bifurcated from the host instrument and accounted for as a free-standing derivative liability and that the Convertible Debenture Warrant should also be valued and accounted for separately as an equity instrument.
The derivative liability related to the embedded conversion feature was revalued at each reporting period as well as on the date of all conversions. The value of the derivative liability associated with the conversions and repayments of the Convertible Debenture due January 2015 during the three months ended April 30, 2014 was approximately $1,671,000. As of April 30, 2014, the Company determined the fair value of the derivative liability to be $-0-, as the full value of the Convertible Debenture due January 2015 was converted and/or repaid in full during the three months ended April 30, 2014. Accordingly, during the three and nine months ended July 31, 2014, the Company recorded losses on the change in fair value of the derivative liability of approximately $-0- and $1,131,000, respectively.
During the three months ended April 30, 2014, holders of $1,240,000 and approximately $9,000 of principal and interest, respectively, of the Convertible Debenture due January 2015, converted their holdings into an aggregate of 8,267,080 and 29,633 shares of common stock and holders of $200,000 of principal of the Convertible Debenture due January 2015 consented to prepayment (without conversion) of obligations to them under the instrument’s prepayment provisions. In connection with these conversions and prepayments the Company recorded a loss on extinguishment of debt of approximately $483,000 during the three months ended April 30, 2014. This loss represents the excess of the fair value of Common Stock issued and cash paid on the date of the respective conversions and prepayments over net book value of the debt on the date of conversion and/or repayment. Since the conversion feature on the Convertible Debenture due January 25, 2015 was determined to be a derivative liability, the net book value includes both the value of the debt, net of discount and the portion of derivative liability related to the conversion feature.
The loss on extinguishment of debt was calculated as follows:
| For the Nine Months Ended July 31, 2014 | ||
| Face value of debt converted and/or prepaid | $ | 1,440,000 |
| Less: discount |
| (658,232) |
| Plus: value of derivative liability |
| 1,670,704 |
| Net book value of debt converted | $ | 2,452,472 |
| Fair value of Common stock and cash issued |
| 2,935,387 |
| Loss on extinguishment of debt | $ | 482,915 |
F-51
As of April 30, 2014, the Convertible Debenture due January 2015 was extinguished in full. However, the Company needed to determine the fair value of the derivative liability for the embedded conversion feature immediately prior to the conversion, in order to determine the change in the fair value of the derivative for the period. The Company determined to measure the derivative immediately prior to the conversion at its intrinsic value, since this method most fairly measured the value of the derivative liability. The intrinsic value computation is provided below.
|
| As of April 30, 2014 | |
|
|
| |
| Stock price used for valuation | $ | 0.34 |
|
|
| 6,667 shares issued per $1,000 face value |
| Aggregate intrinsic value of the $1,150,000 of principal outstanding on April 30, 2014, immediately prior to conversion and repayment | $ | 1,456,797 |
|
|
|
|
The amortization of debt discount related to the Convertible Debenture due January 2015 was approximately $-0- and $233,000 for the three and nine months ended July 31, 2014, respectively, and approximately $92,000 and $175,000 for the three and nine months ended July 31, 2013, respectively.
Convertible Debenture due November 2016
In November 2013, the Company received aggregate gross proceeds of $3,500,000 from the issuance of 6% convertible debentures due November 11, 2016 (“Convertible Debenture due November 2016”). The debentures pay interest annually and are convertible into shares of our common stock at a conversion price of $0.1892 per share on or before November 11, 2016. The embedded conversion feature has certain weighted average anti-dilution protection provisions which would be triggered if the Company issues its common stock, or certain common stock equivalents, (as defined) at a price below $0.142 per share. The Company has the option to pay any interest on the debentures in common stock based on 90% of the volume weighted average
F-52
The Company determined, based upon authoritative guidance, that the conversion feature embedded within the Convertible Debenture due November 2016 should be valued separately and bifurcated from the host instrument and accounted for as a free-standing derivative liability and that the Convertible Debenture Warrant should also be valued and accounted for separately as an equity instrument.
The Company determined the fair value of each of the three elements included within the Convertible Debenture due November 2016. The debenture portion (without the conversion feature) bearing interest at 6% was determined to be a debt instrument with a fair value of $2,710,000. The embedded conversion feature was determined to be a derivative liability with a fair value of $1,570,000. The Convertible Debenture Warrant was determined to be an equity instrument with a fair value of $740,000. The Company determined the fair value of each of these instruments based upon the assumptions and methodologies as discussed below.
Since the Convertible Debenture Warrant was determined to be an equity instrument, the Company first computed the relative fair value of the Convertible Debenture due November 2016 (including the value of its conversion feature) with a fair value of $4,280,000 and the Convertible Debenture Warrant with a fair value of $740,000. Accordingly, the relative fair value of the Convertible Debenture Warrant and the Convertible Debenture due November 2016 (including the value of its conversion feature) was determined to be $515,936 and $2,984,064, respectively. Then, from the relative fair value of the Convertible Debenture due November 2016, the Company deducted in full the fair value of the embedded conversion feature of $1,570,000. The discount of $2,085,936 applied to the face value of the Convertible Debenture due November 2016 consists of the sum of the relative fair value of the Convertible Debenture Warrant of $515,936 and the full value of the bifurcated conversion option derivative liability of $1,570,000. The Convertible Debenture due November 2016 was recorded at a net value of $1,414,064, representing its face value of $3,500,000, less aggregate discounts for the derivative liability and warrant of $2,085,936, as summarized in the table below.
|
|
|
|
|
|
|
| Face value of Convertible Debenture due November 2016 |
|
|
| $ | 3,500,000 |
| Fair value of embedded conversion feature | $ | 1,570,000 |
|
|
|
| Relative fair value of Convertible Debenture Warrant |
| 515,936 |
|
|
|
| Discount | $ | 2,085,936 |
|
| (2,085,936) |
| Proceeds attributable to the Convertible Debenture due November 2016 |
|
|
| $ | 1,414,064 |
F-53
The Company calculated the fair value of the embedded conversion feature of the Convertible Debenture due November 2016 using a Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels of trading and liquidity of the Company stock, probability of default of the host instrument, and loss severity in the event of such default. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement.
|
| As of November 11, 2013 | |
|
|
| |
| Stock price on valuation date | $ | 0.20 |
| Conversion price | $ | 0.189 |
| Discount for lack of marketability |
| 35.5% |
| Term (years) |
| 3.00 |
| Expected volatility |
| 102.8% |
| Weighted average risk-free interest rate |
| 0.62% |
| Trials |
| 100,000 |
| Aggregate fair value | $ | 1,570,000 |
The Company calculated the fair value of the Convertible Debenture Warrant issued on November 11, 2013 using a Black Scholes Model, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s warrant value are expected stock prices, levels of trading and liquidity of the Company stock, probability of default of the host instrument, and loss severity in the event of such default. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement:
|
|
|
|
|
| As of November 11, 2013 | |
|
|
| |
| Stock price on valuation date | $ | 0.20 |
| Exercise price | $ | 0.378 |
| Discount for lack of marketability |
| 22% |
| Term (years) |
| 3.00 |
|
|
|
|
| Expected volatility |
| 102.8% |
| Weighted average risk-free interest rate |
| 0.6% |
| Number of warrants |
| 9,249,472 |
| Aggregate fair value | $ | 740,000 |
The Company determined the fair value of the Convertible Debenture due November 2016 by preparing an analysis of discounted cash flows, using a discount rate of 16.0%, which the Company deemed appropriate given the Company’s current risk scenarios.
F-54
The derivative liability related to the embedded conversion feature is revalued at each reporting period as well as on the date of all conversions, as discussed below. As of July 31, 2014, the Company determined the fair value of the derivative liability to be $1,900,000, and accordingly, during the three and nine months ended July 31, 2014, the Company recorded a gain (loss) on the change in the fair value of the derivative liability of approximately $850,000 and ($330,000), respectively.
As of July 31, 2014, the Company calculated the fair value of the embedded conversion feature of the Convertible Debenture due November 2016 using a Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels of trading and liquidity of the Company stock, probability of default of the host instrument, and loss severity in the event of such default. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement.
|
| As of July 31, 2014 | |
|
|
| |
| Stock price used for valuation | $ | 0. 260 |
| Conversion price |
| 0.189 |
| Discount for lack of marketability |
| 36.3% |
| Term (years) |
| 2.3 |
| Expected volatility |
| 100.6% |
| Weighted average risk-free interest rate |
| 0.78% |
| Trials |
| 100,000 |
| Aggregate fair value | $ | 1,900,000 |
The amortization of debt discount related to the Convertible Debenture due November 2016 for the three and nine months ended July 31, 2014 was approximately $129,000 and $342,000, respectively.
In connection with the issuance of the Convertible Debenture due November 2016, the Company incurred legal costs which were allocated as provided below:
|
|
|
|
|
|
|
| Attributable to: |
| Accounting Treatment |
|
Amount | |
|
|
|
|
|
|
|
| The embedded conversion feature (derivative) |
| Expensed as incurred |
| $ | 8,593 |
| The 8% Convertible Debenture Warrant |
| Charged to additional paid-in capital |
|
| 2,824 |
|
|
|
|
|
|
|
| The 8% Convertible Debenture |
| Recorded as deferred issuance costs and amortized under the interest method over the term of the 8% Convertible Debenture |
|
| 7,739 |
| Total |
|
|
| $ | 19,156 |
F-55
In connection with the issuance of the Convertible Debenture due November 2016, on February 7, 2014, the Company prepared and filed a registration statement registering for resale the shares of its common stock which may be issued upon the conversion of the debenture and exercise of the warrant consistent with the terms and conditions of the debenture agreement the Company entered into with the holders of the registrable shares listed above.
The Company has agreed to maintain the effectiveness of the registration statement through the earlier of three years from the date of the issuance of the Convertible Debenture due November 2016 or until Rule 144 of the Securities Act is available to the holders to allow them to sell all of their registrable securities thereunder.
See Note 2, Subsequent Events - for discussion of the conversion of the Convertible Debenture due November 2016.
4. SALE OF COMMON STOCK
On July 15, 2014, the Company, raised $4,000,000 of gross proceeds via a registered direct offering of its common stock to certain investors (the “Investors”) (the “Offering”). The Company sold an aggregate of 16,000,000 shares of common stock and warrants to purchase an aggregate of 8,000,000 shares of common stock. The purchase price of one share of common stock and a warrant to purchase ½ of a share of common stock was $0.25. The warrants are exercisable immediately as of the date of issuance at an exercise price of $0.40 per share and expire five years from the date of issuance. The exercise price of the warrants is subject to customary adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. Under certain circumstances, the Company has the right to call for cancellation of warrants for which a notice of exercise has not yet been delivered for consideration equal to $.001 per share. The Offering was effected as a takedown off the Company’s shelf registration statement on Form S-3, which became effective on April 25, 2014, pursuant to a prospectus supplement filed with the Securities and Exchange Commission.
5. STOCK BASED COMPENSATION
The Company maintains stock equity incentive plans under which the Company grants non-qualified stock options, stock appreciation rights, stock awards, performance awards, or stock units to employees, directors and consultants.
F-56
Stock Option Compensation Expense
We account for stock options granted to employees and directors using the accounting guidance in ASC 718 “Stock Compensation” (“ASC 718”). In accordance with ASC 718, we estimate the fair value of service based stock options and performance based options on the date of grant, using the Black-Scholes pricing model. For options vesting if the trading price of the Company’s common stock exceeds price targets we use a Monte Carlo Simulation in estimating the fair value at grant date. We recognize compensation expense for service based stock options and options subject to market conditions over the requisite or implied service period of the grant. For performance based awards, compensation expense is recognized over the requisite or implied service period of the grant when the performance target is deemed probable.
We recorded stock-based compensation expense, related to stock options granted to employees and directors, of approximately $1,562,000 and $2,118,000, during the nine months ended July 31, 2014 and 2013, respectively, and approximately $573,000 and $1,091,000 during the three months ended July 31, 2014 and 2013, respectively. Stock-based compensation expense for the nine months ended July 31, 2014 and 2013 includes approximately $1,089,000 and $1,816,000, respectively, and during the three months ended July 31, 2014 and 2013 approximately $496,000 and $1,014,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but vested in the current period. As of July 31, 2014, there was unrecognized compensation cost related to non-vested stock options granted to employees and directors, related to service based options of approximately $2,767,000, which will be recognized over a weighted-average period of 1.8 years and related to performance based options of approximately $427,000 which will be recognized when achievement is considered probable.
We account for stock options granted to consultants using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). In accordance with ASC 505-50, we estimate the fair value of service based stock options and performance based options at each reporting period, using the Black-Scholes pricing model. For options vesting if the trading price of the Company’s common stock exceeds price targets we estimate the fair value at each reporting period using a Monte Carlo Simulation. We recognize compensation expense for service based stock options and options subject to market conditions over the requisite or implied service period of the grant. For performance based awards, compensation expense is recognized when the performance target is achieved.
We recorded consulting expense, related to stock options granted to consultants, during the nine months ended July 31, 2014 and 2013 of approximately $784,000 and $574,000, respectively, and approximately $(103,000) and $147,000 during the three months ended July 31, 2014 and 2013, respectively. Stock-based consulting expense for the nine ended July 31, 2014 and 2013 includes approximately $736,000 and $574,000, respectively, and during the three months ended July 31, 2014 and 2013 approximately $(107,000) and $147,000, respectively, related to the amortization of compensation cost for stock options granted in prior periods but vested in the current period. As of July 31, 2014, there was unrecognized consulting expense related to non-vested stock options granted to consultants, related to service based options of approximately $1,223,000, which will be recognized over a weighted-average period of 1.3 years.
F-57
Fair Value Determination
We use the Black-Scholes pricing model in estimating the fair value of stock options which vest over a specific period of time or upon achieving performance targets. To determine the weighted average fair value of stock options on the date of grant, employees and directors are included in a single group. The fair value of stock options granted to consultants is determined on an individual basis. The stock options we granted during the nine months ended July 31, 2014 consisted of awards with 10-year terms that vest over one year, options with 10-year terms that vest over 36 months, options with 5-year terms which vest immediately and options with 10-year terms which vest upon achievement of performance milestones. The stock options we granted during the nine months ended July 31, 2013 consisted of awards of options with 5-year terms, which vest over one year and options with 10-year terms which vest in three annual installments commencing on the date of grant or over a nine month period.
The following weighted average assumptions were used in estimating the fair value of stock options granted during the nine months ended July 31, 2014 and 2013, and the three months ended July 31, 2014. No stock options were granted during the three months ended July 31, 2013.
|
|
|
|
|
| For the Three Months Ended July 31, 2014 |
|
| For the Nine Months Ended July 31, |
| |||
|
|
| ||||
|
| 2014 |
| 2013 |
| |
| Weighted average fair value at grant date | $0.22 |
| $0.17 |
| $0.25 |
| Valuation assumptions: |
|
|
|
|
|
| Expected life (years) | 5.79 |
| 5.26 |
| 5.98 |
| Expected volatility | 115.4% |
| 116.5% |
| 115.1% |
| Risk-free interest rate | 1.82% |
| 0.73% |
| 1.93% |
| Expected dividend yield | 0 |
| 0 |
| 0 |
The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. We use the simplified method to determine expected term. The simplified method was adopted since we do not believe that historical experience is representative of future performance because of the impact of the changes in our operations and the change in terms from historical options which vested immediately to terms including vesting periods of up to three years. Under the Black-Scholes pricing model 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 term of the options. We estimated the risk-free interest rate based on the implied yield available on the applicable grant date of a U.S. Treasury note with a term equal to the expected term of the underlying grants. We made the dividend yield assumption based on our history of not paying dividends and our expectation not to pay dividends in the future.
F-58
Under ASC 718, the amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. Accordingly, if deemed necessary, we reduce the fair value of the stock option awards for expected forfeitures, which are forfeitures of the unvested portion of surrendered options. Based on our historical experience we have not reduced the amount of stock-based compensation expenses for anticipated forfeitures.
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. If factors change and we employ different assumptions in the application of ASC 718 and ASC 505-50 in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
For options vesting if the trading price of the Company’s common stock exceeds price targets, we used a Monte Carlo Simulation in estimating expected term and fair value.
Stock Option Activity
During the nine months ended July 31, 2014 and 2013, we granted options to purchase 13,010,000 and 180,000 shares, respectively, of common stock at weighted average exercise prices of $0.22 and $0.20 per share, respectively, pursuant to the ITUS Corporation 2010 Share Incentive Plan (the "2010 Share Plan”). During the nine-month period ended July 31, 2013, in addition to options granted under the 2010 Share Plan, we granted options to our outside directors to purchase 3,000,000 shares at weighted average excise prices of $0.21 per share. During the nine-month periods ended July 31, 2014 and 2013, stock options to purchase 345,000 shares and 146,000 shares, respectively, of common stock were exercised with aggregate proceeds of approximately $51,000 and $26,000, respectively.
Stock Option Plans
As of July 31, 2014, we have two stock option plans: the ITUS Corporation 2003 Share Incentive Plan (the "2003 Share Plan") and the 2010 Share Plan, which were adopted by our Board of Directors on April 21, 2003 and July 14, 2010, respectively.
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. The maximum number of shares of common stock available for issuance under the 2003 Share Plan is 70,000,000 shares. The 2003 Share Plan was administered by the Stock Option Committee through June 2004, from June 2004 through July 2010, by the Board of Directors, from July 2010 through August 2012, by the Stock Option Committee, from August 2012 through November 2012, by the Executive Committee of the Board of Directors and since November 2012, by the Board of Directors, which determines the option price, term and provisions of each option. The exercise price with respect to all of the options granted under the 2003 Share Plan since its inception was equal to the fair market value of the underlying common stock at the grant date. In accordance with the provisions of the 2003 Share Plan, the plan terminated with respect to the grant of future options on April 21, 2013. Information regarding the 2003 Share Plan for the nine months ended July 31, 2014 is as follows:
F-59
|
|
|
| Weighted Average Exercise Price Per Share |
| Aggregate Intrinsic Value |
|
|
|
|
| ||
|
| Shares |
|
| ||
| Options Outstanding at October 31, 2013 | 15,638,845 |
| $0.72 |
|
|
| Exercised | (265,000) |
| $0.145 |
|
|
| Forfeited | (1,389,075) |
| $0.63 |
|
|
| Options Outstanding and exercisable at July 31, 2014 | 13,984,770 |
| $0.74 |
| $181,000 |
The following table summarizes information about stock options outstanding and exercisable under the 2003 Share Plan as of July 31, 2014:
|
|
|
|
| Weighted Average Remaining Contractual Life (in years) |
|
|
|
|
|
|
|
| Weighted Average Exercise Price | |
| Range of Exercise Prices |
| Number Outstanding |
|
| ||
|
|
|
| ||||
| $0.07 - $0.37 |
| 1,595,000 |
| 2.64 |
| $0.15 |
| $0.43 - $0.70 |
| 4,684,770 |
| 1.43 |
| $0.62 |
| $0.74 - $0.92 |
| 5,450,000 |
| 2.35 |
| $0.86 |
| $1.04 - $1.46 |
| 2,255,000 |
| 1.49 |
| $1.10 |
The 2010 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. The maximum number of shares of common stock available for issuance under the 2010 Share Plan was initially 15,000,000 shares. On July 6, 2011, the 2010 Share Plan was amended by our Board of Directors to increase the maximum number of shares of common stock that may be granted to 27,000,000 shares, on August 29, 2012, the maximum number of shares was further increased to 30,000,000 shares. On November 8, 2013, the Board of Directors approved an amendment to provide that effective November 8, 2013, the maximum aggregate number of shares available for issuance will be 20,000,000 shares and that on the first business day in 2014 and on the first business day of each calendar year thereafter the maximum aggregate number of shares available for issuance shall be replenished such that 20,000,000 shares will be available for issuance. Accordingly, during the nine months ended July 31, 2014, the number of shares in the 2010 Share Plan was increased by 25,634,980 shares to 55,634,980 shares. In addition, on November 8, 2013, the 2010 Share Plan was amended to provide that on January 2nd of each year commencing on January 2, 2014, each non-employee director of the Company at that time shall automatically be granted a 10 year stock option to purchase 300,000 shares of common stock (400,000 for the Chairman) that will vest in four equal quarterly installments. The 2010 Share Plan was administered by the Stock Option Committee through August 2012, from August 2012 through November 2012, by the Executive Committee of the Board of Directors and since November 2012, by the Board of Directors, which determines the option price, term and provisions of each option. The exercise price with respect to all of the options granted under the 2010 Share Plan was equal to the fair market value of the underlying common stock at the grant date. As of July 31, 2014, the 2010 Share Plan had 13,700,000 shares available for future grants. Information regarding the 2010 Share Plan for the nine months ended July 31, 2014 is as follows:
F-60
|
|
|
| Weighted Average Exercise Price Per share |
|
Aggregate Intrinsic Value | ||
|
| Shares |
|
| ||||
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
| Options Outstanding at October 31, 2013 | 2,984,000 |
| $ | 0.25 |
|
|
|
| Granted | 13,010,000 |
| $ | 0.22 |
|
|
|
| Exercised | (80,000) |
| $ | 0.16 |
|
|
|
| Options Outstanding at July 31, 2014 | 15,914,000 |
| $ | 0.23 |
| $ | 612,000 |
| Options Exercisable at July 31, 2014 | 5,016,222 |
| $ | 0.23 |
| $ | 229,000 |
The following table summarizes information about stock options outstanding under the 2010 Share Plan as of July 31, 2014:
|
|
| Options Outstanding |
| Options Exercisable | ||||||||
|
|
|
|
Weighted Average Remaining Contractual Life (in years) |
|
|
|
|
|
|
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| |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
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|
|
| Weighted Average Remaining Contractual Life (in years) |
|
Weighted Average Exercise Price | ||
|
|
|
|
| Weighted Average Exercise Price |
|
|
|
| ||||
| Range of Exercise Prices |
| Number Outstanding |
|
| Number Exercisable |
|
| |||||
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|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $0.12 - $0.37 |
| 15,914,000 |
| 8.62 |
| $0.23 |
| 5,016,222 |
| 6.63 |
| $0.23 |
|
|
|
|
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|
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|
In addition to options granted under the 2003 Share Plan and the 2010 Share Plan, in September 2012, the Board of Directors approved the grant of stock options to purchase 41,500,000 shares and, during the year ended October 31, 2013, the Board of Directors approved the grant of stock options to purchase 3,000,000 shares.
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Of the stock options granted in September 2012, nonqualified options to purchase 40,000,000 shares were issued to our new executive team, consisting of 16,000,000 stock options issued to our new President and Chief Executive Officer, 8,000,000 stock options issued to our new Senior Vice President of Engineering and 16,000,000 stock options issued to a new strategic advisor to the Company who is also a Director. These stock options have an exercise price of $0.2175 (the average of the high and the low sales price of the common stock on the trading day immediately preceding the approval of such options by the Board of Directors) and have a term of ten years. Half of these stock options vest in 36 equal monthly installments commencing on October 31, 2012, provided that if the grantees are terminated by the Company without cause, an additional 12 months of vesting will be accelerated and such accelerated options will become immediately exercisable. The balance of the stock options will vest in three equal installments upon achievement of a cash milestone, which was satisfied in the fourth quarter of fiscal 2013, and two stock price targets, which were not achieved in fiscal 2013. In November 2013, in light of the cost and expense of revaluing the unvested portion of the performance-based stock options on a quarterly basis for financial reporting purposes, the Board of Directors approved an amendment to the performance-based stock options awarded on September 19, 2012 to the President and Chief Executive Officer, Senior Vice President of Engineering and the strategic advisor. The amendment modifies the option award’s vesting conditions to provide that the unvested portion of the stock options vest in 23 consecutive monthly installments commencing November 30, 2013. The fair value of these options was recalculated to reflect the change to service based options as of November 8, 2013 and the unrecognized compensation amount was adjusted to reflect the increase in fair value. As of July 31, 2014, the outstanding options to purchase 40,000,000 shares had an intrinsic value of $1,660,000. As of July 31, 2014, 24,106,280 of these stock options were exercisable with an aggregate intrinsic value of approximately $1,000,000. These stock options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
The remaining nonqualified stock options granted in September 2012 to purchase 1,500,000 shares consisted of grants of 750,000 stock options to our Chairman in compensation for his service as interim Chief Executive Officer of the Company and as compensation for his prior service as a director, and 750,000 stock options to a director in compensation for his service in recruiting the Company’s new management team. These stock options have an exercise price of $0.2225 (the average of the high and low sales price on September 21, 2012) and an intrinsic value as of July 31, 2014 of approximately $55,000. The options vest in 3 equal annual installments of 250,000 commencing on September 21, 2012 and have a term of ten years. As of July 31, 2014, 1,000,000 options were exercisable with an aggregate intrinsic value of approximately $37,000. These stock options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
During the year ended October 31, 2013, nonqualified stock options to purchase 3,000,000 shares were granted to our outside directors for service rendered to our Company. Of these options,
(a) In November 2012, nonqualified stock options to purchase 1,000,000 shares were issued to one of our directors as additional compensation for service in recruiting the Company’s new management team. These options have an exercise price of $0.211 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing November 30, 2013.
(b) In February 2013, nonqualified stock options to purchase 1,000,000 shares were issued to the Chairman of the Board. These stock options have an exercise price of $0.235 (the average of the high and low sales price on date of grant) and vest 333,334 shares upon grant and 333,333 shares in two annual installments commencing February 15, 2014.
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(c) In March 2013, nonqualified stock options to purchase an aggregate of 1,000,000 shares were granted to the Company’s three outside directors. Each of these stock options has an exercise price of $0.195 (the average of the high and low sales price on date of grant) and vest in four equal quarterly installments commencing March 31, 2013.
As of July 31, 2014, the options to purchase 3,000,000 shares had an intrinsic value of approximately $136,000 and the portion exercisable of 2,333,334 shares had an intrinsic value of approximately $112,000. These options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
The following table summarizes information about the above stock options outstanding that were not granted under the 2003 Share Plan or the 2010 Share Plan as of July 31, 2014:
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| Options Outstanding |
| Options Exercisable | ||||||||
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| Weighted Average Remaining Contractual Life (in years) |
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| Weighted Average Remaining Contractual Life (in years) |
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| Weighted Average Exercise Price |
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| Weighted Average Exercise Price | ||
| Range of Exercise Prices |
| Number Outstanding |
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| Number Exercisable |
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| $0.195-$0.235 |
| 44,500,000 |
| 8.16 |
| $0.22 |
| 27,439,614 |
| 8.17 |
| $0.22 |
Stock Awards
We account for stock awards granted to employees and consultants based on their grant date fair value, in accordance with ASC 718 and ASC 505-50, respectively. During the nine months ended July 31, 2014 and 2013, we issued 130,000 shares and 665,000 shares, respectively, of common stock to consultants for services rendered pursuant to the 2010 Share Plan. We recorded consulting expense for the nine months ended July 31 2014 and 2013 of approximately $41,000 and $168,000, respectively and for the three months ended July 31, 2014 of approximately $6,000 and $117,000, respectively, for the shares of common stock issued to consultants.
6. FAIR VALUE MEASUREMENTS
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Financial assets and liabilities recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 - Financial assets and liabilities 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.
Level 2 - Financial assets and liabilities 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.
Level 3 – Financial assets and liabilities 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 and liabilities. We do not currently have any Level 3 financial assets.
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of July 31, 2014:
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
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| Money market funds – Cash and cash equivalents | $ | 3,651,564 |
| $ | - |
| $ | - |
| $ | 3,651,564 |
| Certificates of deposit Short-term investments |
| 2,550,000 |
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| - |
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| - |
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| 2,550,000 |
| Videocon Industries Limited global depository receipts |
| 4,150,970 |
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| - |
|
| - |
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| 4,150,970 |
| Total financial assets | $ | 10,352,534 |
| $ | - |
| $ | - |
| $ | 10,352,534 |
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The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31, 2013:
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
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| Money market funds – Cash and cash equivalents | $ | 898,172 |
| $ | - |
| $ | - |
| $ | 898,172 |
| Videocon Industries Limited global depository receipts |
| 4,197,341 |
|
| - |
|
| - |
|
| 4,197,341 |
| Total financial assets | $ | 5,095,513 |
| $ | - |
| $ | - |
| $ | 5,095,513 |
The following table presents the hierarchy for our financial liabilities measured at fair value on a recurring basis as of July 31, 2014:
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
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| Derivative liability | $ | - |
| $ | - |
| $ | 1,900,000 |
| $ | 1,900,000 |
| Patent acquisition obligation |
| - |
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| - |
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| 3,136,513 |
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| 3,136,513 |
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| $ | - |
| $ | - |
| $ | 5,036,513 |
| $ | 5,036,513 |
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The following table presents the hierarchy for our financial liabilities measured at fair value on a recurring basis as of October 31, 2013:
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| Derivative Liability | $ | - |
| $ | - |
| $ | 540,000 |
| $ | 540,000 |
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
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| For the Nine Months Ended July 31, 2014 | |
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| ||
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| ||
| Derivative liability: |
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| Beginning balance | $ | 540,000 |
| Aggregate fair value of bifurcated conversion feature issued |
| 1,570,000 |
| Change in fair value of bifurcated conversion feature |
| 1,460,704 |
| Fair value of bifurcated conversion features related to the extinguishment of debt |
| (1,670,704) |
| Ending balance | $ | 1,900,000 |
| Fair value of patent acquisition obligation: |
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| Beginning balance | $ | - |
| Initial fair value, discounted to present value |
| 2,850,511 |
| Amortized interest on patent obligation |
| 286,002 |
| Ending balance | $ | 3,136,513 |
The Company developed the assumptions that were used as follows: The stock price on the valuation date of the Company’s common stock was derived from the trading history of the Company’s common stock. The stock premium for liquidity was computed as the premium required to adjust for the effect of the additional time that it would be expected to take for the market to absorb the converted shares and warrant exercises, given the Company’s current trading volume. The term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s historical volatility; the risk free interest rate was obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future.
F-66
Our non-financial assets that are measured on a non-recurring basis include our property and equipment which are measured using fair value techniques whenever events or changes in circumstances indicate a condition of impairment exists. The estimated fair value of accounts payable and accrued liabilities approximates their individual carrying amounts due to the short term nature of these measurements. It is impractical to determine the fair value of the loan receivable and loan payable to the related party given the nature of these loans. The convertible debentures have been reported net of the discount for the beneficial conversion features and related warrants. Cash and cash equivalents are stated at carrying value which approximates fair value. These assets and liabilities were not presented in the preceding table.
7. INVESTMENTS
At July 31, 2014, we had marketable securities consisting of certificates of deposit of $2,550,000, which were classified as "available-for-sale securities" and reported at fair value.
The fair value of investment in Videocon Industries Limited (“Videocon”) global depository receipts (‘Videocon GDRs”) as of July 31, 2014 and October 31, 2013, and the unrealized loss for the nine months ended July 31, 2014, are as follows:
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| Investment in Videocon | |
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| ||
| Fair Value as of October 31, 2013 | $ | 4,197,341 |
| Unrealized loss |
| (46,371) |
| Fair Value as of July 31 2014 | $ | 4,150,970 |
See Note 2, Subsequent Event – for discussion of the disposition of this investment in August 2014.
F-67
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expense consist of the following as of:
|
| July 31, 2014 |
| October 31, 2013 | ||
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|
| ||||
| Accounts payable | $ | 529,340 |
| $ | 527,208 |
| Payroll and related expenses |
| 363,336 |
|
| 345,484 |
| Accrued litigation expense, consulting and other professional fees |
| 209,244 |
|
| 248,730 |
| Accrued other |
| 202,651 |
|
| 155,048 |
|
| $ | 1,304,571 |
| $ | 1,276,470 |
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9. NET LOSS PER SHARE OF COMMON STOCK
In accordance with ASC 260, “Earnings Per Share”, basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding. Diluted EPS for all periods presented is the same as Basic EPS, as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive. For this reason, excluded from the calculation of Diluted EPS for the nine and three months ended July 31, 2014 and 2013, were stock options to purchase 74,398,770 and 63,182,845 shares respectively, and warrants to purchase 25,923,281 and 9,878,759 shares, respectively and debentures convertible into 18,498,943 shares and 9,600,480 shares respectively.
10. EFFECT OF RECENTLY ADOPTED AND ISSUED PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-11 (“ASU 2013-11”) which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. ASC 2013-11 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2013. The adoption of ASC 213-11 on November 1, 2014 is not expected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers”. The amendments in ASU 2014-9 create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 2014-09 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2016. The adoption of ASC 213-11 on November 1, 2017 is not expected to have a material effect on our consolidated financial statements.
11. INCOME TAXES
We file Federal, New York State and California State income tax returns. Due to net operating losses, the statute of limitations remains open since the fiscal year ended October 31, 1997. We account for interest and penalties related to income tax matters in marketing, general and administrative expenses. There are no unrecognized income tax benefits as of July 31, 2014 and October 31, 2013.
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12. COMMITMENT AND CONTINGENCES
Patent Acquisition Obligations
As of July 31, 2014, we have incurred obligations due no later than November 2017 related to the acquisition of patents, which have a discounted present value of approximately $3,137,000, and which amount will be reduced by royalties paid during the period. The payment due in November 2017 is payable at the option of the Company in cash or common stock.
Litigation Matters
On January 28, 2013, we filed a lawsuit in the United States Federal District Court for the Northern District of California against AUO and E Ink in connection with the AUO License Agreements, alleging breach of contract and other charges, and are seeking compensatory, punitive, and treble damages (the “AUO/E Ink Lawsuit”). In addition to numerous material breaches by AUO of the AUO License Agreements, the Complaint alleges that AUO and E Ink conspired to obtain rights to CopyTele’s ePaper® Electrophoretic Display technology, and CopyTele’s Nano Field Emission Display technology. CopyTele alleges that such activities violated several State and Federal anti-trust and unfair competition statutes for which punitive and/or treble damages are applicable. We can give no assurance as to the potential outcome of this litigation. However, it is reasonably possible that the Company will not prevail on its damages claims in arbitration. Pursuant to the terms of the related arbitration agreement, the Company may be liable for AUO’s attorney’s fees, which may exceed $1 million, if the Company does not prevail.
The operations of the Company involve patent licensing and enforcement in connection with the unauthorized use of patented technologies. In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or award attorney's fees and/or expenses to a defendant(s), which could be material.
Other than the foregoing, we are not a party to any material pending legal proceedings. We are party to claims and complaints that arise in the ordinary course of business. We believe that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations.
F-70
You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
Additional risks and uncertainties not presently known or that are currently deemed immaterial may also impair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the future will have a greater impact on those who purchase our common stock. These purchasers will purchase our common stock at the market price or at a privately negotiated price and will run the risk of losing their entire investment.
ITUS CORPORATION
9,249,472 Shares of
Common Stock
PROSPECTUS
, 2014
F-71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company is paying all expenses of the offering. No portion of these expenses will be borne by the selling security holder. The selling security holder, however, will pay any other expenses incurred in selling its common stock, including any brokerage commissions or costs of sale. Following is an itemized statement of all expenses in connection with the issuance and distribution of the securities to be registered. All of the amounts shown are estimates, except for the SEC Registration Fees.
| SEC Registration Fee |
| $ | 450.62 |
| Accounting Fees and Expenses |
| $ | 10,000.00 |
| Legal Fees and Expenses |
| $ | (1) |
| Miscellaneous Fees and Expenses |
| $ | 1,548.38 |
| Total |
| $ | (1) |
(1) To be included in an amendment to this Registration Statement.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the DGCL, a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorney's fees), as well as judgments, fines and settlements, actually and reasonably incurred in connection with the defense of any action, suit or proceeding (other than an action by or in the right of the corporation) in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner he or she reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation for negligence or misconduct in the performance of his/her duty to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended.
Section 102(b)(7) of the DGCL permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to unlawful payment of dividends and unlawful stock purchase or redemption) or (iv) for any transaction from which the director derived an improper personal benefit.
Article XIII of the By-Laws of the Company contains provisions which are designed to provide mandatory indemnification of directors and officers of the Company to the full extent permitted by law, as now in effect or later amended. The By-Laws further provide that, if and to the extent required by the DGCL, an advance payment of expenses to a director or officer of the Company that is entitled to indemnification will only be made upon delivery to the Company of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 12, 2012, we completed a private placement with 5 accredited investors, including Lewis H. Titterton, Jr., the Company’s Chairman and then Chief Executive Officer, and Bruce Johnson, a director of the Company, pursuant to which we sold $750,000 principal amount of 8% Convertible Debentures due September 2016 (the “2012 Debentures”). In February 2013, $600,000 principal amount of the 2012 Debentures were converted into 6,521,736 shares of our common stock and an additional 68,116 shares were issued in payment of accrued interest. In April 2013, the remaining $150,000 principal amount of 2012 Debentures was converted into 1,663,043 shares of our common stock. The 2012 Debentures were not be registered under the Securities Act in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act, and Rule 506 promulgated thereunder, based on the fact that all of the investors were “accredited investors,” as such term is defined in Rule 501 of Regulation D.
II-1
On September 19, 2012, the Board granted stock options to purchase 41,500,000 shares. Of these options, options to acquire 40,000,000 shares were issued to the new management team and have an exercise price of $0.2175. 20,000,000 of those options will vest only if certain milestones are met. The remaining options to acquire 1,500,000 shares were issued to Lewis H. Titterton, Jr. the Company’s Chairman, and Kent Williams, a former director of the Company, and have an exercise price of $0.2225. For additional information with respect to the options, see “Security Ownership of Certain Beneficial Owners and Management – Equity Compensation Plan Information” above. These options were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement
On January 25, 2013, we completed a private placement with 20 accredited investors, including Robert A. Berman, the Company’s President, Chief Executive Officer and a director, Dr. Amit Kumar, a consultant and director of the Company, and Bruce Johnson, a director of the Company (the “2013 Investors”), pursuant to which we sold $1,765,000 principal amount of 8% Convertible Debentures due in January 2015 (the “2013 Debentures”) and warrants (the “2013 Warrant”) to purchase 5,882,745 shares of common stock (the “2013 Warrant Shares”). From June 2013 through April 2014, all of the January 2013 Debentures were either converted into shares of common stock or paid back in full. Each 2013 Warrant grants the holder the right to purchase the 2013 Warrant Shares at the purchase price per share of $0.30 on or before January 25, 2016. If there is not an effective registration statement covering the 2013 Warrant Shares, 2013 Warrants may be exercised on a cashless basis. The 2013 Debenture and 2013 Warrant were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act, and Rule 506 promulgated thereunder, as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
In connection with the January 25, 2013 offering we paid The Benchmark Company LLC, as placement agent, a cash placement fee of $41,400 (or 6% of the aggregate purchase price from the 2013 Investors they introduced to us) and issued to and its designees warrants to purchase 276,014 shares of common stock (or 6% of the aggregate number of shares underlying the 2013 Debentures issued to the 2013 Investors they introduced to us) upon the same terms as the 2013 Warrants issued in the offering. The warrant was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
Pursuant to the terms of an agreement, dated as of October 18, 2012, between the Company and Netgain Financial, Inc. (“Netgain”), on each of October 18, 2012 and January 18, 2013, the Company issued Netgain 125,000 shares of restricted common stock in payment of public relations and communications services. The Company terminated the agreement on April 9, 2013. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
On March 28, 2013, the Board of Directors granted Messrs. Titterton, Johnson and Williams non-qualified stock options to purchase 400,000, 300,000 and 300,000 shares of our common stock, respectively. These stock options (i) vested in four equal installments on March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013, (ii) will terminate on December 31, 2022 and (iii) have an exercise price of $0.195. These options were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement
On April 3, 2013, the Company, through its wholly owned subsidiary, IPAC, entered into an exclusive license agreement (the “IPAC Agreement”) pursuant to which it acquired the rights to a patent portfolio relating to loyalty awards programs commonly provided by airlines, credit card companies, hotels, retailers, casinos, and others.
II-2
The patent portfolio consists of 13 patents (the “Patents”) that cover the conversion of non-negotiable, loyalty awards points into negotiable funds used to purchase goods and services from third parties, and the conversion of awards points into points and awards provided by other loyalty program providers. Pursuant to the IPAC Agreement, the licensors will receive a percentage of all amounts received by IPAC from licensing and enforcement of the Patents and were issued 200,000 restricted shares of the Company’s common stock. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
On April 23, 2013 the Company entered into the Stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10 million of shares of the Company’s common stock over the two-year term of the agreement. Under the agreement, on April 23, 2013 (i) Aspire Capital purchased 2,500,000 shares of our common stock at $0.20 per share, with gross proceeds to the Company of $500,000, and (ii) Aspire Capital was issued 3,500,000 shares of common stock as a commitment fee. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
On May 29, 2013, the Company offered the holders of the warrants issued in a February 2011 private placement the opportunity to exercise the warrants at a reduced exercise price of $0.16 per share (payable in cash) during the period ended July 15, 2013. In connection therewith, Lewis H. Titterton, Jr., the Company’s Chairman, Bruce Johnson, a director of the Company, and Henry P. Herms, the Company’s Chief Financial Officer and a former director, exercised warrants to purchase 1,400,000, 700,000 and 280,000 shares of our common stock and we received gross proceeds of $380,800. On June 17, 2013, Mr. Krusos, our former Chief Executive Officer, exercised the warrants previously issued to him in our February 2011 private placement on a “cashless” basis and received 547,493 shares of our common stock. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
From October 18, 2012 through October 15, 2013, the Company entered into various agreements with companies to provide investor relations and public relations services to us for which the Company issued an aggregate of 1,490,000 shares of our common stock in payment for such services. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
During the period from April 2013 to November 2013, the Company issued an aggregate of 1,200,000 shares of our common stock to various inventors in connection with the acquisition of rights to patent portfolios. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
On November 11, 2013, we completed a private placement with a single institutional investor, pursuant to which the Company issued a $3,500,000 principal amount of 6% Convertible Debenture due 2016 at an exercise price of $0.1892 per share and a Warrant to purchase 9,249,472 shares of our common stock at an exercise price of $0.3784 per share. The Debenture and Warrant were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement. On September 9, 2014, we entered into the Debt Conversion Agreement, pursuant to which the Debenture was converted into shares of common stock, some of which were subsequently exchanged into shares of Series A Preferred Stock, and the exercise price of the Warrant was reduced to $0.31 per share. The conversion of the Debenture and the exchange of common stock for Series A Preferred Stock were exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
During the six months ended April 30, 2014, the Company issued an aggregate of 110,000 shares of our common stock to various companies in payment of public relations and investor relations services. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
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During the three months ended July 31, 2014, the Company issued an aggregate of 20,000 shares of our common stock to various companies in payment of public relations and investor relations services and 200,000 shares of our common stock to inventors in connection with the acquisition of patents. The common stock was issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act as they were issued to accredited investors, without a view to distribution, and were not issued through any general solicitation or advertisement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed with this registration statement.
| 3.1 | Certificate of Incorporation, as amended. (Incorporated by reference to Form 10-Q for the fiscal quarter ended July 31, 1992 and Form S-3, dated February 11, 2014.) |
| 3.2 | Amendment to the Certificate of Incorporation. (Incorporated by reference to Form 10-K for the fiscal year ended October 31, 2013.) |
| 3.3 | Certificate of Amendment to the Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 on Form 8-K, dated September 4, 2014.) |
| 3.4 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock. (Incorporated by reference to Exhibit 3.1 of our Form 8-K, dated September 10, 2014.) |
| 3.5 | Amended and Restated By-laws. (Incorporated by reference to Exhibit 3.1 to our Form 8-K dated, November 8, 2012.) |
| 4.1 | Registration Rights Agreement, dated as of April 23, 2013, by and between the Company and Aspire Capital Fund, LLC. (Incorporated by reference to Exhibit 4.3 to our Form S-1, dated April 24, 2013.) |
| 5.1 | Opinion of Ellenoff Grossman & Schole LLP covering 9,249,472 shares of common stock issuable upon exercise of a warrant.(Incorporated by reference to Exhibit 5.1 to our Form S-3. filed February 7,2014.) |
| 5.2 | Opinion of Ellenoff Grossman & Schole LLP covering 2,520,000 shares of common stock and 18,498,943 shares of common stock issuable upon conversion of shares of Series A Convertible Preferred Stock.(Filed herewith.) |
| 10.1 | 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 4 to our Form S-8 dated May 5, 2003.) |
| 10.2 | Amendment No. 1 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 4(e) to our Form S-8 dated November 9, 2004.) |
| 10.3 | Amendment No. 2 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2006.) |
| 10.4 | Amendment No. 3 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2006.) |
| 10.5 | Amendment No. 4 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 4(g) to our Form S-8 dated September 21, 2007.) |
| 10.6 | Amendment No. 5 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 4(g) to our Form S-8 dated January 21, 2009.) |
| 10.7 | Amendment No. 6 to the 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 10.5 to our Form 8-K, dated July 20, 2010.) |
| 10.8 | 2010 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated July 20, 2010.) |
| 10.9 | Amendment No. 1 to the 2010 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated July 7, 2011.) |
| 10.10 | Amendment No. 2 to the 2010 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated September 5, 2012.) |
| 10.11 | Amendment No. 3 to the 2010 Share Incentive Plan (Incorporated by reference to Exhibit 10.1 to our Form 10-Q for the fiscal quarter ended January 31, 2014.) |
| 10.12 | Loan and Pledge Agreement, dated November 2, 2007, by and between Mars Overseas Limited and CopyTele International Ltd. (Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2008.) |
| 10.13 | Loan and Pledge Agreement, dated November 2, 2007, by and between CopyTele International Ltd. and Mars Overseas Limited. (Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2008.) |
| 10.14 | Employment Agreement, dated as of September 19, 2012, between the Company and Robert Berman. (Incorporated by reference to Exhibit 10.35 to our Form 10-K for the fiscal year ended October 31, 2012.) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for, and related Order by the Commission, dated May 3, 2013, File No. 0-11254-CF#29240, granting confidential treatment for portions of Section 4 of this exhibit to pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.) |
| 10.15 | Employment Agreement, dated as of September 19, 2012, between the Company and John Roop. (Incorporated by reference to Exhibit 10.36 to our Form 10-K for the fiscal year ended October 31, 2012.) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for, and related Order by the Commission, dated May 3, 2013, File No. 0-11254-CF#29240, granting confidential treatment for portions of Section 4 of this exhibit to pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.) |
| 10.16 | Consulting Agreement, dated as of September 19, 2012, between the Company and Amit Kumar. (Incorporated by reference to Exhibit 10.37 to our Form 10-K for the fiscal year ended October 31, 2012.) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for, and related Order by the Commission, dated May 3, 2013, File No. 0-11254-CF#29240, granting confidential treatment for portions of Section 4 of this exhibit to pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.) |
| 10.17 | Employment Agreement, dated as of July 8, 2014, between the Company and Tisha Stender. (Filed herewith.) |
| 10.18 | Securities Purchase Agreement, dated July 15, 2014, between the Company and the Purchasers named therein in connection with the Company’s registered direct offering. (Incorporated by reference to Exhibit 10.1 to Form 8-K, dated July 15, 2014.) |
| 10.19 | Form of Warrant issued to investors in connection with the Company’s registered direct offering. (Incorporated by reference to Exhibit 4.1 to Form 8-K, dated August 15, 2014). |
| 10.20 | Termination Agreements, each dated August 29, 2014, relating to the Company’s transaction with Videocon Industries Limited. (Filed herewith.) |
| 10.21 | Debt Conversion Agreement, dated September 9, 2014, between the Company and Adaptive Capital, LLC. (Filed herewith.) |
| 10.22 | Warrant issued to Adaptive Capital, LLC. (Filed herewith.) |
| 21.1 | Subsidiaries of ITUS Corporation. (Filed herewith.) |
| 23.1 | Consent of Haskell & White LLP. (Filed herewith.) |
| 23.2 | Consent of Ellenoff Grossman & Shole LLP. (Included in Exhibit 5.2) |
| 24.1 | Power of Attorney. (See signature page.) |
| 101.ins | Instance Document. (Filed herewith.) |
| 101.def | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
| 101.sch | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
| 101.cal | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
| 101.lab | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
| 101.pre | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
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ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
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(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
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(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Melville, State of New York on this 8th day of December, 2014.
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| ITUS CORPORATION | |
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| By: | /s/ Robert A. Berman |
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| Name: Robert A. Berman |
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| Title: President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert Berman his true and lawful attorney-in-fact, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments including post-effective amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that said attorney-in-fact or his substitute, each acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
By: /s/ Robert A. Berman December 8, 2014
Robert A. Berman
President, Chief Executive Officer
and Director (Principal Executive Officer)
By: /s/ Henry P. Herms December 8, 2014
Henry P. Herms
Vice President – Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Lewis H. Titterton Jr. December 8, 2014
Lewis H. Titterton Jr.
Chairman of the Board
By: /s/ Dr. Amit Kumar December 8, 2014
Dr. Amit Kumar
Director
By: /s/ Dr. Andrea Belz December 8, 2014
Dr. Andrea Belz
Director
By: /s/ Bruce F. Johnson December 8, 2014
Bruce F. Johnson
Director
By: /s/ Dale Fox December 8, 2014
Dale Fox
Director
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