Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of August 3, 2016 a total of 293,678,330 shares of the Registrant’s
Common Stock, par value $0.001, were issued and outstanding.
Part I. Financial Information
Item 1. Financial Statements:
e.Digital
Corporation and subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
$
|
|
|
$
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
297,872
|
|
|
|
701,481
|
|
|
Accounts receivable, net
|
|
|
591,250
|
|
|
|
–
|
|
|
Deposits and prepaid expenses
|
|
|
39,625
|
|
|
|
31,189
|
|
|
Total current assets
|
|
|
928,747
|
|
|
|
732,670
|
|
|
Property, equipment and intangibles, net of accumulated depreciation and amortization of $107,692 and $128,950, respectively
|
|
|
25,028
|
|
|
|
26,772
|
|
|
Total assets
|
|
|
953,775
|
|
|
|
759,442
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
369,463
|
|
|
|
120,744
|
|
|
Accrued and other liabilities
|
|
|
86,737
|
|
|
|
109,072
|
|
|
Total current liabilities
|
|
|
456,200
|
|
|
|
229,816
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding
|
|
|
–
|
|
|
|
–
|
|
|
Common stock, $0.001 par value, authorized 350,000,000, 293,678,330 issued and outstanding each period
|
|
|
293,678
|
|
|
|
293,678
|
|
|
Additional paid-in capital
|
|
|
83,031,808
|
|
|
|
83,018,638
|
|
|
Accumulated deficit
|
|
|
(82,827,911
|
)
|
|
|
(82,782,690
|
)
|
|
Total stockholders' equity
|
|
|
497,575
|
|
|
|
529,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
953,775
|
|
|
|
759,442
|
|
See
notes to interim condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
5,126
|
|
|
Patent licensing
|
|
|
593,366
|
|
|
|
540,000
|
|
|
|
|
|
593,366
|
|
|
|
545,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
3,948
|
|
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
112,500
|
|
|
Contingent legal fees and expenses
|
|
|
219,957
|
|
|
|
230,322
|
|
|
Contingent royalties
|
|
|
15,025
|
|
|
|
–
|
|
|
Selling and administrative
|
|
|
192,350
|
|
|
|
221,025
|
|
|
Research and related expenditures
|
|
|
98,755
|
|
|
|
97,606
|
|
|
Total operating costs and expenses
|
|
|
638,587
|
|
|
|
665,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(45,221
|
)
|
|
|
(120,275
|
)
|
|
Income tax benefit (expense)
|
|
|
–
|
|
|
|
–
|
|
|
Net loss for the period
|
|
|
(45,221
|
)
|
|
|
(120,275
|
)
|
|
Loss per common share - basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
293,678,330
|
|
|
|
293,392,066
|
|
|
Diluted
|
|
|
293,678,330
|
|
|
|
293,392,066
|
|
See
notes to interim condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss for period
|
|
|
(45,221
|
)
|
|
|
(120,275
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,151
|
|
|
|
965
|
|
|
Provision for doubtful accounts
|
|
|
–
|
|
|
|
2,204
|
|
|
Stock-based compensation
|
|
|
13,170
|
|
|
|
31,009
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(591,250
|
)
|
|
|
(62,916
|
)
|
|
Deposits and prepaid expenses
|
|
|
(8,436
|
)
|
|
|
2,304
|
|
|
Accounts payable, trade
|
|
|
248,719
|
|
|
|
(11,822
|
)
|
|
Accrued and other liabilities
|
|
|
(22,335
|
)
|
|
|
(58,136
|
)
|
|
Cash used in operating activities
|
|
|
(402,202
|
)
|
|
|
(216,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(1,407
|
)
|
|
|
–
|
|
|
Cash used in investing activities
|
|
|
(1,407
|
)
|
|
|
–
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
–
|
|
|
|
1,100
|
|
|
Cash provided by financing activities
|
|
|
–
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(403,609
|
)
|
|
|
(215,567
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
701,481
|
|
|
|
1,952,981
|
|
|
Cash and cash equivalents, end of period
|
|
|
297,872
|
|
|
|
1,737,414
|
|
See
notes to interim condensed consolidated financial statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
e.Digital Corporation is a holding company incorporated under the
laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company is developing and marketing
an intellectual property portfolio consisting of context and interpersonal awareness systems (“Nunchi®” technology),
advanced data security technologies (“microSignet™” technology), secure communication technologies (“Synap™”
technology) and other technologies.
Unaudited Interim Financial Statements
These unaudited condensed consolidated financial statements have
been prepared by management in accordance with accounting principles generally accepted in the United States and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. These interim condensed consolidated financial statements do not include all of
the information and footnotes required by accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary
for a fair statement of the Company's financial position at June 30, 2016, and the results of its operations and cash flows for
the periods presented, consisting only of normal and recurring adjustments. All significant intercompany transactions have been
eliminated in consolidation. Operating results for the three months ended June 30, 2016 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2017. For further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended March 31, 2016 filed on Form 10-K.
Going Concern/ Liquidity
The Company has incurred significant losses and negative cash flow
from operations and has an accumulated deficit of $82,827,911 at June 30, 2016. Other than cash on hand, the Company has no other
sources of financing currently available as of June 30, 2016. The Company may incur additional losses in the future until licensing
or other revenues are sufficient to sustain continued profitability. Until the Company can demonstrate sustained profitability,
its ability to continue as a going concern is in doubt and may be dependent upon obtaining additional financing in the future.
There is no assurance that the Company will be successful in generating or raising funds, if necessary, to sustain its operations
for twelve months or beyond. Should the Company be unable to generate funds or obtain required financing, it may have to curtail
operations, which may have a material adverse effect on its financial position and results of operations. Uncertainty as to the
outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.
These
consolidated financial statements do not give effect to any adjustments that would be necessary should the Company be unable to
continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal
course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
The Company has not identified any trends or any known demands,
commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease
in liquidity. The termination of eVU operations in the second quarter of fiscal 2016 and the loss of eVU revenues did not have
a material impact on liquidity, results of operations or financial condition of the Company.
Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which requires entities
to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The amendment is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual
periods. The Company is currently evaluating the new standard.
In June 2014, the FASB issued ASU No. 2014-12,
Compensation –
Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved
after the Requisite Service Period
. The guidance requires that a performance target that affects vesting, and that could be
achieved after the requisite service period, be treated as a performance condition. The guidance was effective for annual periods
and interim periods within those annual periods beginning after December 15, 2015. The Company adopted this guidance effective
April 1, 2016, has no performance target awards and, accordingly adoption had no impact on its consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01,
“Extraordinary
and Unusual Items,”
eliminating the concept of extraordinary items for presentation on the face of the income statement.
Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate
component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements. The new
accounting guidance is effective for interim and annual periods beginning after December 15, 2015. The Company adopted this guidance
effective April 1, 2016 and adoption had no impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of
Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going
Concern.
This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding
upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term
substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering
the mitigating effect of management's plans, (4) requires certain disclosures when substantial doubt is alleviated as a result
of consideration of management's plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated,
and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to
be issued). This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact
it will have on its consolidated financial statements.
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes
. This new guidance requires all deferred tax assets and
liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. ASU 2015-17 is
effective for fiscal periods beginning after December 15, 2016 and may be adopted either prospectively or retrospectively.
Early adoption is permitted. The Company has not yet selected a transition method and is currently evaluating the impact that
ASU 2015-17 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance
will require lessees to recognize a right of use asset and a lease liability at the commencement date for all leases with terms
greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after
December 15, 2018 and must be adopted using a modified retrospective approach. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation — Stock Compensation
, which amends ASC Topic 718,
Compensation — Stock Compensation.
The
new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock
compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash
flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same
period. The Company is currently evaluating the potential impact that ASU 2016-09 may have on the Company’s financial position
or results of operations.
Other Accounting Standards Updates not effective until after June
30, 2016 are not expected to have a material effect on the Company’s financial position or results of operations.
3. LOSS PER SHARE
Basic loss per common share is computed
by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted
loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during
the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially
dilutive securities had been issued. Potentially dilutive securities consist of stock options. The dilutive effect of potentially
dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury
stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect
from potentially dilutive securities.
At June 30, 2016 and 2015, stock options exercisable into 4,500,000 and 5,948,578
shares of common stock were outstanding, respectively. These securities were not included in the computation of diluted loss per
share because they had no effect or were antidilutive, but they could potentially dilute earnings per share in future periods.
There was no difference in basic and diluted loss per share or basic and diluted weighted average shares outstanding for the periods
presented.
4. STOCK-BASED COMPENSATION COSTS
The Company
accounts for stock-based compensation under the provisions of ASC 718,
Share-Based Payment
and ASC 505-50,
Equity-Based
Payments to Non-Employees.
ASC 718
requires measurement of all employee stock-based awards using a fair-value method
and recording of related compensation expense in the consolidated financial statements over the requisite service period. Further,
as required under ASC 718, the Company estimates forfeitures for stock-based awards that are not expected to vest.
The
Company recorded stock-based compensation in its consolidated statements of operations for the relevant periods as follows:
|
|
|
Three Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
Research and development
|
|
|
2,782
|
|
|
|
5,329
|
|
|
Selling and administrative
|
|
|
10,388
|
|
|
|
25,680
|
|
|
Total stock-based compensation expense
|
|
|
13,170
|
|
|
|
31,009
|
|
No stock options were granted during the three-month periods ended
June 30, 2016 and 2015.
As of June 30, 2016 total estimated compensation cost of stock options
granted but not yet vested was approximately $13,000 and is expected to be recognized over the weighted average period of 0.25
years.
See Note 5 for further information on outstanding stock options.
5. STOCKHOLDERS’ EQUITY
The following table summarizes stockholders’ equity transactions
during the three-month period ended June 30, 2016:
|
|
|
Common stock
|
|
|
Additional paid-in
|
|
|
Accumulated
|
|
|
Total stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
equity
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Balance, April 1, 2016
|
|
|
293,678,330
|
|
|
|
293,678
|
|
|
|
83,018,638
|
|
|
|
(82,782,690
|
)
|
|
|
529,626
|
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
13,170
|
|
|
|
–
|
|
|
|
13,170
|
|
|
Shares issued on exercise of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Loss for the period
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(45,221
|
)
|
|
|
(45,221
|
)
|
|
Balance, June 30, 2016
|
|
|
293,678,330
|
|
|
|
293,678
|
|
|
|
83,031,808
|
|
|
|
(82,827,911
|
)
|
|
|
497,575
|
|
Options
The following table summarizes stock option activity
for the period:
|
|
|
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
exercise price
|
|
|
intrinsic value
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
Outstanding April 1, 2016
|
|
|
4,500,000
|
|
|
|
0.0799
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Canceled/expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
Outstanding June 30, 2016
|
|
|
4,500,000
|
|
|
|
0.0799
|
|
|
–
|
|
Exercisable at June 30, 2016
|
|
|
3,990,000
|
|
|
|
0.0761
|
|
|
–
|
|
|
(1)
|
Options outstanding are
exercisable at prices ranging from $0.055 to $0.11 and expire over the period from 2018 to 2019 with an average life of 2.19 years
.
|
|
|
(2)
|
Aggregate intrinsic value is based on the closing price of our common stock on June 30, 2016 of $0.0429
and excludes the impact of options that were not in-the-money.
|
Since the Company has a net operating loss carryforward as of June
30, 2016, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the quarter ended June
30, 2016.
6. FAIR VALUE MEASUREMENTS
Cash and cash equivalents are measured at fair value in the Company’s
consolidated financial statements. Accounts receivable are financial assets with carrying values that approximate fair value due
to the short-term nature of these assets. Accounts payable, and accrued and other liabilities are financial liabilities with carrying
values that approximate fair value due to the short-term nature of these liabilities. Effective April 1, 2008 the Company adopted
and follows ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”) which established a fair value hierarchy
that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to
the fair value measurement.
The Company’s cash and cash equivalents are valued using unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820).
7. SEGMENT INFORMATION
Through September 30, 2015, the Company had two operating segments:
(1) patent licensing and (2) products and services. Patent licensing consists of intellectual property revenues from the Company’s
patent portfolio. Products and services consisted of sales of the Company’s eVU products and related services. The Company
ceased providing eVU services at September 30, 2015, effectively ending this segment’s operations.
Reportable segment information for the three months ended June
30, 2016 and 2015 is as follows:
|
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
(Unaudited)
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
SEGMENT REVENUES:
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
5,126
|
|
|
Patent licensing
|
|
|
593,366
|
|
|
|
540,000
|
|
|
Total revenue
|
|
|
593,366
|
|
|
|
545,126
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
3,948
|
|
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
112,500
|
|
|
Contingent legal fees and expenses
|
|
|
219,957
|
|
|
|
230,322
|
|
|
Contingent royalties
|
|
|
15,025
|
|
|
|
–
|
|
|
Total cost of revenues
|
|
|
347,482
|
|
|
|
346,770
|
|
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION:
|
|
|
|
|
|
|
|
|
|
Segment income before corporate costs
|
|
|
245,884
|
|
|
|
198,356
|
|
|
Other corporate operating costs
|
|
|
291,105
|
|
|
|
318,631
|
|
|
Loss before provision for income taxes
|
|
|
(45,221
|
)
|
|
|
(120,275
|
)
|
The Company does not have significant assets employed
in the patent license segment and does not track capital expenditures or assets by reportable segment. Consequently there is no
disclosure of this information.
Revenue by geographic region is determined based on the location
of the Company’s direct customers or distributors for product sales and services. Patent license revenue is considered United
States revenue as payments are for licenses for United States operations irrespective of the location of the licensee’s
home domicile.
|
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
$
|
|
|
United States
|
|
|
593,366
|
|
|
|
540,000
|
|
|
International
|
|
|
–
|
|
|
|
5,126
|
|
|
Total revenue
|
|
|
593,366
|
|
|
|
545,126
|
|
Revenues from two licensees comprised
84% and 15% of revenue for the three months ended June 30, 2016, with no other licensee or customer accounting for more than 10%
of revenues.
Revenues from three licensees comprised 32%, 28% and 18% of revenue for the
three months ended June 30, 2015, with no other customer accounting for more than 10% of revenues.
Accounts receivable from two licensees comprised 85% and 15% of net accounts receivable
at June 30, 2016. Accounts receivable from two licensees comprised 47% and 47% of net accounts receivable at June 30, 2015.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
Intellectual Property Litigation
As of September 30, 2015, the Company had settled or dismissed all
complaints with respect to its Flash-R patent portfolio.
The Company commenced legal action with regards to its Nunchi portfolio
of patents in July 2014 and currently has three active complaints in the U.S. District Court for the Northern District of California
and one in the U.S. District Court for the Southern District of California. In December 2015, the United States Patent Trial and
Appeal Board (PTAB) granted a defendant’s petition for Inter Partes Review (IPR) of the asserted patents. An IPR is a procedure
for challenging the validity of a United States patent before the United States Patent and Trademark Office (USPTO) and often delays
pending enforcement. In July 2016 the USPTO granted a joint motion to dismiss the IPR.
The Company entered into two new Nunchi license agreements
covering three defendants during the first quarter of fiscal 2017. Additionally, the Company received payment related to
one royalty-based agreement executed in the prior fiscal year.
Commitment Related to Intellectual Property Legal Services
In September 2012 the Company engaged Handal and Associates (“Handal”)
to provide IP legal services in connection with licensing and prosecuting claims of infringement of the Company’s patent
portfolio. Pursuant to a partial contingent fee arrangement, the Company is paying a monthly retainer fee of $30,000 to Handal
creditable against future contingency recoveries. Handal has agreed to advance related expenses excluding experts and prior art
search firms. The Company has agreed to pay Handal a fee ranging from 33-40% of any license fee or settlement related to patent
enforcement matters, less prior retainers and expenses. The Company may terminate the representation at any time but would be obligated
to pay fees and advances.
Commitment Related to Intellectual Property Royalties
The Company is obligated for inventor royalties of 4% of net Nunchi
license revenues for the term of related patents, currently 2030.
Facility Lease
In January 2012, the Company entered into a sixty-two month facility
lease for its corporate office location, commencing May 1, 2012, for approximately 3,253 square feet at 16870 West Bernardo Drive,
Suite 120, San Diego, California. The aggregate monthly payment is $6,831 excluding utilities and costs. The aggregate payments
adjust annually with maximum payments totaling $7,157 in the forty-ninth through sixty-second months. Future lease commitments
at June 30, 2016 total $85,879. The Company recognizes rent expense by the straight-line method over the lease term. As of June
30, 2016, deferred rent totaled $14,638.
Concentration of Credit Risk and Sources of Supply
Financial instruments that potentially subject the Company
to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company maintains cash
and cash equivalent accounts with Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Certain
of the Company’s accounts are each insured up to $250,000 by the FDIC. The Company’s exposure for amounts in excess
of FDIC insured limits at June 30, 2016 was approximately $70,886. The Company has not experienced any losses in such accounts.
The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial
banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions.
The Company has not experienced any significant losses on its cash equivalents.
Concentrations of credit risk with respect to trade accounts receivable
are limited due to the number and nature of customers comprising the Company’s customer base and their geographic dispersion.
The Company has not incurred any significant credit related losses.
Guarantees and Indemnifications
The Company enters into standard indemnification agreements in the
ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification
provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions
are accounted for in accordance with ASC 450,
Contingencies
. The indemnification is generally limited to the amount paid
by the customer. To date, there have been no claims under such indemnification provisions.
Employee Benefit – 401K Plan
In September 2012, the Company adopted a defined contribution plan
(401(k)) covering its employees. Matching contributions are made on behalf of all participants, according to the applicable safe
harbor provision. The Company matches 100% (dollar for dollar) on deferrals of up to 4% of employee compensation deferred. As of
June 30, 2016, the Company made matching contributions totaling $2,435.
9. INCOME TAXES
There is no provision for income taxes for the three months ended
June 30, 2016 and 2015 as the Company currently estimates its effective tax rate to be zero due to uncertainty of income in future
interim quarters of the current year and due to net operating loss carryforwards.
At June 30, 2016 and 2015, the Company had deferred tax assets associated
with federal net operating losses (“NOLs”), related state NOLs, foreign tax credits and certain Federal and California
research and development tax credits, but recorded a corresponding full valuation allowance as it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company records a liability for uncertain tax positions when
it is probable that a loss has been incurred and the amount can be reasonably estimated. At June 30, 2016, the Company
has no liabilities for uncertain tax positions.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH
RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND
FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2016.
Cautionary Note on Forward Looking
Statements
In addition to the other information in this report, the factors
listed below should be considered in evaluating our business and prospects. This report contains a number of forward-looking statements
that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ
materially from historical results or those anticipated. In this report, the words “anticipates,” “believes,”
“expects,” “intends,” “future” and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements,
to reflect events or circumstances that may arise after the date hereof.
General
We are a holding company incorporated under the laws of Delaware
that operates through a wholly-owned California subsidiary of the same name. We are developing and marketing intellectual property
consisting of context and interpersonal awareness systems (“Nunchi” technology), advanced data security technologies
(“microSignet” technology), secure communications technologies (“Synap” technology), and other technologies.
We ceased providing eVU® mobile entertainment services to our travel industry customers in the third quarter of fiscal 2015
(December 31, 2014), with related contract eVU services ending as of September 30, 2015.
Through September 30, 2015 we had two operating segments: (1) patent
licensing and enforcement and (2) products and services. Our patent licensing and enforcement revenue consists of intellectual
property revenues from our patent portfolio. Our products and services revenue consisted of the sale of eVU products and accessories
to customers, warranty and technical support services, and content integration fees and related services. At September 30, 2015
we terminated providing eVU services, effectively ending this segment’s operations.
Licensing and Patent Enforcement Activities
We commenced legal enforcement actions in 2007 related to our Flash-R
flash memory patent portfolio, now expired. We successfully obtained license terms from 83 companies and related distributors through
September 30, 2015. We believe our success created both awareness and recognition of our intellectual property among household
named companies and their counsel. Since September 2012, the law firm of Handal and Associates has been handling our patent enforcement
matters on a partial contingent fee basis.
Our current licensing and enforcement activity consists of the following:
Nunchi Technology Enforcement
- We commenced legal
action with regards to our Nunchi portfolio of patents in July 2014. As of March 31, 2016, we had filed patent infringement litigation
and sought licenses from eight companies and related distributors. In the fourth quarter of fiscal 2016 we entered into one royalty
bearing license agreement and one settlement agreement with one defendant. In the first quarter of fiscal 2017, we entered into
two license agreements, covering three defendants. We currently have three active complaints in the U.S. District Court for the
Northern District of California and one active complaint in the U.S. District for the Southern District of California. We expect
to file future complaints against additional companies. In July 2016, the USPTO granted a joint motion to dismiss a defendant’s
December 2015 Inter Partes Review (IPR) of the asserted Nunchi patents. An IPR is a procedure for challenging the validity of a
United States patent before the USPTO. We are in early negotiations with other defendants, and are confident regarding the prospects
for future license revenues from the Nunchi portfolio.
microSignet Technology
- We are seeking to license
our microSignet technology and to date have not commenced any legal actions but may do so in the future.
Synap Technology
-
We are seeking to license
our Synap technology and to date have not commenced any legal actions, but may do so in the future.
We believe that our licensing and/or enforcement activities with
respect to our Nunchi, MicroSignet, and Synap patent portfolios will result in licensing revenue, and continue to develop additional
intellectual property in the areas of context and interpersonal awareness systems and explore new technologies for possible development
or licensing. Our legal action to enforce our Nunchi portfolio of patents has resulted in $593,366 revenue to date and there can
be no assurance that such legal action or future action against additional companies will be successful or result in licensing
revenue. For further information on our technologies and our patent portfolio and related licensing activities, refer to “Item
1 – Business” of our Annual Report on Form 10-K for the year ended March 31, 2016.
Our business is high risk in nature. There can be no assurance we
can achieve sufficient patent license or other revenues to sustain profitability. We continue to be subject to the risks normally
associated with introducing new technologies, including unforeseeable expenses, delays and complications. Accordingly, there is
no guarantee that we can or will report operating profits in future periods.
Overall Performance and Trends
We focused significant efforts on developing, licensing and enforcing
our patent portfolio during the last two fiscal years and during our current fiscal year.
We have successfully completed enforcement litigation and are in
the process of additional enforcement actions. There is a reluctance of patent infringers to negotiate and ultimately take a patent
license without at least the threat of legal action. However, the majority of patent infringement contentions settle out of court
based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed. We
believe we are building a track record of demonstrating the strength, validity and clarity of our patent claims that can result
in significant future revenues from our patent portfolio.
We reported a loss for the first quarter of fiscal
2017. Revenues and profits have been sporadic in prior periods and we have incurred significant historical losses and negative
cash flow from operations. We expect to incur losses in the future until licensing or other revenues are sufficient to sustain
continued profitability. Our ability to continue as a going concern is in doubt and is dependent upon achieving a profitable level
of operations and if necessary obtaining additional financing.
For the first quarter of fiscal 2017 (quarter ended June 30, 2016):
|
|
·
|
We recognized a net loss before income taxes of $45,221 compared to
a net loss before income taxes of $120,275 for the comparable period of the prior fiscal year. The difference in results was attributable
to increased license revenues due to the timing and amount of individual license agreements.
|
|
|
·
|
We recognized patent license revenues of $593,366 as compared to $540,000
for the prior year’s first three months.
|
|
|
·
|
Operating costs and expenses decreased to $638,587 in the three months
ended June 30, 2016 compared to $665,401 in the comparable prior period primarily due to decreased professional fees and decreased
noncash stock-based compensation expense.
|
Management faces challenges for the remainder of fiscal 2017 to
generate license revenues from our technologies. These challenges include, but are not limited to, successful execution of our
legal and licensing enforcement strategy in an uncertain and changing legal and regulatory environment related to patent infringement.
The failure to obtain additional patent license revenues could have a material adverse impact on our operations. Our patent licensing
business is subject to significant risks discussed herein and in our Annual Report on Form 10-K and is subject to uncertainties
as to the timing and amount of future license revenues, if any.
Our monthly cash operating costs average approximately $116,000
per month. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue
advanced product and technology research and development. Our quarterly results are highly dependent on the timing and amount of
licensing fees and accordingly quarterly results can vary dramatically from period to period. As a result of this and other factors,
past results and expenditure levels may not be indicative of future quarters.
Critical Accounting Policies
The discussion and analysis of our
financial condition and results of operations is based upon our consolidated financial statements
located in Item 1
of Part I, “Financial Statements,” and in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended March 31, 2016
. The preparation
of these financial statements prepared in accordance with accounting principles generally accepted in the United States requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including but not
limited to those related to revenue recognition, bad debts, intangible assets, financing operations, stock-based compensation,
fair values, income taxes, contingencies and litigation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe that, of the significant accounting policies discussed
in our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex
judgments:
|
|
·
|
stock-based compensation expense; and
|
Historically, our assumptions, judgments and estimates relative
to our critical accounting policies have not differed materially from actual results. There were no significant changes or modification
of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the three
months ended June 30, 2016. For further information on our critical accounting policies, refer to Note 2 to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended March 31, 2016.
Results of Operations
Three months ended June 30,
2016 compared to the three months ended June 30, 2015 (Unaudited)
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
0%
|
|
|
|
5,126
|
|
|
|
1%
|
|
|
|
(5,126
|
)
|
|
|
(100%
|
)
|
|
Patent licensing
|
|
|
593,366
|
|
|
|
100%
|
|
|
|
540,000
|
|
|
|
99%
|
|
|
|
53,366
|
|
|
|
10%
|
|
|
|
|
|
593,366
|
|
|
|
100%
|
|
|
|
545,126
|
|
|
|
100%
|
|
|
|
48,240
|
|
|
|
9%
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
|
–
|
|
|
|
0%
|
|
|
|
3,948
|
|
|
|
1%
|
|
|
|
(3,948
|
)
|
|
|
(100%
|
)
|
|
Patent licensing and litigation costs
|
|
|
112,500
|
|
|
|
19%
|
|
|
|
112,500
|
|
|
|
21%
|
|
|
|
–
|
|
|
|
0%
|
|
|
Contingent legal fees and expenses
|
|
|
219,957
|
|
|
|
37%
|
|
|
|
230,322
|
|
|
|
42%
|
|
|
|
(10,365
|
)
|
|
|
(5%
|
)
|
|
Contingent royalties
|
|
|
15,025
|
|
|
|
3%
|
|
|
|
–
|
|
|
|
0%
|
|
|
|
15,025
|
|
|
|
–
|
|
|
Selling and administrative
|
|
|
192,350
|
|
|
|
32%
|
|
|
|
221,025
|
|
|
|
41%
|
|
|
|
(28,675
|
)
|
|
|
(13%
|
)
|
|
Research and development
|
|
|
98,755
|
|
|
|
17%
|
|
|
|
97,606
|
|
|
|
18%
|
|
|
|
1,149
|
|
|
|
1%
|
|
|
|
|
|
638,587
|
|
|
|
108%
|
|
|
|
665,401
|
|
|
|
122%
|
|
|
|
(26,814
|
)
|
|
|
(4%
|
)
|
|
Loss before provision for income taxes
|
|
|
(45,221
|
)
|
|
|
(8%
|
)
|
|
|
(120,275
|
)
|
|
|
(22%
|
)
|
|
|
75,054
|
|
|
|
(62%
|
)
|
Loss Before Income Taxes
We reported a net loss before income taxes of $45,221 for the three
months ended June 30, 2016 compared to a net loss before income taxes of $120,275 for the comparable period of the prior year due
primarily due to increased patent license settlements in the current quarter.
Revenues
Revenues increased during first fiscal quarter of 2017 compared
to the same quarter of the prior fiscal year due to the impact of specific license arrangements. The Company exited the eVU business
in the third quarter of fiscal 2015 and therefore has no product and service revenue in the current year.
License fee revenues recognized fluctuate significantly from period
to period primarily based on the following factors:
|
|
·
|
the dollar amount of agreements executed each period, which is primarily driven by the magnitude of infringement associated with a specific licensee;
|
|
|
·
|
the specific terms and conditions of agreements executed each period and the periods of infringement contemplated by the respective payments; and
|
|
|
·
|
fluctuations in the number of agreements executed.
|
In the future the following additional factors could also impact
revenue variability:
|
|
·
|
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.
|
We are targeting new patent licensees but our results will continue
to be dependent on the timing and amount of future patent licensing arrangements, if any.
Operating Costs and expenses
Operating
costs and expenses include
cost of revenues associated with products and services, and costs associated with our patent
licensing and enforcement activities including contingent and non-contingent litigation costs and related enforcement support costs.
For the three months ended June 30, 2016, operating costs and expenses decreased by $26,814 compared to the same period in the
prior year.
Patent
licensing legal costs related to patent enforcement were $112,500 at June 30, 2016 and 2015.
Non-contingent licensing and
litigation costs and related enforcement support costs may be incurred without any directly related revenues in a respective period.
Generally contingent costs relate to revenues during a respective period but can vary depending on our share of certain costs and
expenses.
Contingent legal fees and expenses related
to patent enforcement were $219,957 for the three months ended June 30, 2016 and $230,322 for the three months ended June 30, 2015.
Contingent royalties for the three months ended June 30, 2016 were $15,025 with no comparable expense in the same period of the
prior year.
There were no costs of revenues associated
with products and services in the current year as compared to $3,948 in the prior year’s first quarter due to the Company’s
decision to exit the eVU business in the third quarter of fiscal 2015.
Selling and administrative costs for the three months ended June
30, 2016 decreased by $28,675 compared to the same period in the year prior. The decrease is primarily due to current period noncash
stock-based compensation expense of $10,388 as compared to $25,680 in the prior year’s first quarter, and decreased professional
fees of $38,087 as compared to $46,554 in the same period of the prior year.
Research and related expenses of $98,755 for the three months ended
June 30, 2016 were consistent with the same period in the year prior. Noncash stock-based compensation expense of $2,782 was recorded
for the three months ended June 30, 2016 as compared to $5,329 for the same period in the prior year. Research and related expenses
can vary significantly from quarter to quarter based on the allocation of time spent by personnel who work on both revenue producing
service and repair projects, on patent related costs and on internal research projects. Such expenses also vary based on decisions
made regarding outside engineering and consulting.
Net Loss
Net loss for the three months ended June 30, 2016 was $45,221. The
net loss for the prior comparable first quarter was $120,275.
Liquidity and Capital Resources
At June 30, 2016, we had working
capital of
$472,000
compared
to a working capital of $503,000 at March 31, 2016.
At June 30, 2016 we had cash on hand of $297,872.
Operating Activities
Cash used in operating activities was $402,202 for the three months
ended June 30, 2016. Cash used in operating activities
included
the net loss of $45,221
decreased by net non-cash expenses of $16,321 primarily consisting of stock based compensation of $13,170. Major components reducing
operating cash included an increase of $591,250 in accounts receivable, a decrease of $22,335 in accrued and other liabilities,
offset by an increase of $248,719 in accounts payable.
Cash used in operating activities was $216,667 for the three months
ended June 30, 2015. Cash used in operating activities
included
the net loss of $120,275
decreased by net non-cash expenses of $34,178 primarily consisting of stock based compensation of $31,009. Major components reducing
operating cash included an increase of $62,916 in accounts receivable, a decrease of $58,136 in accrued and other liabilities and
a decrease of $11,822 in accounts payable.
Patent license payments are normally due at signing of the license
or within 30-45 days of settlement or end of royalty reporting period.
Individual working capital components can change dramatically from
period to period due to timing of licensing, sales and corresponding receivable, and payable balances. Accordingly operating cash
requirements vary significantly from period to period.
Investing Activities
We invested $1,407 in computer equipment during the three months
ended June 30, 2016. The Company’s efforts are focused primarily on operations and currently we have no significant investing
capital needs. We have no commitments requiring investment capital.
Financing Activities
There were no cash financing activities during the three months
ended June 30, 2016. We received $1,100 of proceeds from stock option exercises during the three months ended June 30, 2015.
Debt and Other Commitments
We currently have no debt outstanding other than trade payables
and accruals. At June 30, 2016 and 2015 we had no significant purchase commitments for product and components.
We have future lease commitments on our current facility as more
fully described in our accompanying interim condensed consolidated financial statements.
Our legal firm, Handal and Associates, provides IP legal services
in connection with licensing and prosecuting claims of infringement of our patent portfolio. Pursuant to a partial contingent fee
arrangement, we are paying a monthly retainer fee of $30,000 to Handal creditable against future contingency recoveries. Handal
has agreed to advance related expenses excluding experts and prior art search firms. We have agreed to pay Handal a fee ranging
from 33% to 40% of any license fee or settlement related to patent enforcement matters, less prior retainers and expenses. We may
terminate the representation at any time but would be obligated to pay fees and advances.
The Company is obligated for inventor royalties of 4% of net Nunchi
license revenues for the term of related patents, currently 2030.
Cash Requirements
Other than cash on hand and accounts receivable, we have no material
unused sources of liquidity at this time. Our monthly cash operating costs average approximately $116,000 per month. Assuming no
new license revenues and current expenditure levels we would require approximately $480,000 of additional resources to fund operations
for the next twelve months. We believe we may be able to obtain additional funds from future licensing arrangements or other
financing sources but the timing thereof is subject to many factors and risks, many outside our control.
Since we have not demonstrated sustainable profitability, our ability
to continue as a going concern is in doubt and is dependent upon achieving sustained profitability and if necessary obtaining additional
financing. We currently have no plans, arrangements or understandings regarding any acquisitions.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed
to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship
between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.
We carried out an evaluation under the supervision and with the
participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures as of June 30, 2016, the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures
were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial
reporting during our fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses
constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies
which may be identified during this process.