Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
COPY > SEC Filings for COPY > Form 10-K on 16-Jan-2014All Recent SEC Filings

Show all filings for COPYTELE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for COPYTELE INC


16-Jan-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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.

Results of Operations
In light of the change in our primary operations from product development and licensing to patent monetization, and patent assertion in connection with the unauthorized use of patented technologies, the comparison of our results of operations may have limited future value.

Fiscal Year ended October 31, 2013 compared with Fiscal Year ended October 31, 2012

Revenue

Although overall revenue decreased by approximately $551,000 in fiscal year 2013, to approximately $389,000, as compared to approximately $940,000 in fiscal year 2012, in the fourth quarter of fiscal 2013, the Company received approximately $214,00 from patent assertion activities relating to the issuance of licenses. Revenue from fiscal 2012 was attributable to display technology development and license fees related to the AUO License Agreements. Revenue recognition of display technology development and license fees has been suspended pending resolution of the AUO/E Ink Lawsuit. See "- Agreements Relating to Previous Business Operations" above in Item 1.


Table of Contents

Inventor Royalties and Contingent Legal Fees

Inventor royalties and contingent legal fees of approximately $208,000 are attributable to our patent assertion activities initiated during fiscal 2013, and are expensed in the period that the related revenues are recognized. 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 such costs during fiscal year 2012.

Litigation and Licensing Expenses

Litigation and licensing expenses of approximately $109,000 are attributable to our patent assertion activities initiated during fiscal 2013 and the AUO/EInk Lawsuit initiated in January 2013. We did not incur any such costs during fiscal year 2012.

Research and Development Expenses

We discontinued all research and development activity during the fourth quarter of fiscal year 2012. Accordingly, research and development expenses have decreased to $-0- in fiscal year 2013 from approximately $2,212,000 during fiscal year 2012.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses increased by approximately $5,127,000 to approximately $7,990,000 in fiscal year 2013, from approximately $2,863,000 in fiscal 2012. The increase in marketing, general and administrative expenses was principally due to an increase in employee stock option expense of approximately $2,311,000, an increase in consultant stock option expense of approximately $995,000, an increase in investor relations and public relations expense of approximately $670,000, an increase in legal and accounting fees of approximately $286,000, an increase in employee compensation and related costs, other than stock option expense, of approximately $266,000, an increase in rent expense of approximately $219,000, and an increase in consultant fees other than stock option expense of approximately $162,000. 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 of approximately $2,352,000, which will be recognized in future periods upon vesting of the stock options. In addition, as of October 31, 2013, there was unrecognized consulting expense related to non-vested share-based compensation arrangements for stock options granted to consultants of approximately $1,370,000, which will be recognized in future periods upon vesting of the stock options. The increase in rent expense in fiscal year 2013 is a result of discontinuing research and development activities in the fourth quarter of fiscal year 2012 and the discontinuation of allocating certain overhead cost, such as rent expense, to research and development expense. During fiscal year 2013 we vacated and returned a substantial portion of our leased facilities to the landlord for possible re-letting and at October 31, 2013 we recorded an expense of approximately $65,000 related to future rentals of unused facilities. The additional legal and accounting fees and shareholder relations expense are related to the Company's restructuring, which commenced in the fourth quarter of the fiscal year 2012 and the filing of a registration statement with the SEC during fiscal year 2013.

Change in Fair Value of Derivative Liability

The gain recorded from the change in fair value of derivative liability was approximately $475,000 in fiscal 2013, compared to $-0- in fiscal 2012. The derivative liability is related to the issuance of the January 2013 convertible debentures and is changed each reporting period based upon the market price of common stock and the time remaining to the maturity of the debentures.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of approximately $344,000 in fiscal year 2013 compared to $-0- in fiscal year 2012, related to the conversion of $325,000 principal amount of Convertible Debentures due January 2015 into shares of our common stock.


Table of Contents

Interest Expense

Interest expense increased to approximately $1,110,000 in fiscal year 2013 from approximately $8,000 in fiscal year 2012, due to interest expense, amortization of debt discount and debt discount expensed upon conversion of debentures into shares of our common stock. The full principal amount of $750,000 of the Convertible Debentures due September 2016 was converted into shares of common stock during fiscal year 2013 resulting in a charge to interest expense of approximately $717,000 during fiscal year 2013, as the associated beneficial conversion feature was fully amortized.

Dividend Income

Dividend income decreased to $-0- in fiscal year 2013 compared to approximately $13,000 in fiscal year 2012. Dividend income received in fiscal year 2012 was related to the Videocon GDR's acquired in December 2007.

Interest Income

Interest income decreased to approximately $-0- in fiscal year 2013 compared to approximately $3,000 the fiscal year 2012.

Liquidity and Capital Resources

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 September 2012 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 September 2012 debentures of approximately $717,000 related to the debentures' beneficial conversion feature. The Company was permitted to prepay the September 2012 debentures at any time without penalty upon 30 days prior notice. The Company also had the option to pay interest on the September 2012 debentures in common stock. During the three month period ended April 30, 2013, the entire $750,000 principal amount of the September 2012 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 September 2012 debentures resulted in a charge to interest expense of approximately $717,000 during the second quarter of fiscal 2013.

In January 2013, we received aggregate gross proceeds of $1,765,000 from the issuance of 8% convertible debentures due January 25, 2015, of which $250,000 was received from our current President, Chief Executive Officer and director, and two other directors of the Company. The January 2013 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. We have the option to pay any interest on the January 2013 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. We also have the option to pay any interest on the January 2013 debentures with additional debentures. We may prepay the January 2013 debentures at any time without penalty upon 30 days prior notice but only if the sales price of the common stock on the principal market on which the common stock is primarily listed and quoted for trading is at least $0.30 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 January 2013 debentures, we issued warrants to purchase 5,882,745 shares of our common stock. Each January 2013 warrant grants the holder the right to purchase one share of our common stock at the purchase price of $0.30 per share on or before January 25, 2016. In connection with the sale of January 2013 debentures, we paid a placement fee of approximately $41,000 and issued the placement agent a warrant to purchase 276,014 shares of common stock with identical provisions as January 2013 warrants issued with the January 2013 debentures. We also agreed to register the common stock issuable upon conversion of the January 2013 debentures and exercise of the January 2013 warrants. The January 2013 warrants may be exercised on a cashless basis only if there is not an effective registration statement covering such shares at the time the warrants are exercised. During June and July 2013, holders of $325,000 of principal of the January 2013 debentures converted their holdings into an aggregate of 2,166,775 shares of common stock and an additional 20,125 shares of common stock were issued in payment of accrued interest.


Table of Contents

In April 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 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. 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 discount 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 gross proceeds of $3,500,000 from the issuance of a 6% Convertible Debenture due November 11, 2016, to a single institutional investor. The November 2013 debenture pays interest annually and is 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 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 $0.1419 per share. In conjunction with the issuance of the November 2013 debentures, we issued warrants to purchase 9,249,472 shares of our common stock. Each November 2013 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. We also agreed to register the common stock issuable upon conversion of the November 2013 debentures and exercise of the November 2013 warrants. The November 2013 warrants may be exercised on a cashless basis only if there is not an effective registration statement covering such shares at the time the warrants are exercised.


Table of Contents

Based on currently available information, we believe that our existing cash and cash equivalents together with expected cash flows from patent licensing and enforcement, the sale of our common stock under the Stock Purchase Agreement with Aspire Capital Fund LLC (described in Item 5 above - "Recent Sales of Unregistered Securities"), the gross proceeds of $3,500,000 received from the private placement in November 2013 of a 6% Convertible Debenture (also described in Item 5 below - "Recent Sales of Unregistered Securities"), and other potential sources of cash flow 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 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 securities convertible into or exercisable for equity securities could result in dilution to our stockholders. 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.

The following table presents our expected cash requirements for contractual obligations outstanding as of October 31, 2013:

                                                   Payments Due by Period
                              Less
                              than          1-3           3-5            After
Contractual Obligations      1 year        years         years          5 years         Total

Non-cancelable Operating
Leases                     $  228,000   $    19,000   $          -   $           -   $    247,000

Convertible Debentures
due 2015                            -     1,440,000              -               -
                                                                                        1,440,000
Secured Loan Obligation
to Mars Overseas                    -     5,000,000              -               -     5,000,000

Total Contractual Cash
Obligations                $  228,000   $ 6,459,000   $          -   $           -   $  6,687,000

Off-Balance Sheet Arrangements

We have no variable interest entities or other off-balance sheet obligation arrangements.


Table of Contents

Critical Accounting Policies

Our 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 notes to consolidated financial statements, 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.

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.


Table of Contents

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.

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) are recorded as non-refundable deferred revenue on the accompanying consolidated balance sheet.

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 fiscal year 2012 we discontinued utilizing Volga, for contract research and development work. In evaluating our investment in Volga-Svet, Ltd., ("Volga"), a Russian company, at October 31, 2012, we determined that the discontinuation of funding from CTI and lack of available financial information from Volga has impaired the value of our investment in Volga.


Table of Contents

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 $2,693,000 and $615,000 during the years ended October 31, 2013 and 2012, 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 years ended October 31, 2013 and 2012, of approximately $1,105,000 and $110,000, respectively. See Note 2 to the consolidated financial statements for additional information.

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. We recorded stock-based compensation expense for the years ended October31, 2013 and 2012, of approximately $-0- and $927,000, respectively, for the shares of common stock issued to employees. n addition, we recorded consulting expense for the years ended October 31, 2013 and 2012 of approximately $305,000 and $76,000, respectively, for the shares of common stock issued to consultants.

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 Debentures

The Company accounts for hybrid contracts that feature conversion options in accordance with applicable generally accepted accounting principles . . .

  Add COPY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for COPY - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.