UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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900 Walt Whitman Road
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Securities registered pursuant to Section 12(b) of the Act: None | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [x] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [x] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
PART I OverviewAs used herein, “we,” “us,” “our,” the “Company”, “CopyTele” or CTI currently owns 53 U.S. patents and 11 U.S. patent applications. Our principal operations include the development,
3 Patent Monetization and Patent Assertion Patent monetization is the generation of revenue and proceeds from patents and patented technologies (“ CTI’s Patent Portfolios Key Based Encryption Portfolio covering the generation and management of encryption keys used for securing e-mail, text messages, data, voice and facsimile. This type of encryption technology is commonly used for cloud based storage and email archiving, to comply with HIPAA and other regulations regarding the safeguarding of personal information. KB Encryption can also be used for protecting sensitive cellular, satellite, and local area network communications. ePaper® Electrophoretic Display Fundamental portfolio covering the underlying chemistry, manufacturing, assembly, and internal operations of core electrophoretic technology used in the world’s most popular eReader devices. Coverage includes both the particles, and the suspension, which are the primary elements used to create Nano Field Emission Display Portfolio covering a new type of flat panel display consisting of low voltage Micro Electro Mechanical Systems Display Portfolio covering vanadium dioxide coated pixels that electrically modulate light at extremely high speeds to form an image. Additional coverage on 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. 4 Patent Monetization and Patent Assertion Activities 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 Prior Agreements 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 AU Optronics Corp.
On January 28, 2013, we sent AUO a notice, terminating the AUO License Agreements
Videocon Industries Limited In November 2007, we entered into a Technology License Agreement (as amended in May
5 Under the terms of the Videocon License Agreement, we 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
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 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 loans are for a period of seven years, do not bear interest, and prepayment of the loans will not release the lien on the Securities prior to end of the seven year period. The loan agreements 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 under shareholders’ equity in the accompanying consolidated balance sheet, because the loan receivable is secured by the CopyTele Shares and the Share Subscription Agreement and Loan and Pledge Agreement were entered into concurrently.
Volga Svet Ltd. In September 2009, we entered into a Technology License Agreement with Volga Svet Ltd., (the “Volga License Agreement”) 6
ZQX Advisors LLC In August of 2009, we initiated an evaluation of our Encryption Products
We continue to
Competition CTI expects to encounter competition in the areas of patent acquisitions and
We
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Item 1A. Risk Factors. |
Our business involves a high degree of risk and uncertainty, including the following risks and uncertainties:
Risks Related to Our Financial Condition and Operations
We have experienced significant neta history of losses and may incur additional losses in the future.
On a cumulative basis we have sustained substantial losses and negative cash flows from operations since our inception. As of October 31, 2012, our accumulated deficit was approximately $125,083,000. As of October 31, 2012, we had approximately $840,000 in cash, cash equivalents and they may continue.
We have had net lossesshort-term investments on hand, and negative cash flows from operationsworking capital of approximately $900,000. We expect to continue incurring significant legal and general and administrative expenses in each year sinceconnection with our inception, andoperations. As a result, we anticipate that we may continue to incur substantial losses and experience substantial negative cash flows from operations. We have incurred substantial costs and expenses in developing our encryption and flat panel display technologies and in our efforts to produce commercially marketable products incorporating our technology. We have had limited sales of products to support our operations from inception through October 31, 2011. We have set forth below our net losses, research and development expenses and net cash used in operations for the fiscal years ended October 31, 2011 and 2010:future.
| Fiscal Years Ended October 31, | ||||||||
| 2011 | 2010 | |||||||
Net loss | $ | 7,378,036 | $ | 5,175,131 | ||||
Research and development expenses | 3,124,773 | 3,007,459 | ||||||
Net cash used in operations | 716,000 | 2,405,817 | ||||||
We may need additional funding in the future which may not be available on acceptable terms and, if available, may result in dilution to our stockholders.
We anticipate that, if cash generatedstockholders, and the report from operations is insufficient to satisfy our requirements, we will require additional fundingindependent registered public accountants includes an uncertainty paragraph regarding our ability to continue our research and development activities and market our products. Weas a going concern.
Based on currently available information, we believe that our existing cash, cash equivalents, investments in U.S. government securities and certificates of deposit, and accounts receivable,short-term investments, together with expected cash flows from expected sales of our encryption productspatent licensing and revenue relating to our display technologies,enforcement, and other potential sources of cash flows, willflow may not be sufficient to enable us to continue our marketing, production,patent licensing and research and developmentenforcement 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 operationspatent licensing and enforcement activities are insufficient to satisfy our liquidity requirements, we may seek to sell our investment securities or other financial assets or our debt or additional equity securities or obtain loans from various financial institutions where possible. The sale of additional equity securities or securities convertible debtinto or exercisable for equity securities could result in dilution to our stockholders. It is also management’s intention to continue to compensate employees and consultants by issuing stock or stock options. We currently have no arrangements with respect to additional financing.shareholders. We can give no assurancesassurance that we will generate sufficient revenuescash flows in the future (through sales, license feeslicensing and royalties,enforcement of patents, or otherwise) to satisfy our liquidity requirements or sustain future operations, that our production capabilities will be adequate, that other products will not be produced by other companies that will render our products obsolete, that employees and consultants will continue to accept stock as compensation, 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.
As shown in the accompanying consolidated financial statements, we have incurred a net loss of approximately $4,253,000 during the fiscal year ended October 31, 2012, and, as of that date, we have an accumulated deficit of approximately $125,083,000 and a net shareholders’ equity deficit of approximately $1,194,000. These and the other factors described herein raise uncertainty about our ability to continue as a going concern. Management’s plans in regard to these matters are set forth above. The accompanying financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. The report from our independent registered public accountants, KPMG LLP, dated January 29, 2013, includes an explanatory paragraph related to our ability to continue as a going concern.
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We may not generate sufficient revenue to support
If we encounter unforeseen difficulties with our business or operations in the future that require us to obtain additional working capital, and we cannot obtain additional working capital on favorable terms, or at all, our business may suffer.
Our consolidated cash, cash equivalents and short-term investments on hand totaled approximately $840,000 and $3,023,000 at October 31, 2012 and 2011, respectively. To date, we have relied primarily upon cash from our operations and from the public and private sale of equity securities to generate profits.the working capital needed to finance our operations.
Our principal operations include the development, production and marketing of thin flat display technologies, including low-voltage phosphor color displays and low-power passive E-Paper® displays, and the development, production and marketing of multi-functional encryption products that provide information security for domestic and international users over several communications media. In May 2008, we began receiving license fees related toWe may encounter unforeseen difficulties with our display technology from Videocon pursuant to the Videocon License Agreement. The Videocon License Agreement provides for payment of license fees as well as the payment of certain royalties based on sales of products containing our display technology. However, we have agreed to defer certain license fee payments (as described more fully in “Item 1. Business”) and we presently anticipate that ongoing improvements to our display technology and our current discussions with Videocon concerning additional licensees will likely result in future modifications of the timing of payments from Videocon. In June 2011, we received an initial license fee from AUO related to our display technologies pursuant to the AUO License Agreements. The AUO License Agreements also provide for payment of additional license fees upon completion of certain conditions for the respective technologies and, in addition, provide for the basis for royalty payments by AUO to CopyTele. We can give no assurances as to when, if ever, that we will receive any additional license feesbusiness or royalty payments from Videocon or AUO. In addition, our arrangements with Videocon and AUO involve counterparty risk. Our encryption products are only in their initial stages of commercial production. Our investments in research and development are considerable. Our ability to generate sufficient revenues to support our operations in the future or to generate profits will depend upon numerous factors, many of which are beyondthat may deplete our control, including, but not limited to:
Our and Videocon’s ability to implement our technology for Videocon to produce and market products containing our displays.
Our and AUO’s ability to implement our technology for AUO to produce and market products containing our displays.
Our ability to enter into license agreements with other third parties to utilize our technology in their products.
The capability of Volga, with whom we have been working for fourteen years, to produce color and monochrome displays and supply them to us.
Our ability to successfully market our line of encryption products.
Our production capabilities and those of our suppliers as required for the production of our encryption products.
Long-term performance of our products.
The capability of our dealers and distributors to adequately service our encryption products.
Our ability to maintain an acceptable pricing level to end-users for both our encryption and display products.
The ability of suppliers to meet our and Videocon’s or AUO’s requirements and schedules.
Our ability to successfully develop other new products under development, including our thin, flat, low-power passive display technology.
Rapidly changing consumer preferences.
The possible development of competitive products that could render our products obsolete or unmarketable.
Our future negotiations with Videocon and Volga with respect to payments and other arrangements with Volga.
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Because our revenue is subject to fluctuation,capital resources more rapidly than anticipated. As a result, we may be unablerequired to reduce operating expenses quickly enough to offset any unexpected revenue shortfall.obtain additional working capital in the future through bank credit facilities, public or private debt or equity financings, or otherwise. If we are required to raise additional working capital in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders. If we fail to obtain additional working capital as and when needed, such failure could have a shortfall in revenue in relation to expenses,material adverse impact on our operating results would suffer. Our operating results for any particular fiscal year may not be indicative of future operating results. You should not rely on year-to-year comparisons of results of operations as an indication of our future performance.
The loss of Videocon or AUO as customers could materially and adversely affect ourbusiness, results of operations and financial condition.
All of
Failure to effectively manage our net revenue in our Display Technology Segment and approximately 87% of our total net revenue during fiscal year 2011 came from AUO and all of our net revenue in our Display Technology Segment and approximately 82% of our total net revenue during fiscal year 2010 came from Videocon. The loss of either of these customerspotential growth could have a material adverse effectplace strains on our results of operations ormanagerial, operational and financial condition. We may not be able to maintain our customer relationships with Videoconresources and AUO or they may delay performance under, or fail to comply with, the payment terms of their agreements, all of which could materially and adversely affect our business and operating results of operations.
Our potential growth is expected to place a strain on our managerial, operational and financial resources and systems. Further, as our business grows, we will be required to manage multiple relationships. Any growth by us, or financial condition. Any reductionan increase in the amountnumber of revenue thatour strategic relationships, may place additional strain on our managerial, operational and financial resources and systems. Although we derive from Videoconmay not grow as we expect, if we fail to manage our growth effectively or AUO, withoutto develop and expand our managerial, operational and financial resources and systems, our business and financial results will be materially harmed.
Our future success depends on our ability to expand our organization.
As we grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those demands. These demands include increased accounting, management, legal services, staff support, and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an offsetting increase in new salesefficient and effective workforce, and our failure to other customers,do so could have a material adverse effect onadversely affect our business and operating results.
Timing10
Table of payments pursuant to the AUO License AgreementsContents
Our investments are dependent upon completion of certain conditions which we cannot assure you will occur on a timely basis or at all.
Our receipt of the additional $7 million of license fees from AUO is subject to completion of certain conditions for the respective technologies. We cannot presently estimate when, if ever, such conditions will be satisfied. Therefore the future payment dates for the additional license fee payments is uncertain.
Future modifications of the timing of payments pursuant to the Videocon License Agreement could occur that might materially affect which future periods in which revenues are recognized.
Under the terms of the Videocon License Agreement, we were scheduled to receive a license fee of $11 million from Videocon, payable in installments over a 27 month period. The initial installment commenced in May 2008, however certain license fee paymentscapital and credit markets have been subsequently deferred in light of our joint decisionexperiencing extreme volatility and disruption since 2008, and at times, the volatility and disruption have reached unprecedented levels. In some cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers. Although economic conditions appear to jointly develop improved versions of our Nano Display technologybe improving, if the current capital and the additional time and effort required by Videocon and uscredit markets do not continue to incorporate the developmental improvements related thereto which are aimed at reducing the power consumption, improving the reliability and lowering the fabrication cost. However, the aggregate amount of the payments did not change and Videocon’s obligation to make such payments remains in effect. During the fiscal year ended October 31, 2010 we received license fee payments from Videocon of $600,000. No such license fee payments were received from Videocon during the fiscal year ended October 31, 2011. As of October 31, 2011, we have received aggregate license fee payments from Videocon of $3.2 million. With our Nano Display License Agreement with AUO, we have concentrated our technical support to AUO to implement our Nano Display technology utilizing AUO’s facilities. Under the Nano Display License Agreement, Videocon has the potential to receive the Nano Displays produced by AUO and to incorporate the displays into their own products. As a result, we are presently in discussions with Videocon to enter into a new arrangement for us to receive the remainingimprove or further license payments from Videocon. Accordingly,deteriorate, we cannot presently estimate specificmay be unable to liquidate a particular issue. Furthermore, if economic conditions do not continue to improve, or if they further deteriorate, we may be required to record additional impairment charges in a future payment dates for the license fee payments.period despite our ability to hold such investments until maturity.
A substantial portion of our current and future expected business is with Videocon (an Indian company) and AUO (a Taiwanese company) and accordingly, we are faced with the inherent risks of doing business in a foreign country.
There are risks inherent in doing business in a foreign country. Risks of doing business in a foreign country could materially and adversely affect our results of operations and financial condition. These risks include, but are not limited to, unpredictable changes in or application of taxation regulations, foreign exchange controls, uncertain or unpredictable political, legal and economic environments and invalidity of government approvals. The occurrence of one or more of these events or a change in existing policy could have a material adverse effect on our cash flows, earnings, results of operations, and financial condition. These risks may limit or disrupt our operations, restrict the movement of funds or impair contract rights. In addition, the Videocon License Agreement is governed by the law of India and accordingly, in the event of a dispute regarding the Videocon License Agreement, it may be necessary for us to resolve such dispute in India or another foreign country, where we would be faced with unfamiliar laws and procedures. The resolution of disputes in foreign countries can be costly and time consuming, similar to the situation in the United States. However, in a foreign country, we face the additional burden of understanding unfamiliar laws and procedures. We may not be entitled to a jury trial, as we might be in the United States. Further, to litigate or arbitrate in a foreign country, we would be faced with the necessity of hiring lawyers and other professionals who are familiar with the foreign laws. For these reasons, we may incur unforeseen expenses if we are forced to resolve a dispute in India or any other foreign country.
Our equity arrangements with Videocon involve market risks.
At the same time as we entered into the Videocon License Agreement, we entered into the Share Subscription Agreement with Mars Overseas, to purchase the 20,000,000 CopyTele Shares, and our subsidiary, CopyTele International, entered into the GDR Purchase Agreement to purchase the 1,495,845 Videocon GDRs. The value of the Videocon GDRs owned by us depends upon, among other things, the value of Videocon’s securities in its home market of India, as well as exchange rates between the U.S. dollar and Indian rupee (the currency in which Videocon’s securities are traded in its home market). Based on both the duration and the continuing magnitude of the market price declines and the uncertainty of recovery, we recorded other than temporary impairments as of October 31, 2009 and 2011. We can give no assurances that the value of the Videocon GDRs will not decline in the future and future write downs may occur.
In addition, 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. 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 loans are for a term of seven years, do not bear interest and prepayment of the loans will not release the lien on the Securities prior to the end of the seven year period. The loan agreements also provide for customary events of default which may result in forfeiture of the Securities by the defaulting party. We can give no assurances that the respective parties receiving such loans will not default on such loans.
Our arrangements with Volga involve liquidityRisks Related to Patent Monetization and market risks.Patent Assertion Activities
At
We may not be able to monetize our patent portfolios.
As we recently announced, the same time asprimary operations of the Company going forward will be Patent Monetization and Patent Assertion. We expect to first generate revenues and related cash flows from the licensing and enforcement of patents that we entered intocurrently own and we expect to obtain the Volga License Agreement in September 2009,rights to license and enforce additional patents from third parties. However, we acquired a 19.9% ownership interest in Volga in exchange for 150,000 unregistered shares of our common stock. The Volga shares are not publicly traded and there iscan give no assuranceassurances that we will be able to sell the shares at an acceptable price,identify opportunities to exploit such patents or that such opportunities, even if at all.identified, will generate sufficient revenues to sustain future operations.
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Certain of our patent portfolios are subject to existing license agreements with AUO and Videocon 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, and the Videocon License Agreement with Videocon, certain rights to our ePaper® Display patents were licensed to AUO, and certain rights to our nFED Display patents were licensed to AUO and Videocon, respectively. 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, and we are engaged in discussions with Videocon with respect to the Videocon License Agreement. We intend to take the steps necessary to seek to remove any encumbrances that may inhibit our patent licensing and enforcement efforts; however, we can give no assurance that the ePaper® Display patents and the nFED 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 monetize such portfolios.
While we recently commenced lawsuits against AUO and E Ink, we may not be successful in obtaining judgments in our favor.
While we recently filed the AUO/E Ink Lawsuit and the E Ink Lawsuit, 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.
Our revenues are unpredictable, and this may harm our financial condition.
Due to the nature of the licensing business and uncertainties regarding the amount and timing of the receipt of license and other fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of potential licensees and certain other factors, our revenues may vary significantly from quarter to quarter, which could make our business difficult to manage, adversely affect our business and operating results, cause our quarterly results to fall below market expectations and adversely affect the market price of our common stock.
Our success depends in part upon our ability to retain the best legal counsel to represent us in patent enforcement litigation.
The success of our licensing business depends upon our ability to retain the best legal counsel to prosecute patent infringement litigation. As our patent enforcement actions increase, it will become more difficult to find the best legal counsel to handle all of our cases because many of the best law firms may have a conflict of interest that prevents their representation of us.
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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.
Once we commence Patent Monetization and Patent Assertion, we may become subject to claims and counterclaims by third parties.
As we become engaged in the business of Patent Monetization and Patent Assertion, we may be subject to claims, counterclaims and legal actions that arise in the ordinary course of business and which could have a material impact on our operation and financial condition. In connection with any of patent enforcement actions, it is also 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.
Our exposure to uncontrollable outside influences, including new legislation, court rulings or actions by the United States Patent and Trademark Office, could adversely affect our Patent Monetization and Patent Assertion business and results of operations.
Our Patent Monetization and Patent Assertion business is subject to numerous risks from outside influences, including the following:
New legislation, regulations or rules 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 U.S. 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, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions.
Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.
It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.
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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 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 face 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.
Uncertainty in global economic conditions could negatively affect our business, results of operations and financial condition.
Our revenue-generating opportunities depend on the use of our patented technologies by existing and prospective licensees, the overall demand for the products and services of our licensees, and on the overall economic and financial health of our licensees. Although economic conditions appear to be improving, recent uncertainties in global economic conditions have resulted in a tightening of the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. If economic conditions do not continue to improve, or if they further deteriorate, many of our licensees' potential customers, which may rely on credit financing, may delay or reduce their purchases of our licensees' products and services. In addition, the use or adoption of our patented technologies is often based on current and forecasted demand for our licensees' products and services in the marketplace and may require companies to make significant initial commitments of capital and other resources. If negative conditions in the global credit markets delay or prevent our licensees' and their potential customers' access to credit, overall consumer spending on the products and services of our licensees may decrease and the potential adoption or use of our patented technologies may slow, respectively. Further, if the markets in which our licensees' intend to participate do not continue to improve, or deteriorate further, this could negatively impact our licensees' long-term sales and revenue generation, margins and operating expenses, which could in turn have an adverse effect on our future business, results of operations and financial condition.
In connection with patent enforcement actions conducted by us, a court may rule that we have violated certain statutory, regulatory, federal, local or governing rules or standards, which may expose us to certain material liabilities.
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, and if we are required to pay such monetary sanctions, attorneys' fees and/or expenses, such payment could materially harm our operating results and our financial position.
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We are dependent upon a few key employeespersonnel and the loss of their services could adversely affect us.
Our future success is dependentto monetize our patent portfolios will depend on our ability to hire, retain and motivate highly qualified personnel. In particular, our success depends on the continued efforts of our President and Chief Executive Officer, DenisRobert A. Krusos, who is engaged in the managementBerman, and operations of our business, including all aspects of the development, productionSenior Vice President – Engineering, John Roop, and marketing of our encryption products and flat panel display technology. In addition, Mr. Krusos, as well as our other skilled management and technical personnel, are important to our future business and financial arrangements.strategic advisor, Dr. Amit Kumar. We do not have an employment agreement with, nor do we maintain “key person” life insurance on Mr. Krusos.Messrs. Berman or 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
AThe 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. 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 portionamount 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.
We are authorized to issue 300,000,000 shares of common stock. As of January 25, 2013, we have outstanding 185,104,037 shares of common stock or 280,532,256 shares of common stock after giving effect to the assumed exercise of all outstanding warrants and options and assumed conversion of convertible debentures. Due to the limited number of authorized shares available for issuance, we may not able to raise significant additional capital until we increase the number of shares we are authorized to issue. To facilitate the possibility and flexibility of raising of additional capital or the completion of potential acquisitions of patent portfolios, we will seek stockholder approval to increase the number of our authorized shares of common stock. We can provide no assurance that stockholders will approve an amendment to our certificate of incorporation to increase the number of shares of common stock we are authorized to issue. If we require additional capital and we are unable to obtain stockholder approval of increase the number of shares of common stock, we would need to curtail or cease some or all of our operations.
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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.
Provisions of Delaware law and our certificate of incorporation and bylaws 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 Company’s material products have not been incorporated into commercially marketable products, have not generatedDelaware General Corporation Law, 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 bylaws 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 product revenueof the anti-takeover provisions contained in our certificate of incorporation and bylaws.
Together, these provisions may make the removal of management more difficult and may not generate product revenuediscourage 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 future.
Withpast and may continue to fluctuate significantly from quarter to quarter in the exceptionfuture. 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 encryption products, allcommon 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 Company’s productstechnology 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; and
·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.
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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 not been incorporated into commercially marketable products,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
·failure to complete significant transactions.
The financial crisis affecting the banking system and financial markets and the uncertainty in global economic conditions, which began in late 2007 has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. As noted above, our stock price, like many others, has fluctuated significantly in recent periods and if investors have not generated any revenue from commercial productions (other than license fees)concerns that our business, operating results and financial condition will be negatively impacted by global economic conditions, our stock price could continue to fluctuate significantly in future periods.
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 never be commercialized. Even if commercialized, the Company’s productsoverreact, causing fluctuations in our stock prices that may not be commercially successful because consumers may not desireaccurately reflect the Company’s products or third parties may develop superior technology or have proprietary rights that preclude the Company from marketing its products.
The very competitive markets for our encryption products and flat panel display technology could have a harmful effectimpact of court rulings on our business operations and operating results.assets.
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The markets forTable of Contents
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 encryption productscommon stock was the object of securities class action litigation, it could result in substantial costs and flat panel display technology worldwide are highly competitivea diversion of management's attention and subject to rapid technological changes. Most of our competitors are larger than us and possess financial, research, service support, marketing, manufacturing and other resources, significantly greater than ours. Competitive pressures may have a harmful effect onwhich could materially harm our business and operatingfinancial results. We can give no assurances that we will be able to compete successfully in the market for our encryption products and our flat panel displays.
Our common stock is subject to the SEC’sCommission’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 SECCommission regulating broker-dealer practices in connection with transactions in penny stocks. These SECThe Commission’s rules may have the effect of reducing trading activity in our common stock making it more difficult for investors to sell their shares. The SECCommission’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,Commission, 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 SECCommission’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 these SECthe Commission’s rules may result in a lower trading volume of our common stock and lower trading prices.
We havedo not paid, nor do we anticipate paying in the future,declaring any cash dividends.dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate payingplan to pay any cash dividends in the foreseeablenear future. PaymentOur 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.
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Item 1B. Unresolved Staff Comments. None. |
None.
Item 2. Properties. |
We lease approximately 12,000 square feet of office and laboratory research facilities at 900 Walt Whitman Road, Melville, New York (our principal offices) from an unrelated party pursuant to a lease that expires November 30, 2014. Our base rent is approximately $311,000$312,000 per annum and the lease provides an escalation clause for increases in certain operating costs. See Note 7 to our Consolidated Financial Statements.
Item 3. 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, attempted monopolization, and other charges, and we are adequate for our current requirements.seeking compensatory, punitive, and treble damages. A copy of the Complaint filed in the AUO/E Ink Lawsuit is available at www.CopyTele.com.
WeIn addition to numerous and continual material breaches by AUO of the EPD License Agreement, and the Nano Display License Agreement, the Complaint alleges that AUO and E Ink conspired to obtain rights to CTI’s ePaper® Electrophoretic Display technology, and CTI’s Nano Field Emission Display technology, through an elaborate scheme whereby AUO obtained certain rights to the technologies under the guise of jointly developing products with CTI, which products would compete with certain products manufactured by AUO and certain products manufactured and sold by E Ink. Instead of jointly developing products with CTI and competing with E Ink, AUO clandestinely agreed to sell its electrophoretic display business to E Ink, and attempted to include a license to CTI’s ePaper® Electrophoretic Display technology as part of the sale, with CTI receiving no consideration. CTI alleges that such activities violated several State and Federal anti-trust and unfair competition statutes for which punitive and/or treble damages are applicable.
On January 28, 2013, we also filed a separate lawsuit against E Ink for patent infringement. See “Item 1. Business – CTI’s Patent Portfolios – Patent Monetization and Patent Assertion Actions”.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “COPY”. The high and low sales prices as reported by the OTCBB for each quarterly fiscal period during our fiscal years ended October 31, 20112012 and 20102011 have been as follows:
Fiscal Period | High | Low | ||||||
1st quarter 2011 | $ | 0.35 | $ | 0.15 | ||||
2nd quarter 2011 | 0.35 | 0.13 | ||||||
3rd quarter 2011 | 0.50 | 0.17 | ||||||
4th quarter 2011 | 0.25 | 0.13 | ||||||
1st quarter 2010 | $ | 0.78 | $ | 0.35 | ||||
2nd quarter 2010 | 0.52 | 0.28 | ||||||
3rd quarter 2010 | 0.39 | 0.19 | ||||||
4th quarter 2010 | 0.30 | 0.15 | ||||||
Fiscal Period |
|
| High |
|
|
| Low |
|
4th quarter 2012 | $ | 0.34 | $ | 0.07 | ||||
3rd quarter 2012 |
| 0.16 |
| 0.08 | ||||
2nd quarter 2012 |
| 0.29 |
| 0.10 | ||||
1st quarter 2012 |
| 0.17 |
| 0.10 | ||||
4th quarter 2011 | $ | 0.25 | $ | 0.13 | ||||
3rd quarter 2011 |
| 0.50 |
| 0.17 | ||||
2nd quarter 2011 |
| 0.35 |
| 0.13 | ||||
1st quarter 2011 |
| 0.35 |
| 0.15 | ||||
Holders
Securities Authorized for Issuance Under Equity Compensation Plans
Recent Sales of Unregistered Securities
On February 8, 2011, we sold 7,000,000 7,000,000 unregisteredshares of our common stock in a private placement to 10 accredited investors, including Denis A. Krusos, the Company’s former Chairman and Chief Executive Officer, Henry P. Herms, the Company’s Chief Financial Officer and a director, and Lewis H. Titterton, a director and now the current Chairman, and George P. Larounis, directorsformer director of the Company, at a price of $0.1786 per share, or proceeds of $1,250,000. In conjunction with the sale of the common stock, we issued the investors warrants to purchase 7,000,000 unregisteredshares of our common stock. Each warrant grants the holder the right to purchase one share of our common stock (or 7,000,000 shares of common stock in the aggregate) at the purchase price of $0.1786 per share on or before February 8, 2016. Certain of the investors are officers and/or directors of the Company and the warrants issued to such persons included a “cashless exercise” provision.
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On September 12, 2012, we completed a private placement with 5 accredited investors, including Lewis H. Titterton, the Company’s Chairman and then Chief Executive Officer, and Bruce Johnson, a director of the Company (the “Investors”), pursuant to which we sold $750,000 principal amount of 8% Convertible Debentures due 2016 (the “Debentures”). The Debentures mature on September 12, 2016, bear interest at the rate of 8% payable quarterly and are convertible into shares (the “Conversion Shares”) of our common stock of the Company, and at a price per share of $0.092. The Company may prepay the Debentures at any time without penalty upon 30 days prior notice. The Debentures also provide for events of default which, if any of them occurs, would permit the principal of and accrued interest on the Debentures to become or to be declared due and payable, unless the event of default has been cured or the holder of the Debenture has waived in writing the event of default. The Company granted the holders customary piggy-back registration rights. If all of the Debentures are converted, the Company would issue 10,870 shares of its common stock for each $1,000 principal amount of Debentures or 8,152,174 shares of its common stock in the aggregate.
On September 19, 2012, the Board granted stock options to purchase 41.5 million shares. Of these options, options to acquire 40 million shares were issued to the new management team and have an exercise price of $0.2175. Twenty million of those options will vest only if certain milestones are met. The remaining options to acquire 1.5 million shares were issued to Lewis H. Titterton, the Company’s Chairman, and Kent Williams, a director of the Company and have an exercise price of $0.2225. For additional information with respect to the options, see “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Executive Compensation – Equity Compensation Plan Information” below.
On January 25, 2013 (the “Closing Date”), 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 “Investors”), pursuant to which we sold $1,765,000 principal amount of 8% Convertible Debentures due 2015 (the “Debentures”) and warrants (the “Warrants”) to purchase 5,882,745 shares of common stock of the Company, par value $0.01 per share (the “Warrant Shares”). The Debentures mature on January 25, 2015, bear interest at the rate of 8% payable quarterly and are convertible into shares (the “Conversion Shares”) of our common stock at a price per share of $0.15. 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 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.
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The Debentures contain full ratchet anti-dilution protection which means, that, subject to certain exceptions, if the Company sells shares of common stock (or securities convertible or exchangeable into common stock) at an effective price of less than $0.15 per share of common stock, the conversion price of the Debentures will be reduce to such lower effective sales price.” The Debentures also provide for events of default which, if any of them occurs, would permit the principal of and accrued interest on the Debentures to become or to be declared due and payable, unless the event of default has been cured or the holder of the Debenture has waived in writing the event of default. If all of the Debentures are converted, the Company would issue 6,667 shares of common stock for each $1,000 principal amount of Debentures or 11,767,255 shares of its common stock in the aggregate. For each $1,000 principal amount of Debentures, the Company issued a Warrant to purchase 3,333 shares of common stock. Each Warrant grants the holder the right to purchase the 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 Warrant Shares, the Warrants may be exercised on a cashless basis.
Pursuant to the Debentures and Warrants, no Investor may convert or exercise such Investor’s Debenture or Warrant if such conversion or exercise would result in the Investor beneficially owning in excess of 4.99% of our then issued and outstanding common stock. A holder may, however, increase this limitation (but in no event exceed 9.99% of the number of shares of common stock issued and outstanding) by providing the Company with 61 days’ notice that such holder wishes to increase this limitation.
In connection with this offering, the Company granted each Investor registration rights with respect to the Conversion Shares and the Warrant Shares. The Company is obligated to use its reasonable best efforts to cause a registration statement registering for resale the Conversion Shares and the Warrant Shares to be filed no later than 90 days from the Closing Date and must be declared effective no later than 180 days from the Closing Date. The Company is required to use it reasonable best efforts to keep the registration statement effective date until the Conversion Shares and the Warrant Shares can be sold under Rule 144(k) of the Securities Act or such earlier date when all Conversion Shares and the Warrant Shares have been sold publicly; provided, however, the Company shall not be required to keep the Registration Statement effective for a period of more than three years from the Closing Issuance Date. If a registration statement covering the resale of the Conversion Shares is not filed within the 90-day period (the “Filing Default”), then on the date of the Filing Default and on each monthly anniversary (if the Filing Default has not been cured by such date) until the Filing Default is cured, the Company shall pay in cash to each Debenture holder liquidated damages equal to 1.0% of the aggregate purchase price paid by such holder for such Debentures then held by such holder. The liquidated damages will apply on a daily pro-rata basis for any portion of a month prior to curing of the Filing Default. The Company will not be liable for liquidated damages with respect to Warrant Shares.
In connection with this 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 investors they introduced to us) and issued to them warrants to purchase 276,000 shares of common stock (or 6% of the aggregate number of shares underlying the Debentures issued to the investors they introduced to us) upon the same terms as the Warrants issued in the offering.
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The issuances of the securities referred to above (i) were not registered under the Securities Act of 1933, as amended, in reliance on an exemption from registration under Section 3(b) or Section 4(2) of the Act, and Rule 506 promulgated thereunder, based on the fact that all of the investors are “accredited investors,” as such term is defined in Rule 501 of Regulation D and (ii) were not subject to any underwriting discounts or commissions.
Stockholder Return Performance Graph
| Fiscal Year Ended October 31 | ||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||||||
COPYTELE INC | Cum $ | 100.00 | 152.52 | 81.34 | 99.97 | 37.58 | 27.11 | |||||||||||||||||||||
NASDAQ Stock Market (US Companies) | Cum $ | 100.00 | 118.93 | 73.67 | 69.00 | 85.44 | 93.50 | |||||||||||||||||||||
NASDAQ Electronic Components Index | Cum $ | 100.00 | 127.11 | 69.29 | 87.45 | 99.98 | 98.14 | |||||||||||||||||||||
|
| Fiscal Year Ended October 31 | |||||||||||
|
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||||
COPYTELE INC | Cum $ | 100.00 | 53.33 | 65.54 | 24.44 | 17.77 | 28.88 | ||||||
NASDAQ Stock Market (US Companies) | Cum $ | 100.00 | 61.93 | 73.63 | 90.96 | 99.54 | 113.10 | ||||||
NASDAQ Electronic Components Index | Cum $ | 100.00 | 54.48 | 68.82 | 78.69 | 77.26 | 70.76 | ||||||
The comparison of total return on investment for each fiscal year ended October 31 assumes that $100 was invested on November 1, 20062007 in each of CopyTele, The Nasdaq Stock Market U.S. Index and The Nasdaq Electronic Components Index with investment weighted on the basis of market capitalization and all dividends reinvested.
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Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data. |
The following selected financial data has been derived from our audited Consolidated Financial Statements and should be read in conjunction with those statements, and the notes related thereto, which are included in this Annual Report on Form 10-K.
| As of and for the fiscal years ended October 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Net revenue | $ | 1,003,193 | $ | 730,675 | $ | 1,055,797 | $ | 2,063,123 | $ | 486,852 | ||||||||||
Cost of encryption products sold | 34,081 | 38,441 | 27,861 | 95,594 | 73,953 | |||||||||||||||
Provision for excess inventory | — | 43,866 | 19,627 | — | — | |||||||||||||||
Cost of encryption services | — | — | — | — | 86,407 | |||||||||||||||
Cost of display engineering services | — | — | 18,200 | — | — | |||||||||||||||
Research and development expenses | 3,124,773 | 3,007,459 | 4,116,200 | 4,127,393 | 3,403,943 | |||||||||||||||
Selling, general and administrative expenses | 2,872,605 | 2,889,129 | 4,194,227 | 3,829,654 | 2,414,916 | |||||||||||||||
Impairment in value of available for sale securities | 1,785,793 | — | 9,218,972 | — | — | |||||||||||||||
Dividend income | 33,507 | 68,211 | 29,468 | 130,886 | — | |||||||||||||||
Interest income | 2,516 | 4,878 | 20,807 | 37,028 | 34,149 | |||||||||||||||
Provision for income taxes | 600,000 | — | — | — | — | |||||||||||||||
Net loss | (7,378,036 | ) | (5,175,131 | ) | (16,489,015 | ) | (5,821,604 | ) | (5,458,218 | ) | ||||||||||
Net loss per share of common stock – basic and diluted | ($.04 | ) | ($.03 | ) | ($.12 | ) | ($.05 | ) | ($.05 | ) | ||||||||||
Total assets | 8,645,832 | 10,046,076 | 9,848,446 | 7,497,869 | 1,870,159 | |||||||||||||||
Long term obligations | — | — | — | — | — | |||||||||||||||
Shareholders’ equity | 1,058,033 | 4,595,955 | 4,452,272 | 1,730,277 | 1,191,350 | |||||||||||||||
Cash dividends per share of common stock | — | — | — | — | — | |||||||||||||||
| As of and for the fiscal years ended October 31, | ||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||
Net revenue | $ 947,085 | $ 1,003,193 | $ 730,675 | $ 1,055,797 | $ 2,063,123 | ||||
Cost of encryption products sold | 3,873 | 34,081 | 38,441 | 27,861 | 95,594 | ||||
Provision for excess inventory | - | - | 43,866 | 19,627 | - | ||||
Cost of display engineering services | - | - | - | 18,200 | - | ||||
Research and development expenses | 2,211,506 | 3,124,773 | 3,007,459 | 4,116,200 | 4,127,393 | ||||
Selling, general and administrative expenses | 2,866,262 | 2,872,605 | 2,889,129 | 4,194,227 | 3,829,654 | ||||
Impairment in value of available for sale securities | - |
| 1,785,793 |
| - |
| 9,218,972 |
| - |
Interest expense | 7,664 | - | - | - | - | ||||
Dividend income | 13,463 | 33,507 | 68,211 | 29,468 | 130,886 | ||||
Interest income | 3,458 | 2,516 | 4,878 | 20,807 | 37,028 | ||||
Provision for income taxes | - | 600,000 | - | - | - | ||||
Net loss | (4,252,799) | (7,378,036) | ( 5,175,131) | (16,489,015) | (5,821,604) | ||||
Net loss per share of common stock – basic and diluted | ($.02) |
| ($.04) |
| ($.03) |
| ($.12) |
| ($.05) |
Total assets | 5,660,676 | 8,645,832 | 10,046,076 | 9,848,446 | 7,497,869 | ||||
Long term obligations | 32,273 | - | - | - | - | ||||
Shareholders’ equity | (1,194,056) | 1,058,033 | 4,595,955 | 4,452,272 | 1,730,277 | ||||
Cash dividends per share of common stock | - | - | - | - | - | ||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
“Item “Item 1A. – Risk Factors” above. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report on Form 10-K.
General
As used herein, “we,” “us,” “our,” the “Company”, “CopyTele” or “CTI” means CopyTele, Inc. unless otherwise indicated. CTI currently owns 53 U.S. patents and 11 U.S. patent applications. Our principal operations include the development, productionacquisition, licensing, and marketingenforcement of thin flat display technologies, including low-voltage phosphor color displays and low-power passive E-Paper® displays,patented technologies. While in the past, the primary operations of the Company involved licensing in connection with and the development productionof patented technologies, the primary operations of the Company going forward will be patent licensing in connection with the unauthorized use of patented technologies and marketingpatent enforcement. We expect to first generate revenues and related cash flows from the licensing and enforcement of multi-functionalpatents that we currently own. We are continuing to develop our patent portfolios through the filing and prosecution of patent applications and will initiate lawsuits, if necessary, to prevent the unauthorized use of our patented technologies. The changes in the primary operations of the Company included elimination of development efforts, accordingly, we are no longer incurring research and development expenses. Certain of our patents are encumbered due to arrangements previously entered into by the Company. Where we are able, wewill take the steps necessary to remove any encumbrances that may inhibit our patent licensing and enforcement efforts. We expect 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 the ordinary course of our business we will likely initiate patent enforcement actions against unauthorized users of patented technologies on our own behalf and in conjunction with such third parties.
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We continue to look for opportunities to sell off our remaining inventory of encryption products that provide information security for domestic and international users over several communications media.have arrangements to support those products as necessary in connection with any such sales. We do not anticipate developing any additional encryption products.
As part
In connection with the change in the primary operations of the Company during the fourth quarter of fiscal year 2012, we have discontinued research and development activities, reduced our employee count from 19 to 7, and begun to vacate and return portions of our ongoing development activities, we continuefacilities to conduct improvement programs related to both our electrophoretic displaythe landlord for possible re-letting.
Patent Monetization and Patent Assertion
Patent monetization is the generation of revenue and proceeds from patents and patented technologies (“EPD”Patent Monetization”) and flat panel, low voltage phosphor, nanotube display (“Nano Display”) technologies to meet anticipated future customer needs. Our advanced new EPD technology utilizes specially coated particles in combination with. Patent assertion is a uniquespecialized type of pixel structurePatent 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”). CTI’s new business model is Patent Monetization and Patent Assertion. We currently own 53 U.S. patents and 11 U.S. patent applications, which are mainly grouped into 4 patent portfolios: Key Based Encryption (“KB Encryption”); ePaper® Electrophoretic Display (“ePaper® Display”); Nano Field Emission Display (“nFED Display”); and Micro Electro Mechanical Systems Display (“MEMS Display”).
Key Based Encryption
Portfolio covering the generation and management of encryption keys used for securing e-mail, text messages, data, voice and facsimile. This type of encryption technology is commonly used for cloud based storage and email archiving, to comply with HIPAA and other regulations regarding the safeguarding of personal information. KB Encryption can also be used for protecting sensitive cellular, satellite, and local area network communications.
ePaper® Electrophoretic Display
Fundamental portfolio covering the underlying chemistry, manufacturing, assembly, and internal operations of core electrophoretic technology used in the worlds’ most popular eReader devices. Coverage includes both the particles, and the suspension, which are the primary elements used to create an image. This new technology is applicablehighly reflective grey scale images to electronic books and other low power applications. We believe that our advanced EPD technology will have higher contrast, considerably faster operation, and be produced at a lower cost than current electrophoretic displays. Our simulate reading on paper.
Nano Field Emission Display technology incorporates
Portfolio covering a new type of flat panel display consisting of low voltage efficient color phosphors, in combination with nano materials and an electron emission system utilizingspecially coated carbon nanotubes, nano materials to producegenerate secondary electrons, and ionized noble gas, resulting in a bright, sharp, high contrast color video information. Our Nano Displayimage. Emerging technology is applicable to small hand-heldthat would result in a flat panel display utilizing less power, with better picture quality and larger size applications, including TV’s. We believe our Nano Display could potentially have a cost similar to a CRT (cathode ray tube) and thus cost less than current LCDs (liquid crystal displays), partly because our Nano Display does not contain a backlight, color filter or polarizer which represent a substantial portion of the cost of an LCD.lower manufacturing costs.
27
Micro Electro Mechanical Systems Display
Portfolio covering vanadium dioxide coated pixels that electrically modulate light at extremely high speeds to form an image. Additional coverage on 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.
Patent Monetization and Patent Assertion Activities
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, 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.
Prior Agreements
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 AU Optronics Corp., a Taiwanese company (“AUO”) (together the “AUO License Agreements”). Under the EPD License Agreement, we provided AUO with an exclusive, non-transferable, worldwide license of our E-Paper® display Display patents and technology, (the “EPD Licensed Technology”), forin connection with AUO (or an AUO subsidiary) to produce, market and selljointly developing products containing the EPD Licensed Technology, with CopyTele, including the right to sublicense the technology to third parties. We retained the non-exclusive right to use the EPD Licensed Technologyparties in a non-competitive manner.
In May 2011, we also entered into another license agreement (the “Nano Display License Agreement” and togetherconnection with the EPD License Agreement, the “AUO License Agreements”) with AUO.joint development of such products. Under the Nano Display License Agreement, we provided AUO with a non-exclusive, non-transferable, worldwide license of our NanonFED Display patents and technology, (the “Nano Display Licensed Technology”), forin connection with AUO (or an AUO subsidiary) to produce, market and selljointly developing products containing the Nano Display Licensed Technology,with CopyTele, with the right to consent to the granting of licenses of the Nano Display Licensed Technologytechnology to third parties.
Since entering intoOn January 28, 2013, we sent AUO a notice, terminating the AUO License Agreements bothdue 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 CopyTele have set up project teams to implement our EPD and Nano Display technologies. We are continuously providing technical support to AUO’s project teams. This support includes coordinating our technologies to interfaceE Ink in connection with AUO’s production requirements.
Under the AUO License Agreements, AUO has agreed to pay CopyTele an aggregate license feealleging breach of up to $10 million, of which $3 million was paid by AUO in June 2011 and the remaining $7 million is 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, netcontract, breach of the withholding tax,implied covenant of $2.4 million. In addition, eachgood 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”). A copy of the agreements also provides forComplaint filed in the basis for royalty payments by AUOAUO/E Ink Lawsuit is available at www.CopyTele.com. For more details on the AUO/E Ink Lawsuit, please see “Item 3, Legal Proceedings” above in this Annual Report on Form 10-K. We can give no assurance as to CopyTele.the potential outcome of this litigation.
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Videocon Industries Limited
In November 2007, we entered into a Technology License Agreement (as amended in May 2008, the2008), (the “Videocon License Agreement”) with Videocon Industries Limited, an Indian company (“Videocon”).Videocon. In April 2008, the Indian Government approved the Videocon License Agreement. Under the Videocon License Agreement, we provided Videocon with a non-transferable, worldwide license of our nFED Display technology, for thin, flat, low voltage phosphor Nano Displays (the “Videocon Licensed Technology”), for Videocon (or a Videocon Group company) to produce and market products including TVs, incorporating displays utilizing the Videocon Licensed Technology.nFED Displays. With the approval and support of Videocon, we entered into the AUONano Display License AgreementsAgreement for AUO to utilize their production facilities to produce our display technologies, including the Videocon Licensed Technology,nFED Displays for their own products and potentially for Videocon products. Additional licenses of the Videocon Licensed Technology to third partiesnFED Display technology require the joint agreement of CopyTele,CTI and Videocon, and AUO.may require the consent of AUO, depending upon the outcome of CTI’s termination of the Nano Display License Agreement and the AUO/E Ink Lawsuit. We have entered into discussions with Videocon regarding the disposition of the Videocon License Agreement.
Under the terms of the Videocon License Agreement, we 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 (which royalty will decrease when a specified sales level and time period are reached and may increase under other certain circumstances as a result of significant improvements in the Videocon Licensed Technology).Videocon. The initial installment commencedwas received in May 2008 howeverhowever; certain license fee payments have beenwere subsequently deferred in lightdeferred. The deferral of our joint decision to jointly develop improved versions of our Nano Display technology and the additional time and effort required by Videocon and us to incorporate the developmental improvements related thereto which are aimed at reducing the power consumption, improving the reliability and lowering the fabrication cost. However, the aggregate amount of the payments did not change and Videocon’s obligation to make such payments continues to be subject to CopyTele’s limited performance requirements described below and is not dependent on any specific performance standards which must be met by completion or delivery of prototypes of CopyTele’s products in the development stage. During the fiscal year ended October 31, 2010 we received license fee payments from Videocon of $600,000.is no longer in effect; however, we cannot give any assurance that additional license fees will be received. No such license fee payments were received from Videocon during the fiscal yearyears ended October 31, 2012 and 2011. As of October 31, 2011,2012, we have received aggregate license fee payments from Videocon of $3.2 million. With our Nano Display License Agreement with AUO, we have concentrated our technical supportmillion and $7.8 million remains owed to AUO to implement our Nano Display technology utilizing AUO’s facilities. Under the Nano Display License Agreement, Videocon has the potential to receive the Nano Displays produced by AUO and to incorporate the displays into their own products. As a result, we are presently in discussions with Videocon to enter into a new arrangement for us to receive the remaining or further license payments from Videocon. Accordingly, we cannot presently estimate specific future payment dates for the license fee payments.
Prior to our Nano Display License Agreement with AUO, Videocon, under the Videocon License Agreement, and with our assistance, was to provide the design and process engineering required to produce production display modules utilizing the Videocon Licensed Technology and also to provide all tooling and fixtures required for the production process. The display modules consist of our low voltage phosphor nanotube displays, the attached associated driver circuits, and controller circuits. Under the terms of the Videocon License Agreement, we have disclosed to Videocon the Videocon Licensed Technology, including any improvements, provided documentation and training of Videocon personnel, and cooperated with Videocon to jointly implement our technology prior to production to produce prototypes of such modules. In connection with our performance requirements under the Videocon License Agreement, we have provided technical information to Videocon, so they can understand the design and fabrication processes involved in our display technology. This includes providing the design and fabrication processes of the display components, such as the matrix which contains the structure to accommodate our electron emission technology and the color phosphors that are used to illuminate our displays. Other components and fabrication processes include the design details of the electron emission system materials and specifications, the methods, materials and processes required to obtain a vacuum for our display operation and the methods and electronics involved to operate, test, and evaluate the performance of the display. The display technology improvements were aimed at reducing the power, increasing the reliability, lowering fabrication cost and to also accommodate higher resolution (higher pixel density) and higher contrast. All of the above information that we have supplied to Videocon is important for Videocon to potentially receive displays that are potentially produced by AUO and for Videocon to incorporate the displays into their own products. We are continuing to use the assistance of Volga Svet Ltd., a Russian corporation (“Volga”), and an Asian company to implement these improvements. Improvements to the technology are to be jointly owned by CopyTele and Videocon.
Under the Videocon License Agreement we continue to have the right to produce and market products utilizing the Videocon Licensed Technology. We also continue to have the right to utilize Volga, with whom we have been working with for more than fourteen years, and the Asian company, with whom we have been working with for more than eight years, to produce and market, products utilizing the Videocon Licensed Technology.
In connection with the Videocon License Agreement, Videocon and CopyTele each have the right to appoint one senior advisor to the other’s board of directors for the term of the license granted under the Videocon License Agreement. Such appointments are limited to advise with respect to strategic planning and technology in the display field and do not grant either such senior advisor any rights with respect to involvement in the overall management or operations of the Company. While Videocon and CopyTele have made such appointments and the senior advisors from each of the companies are in communications with each other with respect to strategic planning and technology in the display field, the senior advisors have not had any interactions with the other’s board of directors and do not and have not attended any board of director meetings. Such senior advisors do not presently intend to have any interactions with the other’s board of directors in the future.
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. The fair value of our investment in the Videocon GDRs as of October 31, 2011 was approximately $5,382,000.
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 loans are for a period of seven years, do not bear interest, and prepayment of the loans will not release the lien on the Securities prior to end of the seven year period. The loan agreements 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 under shareholders’ equity in the accompanying consolidated balance sheet, because the loan receivable is secured by the CopyTele Shares and the Share Subscription Agreement and Loan and Pledge Agreement were entered into concurrently.
Our Nano Display technology includes a proprietary mixture of specially coated carbon nanotubes and nano materials in combination with our proprietary low voltage color phosphors. The specially coated carbon nanotubes, which are supplied to us by a U.S. company, and nano materials, require a low voltage for electron emission and are extremely small – approximately 1 ten thousandth the width of a human hair. Our technology utilizes a new memory-based active matrix thin film technology with each pixel phosphor activated by electrons emitted by a proprietary carbon nanotube network located extremely close from the pixels. The matrix also has a high pixel field factor to obtain high contrast and low power consumption. As a result, each pixel phosphor brightness is controlled using less than 40 volts. The carbon nanotubes and proprietary color phosphors are precisely placed and separated utilizing our proprietary nanotube and phosphor deposition technology. We have developedentered 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 processmaterial effect on our financial statements. We cannot presently estimate the timing or impact of maintaining uniform carbon nanotube deposition independentany such resolution.
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Volga Svet Ltd.
In September 2009, we entered into a Technology License Agreement with Volga Svet Ltd., (the “Volga License Agreement”) with Volga to produce and market our thin, flat, low voltage phosphor, Nano Displays in Russia. As part of the Volga License Agreement, Volga is required to purchase from us the matrix substrate, carbon nanotubes, and associated display electronics for any production of the licensed displays. In addition, in September 2009, we entered into a separate agreement with Volga whereby we obtained a 19.9% ownership interest in Volga in exchange for 150,000 unregistered shares of our common stock. Since we do not anticipate that we will continue to develop our Nano Displays and have discontinued utilizing Volga for contract research and development work, we are re-evaluating the Volga License Agreement and our ownership interest in Volga.
ZQX Advisors LLC
We have alsoIn August of 2009, we initiated an evaluation of our E-Paper®ePaper® Electrophoretic Display electrophoretic intellectual propertytechnology under an Engagement Agreement with ZQX Advisors LLC (“ZQX”) underand took a 19.5% ownership interest in ZQX. On January 21, 2013, we terminated the Engagement Agreement with ZQX, but currently retain our August 2009 Engagement Agreement. This included a review of our patent claims in connection with patents relating to the current e-reader market. We continue to maintain a 19.5% interest in ZQX.
Other
In August 2009, we entered into a development agreement with a U.S. company to provide engineering and implementation support for the development of our patented extremely low power passive monochrome or color display for use in portable devices including e-books. This company has experience in the field involving portions of our display technology. Our proprietary extremely low power display that we are developing, in conjunction with this U.S. company, incorporates a new micro-matrix substrate. Our display is designed to have bi-stability capability, and uses low power when an image is being created. Once an image is created, power consumption is negligible. Our display is expected to have both monochrome and/or color capability, and operate over wide temperature and environmental conditions. We have jointly updated our display designs to improve its speed of response and contrast. We have performed design simulations to verify its performance. We are jointly seeking business opportunities, with the assistance of Videocon, for this technology including licensees to produce our display technology.
We continue to pursue opportunities to market our voice, fax and data encryption solutions in commercial and government markets. We have designed and developed a breadth of products that provide flexible security performance, whether using any of the many satellite phones or docking units on the market, while having the ability of using the same or compatible device on cellular and landline telephones. We are continually engaged in the development of additional capabilities for our current product lines as well as the development of new products to meet current and anticipated customer applications.
Our operations and the achievement of our objectives in marketing, production, and research and development are dependent upon an adequate cash flow. Accordingly, in monitoring our financial position and results of operations, particular attention is given to cash and accounts receivable balances and cash flows from operations. Since our initial public offering, our cash flows have been primarily generated through the sales of common stock in private placements and upon exercise of warrants and stock options. Since 1999, we have generated limited cash flows from sales of our encryption products, and in May 2008 we began receiving license fees from Videocon and in June 2011 we began receiving license fees from AUO, related to our display technology. We are seeking to improve our liquidity through sales or license of products and technology.
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.
Critical Accounting Policies
Revenue Recognition
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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 arrangement with Videocon represent separate units of accounting. Under the Videocon License Agreement, CopyTele is required to: (a) disclose to Videocon the Videocon Licensed Technology and provide reasonable training of Videocon personnel; (b) jointly cooperate with Videocon to produce prototypes prior to production; and (c) assist Videocon in preparing for production. CopyTele has determined that these performance obligations do not have value to Videocon on a standalone basis, as defined in such accounting guidance, and accordingly they do not represent separate units of accounting.
We have established objective and reasonable evidence of fair value for the royalty to be earned from Videocon during the production period based on analysis of the pricing for similar agreements. Since the inception of the Videocon License Agreement, we have not earned any royalty income. In addition, we have determined that the license fee of $11 million to be paid during the pre-production period and royalties on product sales reflects the established fair value for these deliverables. We will recognize the $11 million license fee over the estimated period that we expect to provide cooperation and assistance, limiting the revenue recognized on a cumulative basis to the aggregate license fee payments received from Videocon. As a result of ongoing improvements to our display technology, we have extended the estimated period that we expect to provide cooperation and assistance. We will assess at each reporting period the progress and assistance provided and will continue to evaluate the period during which this fee will be recognized. On this basis, we recognized license fee revenue from Videocon for the years ended October 31, 2011 and 2010 of $-0- and $600,000, respectively.
We have also assessed the revenue guidance of ASC 605-25 to determine whether multiple deliverables in our arrangements with AUO represent separate units of accounting.accounting. Under the AUO License Agreements CopyTele, we received initial license fees of $3 million, and could receiveof aggregate license fees of up to an$10 million. The additional $7 million in license fees were payable upon completion of certain conditions for the respective technologies. CopyTele hasWe 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.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 license fees over the estimated periodperiods that we expectexpected to complete the conditions for the respective technologies andtechnologies. We have not recognizerecognized any portion of the $7 million of additional license fees as either deferred revenue or revenue as it iswas considered contingent revenue. Upon completion of the various conditions for the respective technologies, the additional license fees of $7 million will be recognized over this performance period, limiting the revenue recognized on a cumulative basis to the aggregate license fee payments received from AUO.
At each reporting period we assess the progress in completing these effortsour performance obligations under the AUO License Agreements and recognize license fee revenue over the remaining estimated period that we expect to complete the conditions for the respective technologies. On this basis, we reassessed the performance period duringrevenue recognition for the fourth quarter of this fiscal year which is reflected2012 and, accordingly, revenue recognition under the AUO License Agreements has been suspended pending resolution of the AUO/E Ink Lawsuit. For more details on the AUO/E Ink Lawsuit, please see “Item 3, Legal Proceedings” above in this Annual Report on Form 10-K.
During the years ended October 31, 2012 and 2011 we recognized approximately $940,000 and $873,000, respectively, of license fee revenue from AUO for the fiscal year ended October 31, 2011 of approximately $873,000.AUO. License fee payments received from AUO which are in excess of the amounts recognized as revenue (approximately $2,127,000$1,187,000 as of October 31, 2011)2012) are recorded as non-refundable deferred revenue on the accompanying consolidated balance sheet. Each of the license agreements withThe AUO License Agreements also provide for the basis for royalty payments on future production, if any, by AUO to CopyTele,CTI, which we have determined represent separate units of accounting. We have not recognized any royalty income under the AUO License Agreements.
Investment Securities
We classify our investment securities in one of two categories: available-for-sale or held-to-maturity. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Held-to-maturity securities, which are investment securities that the Company has the ability to hold to maturity, are carried at amortized cost. The amortization of premiums and accretion of discounts are recorded on the level yield (interest) method, over the period from the date of purchase to maturity. When sales do occur, gains and losses are recognized at the time of sale and the determination of cost of securities sold is based upon the specific identification method. Dividend and interest income are recognized when earned.
We monitor the value of our investments for indicators of impairment, including changes in market conditions and the operating results of the underlying investment that may result in the inability to recover the carrying value of the investment. During the fourth quarter of fiscal year 2011, we determined that based on both the duration and the continuing magnitude of the market price decline and the uncertainty of its recoverability, there was an other than temporary impairment in both our Videocon and Digital Info Security Co. Inc. (“DISC”) investments. During the fourth quarter of fiscal year 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. We will record an additional impairment charge if and when we believe any such investment has experienced an additional decline that is other than temporary.
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Stock-Based Compensation
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 employees and recorded stock-based compensation expense related to this re-pricing of approximately $85,000.
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 cash milestones. For options vesting if the trading price of the Company’s common stock exceeds price targets we use the Monte Carlo Simulation in estimating the fair value at grant date.
Results of Operations
In light of the change in our primary operations to Patent Monetization and Patent Assertion from research, development and licensing, the comparison of our results of operations may have limited future value
Fiscal Year Ended October 31, 20112012 Compared to Fiscal Year Ended October 31, 20102011
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Cost of Encryption Products Sold
Research and Development Expenses
Selling, General and Administrative Expenses
Interest income was approximately $3,000 in both fiscal years 2012 and 2011.
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Interest Expense
Interest expense increased to approximately $8,000 in fiscal year 2012 from $-0- in fiscal year 2011, compareddue to approximately $5,000interest expense incurred in connection with the 8% convertible debentures issued in September 2012.
Impairment Loss
In fiscal year 2010.2012 we wrote off our investment in Volga in the amount of approximately $128,000. In fiscal year 2011 we recorded an other than temporary impairment in both our Videocon and DISC investments of approximately $1,786,000.
Provision for Income Taxes
Provision for income taxes was $-0- in fiscal year 2012 compared to $600,000 in fiscal year 2011, compared to $-0-2011. The provision for income taxes in fiscal year 2010. This provision for income taxes2011 is related to the 20% withholding payment in connection with the $3,000,000 license fee payment byfrom AUO in June 2011.
Liquidity and Capital Resources
Since our inception, we have met our liquidity and capital expenditure needs primarily through the proceeds from sales of common stock in our initial public offering and in private placements, upon exercise of warrants issued in connection with the private placements and our initial public offering, and upon the exercise of stock options. In addition, we have generated limited cash flows from sales of our encryption products and from license fees from Videocon Industries Limited, an Indian company (“Videocon”) related to our display technology pursuant to the Videocon License Agreement.Agreement (as defined below). In May 2011, we entered into the AUO License Agreements (as defined below) with AU Optronics Corp., a Taiwanese company (“AUO”), and in June 2011 we received an initial license fee from AUO.
In February 2011, we received gross proceeds of $1,250,000 from the sale of 7,000,000 unregistered shares of our common stock in a private placement at a price of $0.1786 per share, of which 3,360,000 shares were sold to our then Chairman and Chief Executive Officer, our Chief Financial Officer and director, our current Chairman and a former director of the Company. In conjunction with the sale of the common stock, we issued warrants to purchase 7,000,000 unregisteredshares of our common stock. Each warrant grants the holder the right to purchase one share of our common stock at the purchase price of $0.1786 per share on or before February 8, 2016. The warrants were valued at $0.0756 per share using the Black-Scholes pricing model, adjusted for the estimated impact on fair value of the restrictions relating to the warrants. See “Item 5 – Market for the Registrant’s Common Eqiuty, Related Stockholder Matters and Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities” of this Annual Report on Form 10-K for additional information.
In September 2012, we received aggregate gross proceeds of $750,000 from the sale of 8% convertible debentures due September 12, 2016, of which $300,000 was received from our then Chairman and Chief Executive Officer and one other director of the Company. The debentures pay interest quarterly and are convertible into shares of our common stock at a conversion price of $0.092 per share on or before September 12, 2016. We recorded a discount to the carrying amount of the debentures of approximately $717,000 related to the debentures’ beneficial conversion feature. We may prepay the debentures at any time without penalty upon 30 days prior notice. See “Item 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities” of this Annual Report on Form 10-K for additional information.
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In January 2013, we received aggregate gross proceeds of $ 1,765,000 from the sale 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 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. We may prepay the 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 debentures, we issued warrants to purchase 5,882,745 unregistered shares of our common stock. Each 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. See “Item 5 – Market for the Registrant’s Common Eqiuty, Related Stockholder Matters and Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities” of this Annual Report on Form 10-K for additional information.
During fiscal year 2011,2012, our cash used in operating activities was $716,000.$3,142,000. This resulted from payments to suppliers, employees and consultants of approximately $3,280,000,$3,165,000, which was offset by cash of approximately $131,000$7,000 received from collections of accounts receivable related to sales of encryption products, $2,400,000 received from display technology licensing fees, and approximately $34,000$13,000 of dividend income received and approximately $3,000 of interest income received. Our cash used inCash provided from investing activities during fiscal year 20112012 was approximately $2,138,000,$1,748,000, which resulted from purchasesproceeds from the maturities of short-term investments consisting of certificates of deposit and U.S. government securities of approximately $3,948,000$2,949,000 and approximately $1,000 received from the sale of DISC common stock offset by purchases of approximately $1,200,000 of certificates of deposit and purchases of equipment of approximately $9,000 of equipment, offset by approximately $1,700,000 received upon maturities of short-term investments consisting of U.S. government securities and approximately $119,000 received upon the sale of DISC’s common stock.$2,000 Our cash provided by financing activities during fiscal year 20112012 was approximately $2,534,000,$958,000, which resulted from cash of $1,250,000$750,000 received from the sale of common stock warrantsconvertible debentures in a private placement and approximately $1,284,000$208,000 received upon the exercise of stock options. As a result, our cash, cash equivalents, and short-term investments in U.S. government securities at October 31, 2011 increased2012 decreased $2,183,000 to approximately $3,023,000$840,000 from approximately $1,094,000$3,023,000 at the end of fiscal year 2010.2011.
Prepaid expenses and other current assets decreased by approximately $44,000,$15,000, to approximately $82,000 at October 31, 2012 from approximately $97,000 at October 31, 2011, from approximately $141,000 at October 31, 2010, as a result of the timing of payments. Investment in Videocon is recorded at fair value and decreased by approximately $3,143,000,$654,000, to approximately $5,382,000$4,728,000 at October 31, 20112012 from approximately $8,525,000$5,382,000 at the end of fiscal year 2010,2011, as a result of a decrease in the underlying price of Videocon’s equity shares which are listed on the Luxembourg Stock Exchange. Investment in DISCVolga decreased to $-0- at October 31, 20112012 from approximately $144,000$128,000 at the end of fiscal year 2010,2011, as a result of recording an other than temporary impairment of DISC common shares, which are traded onin the over the counter market (and quoted on the Pink Sheets), and our sale of 4,219,443 sharesvalue of the 7,199,443 shares of DISC common stock we held at October 31, 2010. There was no change in the investment in Volga at October 31, 2011 from $127,500 at October 31, 2010.investment. Accounts payable and accrued liabilities increased by approximately $10,000$175,000 from approximately $450,000$460,000 at the end of fiscal year 20102011 to approximately $460,000$635,000 at October 31, 2012, as a result of the timing of payments and an increase in certain expenses related to the changes in our business. Deferred revenue decreased to approximately $1,187,000 at October 31, 2012, from approximately $2,127,000 at October 31, 2011, as a result of the timing of payments. Deferred revenue increased to approximately $2,127,000 at October 31, 2011, of which approximately $483,000 is non-current as of October 31, 2011, from $-0- at October 31, 2010, as a result of the AUO display technology license fee of $3,000,000 paid in June 2011 reduced by the license fee revenue recognized during fiscal year 20112012 of approximately $873,000.$940,000. Loan payable, which is due in December 2014, remained at $5,000,000 at October 31, 20112012 and 2010.2011. Loan receivable, which is classified as a contra-equity under shareholders’ equity in the accompanying consolidated balance sheet and is due in December 2014,remained at $5,000,000 at October 31, 20112012 and 2010.2011. As a result of these changes, working capital deficit at October 31, 2011 increased2012 was approximately $900,000 compared to working capital of approximately $1,015,000 from approximately $785,000 at October 31, 2010.2011.
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Under the AUO License Agreements, AUO hashad agreed to pay CopyTeleCTI an aggregate license fee of up to $10 million, of which $3 million was paid by AUO in June 2011 and the remaining $7 million iswould have been payable upon completion of certain conditions for the respective technologies, in each case subject to a 20% foreign withholding tax. Accordingly,tax.Accordingly, in June 2011 we received a payment from AUO, net of the withholding tax, of $2.4 million. In addition, each of the agreementsAUO License Agreements also providesprovided for the basis for royalty payments by AUO to CopyTele.
On January 28, 2013, we sent AUO a notice, terminating 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 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, 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. For more details on the AUO/E Ink Lawsuit, please see “Item 3, Legal Proceedings” above in this Annual Report on Form 10-K. We can give no assurance as to the potential outcome of this litigation.
Under the terms of the Videocon License Agreement, we 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 (which royalty will decrease when a specified sales level and time period are reached and may increase under other certain circumstances as a result of significant improvements in the Videocon Licensed Technology).Videocon. The initial installment commencedwas received in May 2008 howeverhowever; certain license fee payments have beenwere subsequently deferred in lightdeferred. The deferral of our joint decision to jointly develop improved versions of our Nano Display technology and the additional time and effort required by Videocon and us to incorporate the developmental improvements related thereto which are aimed at reducing the power consumption, improving the reliability and lowering the fabrication cost. However, the aggregate amount of the payments did not change and Videocon’s obligation to make such payments continues to be subject to CopyTele’s limited performance requirements and is not dependent on any specific performance standards which must be met by completion or delivery of prototypes of CopyTele’s products in the development stage. During the fiscal year ended October 31, 2010 we received license fee payments from Videocon of $600,000.is no longer in effect; however, we cannot give any assurance that additional license fees will be received. No such license fee payments were received from Videocon during the fiscal yearyears ended October 31, 2012 and 2011. As of October 31, 2011,2012, we have received aggregate license fee payments from Videocon of $3.2 million. With our Nano Display License Agreementmillion and $7.8 million remains owed to us. We are not presently involved in development efforts with AUO, weVideocon and it is not anticipated that such efforts will be resumed in the future. We have concentrated our technical support to AUO to implement our Nano Display technology utilizing AUO’s facilities. Under the Nano Display License Agreement, Videocon has the potential to receive the Nano Displays produced by AUO and to incorporate the displaysentered into their own products. As a result, we are presently in discussions with Videocon to enter into a new arrangement for us to receiveregarding the remaining or further license payments from Videocon. Accordingly, we cannot presently estimate specific future payment dates fordisposition of the license fee payments.Videocon License Agreement.
Total employee compensation expense during fiscal years 20112012 and 20102011 was approximately $3,001,000 and $3,661,000, and $3,469,000, respectively.respectively, including in fiscal year 2012 approximately $74,000 of expense relating to severance payments to terminated employees. During fiscal years 20112012 and 2010,2011, a significant portion of employee compensation consisted of the issuance of stock and stock options to employees in lieu of cash compensation. We recorded compensation expense for the fiscal years ended October 31, 20112012 and 20102011 of approximately $1,819,000$927,000 and $1,832,000,$1,819,000, respectively, for shares of common stock issued to employees. We recorded approximately $742,000$615,000 and $743,000$742,000 of stock-based compensation expense, related to stock options granted to employees and non-employee directors, during fiscalthe years ended October 31, 2012 and 2011, and 2010, respectively. It is management’s intention to continue to compensate employees by issuing stock or stock options.
In addition, during fiscal years 20112012 and 2010,2011, we issued shares of common stock to consultants for services rendered. We recorded consulting expense for fiscal years ended October 31, 20112012 and 20102011 of approximately $113,000$76,000 and $76,000,$113,000, respectively, for shares of common stock issued to consultants. In addition, during fiscal years 20112012 and 2010,2011, we recorded approximately $44,000$110,000 and $6,000,$44,000, respectively, of consulting expense for stock options granted to consultants. It is management’s intentionDuring the fourth quarter of fiscal year 2012, management discontinued compensating employees through the issuance of stock and does not presently anticipate instituting this practice in the future. Management intends to also continue to compensate consultants by issuing stock or stock options to the extent that ourprovide incentives which will attract, retain and motivate highly competent persons as officers, key employees and non-employee directors of, and consultants do not require cash payments.
During fiscal year 2008, we issued 20,000,000 unregistered shares of our common stock to Mars Overseas an affiliate of Videocon for an aggregate purchase price of $16,200,000 and we purchased 1,495,845 Videocon GDRs for an aggregate purchase price of $16,200,000. In July 2011, we received a dividend of approximately $34,000 on the Videocon GDRs we hold. While the Videocon GDRs are held as security for the loan payable to Mars Overseas, the agreement governing such loan provides that any dividends, distributions, rights or other proceeds or benefits with respect to, the Videocon GDRs shall be promptly transferred to us free and clearCompany.
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Based on currently available information, on the transactions in which we acquired the Videocon GDRs.
In February 2011, we received proceeds of $1,250,000 pursuant to the sale of 7,000,000 unregistered shares of our common stock and warrants to purchase 7,000,000 shares of our unregistered common stock in a private placement. See “Recent Sales of Unregistered Securities” above in Item 5 for additional information on the sale of the securities. Additionally, in February 2011, we sold an additional 3,300,000 shares of DISC common stock that were being held for investment for approximately $100,000.
We believe that our existing cash, cash equivalents, and short-term investments, in U.S. government securities and certificates of deposit, together with expected cash flows from expected sales of our encryption productspatent licensing and revenue relating to our display technologies,enforcement, and other potential sources of cash flow willmay not be sufficient to enable us to continue our marketing, production,patent licensing and research and developmentenforcement 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 operationspatent licensing and enforcement activities are insufficient to satisfy our liquidity requirements, we may seek to sell our investment securities or other financial assets or our debt or additional equity securities or obtain loans from various financial institutions where possible. The sale of additional equity securities or securities convertible debtinto or exercisable for equity securities could result in dilution to our stockholders. It is also management’s intention to continue to compensate employees and consultants by issuing stock or stock options. We currently have no arrangements with respect to additional financing.shareholders. We can give no assurance that we will generate sufficient revenuescash flows in the future (through sales, license feeslicensing and royalties,enforcement of patents, or otherwise) to satisfy our liquidity requirements or sustain future operations, that our production capabilities will be adequate, that other products will not be produced by other companies that will render our products obsolete, that employees and consultants will continue to accept stock as compensation, 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 fundsfunding if needed or if we cannot sufficiently reduce operating expenses, we would need to curtail or cease some or all of our operations.
We are seeking to improve our liquidity through increased sales or license of products and technology. In an effort to generate sales,
As shown in the accompanying consolidated financial statements, we have marketed our encryption products to U.S. and international distributors and directly to end-users. Duringincurred a net loss of approximately $4,253,000 during the fiscal year 2011,ended October 31, 2012, and, as of that date, we have recognized revenue from sales of encryption productsan accumulated deficit of approximately $131,000,$125,083,000 and revenue from display technology license feesa net shareholders’ deficit of approximately $873,000.
Contractual Obligations
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Less than 1 year | 1-3 years | 4-5 years | After 5 years | Total | |||||||||||||||
Consulting Agreement | $ | 150,000 | $ | — | $ | — | $ | — | $ | 150,000 | ||||||||||
Noncancelable Operating Leases | 286,000 | 648,000 | — | — | 934,000 | |||||||||||||||
Secured Loan Obligation to Mars Overseas | — | — | 5,000,000 | — | 5,000,000 | |||||||||||||||
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Total Contractual Cash Obligations | $ | 436,000 | $ | 648,000 | $ | 5,000,000 | $ | — | $ | 6,084,000 | ||||||||||
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| 313,000 |
| 339,000 |
| - |
| - |
| 652,000 | |||||||
Convertible Debentures |
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| 750,000 |
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| 750,000 | |||||||
Secured Loan Obligation to Mars Overseas |
| - | 5,000,000 | - | - | 5,000,000 | |||||||||||
Total Contractual Cash Obligations |
| $ 313,000 | $ 5,339,000 | $ 750,000 | $ - | $ 6,402,000 | |||||||||||
Off-Balance Sheet Arrangements
We have no variable interest entities or other off-balance sheet obligation arrangements.
Effect of Recent Accounting Pronouncements
Effective February 1, 2010, we adoptedIn December 2011, the new Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-12 (“ASU”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. 2010-06, which requires additional fair value disclosures.2011-05. This guidance requires reporting entitiesamendment defers the effective date of the requirement to disclose transfers in andpresent separate line items on the income statement for reclassification adjustments of items out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidanceaccumulated other comprehensive income into net income. ASU 2011-12 is effective for interim and annual reporting periods beginning after December 15, 2009, except forat the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on Level 3 activity is effective for our fiscal year beginning November 1, 2011. As this guidance is only disclosure related, it did not have an impact on our financial position or results of operations.
Effective November 1, 2010, we adopted the new FASB ASU No. 2009-13. This ASU amends ASC Subtopic 605-25 to eliminate the requirement that all undelivered elements have Vendor Specific Objective Evidence (“VSOE”) or Third-Party Evidence (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE for one or more delivered or undelivered elements in a multiple-element arrangement, we will be required to estimate the selling prices of those elements that meet the remaining separation criteria. The overall arrangement fee will be allocated to each element based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Additionally, the new guidance will require us to disclose more information about multiple-element revenue arrangements. We have applied this guidance prospectively for revenue arrangements entered into or materially modified after November 1, 2010. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
In June 2011, the FASB issued ASUsame time as Accounting Standards Update 2011-05,Comprehensive Income (Topic 220),: Presentation of Comprehensive Income.Income (“ASU 2011-05”), so that entities will not be required to comply with the presentation requirements in ASU 2011-05 requires that all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both cases, an entitythis ASU 2011-12 is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income,deferring. ASUs 2011-12 and a total amount for comprehensive income. Since ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, it will have no impact on our financial position or results of operations. ASU 2011-05 isare effective retrospectively 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. We do not expect the adoption of these new disclosure requirements to have not electeda 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 early adoptthe 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 will adopt ASU 2011-052012-04 on February 1, 2013. The Company does not expect the adoption of ASU 2012-04 to 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 first quarterFASB 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 will adopt ASU 2012-03 on February 1, 2013. The Company does not expect the adoption of fiscal year 2013.ASU 2012-03 to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk. |
As of October 31, 2011,2012, we had invested a portion of our cash on hand in short-term, fixed rate and highly liquid instruments that have historically been reinvested when they mature throughout the year. Although our existing short-term instruments are not considered at risk with respect to changes in interest rates or markets for these instruments, which investments consist of US government securities and FDIC guaranteed certificates of deposit, our rate of return on these securities could be affected at the time of reinvestment, if any.
At October 31, 20112012 we determined that due to the continual decline in market value, the uncertaintydiscontinuation of its recoverabilityfunding by CTI and the decline in trading volume,lack of available financial information from Volga has impaired the value of our investment in DISC, which hadVolga and accordingly, a carrying valuewrite-off of our investment of approximately $63,000, should be written down to $-0-. Accordingly, we have no further market risk related to our investment in DISC.$128,000 was recorded as of October 31, 2012.
As a small business issuer, the Company is not required to provide the disclosures set forth in this item.
Item 8. Financial Statements and Supplementary Data. |
See accompanying “Index to Consolidated Financial Statements.”
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.None. |
None.
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Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a permanent exemption of the SECCommission that permits the Company to provide only management’s report in this Annual Report on Form 10-K. Accordingly, our management’s assessment of the effectiveness of our internal control over financial reporting as of October 31, 20112012 has not been audited by our auditors, KPMG LLP or any other independent registered accounting firm.
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Changes in Internal Control Over Financial Reporting
Not applicable.Item 9A(T). Controls and Procedures.
Item 9B. Other Information.
PART IIIOn January 28, 2013, we terminated the AUO License Agreements due to numerous alleged material and continual breaches of the agreements by AUO. For a complete description, see “Item 1. Business – Prior Agreements.”
Item 10. Directors, Executive Officers and Corporate Governance.
(a)Our Directors and Executive Officers
Name | Position with the Company and Principal Occupation | Age | Director and/ or Executive Officer Since | |||||||
Denis A. Krusos | Director, Chairman of the Board and Chief Executive Officer | 84 | 1982 | |||||||
Henry P. Herms | Director, Chief Financial Officer and Vice President – Finance | 66 | 2000 | |||||||
George P. Larounis | Director | 83 | 1997 | |||||||
Lewis H. Titterton Jr. | Director | 67 | 2010 | |||||||
Name |
| Position with the Company and Principal Occupation |
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Age |
| Director and/ |
| |
Lewis H. Titterton Jr. | Chairman of the Board | 68 | 2010 | |||||
Robert A. Berman | Director, President and Chief Executive Officer | 49 | 2012 | |||||
Henry P. Herms | Director, Chief Financial Officer and Vice President – Finance | 67 | 2000 | |||||
Dr. Amit Kumar | Director, Strategic Advisor | 48 | 2012 | |||||
Bruce F. Johnson | Director | 70 | 2012 | |||||
Kent B. Williams | Director | 63 | 2012 | |||||
John Roop | Senior Vice President – Engineering | 63 | 2012 | |||||
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(b)Business Experience of our Directors and Executive Officers
Mr. KrusosTitterton 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 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.
Mr. Berman has served as our Chairman of the BoardPresident and Chief Executive Officer since September 19, 2012 and was elected to our Board of Directors on November 1982.30, 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, 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.
Dr. Kumar has served on our Board of Directors 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 M.S.E.E. degreeA.B. in Chemistry from NewarkOccidental College and Ph.D. from Caltech.
Mr. Johnson has served on our Board of Engineering,Directors since August 29, 2012. Mr. Johnson has been a B.E.E. degreecommodity 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 City College1969 to 2003. He also serves on the board of New Yorkdirectors of the Chicago Crime Commission. Mr. Johnson holds a B.S. in Marketing from Bradley University and a J.D. degree from St. John’s University.
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Mr. Williams has served on our Board of Directors since August 21, 2012. He has the managing member of Vista Asset Management LLC, an investment advisory firm, since 2002. He has more than 40 years’ experience in the capital markets, including positions with U.S. Trust, Wood Island Associates and Merrill Lynch. In 2011, he also founded VIA Motors, a clean tech, plug-in electric vehicle company. He is a member of the CFA Institute and the CFA Society of San Francisco and received his M.B.A. from St Mary’s College of California and a B.A. from the University of California at Berkeley.
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. Titterton was appointed Director by our Board of Directors effective August 16, 2010. Mr. Titterton is currently President and 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. He was also adjunct professor of finance at State University of New York at Albany from 1976 through 1979. 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.
We believe that our board of directors represents a desirable mix of backgrounds, skills, and experiences. Below are some of the specific experiences, qualifications, attributes or skills in addition to the biographical information provided above that led to the conclusion that each person should serve as one of our directors in light of our business and structure:
Mr. Krusos isTitterton has been involved with our Company as a founderdirector or investor for over nineteen years. Mr. Titterton also has substantial experience with advising on the strategic development of technology companies and Chief Executive Officer of the Company, has over fiftyforty years of experience in various aspects of the displaytechnology industry.
Mr. Berman has experience in development, licensing, and electronics industrymonetization of intellectual property as well a broad variety of other areas including finance, acquisitions, and marketing, and has served as an officer of another publicly traded patent monetization company.
Dr. Kumar has experience in development, licensing, and monetization of intellectual property as well as a deep understandingbroad variety of all aspectsother areas including finance, acquisitions, R&D, and marketing, and has served as a director and officer of our business.another publicly traded patent monetization company.
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Mr. Johnson has been involved with the Company as an investor for over 9 years and has over 30 years’ experience in the capital markets as a result of his investment background.
Mr. Williams has been involved with the Company as an investor for over 12 years and has over 40 years’ experience in the capital markets.
Mr. Herms has served as our Chief Financial Officer and Vice President - Finance since 2000 and as our Chief Financial Officer from 1982 to 1987, and 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.
Except for Dr. Kumar and Mr. Larounis has been involved with our Company for over eighteen years, has over fifty years of experience in the electronic industry and in industrial property rights and licensing, and has a deep understanding of all aspects of our business.
Mr. Titteron has been involved with our Company as a director or investor for over nineteen years. Mr. Titterton also has substantial experience with advising on the strategic development of technology companies and over forty years of experience in various aspects of the technology industry.
NoneJohnson, none of our current directors or executive officesofficers have served as a director of another public company within the past five years.
We have no significant employees other than our executive management team.
(e)Involvement of Certain Legal Proceedings
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Section 16(a) Beneficial Ownership Reporting Compliance
Code of Ethics
Nomination Procedures
Audit Committee and Audit Committee Financial Expert
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Item 11. Executive Compensation
Compensation Discussion and Analysis
Philosophy and Objectives
|
Role of our Board of Directors
Elements of Executive Compensation
Our executive compensation consists primarily of two elements: (1) base salary and (2) stock options under our stock equity incentive plans.plans and, when appropriate, performance based bonus. Our Board of Directors does not follow a specific set of guidelines or formulas in determining the amount and mix of compensation elements. We seek to reward shorter-term performance through base salary and, when appropriate, performance based bonus and longer-term performance through stock options granted under our stock equity incentive plans.
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Base Salary
Equity Based Incentives
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As with other elements of executive compensation, the determination of stock options granted were not based on complex or extensive quantitative or qualitative factors that lend themselves to substantive disclosure. Instead, the awards granted in fiscal year 20112012 were based primarily on the business judgementjudgment of the Board of Directors.
Shareholder Advisory Vote
decisions.Other Benefits
Policy on Ownership of Stock and Options
Policy on Deductibility of Compensation
Compensation Committee Interlocks and Insider Participation
As disclosed above, the Board of Directors 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 of Directors concerning executive compensation.
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Compensation Committee Report
Denis A Krusos
Robert A. Berman
Henry P. Herms
George P. LarounisBruce F. Johnson
Lewis H. TittertonDr. Amit Kumar
Kent B. Williams
Executive Compensation
SUMMARY COMPENSATION TABLE2012.
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SUMMARY COMPENSATION TABLE | ||||||||||||||||||
Name and Principal Position |
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Year | Salary ($) | Bonus ($) | Option ($) (1) | All Other Compensation ($) (2) | Total Compensation ($) | |||||||||||
Robert A. Berman (3) Chief Executive Officer and Director | 2012 | $ | 32,223 | $ | - | $ | 2,882,667 | $ | - | $ | 2,914,890 | |||||||
Lewis H. Titterton Jr. (4) | 2012 | $ | - | $ | - | $ | 136,575 | $ | - | $ | 136,575 | |||||||
Denis A. Krusos (5) former Chairman of the Board and Chief Executive Officer | 2012 2011 2010 | $ | 208,333 250,000 250,000 | $ | - 200,000 - | $ | - 179,356 - | $ | 29,145 34,813 37,524 | $ | 237,478 664,169 287,524 | |||||||
Henry P. Herms Chief Financial Officer, Vice President- Finance and Director | 2012 2011 2010 | $ | 150,000 129,167 125,000 | $ | - 12,500 12,500 | $ | 69,219 29,893 - | $ | 15,033 18,508 16,244 | $ | 234,252 190,068 153,744 | |||||||
John Roop (6) Senior Vice President of Engineering | 2012 | $ | 25,000 | $ | - | $ | 1,441,333 | $ | - | $ | 1,466,333 | |||||||
(1)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, 2012, 2011 and 2010 for each Named Executive Officer in accordance with ASC 718 and also reflects the repricing of certain options on September 5, 2012. See “Option Repricing,” below”. 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, 2012, included elsewhere in this Annual Report on Form 10-K.
(2)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 auto allowance and related expenses for fiscal years ended October 31, 2012, 2011 and 2010.
(3)Mr. Berman was elected as President and Chief Executive Officer on September 19, 2012 and elected as a director on November 30, 2012. Pursuant to the terms of his employment agreement, while Mr. Berman’s salary accrued, it is not payable until the milestone set forth in his employment agreement is achieved. See “Employment and Consulting Agreements” below in this section.
(4)Mr. Titterton served as our interim Chief Executive Officer from August 21, 2012 to September 19, 2012. 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.
(5)Mr. Krusos was terminated as the Chief Executive Officer of the Company on August 21, 2012 and he resigned as a director on October 8, 2012.
(6)Mr. Roop was elected as Senior Vice President of Engineering on September 19, 2012. Pursuant to the terms of his employment agreement, while Mr. Roop’s salary accrued, it is not payable until the milestone set forth in his employment agreement is achieved. See “Employment and Consulting Agreements” below in this section.
Employment and Consulting 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 will receive an annual base salary of $290,000, provided, however that payment of his salary is deferred until the Cash Milestone (as described below) has been achieved.
In addition to his base salary, Mr. Berman is 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. Mr. Berman is 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.
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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 will vest in three equal installments upon achievement of the Cash Milestone and the Stock Price Targets (without regard to the 12 month period). 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.
Employment Agreement with John Roop
On September 19, 2012, the Company entered into an Employment Agreement with John Roop (the “Roop Agreement”) to serve as Senior Vice President of Engineering of the Company. Pursuant to the Roop Agreement, Mr. Roop will receive an annual base salary of $225,000, provided, however that payment of his salary is deferred until the Cash Milestone (as described below) has been achieved.
In addition to his base salary, Mr. Roop is 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. Mr. Roop is 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.
In addition to his base salary, Mr. Roop is entitled to receive the same cash bonuses granted to Mr. Berman and was granted options to purchase 8,000,000 shares of the Company’s common stock and upon the same terms as those granted to Mr. Berman.
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Consulting Agreement with Amit Kumar
On September 19, 2012, Company entered into a consulting agreement with Dr. Kumar pursuant to which Dr. Kumar will provide business consulting services for an annual consulting fee of $120,000, provided, however that payment of the consulting fee is deferred until the Cash Milestone has been achieved.
In addition to his consulting fee, Dr. Kumar is entitled to receive the same cash bonuses granted to Mr. Berman and was granted options in the same amount and upon the same terms and those granted to Mr. Berman.
Stock Options
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
Option Awards (1)2012:
52 (1) 222,230 options vested and became exercisable on October 31, 2012 and the remaining 7,777,770 shares shall vest and become exercisable in 35 consecutive monthly installments on the last day of each month, beginning November 30, 2012 and continuing through September 30, 2015. (2) Options will vest in three equal installments upon achievement of the Cash Milestone and the Stock Price Targets. (3) 250,000 options immediately vested on September 19, 2012, and the remaining 500,000 options shall vest and become exercisable in two consecutive annual installments of 250,000 options each beginning on September 19, 2013. (4) Mr. Krusos’ employment was terminated effective August 21, 2012. The exercisability of Mr. Krusos’ options will be subject to the results of the Company’s ongoing review of the facts underlying his termination, which results shall be presented to the Board upon completion. (5) Options were repriced on September 4, 2012. See “Options Repricing”, below. (6) 8,345 options vested and became exercisable on October 31, 2012 and the remaining 291,655 shares shall vest and become exercisable in 35 consecutive monthly installments on the last day of each month, beginning November 30, 2012 and continuing through September 30, 2015. (7) 111,115 options vested and became exercisable on October 31, 2012 and the remaining 3,888,885 shares shall vest and become exercisable in 35 consecutive monthly installments on the last day of each month, beginning November 30, 2012 and continuing through September 30, 2015. (8) Options will vest in three equal installments upon achievement of the Cash Milestone and the Stock Price Targets. 53 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The following table sets forth certain information with respect to grants of stock options to the Named Executive Officers during fiscal year 2011:2012:
GRANTS OF PLAN BASED AWARDS TABLE
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) | ||||
Robert A. Berman | 9/19/2012(2) | 16,000,000 | $ 0.2175(4) | $ 2,882,667 | ||||
Lewis H. Titterton Jr. | 9/19/2012 | 750,000 | $ 0.2225(5) | $ 136,575 | ||||
Denis A. Krusos | -- | -- | -- | -- | ||||
Henry P. Herms | 9/19/2012(3) 9/4/2012(7) | 300,000 300,000 | $ 0.235(6) $ 0.145 | $ 57,930 $ 11,289 | ||||
John Roop | 9/19/2012(8) | 8,000,000 | $ 0.2175(4) | $ 1,441,333 | ||||
Name | Grant Date | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise Price of Option Awards ($/Sh) | Grant Date Fair Value ($) | ||||||||||||
Denis A. Krusos | 6/02/11 | 600,000 | $ | 0.37 | $ | 179,356 | ||||||||||
Henry P. Herms | 6/02/11 | 100,000 | $ | 0.37 | $ | 29,893 | ||||||||||
The following table summarizes(1) In accordance with ASC 718, the exerciseaggregate grant date fair value of stock option awards for each Named Executive Officer reflects the repricing of certain options on September 5, 2012. See “Option Repricing,” below
(2) Reflects options granted to Mr. Berman under the Berman Agreement.
(3) Reflects options granted to Mr. Herms under the 2010 Share Incentive Plan.
(4) 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.
(5) The exercise price was based on the average of the high and the low sales price of the Common Stock on the second trading day immediately following the approval of such options by the Board.
(6) The exercise price was based on the closing trading price of the Common Stock on the second trading day immediately following the approval of such options by the Board.
(7) Options were repriced on September 4, 2012. See “Options Repricing”, below.
(8) Reflects options granted to Mr. Roop under the Roop Agreement.
There were no stock options exercised during fiscal year 20112012 by Named Executive Officers:
OPTION EXERCISES AND STOCK VESTED TABLEOfficers.
| Option Awards | ||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) (1) | ||||||
Denis A. Krusos | 500,000 | $ | -0- | |||||
54
Option Repricing
On September 4, 2012, the Board approved a re-pricing of options to purchase a total of 1,840,000 shares of the Company’s common stock granted under the Company’s 2003 Share Incentive Plan, which were granted from May 11, 2004 to October 8, 2009 with exercise prices ranging from $0.65 to $1.46 and are held by 11 persons, including Henry P. Herms and George Larounis. Pursuant to the re-pricing, the option agreements were unilaterally amended by the Board to reduce the exercise price of each option to $0.145, which was the closing sales price of the Company’s common stock on September 4, 2012. The number of shares, the vesting commencement date and the length of the vesting period, and expiration period for each of these options were not altered.
The following stock option grants and related stock option agreements issued to the Company’s Named Executive Officers and directors are affected by the re-pricing:
| Grant Date |
# of Shares | Old Option Price | New Option Price | Exercise Date | Expiration Date |
Henry P. Herms |
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| 5/11/04 | 5,000 | $ 0.81 | $ 0.145 | 9/4/12 | 5/10/04 |
| 10/26/04 | 70,000 | $ 1.04 | $ 0.145 | 9/4/12 | 10/25/04 |
| 6/1/06 | 50,000 | $ 0.83 | $ 0.145 | 9/4/12 | 5/31/16 |
| 11/12/07 | 75,000 | $ 1.17 | $ 0.145 | 9/4/12 | 11/11/17 |
| 10/8/09 | 100,000 | $ 0.92 | $ 0.145 | 9/4/12 | 10/7/19 |
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George Larounis |
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| 10/26/04 | 60,000 | $ 1.04 | $ 0.145 | 9/4/12 | 10/25/14 |
| 6/1/06 | 120,000 | $ 0.83 | $ 0.145 | 9/4/12 | 5/31/16 |
| 11/13/07 | 60,000 | $ 1.21 | $ 0.145 | 9/4/12 | 11/12/17 |
| 10/8/09 | 60,000 | $ 0.92 | $ 0.145 | 9/4/12 | 11/30/17 |
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| 300,000 |
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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 value of such options would be $110,667, 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, 2012 of $0.259 and (y) the options’ exercise price of $0.2175 per share.
55
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 $22,308).
As more fully described in “Employment Agreement with John Roop,” if Mr. Roop 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 value of such options would be $55,333, which was calculated by multiplying (a) $111,111 options (being the number of options granted to him on September 19, 2012 that would be accelerated options by (b) an amount equal to the excess of the (x) our closing share price on October 31, 2012 of $0.259 and (y) the options’ exercise price of $0.2175 per share.
In addition to the acceleration of the options, if Mr. Roop’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. Roop only any earned compensation and/or bonus due under the Roop 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 $ 17,308)
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 value of Mr. Herms’ outstanding options would be $7,000, which was calculated by multiplying (a) 291,655 options (being the unvested portion of options granted to him on September 19, 2012 that he held on October 31, 2012) by (b) an amount equal to the excess of the (x) our closing share price on October 31, 2012 of $0.259 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.
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·Change in Effective Control: A change in effective control of the Company occurs on the date that either:
oAny 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
oA majority of the members of the Board of Directors of the Company 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 of directors 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.
·Change in Ownership of Substantial Assets: A change in the ownership of a substantial portion of the Company's assets occurs on the date that 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) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of the assets of the Company immediately before such acquisition or acquisitions. For this purpose, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
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.
Director’s Compensation
57
Our employee directors, Denis A. Krusos and Henry P. Herms, did not receive any additional compensation for services provided as a director during fiscal year 2011.2012. Prior to his appointment as interim Chief Executive Officer of the Company on August 21, 2012 until September 19, 2012, Mr. Titterton was a non-employee director. The following table sets forth compensation of George P.Messrs, Larounis, Titterton, Johnson and Lewis H. Titteron Jr.Williams, our non-employee directors for fiscal year 2011:
DIRECTORS COMPENSATION2012:
Name | Option Awards ($) (1) (2) | Bonus ($) | All Other Compensation ($) | |||||||||
George P. Larounis | $ | 7,154 | $ | 20,000 | — | |||||||
Lewis H. Titterton Jr. | $ | — | $ | — | — | |||||||
DIRECTORS COMPENSATION | ||||||
Name | Option Awards ($) (1) |
Bonus ($) | All Other Compensation ($) | |||
George P. Larounis (2) | $ 13,348 | - | - | |||
Lewis H. Titterton Jr. | (3) | (3) | (3) | |||
Bruce F. Johnson | $ 5,118 | - | - | |||
Kent B. Williams | $ 139,617 | - | ||||
(2)Mr. Larounis determined to retire and not stand for re-election at our 2012 annual meeting of stockholders. (3)Mr. Titterton’s compensation as the Company’s interim Chief Executive Officer and as a director of the Company is fully disclosed in the Summary Compensation Table. 58 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth certain information with respect to our common stockstock beneficially owned as of January 23, 201225, 2013 by (a) each person who is known by our managementourmanagement to be the beneficial owner of more than 5% of our outstanding common stock, (b) each of our directors and executive officers, of CopyTele, and (c) all directors and executive officers as a group:
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership(1)(2)&(3) | Percent of Class(4) | ||||||
Mars Overseas Limited (5) P.O. Box 309, GI Ugland House South Church Street, George Town Grand Cayman, Cayman Islands | 20,000,000 | 11.13 | % | |||||
Denis A. Krusos 900 Walt Whitman Road Melville, NY 11747 | 11,119,880 | 5.86 | % | |||||
Henry P. Herms 900 Walt Whitman Road Melville, NY 11747 | 1,265,575 | * | ||||||
George P. Larounis 900 Walt Whitman Road Melville, NY 11747 | 1,320,000 | * | ||||||
Lewis H. Titterton Jr. 900 Walt Whitman Road Melville, NY 11747 | 8,146,562 | 4.50 | % | |||||
All Directors and Executive Officers as a Group (4 persons) | 21,852,017 | 11.33 | % | |||||
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1)(2)(3)(4)(5)(6)(7) | Percent of Class (8) | ||
Mars Overseas Limited (9) |
| 20,000,000 |
| 10.81% |
P.O. Box 309, GI Ugland House | ||||
South Church Street, George Town | ||||
Grand Cayman, Cayman Island | ||||
Denis A. Krusos (10) | 11,119,880 | 5.70% | ||
One Lloyd Harbor Road | ||||
Lloyd Harbor, New York 1174 | ||||
Lewis H. Titterton, Jr. |
| 10,026,996 |
| 5.32% |
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
Robert A. Berman | 1,611,118 | * | ||
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
Dr. Amit Kumar |
| 2,170,318 |
| 1.16% |
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
Bruce F. Johnson | 7,415,622 | 3.94% | ||
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
Kent B. Williams |
| 1,057,244 |
| * |
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
Henry P. Herms | 1,307,252 | * | ||
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
John A. Roop |
| 555,559 |
| * |
900 Walt Whitman Road | ||||
Melville, NY 11747 | ||||
All Directors and Executive Officers as a | 24,144,109 | 12.22% | ||
Group | ||||
(7 persons) |
59
(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 736,677 shares and 736,677 shares which Henry P. Herms 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 1,400,000 shares, 700,000 shares, 280,000 shares, and 2,380,000 shares which Lewis H. Titterton, Bruce F. Johnson, Henry P. Herms 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 February 8, 2011.
(4) Includes 99,540 shares indirectly owned through the Vista Asset Management 401(k) plan, of which Kent Williams and his wife are the sole trustees, 47,700 shares owned by Mr. Williams’ wife and 215,460 shares indirectly owned by Mr. Williams’ wife through the Vista Asset Management 401(k) plan. Mr. Williams disclaims beneficial ownership of the shares owned by his wife.
(5) Includes 1,630,434 shares, 1,630,434 shares and 3,260,868 shares which Lewis H. Titterton, Bruce F. Johnson and all directors and executive officers as a group, respectively, have the right to acquire within 60 days upon conversion of debentures purchased by them in the private placement on September 12, 2012.
(6) Includes 500,000 shares, 1,000,000 shares, 1,000,000 shares and 2,500,000 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 conversion of debentures and exercise of warrants purchased by them in the private placement on January 25, 2013.
(7) Includes 250,000 shares, 1,111,118 shares, 583,334 shares, 555,559 shares, 1,111,118 shares and 3,611,129 shares which Lewis H. Titterton, Robert A. Berman, Kent B. Williams, John Roop, Dr. Amit Kumar 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.
(8) Based on 185,104,037 shares of Common Stock outstanding as of January 25, 2013.
(9) The Company has relied solely on information provided in Amendment No. 1 to the Schedule 13G which Mars Overseas Limited filed with the Securities and Exchange Commission on May 17, 2010. As reported in the Schedule 13G/A, Mars Overseas is a joint venture controlled by six entities. The governing documents of Mars Overseas require majority voting of the six entities that are party to the joint venture with respect to the 20,000,000 CopyTele shares owned by Mars Overseas. Four of these six entities are controlled by members of the Dhoot family, which include Messrs. Venugopal N. Dhoot, Rajkumar N. Dhoot and Pradipkumar N. Dhoot. The remaining two entities are publicly traded corporations outside of the United States, of which the above-mentioned members of the Dhoot family hold a significant percentage, although less than 50% of such publicly traded companies. Messrs. Venugopal N. Dhoot, Rajkumar N. Dhoot and Pradipkumar N. Dhoot all disclaim beneficial ownership in the shares held by Mars Overseas except to the extent of their pecuniary interest, and disclaim membership as a group.
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(10) The Company has relied solely on information provided in Amendment No. 7 to the Schedule 13G which Denis Krusos filed on February 18, 2011. Mr. Krusos’ employment was terminated effective August 21, 2012. Includes 1,400,000 shares that Denis Krusos has the right to acquire within 60 days upon exercise of warrants purchased by him in the private placement on February 8, 2011. Also includes 8,550,000 shares which Denis Krusos may 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. The exercisability of Mr. Krusos’ options will be subject to the results of the Company’s ongoing review of the facts underlying his termination, which results shall be presented to the Board upon completion.
Change in Control
We are not aware of any arrangement that might result in a change in control in the future.
Equity Compensation Plan Information
The following is information as of October 31, 20112012 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 6 to Consolidated Financial Statements for more information on these plans.
Plan category Equity compensation plans not approved by security holders (1) 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) 18,602,045 $ 0.78 7,594,555
Plan category Number of Weighted average Number of securities Equity compensation plans not approved by security holders (1)(2)(3)(4) 60,670,045 $0.3532 1,303,565
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
exercise price of
outstanding
options, warrants
and rights
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
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(2) On July 14, 2010 the Board of Directors 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 of Directors to increase the maximum number of shares of common stock that may be granted to 27,000,000.27,000,000 and 30,000,000 shares, respectively. Current and future non-employees directors are automatically granted nonqualified stock options to purchase up to 60,000 shares of common stock upon their initial election to the Board of Directors and 60,000 shares of common stock at the time of each subsequent annual meeting of our shareholdersstockholders at which they are elected to the Board of Directors. The 2010 Share Incentive Plan iswas administered by the Stock Option Committee through August 2012, and since August 2012 by the Executive Committee of the Board of Directors, which determines the option price, term and provisions of each option. The 2010 Share Incentive Plan terminates on July 14, 2020. The Board of Directors may amend, suspend of 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 will vest in three equal installments if the Company generates aggregate cash payments in excess of a specified amount (the “Cash Milestone”) 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”). The options otherwise have the same terms and conditions as options granted under the Company’s 2010 Share Incentive Plan.
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Except for (i) the sale by the Company of its common stock and warrants to certain of our directors and officers as described
As more fully disclosed in Item 5. “Recent Sales of Unregistered Securities” and (ii) those transactions between the Company and Videocon or Mars Overseas, there have been no related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 of Regulation S-K.“Item 1. Business – Prior Agreements,” Videocon and Mars Overseas are related persons under Item 404 of Regulation S-K due to Mars Overseas’ beneficial ownership of more than five percent (5%) of our outstanding common stock. Common Stock. Under the terms of the Videocon License Agreement, Videocon was requiredwe were scheduled to pay usreceive a non-refundable technology transfer license fee of $11 million of which $2 millionfrom Videocon, payable in installments over a 27 month period and an agreed upon royalty from Videocon based on display sales by Videocon. The initial installment was paidreceived in May 2008 however certain license fee payments were subsequently deferred. The deferral of the license fee payments is no longer in effect; however, we cannot give any assurance that additional license fees will be received. No license fee payments were received from Videocon during the fiscal years ended October 31, 2012 and the balance was scheduled to be paid, as follows: $1.5 million in February 2009, $2.5 million in November 2009, and $5 million in August 2010. However, as set forth above in “Item 1. Business”,2011. As of October 31, 2012, we have agreedreceived aggregate license fee payments from Videocon of $3.2 million and $7.8 million remains owed to defer a portion of these payments.us. We have entered into discussions with Videocon is also required to pay us a royalty of six percent ofregarding the Ex-Factory Price (defined in the Videocon License Agreement to be selling price of the products/goods less any costs incidental to the delivery of the goods to the customer) on the first $5,000,000 of display sales (at the Ex-Factory Price) by Videocon, and with respect to all display sales in excess of $5,000,000 (at the Ex-Factory Price), (i) three percent of Ex-Factory Price with respect to sales made on or prior to the seventh anniversary of the effective datedisposition of the Videocon License Agreement and (ii) one percent of the Ex-Factory Price with respect to sales made after the seventh anniversary of the effective date of the Videocon License Agreement; provided that the royalty may increase under other certain circumstances as a result of significant improvementsAgreement.
As more fully disclosed in the Videocon Licensed Technology, as defined in the Videocon License Agreement. Additional details of the transactions with Videocon and Mars Overseas can be found under “Item 1. Business” subsection “Overview” – Prior Agreements” we are parties to a Technology License Agreement with Volga-Svet Ltd., a Russian corporation (“Volga”), to produce and “Item 7. Management’s Discussionmarket our thin, flat, low voltage phosphor, Nano Displays in Russia. Volga is considered a related party under item 404 of Regulation S-K due to our 19.9% ownership interest in Volga. We have been working with Volga for the past fourteen years to assist us with our low voltage phosphor displays. During the fiscal year ended October 31, 2012, we paid Volga $326,000 in research and Analysisdevelopment fees. During the third quarter of Financial Conditionfiscal 2012 we reduced our level of development activity with Volga. Since we do not anticipate that we will continue to develop our Nano Displays, we are re-evaluating the Volga License Agreement and Results of Operation,” subsection “General.”our ownership interest in Volga.
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As more fully described in “Item 5. - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities -- Recent Sales of Unregistered Securities,” on September 12, 2012, we completed a private placement of $750,000 principal amount of 8% Convertible Debentures due 2016 (the “Debentures”). Lewis H. Titterton, Jr. the Company’s Chairman and then Chief Executive Officer, and Bruce Johnson, a director of the Company, each purchased $250,000 principal amount of the securities in this offering.
As more fully described in “Item 5. - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities -- Recent Sales of Unregistered Securities,” on January 25, 2013, we completed a private placement of $1,765,000 principal amount of 8% Convertible Debentures due 2015 (the “Debentures”) and warrants (the “Warrants”) to purchase 5,882,745 shares of common stock. 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.
As more fully described in “Item 11.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, Dr. Amit Kumar, a consultant and director of the Company, and John Roop, the Company’s Senior Vice President of Engineering and concurrently issued to them options to purchase 16,000,000, 16,000,000 and 8,000,000 shares of the Company’s common stock, respectively.
Related Person Transaction Approval Policy
Our BoardWhile we have no written policy regarding approval of Directors review and approve all transactions between us and a related person, our Board of Directors, as matter of appropriate corporate governance, we reviews and approves all such transactions, to the extent required by applicable rules and regulations. Generally, management would present to the Board of Directors 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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Item 14. Principal Accounting Audit Fees and Services
The following table describes fees for professional audit services rendered and billed by KPMG LLP, our present independent registered public accounting firm and principal accountant, since August 2009, for the audit of our annual consolidated financial statements and for other services during the fiscal years 20112012 and 2010, and Grant Thornton LLP, our independent registered public accounting firm and principal accountant prior to August 2009, for services in connection with our Annual Report on Form 10-K for the fiscal year ended October 31, 2009 and our Form S-8 filed on July 20, 2010.2011:
Type of Fee | 2011 | 2010 |
| 2012 |
| 2011 | ||||||
Audit Fees (1) | $ | 299,000 | $ | 420,920 | ||||||||
Audit Related Fees (2) | — | 50,000 | ||||||||||
Audit Fees |
| $ 287,000 |
| $ 299,000 | ||||||||
Audit Related Fees |
| - |
| - | ||||||||
Tax Fees | — | — |
| - |
| - | ||||||
All Other Fees | — | — |
| - |
| - | ||||||
|
| |||||||||||
Total | $ | 299,000 | $ | 470,920 |
| $ 287,000 |
| $ 299,000 | ||||
|
| |||||||||||
Procedures For Board of Directors Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
PART IV2012.
Item 15. Exhibits, Financial Statement Schedules
(a)(1)(2) Financial Statement Schedules
|
See accompanying “Index to Consolidated Financial Statements.”
(a)(3) Executive Compensation Plans and Arrangements
CopyTele, Inc. 2003 Share Incentive Plan (filed as Exhibit 4 to our Form S-8 dated May 5, 2003).
65
Amendment No. 1 to the CopyTele, Inc. 2003 Share Incentive Plan (filed as Exhibit 4(e) to our Form S-8 dated November 9, 2004).
CopyTele, Inc. 2010 Share Incentive Plan (filed as Exhibit 10.1 to our Form 8-K, dated July 20, 2010).
Amendment No. 1 to the CopyTele, Inc. 2010 Share Incentive Plan (filed as Exhibit 10.1 to our Form 8-K, dated July 7, 2011).
Amendment No. 2 to the CopyTele, Inc. 2010 Share Incentive Plan (filed as Exhibit 10.1 to our Form 8-K, dated September 5, 2012).
Form of Stock Option Agreement under CopyTele, Inc. 2010 Share Incentive Plan (time based vesting for employee participants) (filed as Exhibit 4.16 to our Form S-8, dated October 12, 2012).
66
Form of Time Based Stock Option Award Agreement between CopyTele, Inc. and Robert A. Berman, John Roop and Dr. Amit Kumar (filed as Exhibit 4.13 to our Form S-8, dated October 12, 2012).
Form of Time Based Stock Option Award Agreement between CopyTele, Inc. and Lewis H. Titterton Jr. and Kent B. Williams (filed as Exhibit 4.14 to our Form S-8, dated October 12, 2012).
Form of Performance Based Stock Option Award Agreement between CopyTele, Inc. and Robert A. Berman, John Roop and Dr. Amit Kumar (Portions of Section 12 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 November 15, 2012, File No. 333-184410-CF#28920, granting confidential treatment for portions of Section 12 of this exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended) (filed as Exhibit 4.15 to our Form S-8, dated October 12, 2012).
Employment Agreement, dated as of September 19, 2012, between the Company and Robert Berman. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
Employment Agreement, dated as of September 19, 2012, between the Company and John Roop. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
Consulting Agreement, dated as of September 19, 2012, between the Company and Amit Kumar. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
3.2 Amendment to the Certificate of Incorporation (Filed herewith.)
3.3 Amended and Restated By-laws. (Incorporated by reference to Exhibit 3.1 to our Form 8-K dated November 8, 2012)
67
4.1 Common Stock Purchase Warrant issued to ZQX Advisors, LLC on August 20, 2009. (Incorporated by reference to Exhibit 4.1 to our Form 10-K for the fiscal year ended October 31, 2009.)
10.1 CopyTele, Inc. 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 4 to our Form S-8 dated May 5, 2003.)
10.8 Form of Repricing Letter with respect to Options granted under the CopyTele, Inc. 2003 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated September 11, 2012.)
10.10 Amendment No. 1 to the CopyTele, Inc. 2010 Share Incentive Plan. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated July 7, 2011.)
10.11 Amendment No. 2 to the CopyTele, Inc. 2010 Share Incentive Plan (filed as Exhibit 10.1 to our Form 8-K, dated September 5, 2012).
68
10.12 Form of Stock Option Agreement under CopyTele, Inc. 2010 Share Incentive Plan (for employee participants). (Incorporated by reference to Exhibit 10.2 to our Form 8-K dated July 20, 2010.)
10.15 Form of Stock Option Agreement under CopyTele, Inc. 2010 Share Incentive Plan (time based vesting for employee participants) (Incorporated by reference to Exhibit 4.16 to our Form S-8, dated October 12, 2012.)
10.16 Form of Time Based Stock Option Award Agreement between CopyTele, Inc. and Robert A. Berman, John Roop and Dr. Amit Kumar (Incorporated by reference to Exhibit 4.13 to our Form S-8, dated October 12, 2012.)
10.17 Form of Time Based Stock Option Award Agreement between CopyTele, Inc. and Lewis H. Titterton Jr. and Kent B. Williams (Incorporated by reference to Exhibit 4.14 to our Form S-8, dated October 12, 2012.)
10.18 Form of Performance Based Stock Option Award Agreement between CopyTele, Inc. and Robert A. Berman, John Roop and Dr. Amit Kumar (Portions of Section 12 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 November 15, 2012, File No. 333-184410-CF#28920, granting confidential treatment for portions of Section 12 of this exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.) (Incorporated by reference to Exhibit 4.15 to our Form S-8, dated October 12, 2012.)
10.19 Amended and Restated Technology License Agreement, dated May 16, 2008, between CopyTele, Inc. and Videocon Industries Limited. (Confidential portions have been omitted and filed separately with the Commission.) (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2008.)
10.20 Modification Letter, dated March 11, 2009, from CopyTele, Inc. to Videocon Industries Limited with respect to the Amended and Restated Technology License Agreement, dated May 16, 2008. (Incorporated by reference to Exhibit 10.21 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010.)
69
10.21 Modification Letter, dated January 13, 2010, from CopyTele, Inc. to Videocon Industries Limited with respect to the Amended and Restated Technology License Agreement, dated May 16, 2008. (Incorporated by reference to Exhibit 10.22 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010.)
10.27 Exclusive License Agreement, dated May 27, 2011, by and between CopyTele and AU Optronics Corp. (Confidential portions have been omitted and filed separately with the Commission.) (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2011.)
10.28 License Agreement, dated May 27, 2011, by and between CopyTele and AU Optronics Corp. (Confidential portions have been omitted and filed separately with the Commission.) (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2011).
70
10.29 Notice of Termination, dated January 28, 2013, from CopyTele and AU Optronics Corp. (Filed herewith)
10.33 Form of Subscription Agreement executed as of September 12, 2012 by and among the Company and each Investor. (Incorporated by reference to Exhibit 10.1 to our Form 8-K, dated September 18, 2012).
10.34 Form of Debenture issued as of September 12, 2012 by the Company to each Investors (Incorporated by reference to Exhibit 10.2 to our Form 8-K, dated September 8, 2012).
10.35 Employment Agreement, dated as of September 19, 2012, between the Company and Robert Berman. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
10.36 Employment Agreement, dated as of September 19, 2012, between the Company and John Roop. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
10.37 Consulting Agreement, dated as of September 19, 2012, between the Company and Amit Kumar. (filed herewith) (Portions of Section 4 of this exhibit have been redacted and filed separately with the Commission in accordance with a request for confidential treatment, dated January 29, 2013, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.)
10.38 Form of Subscription Agreement executed as of January 25, 2013 by and among the Company and each Investor. (Filed herewith.)
71
10.39 Form of Debenture issued as of January 25, 2013 by the Company to each Investors. (Filed herewith.)
10.40 Form of Common Stock Purchase Warrant issued as of January 25, 2013 by the Company to each Investors. (Filed herewith.)
21 Subsidiaries of CopyTele, Inc. (Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.)
23.1 Consent of KPMG LLP. (Filed herewith.)
101.ins Instance Document*
101.def XBRL Taxonomy Extension Definition Linkbase Document*
101.sch XBRL Taxonomy Extension Schema Document *
101.cal XBRL Taxonomy Extension Calculation Linkbase Document *
101.lab XBRL Taxonomy Extension Label Linkbase Document *
101.pre XBRL Taxonomy Extension Presentation Linkbase Document *
* Furnished, not filed herewith.
72
SIGNATURES
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COPYTELE, | ||||||||||||
By: | /s/ Robert Berman | |||||||||||
Robert Berman | ||||||||||||
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| President and | ||||||||||
January 29, 2013 | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. | ||||||||||||
By: | /s/ Robert Berman | |||||||||||
| Robert Berman | |||||||||||
January 29, 2013 | President, Chief Executive Officer | |||||||||||
and Director (Principal Executive Officer) |
By: | /s/ Henry P. Herms | |||||||||||
Henry P. Herms | ||||||||||||
Vice President - Finance, | ||||||||||||
Chief Financial Officer and | ||||||||||||
Director (Principal Financial | ||||||||||||
January 29, 2013 | and Accounting Officer) |
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By: | /s/ Lewis H. Titterton Jr. | |||||||||
Lewis H. Titterton Jr | ||||||||||
January 29, 2013 | Chairman of the Board | |||||||||
By: | /s/ Dr. Amit Kumar | |||||||||
Dr. Amit Kumar | ||||||||||
January 29, 2013 | Director | |||||||||
By: | /s/ Kent B. Williams | |||||||||
Kent B. Williams | ||||||||||
January 29, 2013 | Director | |||||||||
By: | /s/ Bruce F. Johnson | |||||||||
Bruce F. Johnson | ||||||||||
January 29, 2013 | Director |
73
COPYTELE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 20112012
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. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders CopyTele, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of CopyTele, Inc. and subsidiaries as of October 31, 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 financial position of CopyTele, Inc. and subsidiaries as of October 31, The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has negative working capital, and has a shareholders' deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Melville, New York
F- 2 Table of
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ FOR THE YEARS ENDED OCTOBER 31,
F - 4 Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
F- 5 Description of Business As used herein, “we,” “us,” “our,” the “Company” and “CopyTele” refers to CopyTele, Inc. Our principal operations include the development, Our past operations also included the development, production and marketing of Funding and Management’s Plans Since our inception, we have met our liquidity and capital expenditure needs primarily through the proceeds from sales of common stock in our initial public offering and in private placements, upon exercise of warrants issued in connection with the private placements and our initial public offering, and upon the exercise of stock options. In addition, we have generated limited cash flows from sales of our encryption products and from license fees from Videocon Industries Limited, an Indian company (“Videocon”) related to our display technology pursuant to the Videocon License Agreement (as defined below). In May 2011, we entered into the AUO License Agreements (as defined below) with AU Optronics Corp., a Taiwanese company (“AUO”), and in June 2011 we received an initial license fee from AUO.
In connection with the change in
In February 2011, we F - 6 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, of which $300,000 was sold to our current Chairman and then Chief Executive Officer and one other director of the Company. The debentures pay interest quarterly and are convertible into shares of our common stock at a conversion price of $0.092 per share on or before September 12, 2016. We recorded a discount to the carrying amount of the debentures of approximately $718,000 related to the debentures’ beneficial conversion feature. We may prepay the debentures at any time without penalty upon 30 days prior notice. 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, of which $250,000 was sold to 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. We may prepay the 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 debentures, we issued warrants to purchase 5,882,745 unregistered shares of our common stock. Each 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. The debentures contain a beneficial conversion feature and a down round provision which we will evaluate in the first quarter of fiscal year 2013. During fiscal year 2012, our cash used in operating activities was approximately $3,141,000. This resulted from payments to suppliers, employees and consultants of approximately $3,165,000, which was offset by cash of approximately $7,000 received from collections of accounts receivable related to sales of encryption products, approximately $13,000 of dividend income received and approximately $3,000 of interest income received. Cash provided from investing activities during fiscal year 2012 was approximately $1,748,000, which resulted from proceeds from the maturities of short-term investments consisting of certificates of deposit and U.S. government securities of approximately $2,949,000 and approximately $1,000 received from the sale of Digital Info Security Co. Inc. (“DISC”) common stock offset by purchases of approximately $1,200,000 of certificates of deposit and purchases of equipment of approximately $2,000. Our cash provided by financing activities during fiscal year 2012 was approximately $958,000, which resulted from cash of $750,000 received from the sale of convertible debentures in a private placement and approximately $208,000 received upon the exercise of stock options.�� As a result, our cash, cash equivalents, and short-term investments at October 31, 2012 decreased $2,183,000 to approximately $840,000 from approximately $3,023,000 at the end of fiscal year 2011. Total employee compensation expense during fiscal years 2012 and 2011 was approximately $3,001,000 and $3,661,000, respectively, including in fiscal year 2012 approximately $74,000 of expense relating to severance payments to terminated employees. During fiscal years 2012 and 2011, a significant portion of employee compensation consisted of the issuance of stock and stock options to employees in lieu of cash compensation. We recorded compensation expense for the fiscal years ended October 31, 2012 and 2011 of approximately $927,000 and $1,819,000, respectively, for shares of common stock issued to employees. We recorded approximately $615,000 and $742,000 of stock-based compensation expense, related to stock options granted to employees and directors, during the fiscal years ended October 31, 2012 and 2011, respectively. During the fourth quarter of fiscal 2012, management discontinued compensating employees through the issuance of stock. F - 7 Table of Contents Based on currently available information, we believe that our existing cash, cash equivalents, As shown in the accompanying consolidated financial statements, we have incurred a net loss of approximately $4,253,000 during the fiscal year ended October 31, 2012, and, as of that date, we have an accumulated deficit of approximately $125,083,000 and a net shareholders’ deficit of approximately $1,194,000. These and the other factors described herein raise uncertainty about our ability to continue as a going concern. Management’s plans in regard to these matters are set forth above. The accompanying financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. The report from our independent registered public accountants, KPMG LLP, dated January 29, 2013, includes an explanatory paragraph related to our ability to continue as a going concern. 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
Under the AUO License Agreements, AUO
On January 28, 2013, we sent AUO a notice, terminating 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 Federal District Court for the Northern District of California against AUO and E Ink Corporation 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”). For more details on the AUO/E Ink Lawsuit, please see Note 7 “Commitments and Contingencies - Litigation Matters. We can give no assurance as to the potential outcome of this litigation. F - 8 Related Party Transactions with Videocon Industries Limited In November 2007, we entered into a Technology License Agreement (as amended in May 2008), (the “Videocon License Agreement”) with Videocon. In April 2008, the Indian Government approved the Videocon License Agreement. Under the Videocon License Agreement, we provided Videocon with a non-transferable, worldwide license of our technology for thin, flat, low voltage phosphor, Under the terms of the Videocon License Agreement, we 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
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 loans are for a period of seven years, do not bear interest, and prepayment of the loans will not release the lien on the Securities prior to end of the seven year period. The loan agreements 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 under shareholders’ equity in the accompanying consolidated balance sheet, 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.
F - 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation During the fourth quarter of fiscal year 2012, the Company began operating its business as one segment – patent monetization and patent assertion. The accompanying financial statements have been presented on that basis. The consolidated financial statements include the accounts of CopyTele, Inc. and its wholly owned subsidiaries, CopyTele International and CopyTele Marketing Inc. (“CopyTele Marketing”). CopyTele International and CopyTele Marketing were incorporated in the British Virgin Islands in 2007. CopyTele International was formed for the purpose of holding the Videocon GDRs. As of October 31, Revenue Recognition Revenues from sales are recorded when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and title has transferred or services have been rendered; (iii) our price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.
At each reporting period we assess the progress in completing During the fiscal years ended October 31, 2012 and 2011 we recognized approximately $940,000 and $873,000, respectively, of license fee revenue from F - 10
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, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. We do not have any financial liabilities that are required to be measured at fair value on a recurring basis. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets recorded in the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows: Level 1 - Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market which we have the ability to access at the measurement Level 2 - Financial assets whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 3 The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31,
F - 11
The following table presents the hierarchy for our financial assets measured at fair value on a recurring basis as of October 31,
Our non financial assets and liabilities 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. These assets were not presented in the preceding table. It 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. These assets and liabilities were not presented in the preceding table.Cash and cash equivalents are stated at carrying value which approximates fair value. Short-term Investments At October 31, F - 12 Statements of Cash Flows Cash and cash equivalents consist of highly liquid instruments that are readily convertible into cash and have original maturities of less than three months. During the fiscal years ended October 31, Warranty Policy We warrant that our encryption products are free from defects in material and workmanship for a period of one year from the date of initial purchase. The warranty does not cover any losses or damage that occur as a result of improper installation, misuse or neglect. Management has recorded a warranty liability of $5,000 as of October 31,
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. During the fourth quarter of fiscal year 2012, we determined that the discontinuation of funding from CopyTele for contract research and development work and lack of available financial information from Volga has impaired the value of our investment in Volga. During the fourth quarter of fiscal year 2011, we determined that there was an other than temporary impairment in both our Videocon and DISC investments. See Note 4 for further discussion. We will record an additional impairment charge if and when we believe any such investment has experienced an additional decline that is other than temporary.
The Company recognizes rent expense from operating leases with periods of free and scheduled rent increases on a straight-line basis over the applicable lease term. The Company considers lease renewals in the useful life of its leasehold improvements when such renewals are reasonably assured. Research and Development Expenses Research and development expenses are expensed in the year incurred. We have discontinued all research and development activity during the fourth quarter of fiscal year 2012. Subsequent to October 31, 2012, we commenced disposing of certain fully depreciated research and development equipment. 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 - 13 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 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. We account for stock options granted to employees and directors using the accounting guidance included in ASC 718 “Stock Compensation” (“ASC 718”). In accordance with ASC 718, we estimate the fair value of stock options granted on the date of grant using the Black-Scholes pricing
directors, of approximately Included in the stock-based compensation cost related to stock options granted to employees and directors recorded during the fiscal years ended October 31, 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 stock options granted on the date of grant using the Black-Scholes pricing F - 14 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 The total intrinsic value of stock options exercised during fiscal years
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 cash milestones. The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. 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 - 15 For options vesting if the trading price of the Company’s common stock exceeds two separate price targets we used the Monte Carlo Simulation in estimating the fair value at grant date. 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. 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 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,
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 the allowance for doubtful accounts, depreciation lives, asset impairment evaluations, tax assets and liabilities, license fee revenue, stock-based compensation and other contingencies. Actual results could differ from those estimates. Effect of Recently Issued Pronouncements
In December 2011, the
F - 16 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 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
3. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject us to concentrations of credit risk consist principally of accounts receivable from sales in the ordinary course of business. Management reviews our accounts receivable and other receivables for potential doubtful accounts and maintains an allowance for estimated uncollectible amounts. Generally, no collateral is received from customers for our accounts receivable. Our policy is to write-off uncollectable amounts at the time it is determined that collection will not occur. During fiscal year 4. INVESTMENTS
Short-term Investments and At October 31, F - 17 Investment in Videocon Our investment in Videocon is classified as an 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, 2011, 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 $7,105,000, and the uncertainty of its recovery, a write-down of the investment of approximately $1,723,000 should be recorded as of October 31, 2011, and a new cost basis of approximately $5,382,000 should be established. An other than temporary impairment of approximately $10,818,000, on a cumulative basis, has been recorded as of October 31, 2011.
The fair value of investment in Videocon as of October 31,
Investment in Digital Security Co. Inc. Our investment in DISC is classified as an “available-for-sale security” and reported at fair value, with unrealized gains and losses excluded from operations and reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The original cost basis was determined using the specific identification method. DISC’s common stock is not registered under the Securities Exchange Act of 1934, as amended, but is traded in the over the counter market and quoted on the Pink Sheets. At each reporting period we assess our investment in DISC, in accordance with ASC 320 and SEC guidance, to determine if a decline that is other than temporary has occurred. In evaluating our investment in DISC at October 31, 2011 we determined that, due to the continual decline in market value, the uncertainty of its recoverability and the decline in trading volume, the investment should be written-off. Accordingly, a write-off of the investment of approximately $63,000 was recorded as of October 31, 2011. F - 18 The fair value of our investment in DISC as of October 31,
During the fiscal years ended October 31, 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.
Research and development expenses in the accompanying consolidated statements of operations include payments to Volga for the fiscal years ended October 31, 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
F - 19 5. ACCRUED LIABILITIES Accrued liabilities consist of the following as of:
6. SHAREHOLDERS’ EQUITY On November 30, 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. Common Stock Issuances We account for stock awards granted to employees and consultants based on their grant date fair value. During the fiscal years ended October 31,
2012 and 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, F- 20 Stock Option Plans As of October 31, During the
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,
The following table summarizes information about stock options outstanding under the 2003 Share Plan as of October 31, Options Outstanding Options Exercisable
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 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. 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, and on August 29, 2012, the maximum number of shares was further increased to 30,000,000 shares. Current and future non-employee directors are automatically granted nonqualified stock options to purchase up to 60,000 shares of common stock upon their initial election to the Board of Directors and 60,000 shares of common stock at the time of each subsequent annual meeting of our shareholders at which they are elected to the Board of Directors. The 2010 Share Plan
F - 22 The following table summarizes information about stock options outstanding under the 2010 Share Plan as of October 31,
Options Outstanding Options Exercisable In addition to options granted under the stock option plans, in September 2012, in connection with our new executive team the Board of Directors approved the grant of nonqualified stock options to purchase 41.5 million shares of our common stock.
The remaining stock options to purchase 1.5 million 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 have an aggregate intrinsic value at October 31, 2012 of $54,750. 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, 2012, 500,000 options were exercisable with an aggregate intrinsic value of $18,250.
Options Outstanding Options Exercisable F - 23 7. COMMITMENTS AND CONTINGENCIES Leases We lease space at our principal location for office and laboratory research facilities. The current lease is for approximately 12,000 square feet and expires on November 30, 2014. The lease contains base rentals of approximately Rent expense for the fiscal years ended October 31, 2012 and 2011, was approximately $305,000 and $307,000, respectively. On January 28, 2013,
On January 28, 2013, CopyTele also initiated a patent infringement lawsuit in the Federal District Court for the Northern District of California against E Ink, regarding certain patents owned by CopyTele pertaining to CopyTele’s ePaper® Electrophoretic Display technology. CopyTele alleges that E Ink has infringed and continues to infringe such patents in connection with the manufacture, sale, use, and importation of eReaders, and other devices with electrophoretic displays. We can give no assurance as to the potential outcome of this litigation. Commencing in the fourth quarter of fiscal year 2012 the primary operations of the Company involved patent licensing in connection with the unauthorized use of patented technologies and patent enforcement. 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.
8. EMPLOYEE PENSION PLAN We adopted a qualified noncontributory defined contribution pension plan, effective November 1, 1983, covering all of our present 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 F - 24
9. INCOME TAXES Income tax provision (benefit) consists of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset, net, at October 31,
As of October 31, We had tax net operating loss and tax credit carryforwards of approximately During the fiscal year ended October 31, 2011, we received a $3,000,000 license fee from AUO which was subject to a 20% foreign withholding tax. The $600,000 withholding tax, at the election of the Company, could be deducted as an operating expense for US income tax purposes or credited against future US income tax.
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 for the fiscal years ended October 31, 2012 and 2011 of 0% and
During the two fiscal years ended October 31,
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. F - 26
Geographic Information We generate revenue both domestically (United States) and internationally. International revenue is based on the country in which our customer (distributor) is located. For the fiscal years ended October 31,
The following table sets forth unaudited financial data for each of our last eight fiscal quarters:
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