Intellectual property licensing company, e.Digital Corporation (OTCMKTS:EDIG), declined sharply in July after the company decided to file for bankruptcy. The share price went from trading at the level of $0.03 to touch $0.0007 on July 14, 2017. We went through the latest news as well as quarterly reports and concluded that the market’s reaction may be exaggerated. Nobody seems to be taking into account the fact that the company still has cash and no debt. Additionally, the last net asset value reported was positive. It is still solvent. Hence, we wanted to convey the situation to our readers. Have a look at the recent share price action:
What’s the business of e.Digital?
The company is a holding company that manages IP assets. The business objective of the company as stated in the annual report is:
“e.Digital Corporation They are an intellectual property licensing company developing and pursuing licensing of three intellectual property portfolios: context and interpersonal awareness systems (“Nunchi®” technology), advanced data security technologies (“microSignet™” technology) and secure communication technologies (“Synap™” technology).” Source
More specifically, according to the company’s website, Nunchi operates assets in the “areas of health, wellness, emergency response, security monitoring, personal safety, social and professional networking among others.” microSignet operates assets in the semiconductor sector. Synap owns intellectual property that is useful for the security and communications industry.
How does the company make the money?
e.Digital owns intellectual property that is used to help businesses develop its activities, and also finds companies infringing on EDIG’s patent rights to sue them. There are many other competitors operating the same business model in the United States. They all have the same necessity; a lot of cash. Why? Because cash is needed to launch law actions against other companies. If the IP agents run out of cash, they cannot operate any more. But, they leave a great gem hidden on the balance sheet; the patents accumulated.
The company seemed to be operating normally. On Feb. 14, 2017, it declared the results for its last quarter. We will have a look at the balance sheet later, but the financial figures from the income statement seemed very good.
- Net income of $73,365 for the third quarter of fiscal 2017 as compared to a net loss of $363,869 for the prior year’s same period.
- Two patent licenses signed in the quarter with revenues of $151,000, while no revenue was reported in the same period in 2016.
Additionally, the company updated the market regarding its operations, and nothing dramatic was announced. These were the most remarkable words of Fred Falk, the CEO of e.Digital:
“The cyber security space is a notoriously difficult space to penetrate without long standing relationships or the financial resources to support product development, but can be very lucrative once a foothold is established. We continue to meet with potential investors and partners that could allow us to bring products to this burgeoning and expansive industry which is expected to grow to $170 billion annually by 2020.” Source
New patents were announced in 2017. On May 3, 2017, it was reported that e.Digital Corporation announced that the United States Patent and Trademark Office had granted them U.S. Patent 9,641,664. Fred Falk, President and CEO of e.Digital Corporation, said:
“This is the tenth patent granted into the foundational Nunchi® patent portfolio that we believe is poised to play a key role in the future of mobile communications and the Internet of Things. The claims of this new patent address specific applications of Nunchi in transportation and infrastructure, as well as providing additional coverage in the growing Internet of Things space.” Source
Additionally, new directors decided to work for the company. Would these directors join a company that is close to bankruptcy?. Not at all. On Oct. 12, 2016, e.Digital Corporation declared the appointment of Don Springer as an independent director. The CFO, MarDee Haring-Layton, was appointed as Corporate Secretary. Fred Falk, President and CEO of Digital, uttered these words:
“Don is an experienced international executive and has built a successful business providing companies, their board of directors, and executives, with valuable knowledge and direction as a result of his extensive career. We are excited that he has joined our Board, outside of his business, and we look forward to benefitting from his judgement and expertise.” Source
Mr. Springer had this to say about the new developments:
“e.Digital is positioning itself to take advantage of multiple strategic opportunities. I look forward to adding value with the Company in their future success.” Source
Surprisingly, after all these good news in July, the company decided to file for bankruptcy:
“On July 6, 2017, filed a voluntary petition for relief under provisions of Chapter 7 of Title 11 of the United States Code, 11 U.S.C. ” Source
Last Balance Sheet Reported
We went to check the last financial accounts released and saw that the company still has sufficient cash:
|ASSETS||Dec 31, 2016||March 31, 2016|
|Cash and cash equivalents||232,048||701,481|
|Accounts receivable, net||68,000||–|
|Deposits and prepaid expenses||42,142||31,189|
|Total current assets||342,190||732,670|
|Property, equipment and intangibles, net of accumulated depreciation and amortization of $114,151 and $128,950, respectively||20,114||26,772|
Furthermore, the amount of liabilities is not as large as the amount of assets. Thus, the net asset value reported was positive. On the the top of it, no financial long term debt was reported:
|LIABILITIES AND STOCKHOLDERS’ EQUITY||Dec 31, 2016||March 31, 2016|
|Accounts payable, trade||59,260||120,744|
|Accrued and other liabilities||76,256||109,072|
|Total current liabilities||135,51||229,816|
How could the company change so much in a short period of time? We may need to check the financial situation at this point in time to see whether the situation is so bad. But, Mr Market rapidly decided to push the share price down without even looking at the financial accounts.
What happens now and conclusion
The share price will continue trading normally because even if the company is reorganizing itself, there are still assets hidden on the balance sheet, and the amount of liabilities is less than the amount of assets. Thus, we don’t see a clear reason to panic.
The new financial accounts will have to be released, which may make the share price jump. Additionally, once things settle down, the company may have to sell assets and restructure the business. Such type of announcements could create a lot of volatility in the market, thus readers need to be alert. The risk/reward on this one looks appealing.
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Image courtesy of Casper Casparian via Flickr
Disclosure: We have no position in EDIG and have not been compensated for this article.