Interview with the CEO: e.Digital Corporation (EDIG)

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TWST: What is the history of e.Digital?

Mr. Falk: The history of e.Digital is an exciting one. The company has been around since 1988, and one of the first products that we developed was a microphone earphone product that was all in one unit. The challenge there was that if you put a microphone close to a speaker, you get feedback. We were able to overcome that. We ended up selling that technology, because it was patented, to a company that was just starting, which ended up becoming the company called Jabra. And Jabra has been around since about the 1989, 1990 time frame.

They were the ones that came out with these little ear pieces that you could plug into your cellphone so you didn’t have to have this like boom microphone to talk in to. Everything was basically coming from your ear, and you used the bone structure in your head to pick up the sound. They were selling these things all over the place, and they had these wild psychedelic colors: bright yellows and the bright pinks and things like that. They are still in business. If you go to the Jabra website, you can see what they are up to nowadays; they are a very big company. And we were the founding technology for that company.

What we did after that was, we utilized the money that we got from selling them the I.P. to develop another world’s first, which was a portable consumer product that allowed you to make voice recordings on to removable flash memory. Back then, this was in the 1990, 1991 time frame, nobody knew what flash memory was, and in fact, flash memory, if you bought it in raw chips like from Intel, they were selling for like $70 a megabyte. We felt that, at some point, just like hard drives, that the capacity would go up and that the prices would come down. We actually developed and manufactured our own flash cards, and we did all of that here in San Diego, and the product was launched, and the product was called Flashback. We ended up selling it under the company name, but we also OEM the product to SANYO, and it had the SANYO name and logo on it.

We did that for quite a while, but then we started picking up on this new technology that was just coming out called MP3. Because of the fact that we had all this experience in technology, in the flash memory space, we felt, “Well, if we can record voice on to flash memory, we can do that with music.” But the key, because flash memory was still very expensive, was to compress the music files as much as you could so that you could put a lot of music on a little amount of flash. We worked with Lucent Technologies because they had a music encoder/decoder that was specifically designed for music, so it would make the file size as small as possible without losing the music quality, the audio quality. We worked very closely with them, and we also worked very closely with IBM because they had new technologies coming out that they wanted us to utilize in this new space.

We ended up coming out with our own product line, and we started to develop products for other companies, such as Samsung and others. We were one of the pioneers in the MP3 player technology space. We worked very closely with the record labels to make sure that the music that they were providing that went on to our devices couldn’t be pirated; they were encrypted files. We learned after a while that the retail space was not for the lighthearted, and we ended up focusing more on just developing the technology to go into these new innovative products.

The next product we developed was for the airline space, and it was a portable in-flight entertainment device — the first of its kind to use a hard drive. The key to this product was the encryption technology, which again our engineers developed. The Hollywood studios didn’t want the content that they were providing for these devices to be pirated because the movies that they were providing were still in the movie theater; they weren’t on DVD yet. So they were considered their prime, or what they call early-window content.

We had to prove to all of the major studios, like Universal, Fox and Warner, that our encryption technology was solid, and we did that. They gave it the thumbs up, and so the product was introduced into the airline space. Within a short amount of time, there were many airlines all around the world using this product with our technology in it and our hardware design. And in fact, we were in that space from roughly the 2004 time frame just until recently. We still have one airline customer left that we are providing products to, but they are getting ready to phase that out as well.

What has happened is that people nowadays are bringing their own content with them on their iPads and other tablets, even on their large-screen phones. And content is very accessible. You can get it through iTunes; you can get it through Amazon. Over the last few years, as this new model started to invade the airline space, our product slowly became less important, but we were in that space for well over 10 years. Given how fast technology comes and goes, I think that’s pretty impressive. Now, we are focusing pretty much on developing new security — online security and content security — technology based on our history of being in the security space.

TWST: So as you were just leading into it, what are your major projects now? What exactly are you working at?

Mr. Falk: Well, we’ve got a number of things going on. In addition to our Nunchi technology, which we have a patent portfolio that consists of about seven patents now, we’ve got a new project in the works. We have given it the project name Pluto, and it is a communication security technology for voice, e-mails and text messages to prevent people from hacking in to your communication. There is a lot of stress going on out there where executives and government officials, and even other high-profile people like celebrities, are being hacked. Their e-mails are being hacked; their text messages are being hacked.

Pluto addresses the need for that security in a brand-new type of technology that we are developing. Right now, that is what our engineers are looking at and working on, and our hope is to find a partner that will help us bring this product into the marketplace. Being a smaller company, we need a big brother that has the financial resources and the distribution resources to get this kind of technology out there, and there are a number of companies that we are already talking to.

We also have our other technology called microSignet. This is a technology that utilizes the flaws that are inherent in semiconductors when they are manufactured. Every chip that gets manufactured comes out with certain flaws, and they are unique to that particular chip. So that means, you can use that flaw as a fingerprint, so to speak, for things like authentication. So as an example, if you have a set-top box at home that has this technology built into it, once a content distribution center — say it was iTunes or Amazon — established a relationship with your set-top box and recognized that fingerprint, from there on out, every time you download content to your set-top box, it will look for that fingerprint, and if it doesn’t see it, it’s not going to provide the content. So it’s really a content-protection technology.

It could also be used for user authentication for online banking. If it is set up in your computer, the bank software will look onto the device, whether it’s your desktop or laptop computer or tablet, looking for that fingerprint of that semiconductor before it allows any kind of transaction. So again, this requires the partnership of a semiconductor company to help us get this technology out there. And so those are really the core new projects that we are working on.

TWST: When you are looking for partners, what are the characteristics you are looking for?

Mr. Falk: Well, as an example, for the microSignet technology, we are going to be looking for a semiconductor company that would be willing to share with us the technical details of establishing a fingerprint of the unique identifiers, or flaws for lack of a better term, that are in their chips when they are manufactured. This is something that the average person just doesn’t know about it, and of course, as you can imagine, the semiconductor companies don’t want to just open that up to the public. As far as they are concerned, none of their chips have flaws, but that’s just the reality of the way they are made, that they have unique differentiation.

We need to be able to work with them to find out how you get to these things so that we can establish this fingerprint. We also want a company with pull in the industry. We want someone that is a well-recognized company that helps to get the word out to the media and other potential partners in the online security space, so that’s pretty much what we are looking for.

TWST: What are some of the important trends that you are seeing right now in your sector, and how are you positioning e.Digital to take advantage of those trends?

Mr. Falk: There is a lot going on in the online- and content-security space as well as communication security, and this is where I feel the projects that we are currently working on fit right in. I mean, there isn’t a day that goes by that you don’t read about or hear about some security breach, whether it’s Target or Wal-Mart or whoever that is being breached, and this is where I feel we are in at a good time with our new technologies. The protection of content is becoming increasingly important as more and more data is on the Web or on the phone or wherever, and this Pluto technology really helps to address that issue.

TWST: What do you see as your biggest market opportunity right now?

Mr. Falk: Well, I believe all of our new technologies are promising, but we have to focus most of our resources on what is going to bring in the revenue of course. And at this point, it is our Nunchi patent portfolio. By the way, Nunchi is a Korean word, which means the subtle art of listening and gauging another’s situation or mood. The way the technology works is, it utilizes the sensors that are in your cellphone, for instance, or your tablet computers to try to determine what is going on in your particular environment. And we have a patent portfolio, as I mentioned earlier, that consists of at least seven patents at this point that cover that space.

What we are finding is that there are a lot of products coming out into the marketplace that we feel would be able to utilize our technology. Wearables — these new fitness trackers, for example — are an example. There are a lot of sensors that are in those products, and they keep track of things like heart rate and also things inside of your immediate environment.

But the other area is the connected home market and specifically the security market, products like the Dropcam product and the simplicam product, and there are many more of them coming out. Another company, Piper, they have these home security cameras that utilize your Wi-Fi network at home to let you know if there is something unusual going on in your house. These products typically have a camera and microphone built into them. And when they sense something out of the ordinary, they will send you either a text message or an e-mail saying, “Hey, you better take a look at what’s going on inside your house.” We believe this fits right into the area that’s covered by our Nunchi patent. And we’ve got a lot going on in that space.

Unfortunately, we had to initiate some litigation against companies that weren’t willing to sit down and take a license. We can’t just sit back and watch these products coming to the marketplace using our technology without us being compensated for the use of this technology. And so, like I said, we want to focus on the things that are going to bring in the revenue in the short term as we are working on these other sort of longer-term projects.

TWST: Where are your biggest challenges right now?

Mr. Falk: I’d say the biggest challenges for a small company like us are getting the word out on our innovations and finding the right partners to productize our technologies. As I said before, we really do need a big brother of some sort to help fund our technology and to fund product development, as well as get the technology into the hands of the consumers. We are going to be bringing on a business-development person to help us get out there in front of some of these potential licensees.

But it’s interesting that our litigation activities from the past have put us in front of a lot of consumer products companies out there. In a strange way, we have established relationships with a lot of companies out there, and we are going to try to leverage that, and we are actually leveraging some of that to get in front of some of these people. So I guess I would say our biggest challenge right now is just getting the word out.

TWST: You have a segment of the company that is involved specifically with patent licensing and enforcement. Is that specifically related to your own I.P.?

Mr. Falk: Yes, it’s definitely related to our patent. As an example, the patent portfolio that we generated back in the early 1990s that had to do with that flash-based product, the Flashback, we have been monetizing that portfolio since 2008. It has been the main revenue stream for our company, and we have funded the company since 2008 as a result of that patent-monetization process. It has also funded all of our new technology developments, including all of our new patents. So it is an important part of our business, but basically, as I said, we are utilizing our own patents.

People might think we are a patent troll or something like that, but a patent troll in our minds is somebody that goes out and buys patents for the specific reason they go out and sue people. We don’t. We develop our own technology. We patent that technology. We try to go out and license that technology to companies that we feel would benefit by having a license to that technology. But if we see that people are introducing products without wanting to take a patent license, as I said earlier, then we have to get the word out to them that we are not just going to sit back and let you take advantage of us.

TWST: How does the company maintain the innovation, its innovation momentum?

Mr. Falk: We have some very talented people working for the company and help work with the company. Pat Nunally, who is our Technology and Patent Consultant, he’s got a very strong background in technology innovation. I can’t remember off the top of my head how many patents he has generated, but it is a lot. He’s got a strong background in cipher technology and security technology.

And, then our Director of Engineering, Kevin Bostenero, he also has a very strong engineering background in the cipher-technology environment and also the security space, and that’s why over all of these years, over all of our products, we have been able to provide and develop security technologies that are accepted in the industry, whether it’s by the Hollywood studios or the record labels, and hopefully soon, the online security people. So we’ve got a strong background of security, and we have to continue to leverage that moving forward based on the talent that we have.

TWST: What are your plans for monetizing the Nunchi technology, and what does that timeline look like?

Mr. Falk: Well, right now, our legal team has filed three complaints against some of these home security camera companies. One is against Dropcam, which is owned by Nest, which is owned by Google. Another is against simplicam, which is owned by ArcSoft, and then there is another company called Oco. And we are in the early stages of the litigation, and in fact, recently, in early August, we had a claim construction hearing, which is also known as a Markman hearing, in the San Francisco court district, in the Northern District. We are waiting for a ruling from our judge on that.

But moving forward, if we can prevail on some of these legal challenges, like a Markman hearing, moving forward, that puts us in a much better position to approach companies and try to get them to license our technologies. Aside from that, we are definitely going to continue to develop our Pluto technology, and the further we get along with that, the better positioned we are to show potential partners what we have here and get them excited about it. Those are really the short-term strategic goals.

TWST: Tell us about your background and the rest of the management team.

Mr. Falk: Well, I grew up in electronics manufacturing, and from there, I went into manufacturing engineering, and then, I transitioned into OEM sales and technology licensing. That is basically my background. I have been with the company since 1995, originally in technology licensing. I went out and I brought in OEM customers — such as Samsung, such as Linear — for the Flashback product that we had developed back in those days. And then, I believe it was in the 1996 to 1997 time frame, I was appointed President of the company and then eventually CEO.

MarDee Haring-Layton is our Chief Financial Officer, and she has been with the company since 2011. She’s got a strong accounting background, having spent time with Deloitte and Charlotte Russe and some other companies. She has got a strong Sarbanes-Oxley background. Kevin Bostenero, as I mentioned before, our Director of Engineering, he’s got a very strong engineering background, again in cipher technologies and security technologies, things like encryption, and Pat Nunally, who I mentioned before, is also outstanding.

TWST: For investors and potential investors, what are the most important messages you would like them to hear or things they should really know about the company?

Mr. Falk: We have a very strong technology background and a very strong background of developing innovative technologies, things that are the first in various industries, and we are going to continue to develop new technologies. We are going to continue to strengthen our patent portfolios by filing new patents and continuations to our existing patents. Our plan is to continue to monetize our technology through licensing, enforcement and certainly through partnering. And we are going to continue to develop our Pluto technology, and look for partners to productize that technology and to help generate awareness of our company.

I have been researching a number of investment conferences for the next year that I would like to attend and speak at to help educate people on the company and the technologies. There are a lot of exciting things going on here at the company, and we feel that next year is going to be a very exciting year for the company. We are addressing a lot of high-focus areas within the industry, the security industry especially, with the technologies that we are developing, and so I am hoping that we can attract new investors to join us on the ride.

TWST: Thank you. (LMR)

Alfred H. Falk

CEO

e.Digital Corporation

16870 W. Bernardo Drive

Suite 120

San Diego, CA 92127

(858) 304-3016

(866) 502-8234 — TOLL FREE

(858) 304-3023 — FAX

www.edigital.com