XNAS:EONC eOn Communications Corporation Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2012.

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 000-26399

 

 

eOn Communications Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   62-1482176

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1703 Sawyer Road

Corinth, MS

  38834
(Address of principal executive offices)   (Zip code)

(800) 955-5321

(Registrant’s telephone number, including area code)

 

 

Check whether the issuer: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filler, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Small reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

2,870,405 shares of common stock, $0.005 par value, were outstanding as of February 29, 2012.

 

 

 


Table of Contents

EON COMMUNICATIONS CORPORATION

FORM 10-Q

QUARTER ENDED JANUARY 31, 2012

TABLE OF CONTENTS

 

PART I

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements      2   
   Condensed Consolidated Balance Sheets at January 31, 2012 (unaudited) and July 31, 2011      2   
   Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended January 31, 2012 and 2011 (Unaudited)      3   
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2012 and 2011 (Unaudited)      4   
   Notes to Condensed Consolidated Financial Statements (unaudited)      5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      18   

Item 4T.

   Controls and Procedures      18   

PART II

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      19   

Item 1A.

   Risk Factors      19   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      19   

Item 3.

   Defaults Upon Senior Securities      19   

Item 4.

   Mine Safety Disclosures      19   

Item 5.

   Other Information      19   

Item 6.

   Exhibits      19   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

     January 31,     July 31,  
     2012     2011  
     (unaudited)     (Note 1)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 1,988      $ 1,542   

Trade accounts receivable, net of allowance of $383 and $351, respectively

     4,681        5,175   

Inventories

     5,243        5,516   

Prepaid and other current assets

     267        205   
  

 

 

   

 

 

 

Total current assets

     12,179        12,438   

Property and equipment, net

     248        223   

Investments

     990        990   
  

 

 

   

 

 

 

Total assets

   $ 13,417      $ 13,651   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Trade accounts payable

   $ 2,046      $ 2,660   

Current maturities of notes payable - related party

     793        575   

Accrued expenses and other

     1,559        1,699   
  

 

 

   

 

 

 

Total current liabilities

     4,398        4,934   

Notes payable - related party, net of current maturities

     2,966        3,103   
  

 

 

   

 

 

 

Total liabilities

     7,364        8,037   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value, (10,000,000 shares authorized, no shares issued and outstanding)

     —          —     

Common stock, $0.005 par value (10,000,000 shares authorized, 3,009,985 and 3,003,985 shares issued, respectively)

     15        15   

Additional paid-in capital

     56,293        56,281   

Treasury stock, at cost (139,580 shares)

     (1,503     (1,503

Accumulated deficit

     (49,418     (49,769

Accumulated other comprehensive income

     —          5   
  

 

 

   

 

 

 

Total eOn Communications Corp. stockholders’ equity

     5,387        5,029   

Noncontrolling interest

     666        585   
  

 

 

   

 

 

 

Total stockholders’ equity

     6,053        5,614   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 13,417      $ 13,651   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     January 31,     January 31,  
     2012     2011     2012     2011  

REVENUE

        

Products

   $ 4,707      $ 4,467      $ 9,732      $ 9,143   

Services

     966        1,254        2,171        2,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     5,673        5,721        11,903        11,550   
  

 

 

   

 

 

   

 

 

   

 

 

 

COST OF REVENUE

        

Products

     3,705        3,441        7,602        6,958   

Services

     357        607        962        1,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

     4,062        4,048        8,564        8,168   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,611        1,673        3,339        3,382   

OPERATING EXPENSE

        

Selling, general and administrative

     1,337        1,506        2,612        2,992   

Research and development

     104        137        212        270   

Other operating expense (income), net

     (8     (13     (17     20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     1,433        1,630        2,807        3,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     178        43        532        100   

Interest expense, net

     (94     (136     (82     (294
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and discontinued operations

     84        (93     450        (194

Income tax expense

     10        —          18        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     74        (93     432        (194

DISCONTINUED OPERATIONS

        

Loss from discontinued operations

     —          (51     —          (232
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     74        (144     432        (426

Less: Net income attributable to noncontrolling interest

     69        61        81        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ 5      $ (205   $ 351      $ (452
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

        

Net income (loss)

   $ 5      $ (205   $ 351      $ (452

Realized gains on available-for-sale securities

     —          —          5        —     

Foreign currency translation adjustment

     —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 5      $ (205   $ 356      $ (450
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     2,870        2,858        2,869        2,857   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     2,870        2,858        2,869        2,857   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per share:

        

From continuing operations

   $ —        $ (0.05   $ 0.12      $ (0.08

From discontinued operations

     —          (0.02     —          (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per share

   $ —        $ (0.07   $ 0.12      $ (0.16
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per share:

        

From continuing operations

   $ —        $ (0.05   $ 0.12      $ (0.08

From discontinued operations

     —          (0.02     —          (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per share

   $ —        $ (0.07   $ 0.12      $ (0.16
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     Six Months Ended  
     January 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 432      $ (426

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Stock-based compensation expense

     3        36   

Depreciation and amortization

     48        150   

Realized gain on available-for-sale securities

     (5     —     

Provision for doubtful trade accounts receivable

     11        26   

Loss on disposal of property and equipment

     —          14   

Imputed interest expense on notes payable

     81        295   

Changes in net assets and liabilities:

    

Trade accounts receivable

     483        (429

Trade accounts receivable/payable - related party

     —          8   

Inventories

     273        (635

Prepaid and other assets

     (62     (32

Trade accounts payable

     (614     127   

Accrued expenses and other

     (140     (229
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     510        (1,095
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (73     (44

Capitalized software development costs

     —          (207
  

 

 

   

 

 

 

Net cash used in investing activities

     (73     (251
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of note payable

     —          (860

Proceeds from employee stock purchase plan

     9        10   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     9        (850
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          2   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     446        (2,194

Cash and cash equivalents, beginning of period

     1,542        4,108   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,988      $ 1,914   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ —        $ 310   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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EON COMMUNICATIONS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Six Months Ended January 31, 2012 and 2011

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by eOn Communications Corporation (“eOn” or the “Company”). It is management’s opinion that these statements include all adjustments, consisting of only normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows as of January 31, 2012, and for all periods presented.

Description of Business

eOn is a global provider of communications solutions enabling its customers to communicate more effectively. eOn’s offerings are built on reliable open architectures that enable easy adoption of emerging technologies, such as Voice over Internet Protocol (VoIP) and concepts such as Service Oriented Architecture (SOA). The Company’s Cortelco product line provides customer premise equipment (CPE) commercial grade telephone products primarily for use in businesses, government agencies, colleges and universities, telephone companies, and utilities. Cortelco Systems Puerto Rico’s operations include the sale and service of integrated communications systems, data equipment, security products, and telephony billing services.

Interim Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include the accounts of eOn Communications Corporation, eOn Communications (Beijing) Corporation Limited (“eOn China”), Cortelco Systems Holding Corp. (“Cortelco”) acquired on April 1, 2009 and Cortelco Systems Puerto Rico (“CSPR”), control of which was acquired on June 9, 2010. All significant inter-company balances and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto as of July 31, 2011 and 2010 and for each of the two years in the period ended July 31, 2011, which are included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value Measurements

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact, and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non performance.

Accounting standards have established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting standards have established three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

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The Company’s cash equivalent instruments, primarily money market securities and U.S. Treasury Securities, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

As of January 31, 2012, the carrying value of the Company’s investment in Symbio Investment Corporation (“Symbio”) was $990,000. Symbio is a holding company whose primary asset is an approximate twenty percent investment in Symbio SA. The Company believes, based on recent stock issuances by Symbio SA, that the fair value of the Company’s investment in Symbio may be less than the Company’s cost. There are no quoted market prices for the Company’s investment in Symbio, and sufficient information is not readily available for the Company to utilize a valuation model to determine its fair value without incurring excessive costs relative to the materiality of the investment. Accordingly, the Company has not estimated the fair value of its investment in Symbio at January 31, 2012. Based on the Company’s evaluation of the near-term prospects of Symbio and the Company’s ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any potential impairment to be other-than-temporary at January 31, 2012.

The note payable to the former Cortelco shareholders (Note 6) is valued each period end using a discounted cash flow analysis of the projected future payments of Cortelco using a discount rate of 15.22%. The note is classified within Level 3 of the fair value hierarchy. Projected future payments are evaluated at each reporting period and are significantly impacted by seasonal changes in inventory and vendor and customer payments. The following represents transactions related to the note payable for the six months ended January 31, 2012 (in thousands):

 

Beginning fair value - August 1, 2011

   $ 3,504   

Imputed interest

     257   

Change in estimates

     (180
  

 

 

 

Interest expense

     77   

Payments

     —     
  

 

 

 

Ending fair value - January 31, 2012

   $ 3,581   
  

 

 

 

Income Taxes

Due to uncertainties surrounding the timing of realizing the benefits of its net deferred tax assets in future returns, to the extent that it is more likely than not that deferred tax assets may not be realized, the Company continues to record a valuation allowance against all of its deferred tax assets at January 31, 2012.

Software Development Costs

The Company capitalizes costs in developing software products upon determination that technological feasibility has been established for the product, if that product is to be sold, leased or otherwise marketed. Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. When the product or enhancement is available for general release to customers, capitalization is ceased, and previously capitalized costs are amortized based on current and anticipated future revenues for the product, but with an annual amortization amount at least equal to the straight-line amortization over an estimated economic life of five years.

In accordance with ASC Topic 360, Property, Plant, Equipment, management of the Company evaluates the carrying value of the process technology and software development costs annually or when a possible impairment is indicated. Subsequent to the general release of the eConn IP PBX software to customers in the first fiscal quarter of 2011, the product did not reach the anticipated level of market acceptance. Based on its evaluation, management recorded an impairment charge of approximately $916,000 against the software in the fourth quarter of fiscal 2011.

Recently Issued and Adopted Accounting Standards

In December 2010, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS, which amends ASC 820, Fair Value Measurements and Disclosures. ASU 2011-04 provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 also changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011. These new standards will be effective for the Company beginning in the third quarter of fiscal 2012. As this update impacts presentation only, its adoption will not have a material impact on our consolidated financial statements.

 

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In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income – an update to ASC 220, Comprehensive Income. ASU 2011-05 requires the components of net income and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but continuous statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. In addition, ASU 2011-05 requires companies to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 is effective for annual periods beginning after December 15, 2011 and interim periods thereafter. As this update impacts presentation only, its adoption will not have a material impact on the Company’s consolidated financial statements.

Reclassification

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform to the January 31, 2012 condensed consolidated financial statement presentation.

 

2. Stock Based Compensation

Equity Incentive Plans

The Company’s Equity Incentive Plans, adopted in fiscal years 1997, 1999 and 2001, authorize the granting of incentive stock options, supplemental stock options, stock bonuses, and restricted stock purchase agreements to officers, directors, and employees of the Company and to non-employee consultants. The board of directors has declared that no future grants will be made under the plan adopted in 1997. Incentive stock options are granted only to employees and are issued at prices not less than the fair market value of the stock at the date of grant. The options generally vest over a four-year period and the term of any option cannot be greater than ten years from the date of grant. Restricted stock purchase agreements are issued at prices not less than 85% of the fair market value of the stock at the date of grant. During the six months ended January 31, 2012, there were no options to purchase shares of common stock and no restricted stock granted by the Company.

The Company’s majority-owned subsidiary, CSPR, issued previously held treasury stock to management and directors of CSPR as compensation in the six months ended January 31, 2011. The stock, valued at $36,000, is recorded as expense in the six months ended January 31, 2011.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan permits employees to purchase up to 200,000 shares of the Company’s common stock. The purchase price under this plan is 85% of the fair market value of the common stock at the beginning of an offering period or on a purchase date, whichever is less. Offering periods generally last one year with purchase dates six and twelve months from the beginning of an offering period. During the six months ended January 31, 2012, employees purchased 6,000 shares under the plan.

Determining Fair Value

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical daily closing prices adjusted for expected future volatility. The Company believes that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The Company uses historical information to calculate the expected life of option grants. The Company believes that historical information is currently reflective of the economic life of outstanding option grants. The dividend yield is determined by dividing the expected per share dividend during the coming year by the average fair market value of the stock during the quarter. The Company has not historically declared any cash dividends on its common stock, and currently intends to retain any retained earnings to finance the operation and expansion of the business and therefore does not expect to pay cash dividends on the common stock in the foreseeable future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The estimated fair value of the employee stock options are amortized to expense using the straight-line method over the vesting period.

Stock-based compensation of $3,000 and $36,000 was recognized for the six months ended January 31, 2012 and 2011, respectively. As of January 31, 2012, the Company has no unrecognized compensation costs related to unvested stock options under the Plans.

 

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General Stock Option Information

Activity in the Company’s stock option plans since July 31, 2011 is as follows:

 

                  Weighted  
     Shares            Average  
     Available      Options     Exercise  
     for Grant      Outstanding     Price  

Options at August 1, 2011

     302,756         73,521      $ 10.80   

Granted

     —           —          —     

Exercised

     —           —          —     

Cancelled

     1,588         (1,588     2.76   
  

 

 

    

 

 

   

 

 

 

Options at January 31, 2012

     304,344         71,933      $ 10.98   
  

 

 

    

 

 

   

 

 

 

Information regarding the stock options outstanding under the Company’s stock option plans at January 31, 2012 is summarized as follows:

 

            Weighted                       
            Average      Weighted             Weighted  
     Outstanding      Remaining      Average      Exercisable      Average  
     at January 31      Contractual      Exercise      at January 31      Exercise  

Range of Exercise Prices

   2012      Term      Price      2012      Price  

 $ 0.00 —  $ 5.00

     5,800         .9 years       $ 3.95         5,800       $ 3.95   

 $ 5.01 — $10.00

     34,800         4.0 years         7.45         34,800         7.45   

$10.01 — $15.00

     1,000         .0 years         11.90         1,000         11.90   

$15.01 — $25.00

     30,333         2.1 years         16.35         30,333         16.35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     71,933         2.9 years       $ 10.98         71,933       $ 10.98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value of both options outstanding and options exercisable as of January 31, 2012 was $0. All options outstanding were fully vested as of January 31, 2012. During the six months ended January 31, 2012, no options to purchase common stock were exercised.

 

3. Revenue Recognition

The Company’s revenues from its six product lines are the result of separate, individual deliverables:

 

   

Type of Revenues Earned

        Professional   Maintenance

Product Line

 

Equipment/Software

 

Services

 

Contracts

Millennium PBX System

  Individual sale    

eQueue Contact Center System

  Individual sale   Individual sale   Individual sale

VOIP Telephones

  Individual sale    

Cortelco Products

  Individual sale    

CSPR Products

  Individual sale   Individual sale   Individual sale

CSPR Telephony Billing

    Individual sale  

Some customers contract for professional services to tailor their system to specific requirements. Professional services are invoiced separately upon completion. eQueue customers can also elect to enter into maintenance contracts to receive software updates and free technical support. Revenue is recognized quarterly for each maintenance period as provided.

The VOIP telephones can be deployed with either the Millennium or eQueue systems to provide lower call costs as well as flexible telecom management across multiple locations. These phones may be sold with a new system, but are often sold subsequent to the system sale.

Cortelco sells corded and cordless analog and digital telephones capable of operating in the multiple PBX, Key System and Centrex environments primarily through stocking distributors.

 

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Telephony billing revenues from the resale of Puerto Rico Telephone services are recognized monthly as services are provided to customers.

The Company records shipping and handling fees billed to customers as revenue, and shipping and handling costs incurred with the delivery of products as cost of sales.

Revenues from our products are recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. Generally, revenue is recognized (i) upon shipment for equipment and software, (ii) as work is performed for professional services, and (iii) in equal periodic amounts over the term of the contract for software and hardware maintenance.

 

4. Related Parties

Symbio Investment Corp.

On August 1, 2007 and August 27, 2007, the Company made strategic investments in Symbio of $500,000 and $400,000 for 250,000 and 200,000 shares, respectively, or a total of approximately 3% of Symbio. Symbio is a holding company whose primary asset is an approximate twenty percent investment in Symbio SA, a provider of software development, testing, and globalization outsourcing services to multinational companies. Symbio is a privately held entity and the Company accounts for its investment by the cost method.

At the time of the second investment in Symbio, the Company received a put option from David Lee, effective beginning January 1, 2008 and expiring on January 1, 2011. In December 2010, the expiration on the put option was extended until January 1, 2013. The put option allows the Company to sell to David Lee a maximum aggregate of 200,000 shares of its investment in Symbio for a per share price of $2.00.

In consideration of the put option, in the event that the 200,000 shares are sold without exercise of the put option before January 1, 2013, the Company has agreed to pay David Lee 50% of the proceeds in excess of $1,000,000.

In conjunction with the purchase of these shares, David Lee was appointed to the board of directors of Symbio and has been elected Chairman. eOn was granted a total of 45,000 shares of Symbio stock in April 2008 and April 2009 as compensation for Mr. Lee’s services. These shares have been valued at $90,000, and have been recorded as an increase in investments and a capital contribution by David Lee.

The Company has not had significant trade activity with Symbio in the current or preceding fiscal year.

 

5. Inventories

Inventories consist of the following (in thousands):

 

     January 31,     July 31,  
     2012     2011  

Raw materials and purchased components

   $ 1,394      $ 1,612   

Finished goods

     5,982        6,088   
  

 

 

   

 

 

 

Total

     7,376        7,700   

Obsolescence reserve

     (2,133     (2,184
  

 

 

   

 

 

 

Inventories

   $ 5,243      $ 5,516   
  

 

 

   

 

 

 

 

6. Notes Payable, Related Party

On April 1, 2009, the Company executed a note payable to Cortelco’s former shareholders for $10,500,000 (the “Cortelco Note”) in connection with the acquisition of Cortelco. The Cortelco Note is non-interest bearing and is to be repaid based primarily upon the level of Cortelco earnings after closing and all Cortelco shareholders are eligible to receive quarterly payments thereunder in cash until the full consideration has been paid.

The fair value of the Cortelco Note payable obligation was approximately $3,581,000 at January 31, 2012 using a discounted cash flow analysis of the projected future payments and a discount rate of 15.22%. The Cortelco Note balance includes $92,000 and $77,000 of interest expense during the three and six months ended January 31, 2012 imputed at the 15.22% discount rate using the effective interest method.

Actual payments under the Cortelco Note, which are to be based on future earnings of Cortelco, may differ significantly from the projected payments estimated at the Cortelco Note’s inception. These differences may result in significant fluctuations in periodic interest expense in order to properly reflect interest expense over the actual life of the Cortelco Note.

 

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On June 9, 2010 pursuant to a Stock Purchase Agreement, the Company recorded a note payable to David S. Lee, eOn’s Chairman, for the principal amount of $185,511 payable in three annual installments beginning June 9, 2011. Mr. Lee requested deferral of the payment due on June 9, 2011; therefore, the first and second installments are included in short-term notes payable. The present value of the note payable at January 31, 2012 is approximately $178,000.

 

7. Product Warranties

The Company generally provides customers a one year product warranty from the date of purchase for the Millennium and eQueue product lines. Warranty for the Cortelco product line ranges from one to five years based upon the product purchased. The Company estimates the costs of satisfying warranty claims based on analysis of past claims experience and provides for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 0.6% - 2.3% of product revenues, has historically been comprised of materials and direct labor costs. The Company performs quarterly evaluations of these estimates, and any changes in estimates, which could potentially be significant, are included in earnings in the period in which the evaluations are completed. The following table summarizes the activity related to the product warranty liability during the six months ended January 31, 2012 and 2011 (in thousands):

 

         2012             2011      

Beginning balance

   $ 185      $ 222   

Warranty cost incurred

     (53     (91

Accrued warranty cost

     54        76   
  

 

 

   

 

 

 

Ending balance

   $ 186      $ 207   
  

 

 

   

 

 

 

 

8. Changes in Stockholders’ Equity

The following represents the changes in stockholders’ equity for the six months ended January 31, 2012 (in thousands, excluding share data):

 

                                            Accumulated               
                   Additional                        Other            Total  
     Common Stock      Paid-In      Treasury Stock     Accumulated     Comprehensive     Noncontrolling      Stockholders’  
     Shares      Amount      Capital      Shares     Amount     Deficit     Income     Interest      Equity  

Balance at August 1, 2011

     3,003,985       $ 15       $ 56,281         (139,580   $ (1,503   $ (49,769   $ 5      $ 585       $ 5,614   

Stock based compensation expense, stock options and ESPP

     6,000         —           12                    12   

Comprehensive income :

                      

Other comprehensive income

                    (5        (5

Net income

     —           —           —           —          —          351        —          81         432   
                      

 

 

 

Comprehensive income

     —           —           —           —          —              —           427   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at January 31, 2012

     3,009,985       $ 15       $ 56,293         (139,580   $ (1,503   $ (49,418   $ —        $ 666       $ 6,053   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

9. Discontinued Operations

The Company has evaluated its wholly-owned subsidiary in China and determined that the operation has not provided a strategic benefit to the Company. The Company charged off inventories of approximately $134,000 and discontinued the China operations in the second fiscal quarter of 2011. In conjunction with exit of operations in China, the Company reversed approximately $107,000 of accumulated foreign currency translation adjustments related to the China operation in the fiscal year ended July 31, 2011. Consequently, current and prior period financial activity and balances are reported as discontinued operations.

 

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Summarized financial information for discontinued operations for the referenced periods is as follows (in thousands):

 

     January 31,     July 31,  
     2012     2011  

Total assets

   $ —        $ —     
  

 

 

   

 

 

 

Accrued expenses and other

     18        18   
  

 

 

   

 

 

 

Total liabilities

   $ 18      $ 18   
  

 

 

   

 

 

 

Net liabilities - discontinued operations

   $ (18   $ (18
  

 

 

   

 

 

 

 

     Three Months Ended     Six Months Ended  
     January 31,     January 31,  
         2012              2011             2012              2011      

Revenue

   $ —         $ —        $ —         $ 34   

Cost of revenue

     —           15        —           145   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     —           (15     —           (111

Operating expenses

     —           22        —           107   

Other expense

        14           14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expense

     —           36        —           121   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

   $ —         $ (51   $ —         $ (232
  

 

 

    

 

 

   

 

 

    

 

 

 

 

10. Concentrations, Commitments and Contingencies

 

(a) Customer Concentrations

At January 31, 2012, five customers accounted for approximately 39% of total accounts receivable and individually 10%, 9%, 8%, 6%, and 6% of the total accounts receivable. At January 31, 2011, four customers accounted for approximately 34% of total accounts receivable and individually 11%, 10%, 7%, and 6% of the total accounts receivable. For the six months ended January 31, 2012, four customers accounted for approximately 45% of total revenue and individually 16%, 13%, 11%, and 5% of total revenue. For the six months ended January 31, 2011, five customers accounted for approximately 40% of total revenue and individually 13%, 9%, 8%, 5%, and 5% of total revenue.

 

(b) Commitments

At January 31, 2012, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $2,326,000.

Cortelco has a line of credit with available borrowings based on an asset formula involving accounts receivable and inventories up to a maximum of $1,000,000, none of which was drawn on in the current or prior fiscal year. The line of credit is secured by substantially all of Cortelco’s assets and expires December 15, 2012. The loan’s interest rate, with a floor of 4%, is floating based on LIBOR.

CSPR has a $500,000 revolving line of credit, none of which was drawn on as of January 31, 2012, secured by trade accounts receivable and bears interest at 2% over Citibank’s base rate. The agreement has certain covenant requirements and expires November 30, 2012.

 

(c) Litigation

The Company is involved in various matters of litigation, claims, and assessments arising in the ordinary course of business. In the opinion of management, the eventual disposition of these matters will not have a material adverse effect on the financial statements.

The Municipal Revenue Collection Center of Puerto Rico (“CRIM”) conducted a personal property tax audit for the years 1999 and 2000 which resulted in assessments of approximately $320,000 (approximately $522,000 as of February 9, 2012, including interest and penalties). The assessments arose from CRIM’s disallowances of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2003 personal property tax returns. During the audit

 

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process, CRIM alleged that some components of the inventory reported as exempt should be taxable. The parties met several times and an informal administrative hearing was held on September 27, 2006. CSPR submitted its position in writing within the time period provided by CRIM. CSPR believes it has strong arguments to support its position that the components of inventory qualify as raw material. Management believes a settlement may be reached for an amount less than the assessment. Accordingly, the Company has recorded a liability of $80,000 as of July 31, 2011 and January 31, 2012.

 

11. Segments

The Company’s reportable segments are Communications Systems and Services, Telephony Products and Puerto Rico, each of which offers different products and services or services a different geographic area. The Communications Systems and Services segment develops and markets products that help businesses communicate more effectively and efficiently with their customers. The Telephony Products segment provides telephone products, service and support to businesses and organizations. The Puerto Rico segment provides the sale and service of integrated communications systems, data equipment, security products and telephony billing services to Puerto Rico and the Virgin Islands. Performance of each segment is assessed independently.

Segment reporting for activity as of and for the three and six months ended January 31, 2012 follows (in thousands):

 

     Communications                                           
     Systems and Services     Telephony Products      Puerto Rico      Total  
     3 Months     6 Months     3 Months      6 Months      3 Months      6 Months      3 Months      6 Months  

Revenue

   $ 531      $ 906      $ 2,982       $ 6,833       $ 2,160       $ 4,164       $ 5,673       $ 11,903   

Net (loss) income from operations

     (170     (337     204         699         144         170         178         532   

Total assets

     —          2,322        —           7,981         —           3,114         —           13,417   

Capital expenditures

     —          —          18         18         45         55         63         73   

Allowance for doubtful accounts

     —          307        —           16         —           60         —           383   

Depreciation and amortization

     2        3        7         14         17         31         26         48   

Segment reporting for activity as of and for the three and six months ended January 31, 2011 follows (in thousands):

 

     Communications                                           
     Systems and Services     Telephony Products      Puerto Rico      Total  
     3 Months     6 Months     3 Months      6 Months      3 Months      6 Months      3 Months      6 Months  

Revenue

   $ 553      $ 1,318      $ 2,799       $ 5,956       $ 2,369       $ 4,276       $ 5,721       $ 11,550   

Net (loss) income from operations

     (386     (605     296         647         133         58         43         100   

Total assets

     —          1,955        —           9,106         —           3,499         —           14,560   

Capital expenditures

     —          4        5         6         19         34         24         44   

Capitalized software development

     50        207        —           —           —           —           50         207   

Allowance for doubtful accounts

     —          217        —           16         —           25         —           258   

Depreciation and amortization

     58        90        15         29         15         31         88         150   

Substantially all of the Company’s revenues are earned in the United States and the Commonwealth of Puerto Rico. Revenue from discontinued operations earned in the People’s Republic of China for the six months ended January 31, 2011 was approximately $34,000. Substantially all of the Company’s assets are located in the United States.

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are those that express management’s views of future events, developments, and trends. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms and other comparable expressions. Forward-looking statements include statements regarding our anticipated or projected operating performance, financial results, liquidity and capital resources. These statements are based on management’s beliefs, assumptions, and expectations, which in turn are based on the information currently available to management. Information contained in these forward-looking statements is inherently uncertain, and our actual operating performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond our ability to predict or control. Factors that may cause or contribute to such differences include, but are not limited to, eOn’s ability to compete successfully in its industry and to continue to develop products for new and rapidly changing markets. We also direct your attention to the risk factors affecting our business that are discussed in the Company’s most recently filed 10-K. eOn disclaims any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments. The following discussions should be read in conjunction with our condensed financial statements and the notes included thereto.

 

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Overview

eOn Communications Corporation (“eOn” or the “Company”) is a provider of communications solutions. Backed with over 20 years of telecommunications engineering expertise, the Company’s solutions enable its customers to use technologies to communicate more effectively. eOn’s offerings are built on reliable open architectures that enable easy adoption of technologies, such as Voice over Internet Protocol (VoIP) and concepts such as Service Oriented Architecture (SOA). Whether businesses are looking to leverage the advantages of enterprise IP telephony or advanced contact center technologies, eOn delivers proven, IP-ready products that improve business performance.

Cortelco is committed to fulfilling the communication needs of business and organizations worldwide. Cortelco’s mission is to provide our valued customers with telephone products together with service and support. Cortelco has formed partnerships with distributors and provides the support needed to supply customers with sales, marketing, customer service, technical support and training. The Company’s Cortelco product line provides customer premise equipment (CPE) commercial grade telephone products primarily for use in businesses, government agencies, colleges and universities, telephone companies, and utilities.

CSPR’s core business includes the design, implementation and maintenance of solutions in the area of voice, data center and security. CSPR’s other lines of business include the reselling of telephone lines, internet access, disaster recovery, business continuity and private cloud computing solutions. CSPR has partnered with strategic suppliers and utilizes a direct sales force to sell its services and products, most of which are installed by CSPR technicians.

On April 1, 2009, the Company acquired Cortelco for up to $11,000,000 in cash. Cortelco merged with a newly formed wholly-owned subsidiary of eOn and is now a wholly-owned subsidiary of eOn. In exchange for all of the outstanding shares of Cortelco stock, Cortelco shareholders received an initial aggregate payment of $500,000 and a note payable for $10,500,000 (the “Cortelco Note”). The Cortelco Note is non-interest bearing and is to be repaid based primarily upon the level of Cortelco earnings and all Cortelco shareholders are eligible to receive quarterly payments thereunder in cash until the full consideration has been paid. The fair value of the Cortelco Note payable obligation assumed on the April 1, 2009 acquisition date was estimated using a discounted cash flow method, and together with approximately $124,000 in acquisition costs, resulted in a total purchase price of $5,054,000. As of January 31, 2012, the Company has made payments of approximately $2,786,000 to former Cortelco shareholders for the acquisition, including the initial aggregate payment of $500,000. David Lee, Chairman of eOn, was the Chairman and the controlling shareholder of Cortelco at the date of acquisition.

On June 9, 2010, the Company executed a Stock Purchase Agreement to purchase 501,382 shares of common stock of CSPR from David S. Lee, eOn’s Chairman. The acquisition of CSPR stock was completed on June 9, 2010. The consideration for the CSPR shares consists of (i) 90,959 Company shares of stock, issued to Mr. Lee effective June 9, 2010, (ii) a cash payment of $185,511.34, payable in three annual installments, with the initial installment due on June 9, 2011, (iii) and the right to share in sales proceeds received by the Company if the Company sells the CSPR shares on or before June 9, 2013 for a price that is more than the Company paid for the shares. The number of eOn shares issued to Mr. Lee was calculated based on the average closing price of eOn Shares for thirty (30) trading days ending on June 8, 2010. The Company has the right to require Mr. Lee to repurchase the CSPR shares at the price paid by the Company on or after June 9, 2013, but before June 9, 2014. The purchase, combined with shares already owned by the Company, establishes eOn Communications as the majority shareholder of CSPR.

Critical Accounting Policies and Estimates

There were no material changes during the six months ended January 31, 2012 to the critical accounting policies reported in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011.

Results of Operations

For the Three Months Ended January 31, 2012 compared to the Three Months Ended January 31, 2011

Net Revenue

Net revenue decreased by approximately 1% to $5,673,000 for the three months ended January 31, 2012 compared to $5,721,000 for the same period of the previous year. The decrease was primarily attributable to decreased revenues of approximately $292,000 in the Company’s eQueue and CSPR product lines. The decrease is partially offset by revenue increases of approximately $244,000 in the Company’s other product lines.

 

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Cost of Revenue and Gross Profit

Cost of revenue is primarily comprised of purchases from our contract manufacturers and other suppliers and costs incurred for final assembly of our systems. Gross profit decreased approximately 4% to $1,611,000 for the three months ended January 31, 2012 from $1,673,000 for the same period of the previous year. Declines in eQueue, CSPR and Cortelco gross profits were partially offset by an increase in the Millennium product line gross profit for the three month period ended January 31, 2012 when compared to the same period of the previous year. The cost of revenue in the previous year included approximately $46,000 in amortization of eConn IP-PBX software costs. There was no software amortization in the three months ended January 31, 2012. Gross profit percent decreased to approximately 28% for the three months ended January 31, 2012 compared with gross profit percent of approximately 29% for the same period of the previous year, primarily the result of product mix.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries and benefit costs, marketing costs, and facilities and other overhead expenses incurred to support our business. Selling, general and administrative expenses decreased approximately 11% to $1,337,000 for the three months ended January 31, 2012, from $1,506,000 for the same period of the previous year. The decrease is primarily due to declines in subcontract, professional fees and facility expenses when compared to the same period of the previous year. Prior period expenses include approximately $11,000 of amortization related to technology that was fully amortized in fiscal 2011.

Research and Development

Research and development expense consists primarily of personnel and related facility costs for our engineering staff. Research and development expenses decreased approximately 24% to $104,000 for the three months ended January 31, 2012 from $137,000 for the same period of the previous year. Research and development expense for the current quarter reflect reductions in compensation and related expenses and overhead expenses when compared to the same period of the previous year. In the three months ended January 31, 2011, the Company capitalized approximately $51,000 of software development. There was no capitalized software development in the same period of the current year.

Other Operating Expense (Income), net

Other expense is primarily comprised of bank service charges, stock compensation expense, franchise taxes, currency differences, proceeds from scrap sales, and gains or losses from disposal of fixed assets. Other income was $8,000 for the three months ended January 31, 2012 compared to expense of $13,000 for the same period of the previous year. Other income for the current year includes proceeds from scrap sales of approximately $12,000.

Interest Expense, net

Interest expense was $94,000 for the three months ended January 31, 2012 compared to interest expense of $136,000 for the same period of the previous year. Interest expense in the current period includes $92,000 of imputed interest expense on the Cortelco Note, of which approximately $36,000 in interest benefit is a result of changes in the estimated timing of future principal payments.

Income Tax Expense

Income tax expense for the three months ended January 31, 2012 and 2011 totaled $10,000 and $0, respectively. Income tax expense in the current period consists of current state income tax expense in states in which net operating loss carry forwards were not available to offset taxable income. Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax attributes in future returns, to the extent that it is more likely than not that deferred tax assets may not be realized, the Company continues to record a valuation allowance against substantially all of its deferred tax assets at January 31, 2012.

For the Six Months Ended January 31, 2012 compared to the Six Months Ended January 31, 2011

Net Revenue

Net revenue increased by approximately 3% to $11,903,000 for the six months ended January 31, 2012 compared to $11,550,000 for the same period of the previous year. The increase was attributable to increased revenues of approximately $877,000 in the Cortelco product line compared to the same period of the previous year. The increase is partially offset by revenue declines of $524,000 in the Company’s other product lines.

Cost of Revenue and Gross Profit

Cost of revenue is primarily comprised of purchases from our contract manufacturers and other suppliers and costs incurred for final assembly of our systems. Gross profit decreased approximately 1% to $3,339,000 for the six months ended January 31, 2012 from $3,382,000 for the same period of the previous year. Increases in Cortelco, CSPR and Millennium gross profit was partially offset by a decline in eQueue gross profit for the six months ended January 31, 2012

 

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when compared to the same period of the previous year. The cost of revenue in the previous year included approximately $61,000 in amortization of eConn IP-PBX software costs. There was no software amortization in the six months ended January 31, 2012. Gross profit percent decreased to approximately 28% for the six months ended January 31, 2012 compared with gross profit percent of approximately 29% for the same period of the previous year, primarily the result of product mix.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries and benefit costs, marketing costs, and facilities and other overhead expenses incurred to support our business. Selling, general and administrative expenses decreased approximately 13% to $2,612,000 for the six months ended January 31, 2012, from $2,992,000 for the same period of the previous year. The decrease is primarily due to declines in subcontract, salaries and related expenses, travel and facility expenses when compared to the same period of the previous year. Prior period expenses include approximately $21,000 of amortization related to technology that was fully amortized in fiscal 2011.

Research and Development

Research and development expense consists primarily of personnel and related facility costs for our engineering staff. Research and development expenses decreased approximately 21% to $212,000 for the six months ended January 31, 2012 from $270,000 for the same period of the previous year. Research and development expense for the current period reflects reductions in compensation and related expenses and overhead expenses when compared to the same period of the previous year. In the six months ended January 31, 2011, the Company capitalized approximately $207,000 of software development. There was no capitalized software development in the same period of the current year.

Other Operating Expense (Income), net

Other expense is primarily comprised of bank service charges, stock compensation expense, franchise taxes, currency differences, proceeds from scrap sales, and gains or losses from disposal of fixed assets. Other income was $17,000 for the six months ended January 31, 2012 compared to expense of $20,000 for the same period of the previous year. Other income for the current year includes proceeds from scrap sales of approximately $31.000.

Interest Expense, net

Interest expense was $82,000 for the six months ended January 31, 2012 compared to interest expense of $294,000 for the same period of the previous year. Interest expense in the current period includes $77,000 of imputed interest expense on the Cortelco Note, of which approximately $180,000 in interest benefit is a result of changes in the estimated timing of future principal payments.

Income Tax Expense

Income tax expense for the six months ended January 31, 2012 and 2011 totaled $18,000 and $0, respectively. Income tax expense in the current period consists of current state income tax expense in states in which net operating loss carry forwards were not available to offset taxable income. Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax attributes in future returns, to the extent that it is more likely than not that deferred tax assets may not be realized, the Company continues to record a valuation allowance against substantially all of its deferred tax assets at January 31, 2012.

Liquidity and Capital Resources

As of January 31, 2012, the Company had cash and cash equivalents of $1,988,000 and working capital of $7,781,000.

Our operating activities resulted in a net cash inflow of $510,000 for the six months ended January 31, 2012 compared to a net cash outflow of $1,095,000 for the same period of the previous year. The net operating cash inflow for the current period primarily reflects net income (adjusted for non-cash items), lower accounts receivable and inventories partially offset by lower trade accounts payable and accrued expenses. The net operating cash outflow for the prior year period primarily reflects net loss (adjusted for non-cash items) and higher inventories and accounts receivable and lower accrued expenses partially offset by higher accounts payable.

Our investing activities resulted in a net cash outflow of $73,000 for the six months ended January 31, 2012 compared to a net cash outflow of $251,000 for the same period of the previous year. Cash used in investing activities for the six months ended January 31, 2012 was a result of net cash used for purchases of property and equipment. Cash used in investing activities for the same period of the previous year was a result of net cash used for capitalized software costs of approximately $207,000, and purchases of property and equipment.

 

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Our financing activities resulted in a cash inflow of $9,000 for the six months ended January 31, 2012 compared to a cash outflow of $850,000 for the same period of the previous year. Cash provided by financing activities in the current period reflects purchases under the Employee Stock Purchase Plan. Cash used in financing activities in prior period reflect payments on notes payable partially offset by purchases under the Employee Stock Purchase Plan.

Liquidity

Since inception, the Company has financed its operations through debt financing and proceeds generated from public offerings of its common stock. The proceeds from these transactions have been used primarily to fund research and development costs, and selling, general and administrative expenses.

The Company has incurred substantial net operating losses since inception and has had negative cash flows from operating activities through July 31, 2011, resulting in an accumulated deficit of $49,769,000 at that date. During the six months ended January 31, 2012, cash and cash equivalents increased to $1,988,000 from $1,542,000 at July 31, 2011, primarily as a result of collections of accounts receivable and reductions in inventories.

The Company had income from continuing operations of $432,000 for the six months ended January 31, 2012 versus net loss from continuing operations of $194,000 for the same period in the prior year. As of January 31, 2012, the Company had $1,988,000 in cash and cash equivalents available to fund operations, of which $8,000 was held in international bank accounts.

The Company is largely dependent on available cash, cash equivalents, and operating cash flow to finance operations and meet its other capital needs. Cortelco has a line of credit with available borrowings based on an asset formula involving accounts receivable and inventories up to a maximum of $1,000,000, none of which was drawn on in the current or prior fiscal year. The line of credit is secured by substantially all of Cortelco’s assets and expires December 15, 2012. The loan’s interest rate, with a floor of 4%, is floating based on LIBOR. CSPR has a $500,000 revolving line of credit, none of which was drawn on as of January 31, 2012, secured by trade accounts receivable and bears interest at 2% over Citibank’s base rate. The agreement has certain covenant requirements and expires November 30, 2012. If such sources are not sufficient, alternative funding sources may not be available. The Company believes that cash on hand plus the additional liquidity that it expects to generate from operations will be sufficient to cover its working capital and fund expected capital expenditures over at least the next twelve months.

Capital Resources

We believe that cash and cash equivalents plus the additional liquidity that we expect to generate from operations will be sufficient to meet the cash requirements of the business including capital expenditures and working capital needs for at least the next twelve months. Should actual results differ significantly from our current assumptions, our liquidity position could be adversely affected and we could be in a position that would require us to raise additional capital, which may not be available to us or may not be available on acceptable terms.

Discontinued Operations

The Company has evaluated its wholly-owned subsidiary in China and determined that the operation has not provided a strategic benefit to the Company. In conjunction with exit of operations in China, the Company recorded inventory reserve provisions of approximately $134,000 in the fiscal year ended July 31, 2011. The Company discontinued support of the China operations in the second fiscal quarter of 2011. Consequently, current and prior period financial activity and balances are reported as discontinued operations.

Net Income (Loss)

Net income was $5,000 and $351,000 for the three and six months ended January 31, 2012 compared to a net loss of $205,000 and $452,000 for the three and six month periods in the previous year due to fluctuations in gross margins and expenses explained above.

Reported net income for the current period has been materially impacted by the imputed interest expense due to the amortization of the difference between the face value of the contingent obligation to the former Cortelco shareholders and the discounted present value of the note payable recorded on the balance sheet. The table below presents a non-GAAP financial disclosure to provide a quantitative analysis of the impact of the imputed interest expense on reported net income and income per share. Management does not include this expense in its analysis of financial results or how resources are allocated. Because of this, we deemed it meaningful to provide this non-GAAP disclosure of the impact of this significant item on our financial results.

 

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Non-GAAP Financial Disclosure

(In thousands, except per share amounts)

 

     Three Months Ended      Six Months Ended  
     January 31, 2012      January 31, 2012  

Net income reported

   $ 5       $ 351   

Imputed interest on notes payable

     77         62   
  

 

 

    

 

 

 

Net income less imputed interest

   $ 82       $ 413   
  

 

 

    

 

 

 
     

Net income per common share as reported

   $ —         $ 0.12   

Interest imputed

     0.03         0.02   
  

 

 

    

 

 

 

Net income per common share less imputed interest

   $ 0.03       $ 0.14   
  

 

 

    

 

 

 

Weighted average shares outstanding - basic

     2,870         2,869   
  

 

 

    

 

 

 

Concentrations, Commitments and Contingencies

 

(a) Customer Concentrations

At January 31, 2012, five customers accounted for approximately 39% of total accounts receivable and individually 10%, 9%, 8%, 6%, and 6% of the total accounts receivable. At January 31, 2011, four customers accounted for approximately 34% of total accounts receivable and individually 11%, 10%, 7%, and 6% of the total accounts receivable. For the six months ended January 31, 2012, four customers accounted for approximately 45% of total revenue and individually 16%, 13%, 11%, and 5% of total revenue. For the six months ended January 31, 2011, five customers accounted for approximately 40% of total revenue and individually 13%, 9%, 8%, 5%, and 5% of total revenue.

 

(b) Commitments

At January 31, 2012, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $2,326,000.

Cortelco has a line of credit with available borrowings based on an asset formula involving accounts receivable and inventories up to a maximum of $1,000,000, none of which was drawn on in the current or prior fiscal year. The line of credit is secured by substantially all of Cortelco’s assets and expires December 15, 2012. The loan’s interest rate, with a floor of 4%, is floating based on LIBOR.

CSPR has a $500,000 revolving line of credit, none of which was drawn on as of January 31, 2012, secured by trade accounts receivable and bears interest at 2% over Citibank’s base rate. The agreement has certain covenant requirements and expires November 30, 2012.

 

(c) Litigation

The Company is involved in various matters of litigation, claims, and assessments arising in the ordinary course of business. In the opinion of management, the eventual disposition of these matters will not have a material adverse effect on the financial statements.

The Municipal Revenue Collection Center of Puerto Rico (“CRIM”) conducted a personal property tax audit for the years 1999 and 2000 which resulted in assessments of approximately $320,000 ($522,000 as of February 9, 2012, including interest and penalties). The assessments arose from CRIM’s disallowances of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2003 personal property tax returns. During the audit process, CRIM alleged that some components of the inventory reported as exempt should be taxable. The parties met several times and an informal administrative hearing was held on September 27, 2006. CSPR submitted its position in writing within the time period provided by CRIM. CSPR believes it has strong arguments to support its position that the components of inventory qualify as raw material. However, management believes a settlement may be reached for an amount less than the assessment. Accordingly, the Company has recorded a liability of $80,000 as of July 31, 2011 and January 31, 2012.

 

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Item 3. – Quantitative and Qualitative Disclosures About Market Risk.

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

Item 4. – Controls and Procedures.

Evaluation of disclosure controls and procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the three-month period ended January 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II - OTHER INFORMATION

Item 1. – Legal Proceedings.

None.

Item 1A. – Risk Factors.

There have been no material changes in the Company’s risk factors from those reported on the Company’s most recently filed 10-K.

Item 2. – Unregistered Sales of Securities and Use of Proceeds.

None.

Item 3. – Defaults Upon Senior Securities.

None.

Item 4. – Mine Safety Disclosures.

None.

Item 5. – Other Information.

None.

Item 6. – Exhibits.

(A) Exhibits.

 

Exhibit
No.

  

Description

  31.1    Officers’ Certification of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of 2002
  32.1    Officers’ Certification of Periodic Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101    The following materials from our Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

 

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SIGNATURE

Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

EON COMMUNICATIONS CORPORATION

 

Dated: March 13, 2012      

/s/ Lee M. Bowling

      Lee M. Bowling
     

Chief Financial Officer

(Duly Authorized Officer, Principal Financial and

Accounting Officer)

 

20

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