EON COMMUNICATIONS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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.
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.
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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,
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 October 31, 2012, the Company has
made payments of approximately $3,128,000 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.
Critical Accounting Policies and Estimates
There were no material changes during the three months ended October 31, 2012 to
the critical accounting policies reported in our Annual Report on Form 10-K for
the fiscal year ended July 31, 2012.
Results of Operations
For the Three Months Ended October 31, 2012 compared to the Three Months Ended
October 31, 2011
Net revenue decreased by approximately 8% to $5,734,000 for the three months
ended October 31, 2012 compared to $6,230,000 for the same period of the
previous year. The decrease was primarily attributable to decreased revenues of
approximately $897,000 in the Company's eQueue and telephony product lines. The
decrease is partially offset by revenue increases of approximately $401,000 in
the Company's CSPR product line.
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 12% to $1,515,000 for the three
months ended October 31, 2012 from $1,728,000 for the same period of the
previous year. Gross profit percent decreased to approximately 26% for the three
months ended October 31, 2012 compared with gross profit percent of
approximately 28% 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
increased approximately 1% to $1,292,000 for the three months ended October 31,
2012, from $1,275,000 for the same period of the previous year.
Research and Development
Research and development expense consists primarily of personnel and related
facility costs for our engineering staff. Research and development expenses
increased approximately $1,000 to $109,000 for the three months ended
October 31, 2012 from $108,000 for the same period of the previous 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 expense was $14,000 for the
three months ended October 31, 2012 compared to income of $9,000 for the same
period of the previous year.
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Interest Income, net
Interest income was $42,000 for the three months ended October 31, 2012 compared
to interest income of $12,000 for the same period of the previous year. Interest
income in the current period includes $43,000 of imputed interest benefit on the
Cortelco Note, of which approximately $172,000 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 October 31, 2012 was $7,000
compared to income tax expense of $8,000 for the same period of the previous
year. Tax expense consists of 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 October 31, 2012.
Liquidity and Capital Resources
As of October 31, 2012, the Company had cash and cash equivalents of $1,879,000
and working capital of $7,686,000.
Our operating activities resulted in a net cash inflow of $47,000 for the three
months ended October 31, 2012 compared to a net cash outflow of $47,000 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, inventories and prepaid assets partially offset by lower
trade accounts payable and accrued expenses. The net operating cash outflow for
the prior year period primarily reflects higher inventories, higher prepaid
assets and lower accounts payable partially offset by net income (adjusted for
Our investing activities resulted in a net cash outflow of $148,000 for the
three months ended October 31, 2012 compared to a net cash outflow of $28,000
for the same period of the previous year. Cash used in investing activities for
the three months ended October 31, 2012 and for the same period of the previous
year was a result of net cash used for purchases of property and equipment.
Our financing activities resulted in a cash outflow of $182,000 for the three
months ended October 31, 2012 compared to a cash inflow of $9,000 for the same
period of the previous year. Cash used by financing activities in the current
and prior periods reflects payments on notes payable partially offset by
purchases under the Employee Stock Purchase Plan.
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 resulting in an
accumulated deficit of $49,217,000. As of October 31, 2012 the Company had
$1,879,000 in cash and cash equivalents available to fund operations.
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. Management expects to extend the line of credit through
December 2013 under similar terms. 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 October 31, 2012, secured by trade accounts
receivable and bears interest at 2% over Citibank's base rate. The agreement has
certain covenant requirements and expired November 30, 2012. Subsequent to
October 31, 2012, the agreement was extended through November 30, 2013 under
similar terms. 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.
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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
Net income was $88,000 for the three months ended October 31, 2012 compared to
net income of $346,000 for the same period of the previous year due primarily to
Concentrations, Commitments and Contingencies
(a) Customer Concentrations
At October 31, 2012, five customers accounted for approximately 52% of total
accounts receivable and individually 22%, 10%, 7%, 7%, and 6% of the total
accounts receivable. At October 31, 2011, four customers accounted for
approximately 47% of total accounts receivable and individually 15%, 13%, 11%,
and 8% of the total accounts receivable. For the three months ended October 31,
2012, four customers accounted for approximately 41% of total revenue and
individually 18%, 13%, 7%, and 3% of total revenue. For the three months ended
October 31, 2011, four customers accounted for approximately 49% of total
revenue and individually 17%, 14%, 13%, and 5% of total revenue.
At October 31, 2012, the Company had outstanding commitments for inventory
purchases under open purchase orders of approximately $2,564,000.
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, 2012 and October 31, 2012.
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