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| EONC > SEC Filings for EONC > Form 10-Q on 15-Dec-2008 | All Recent SEC Filings |
15-Dec-2008
Quarterly Report
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 below. 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.
Overview
eOn Communications Corporation ("eOn" or the "Company") is a global provider of innovative communications solutions. Backed with over 20 years of telecommunications engineering expertise, the Company's solutions enable its 8,000 customers to easily leverage advanced technologies in order 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). Whether businesses are looking to leverage the advantages of enterprise IP telephony or advanced contact center technologies, eOn Communications delivers proven, IP-ready products that improve business performance.
On February 23, 2007, the Company's subsidiary, eOn IP Voice, Inc. ("EIPV") purchased certain accounts receivable, inventory and fixed assets and assumed certain liabilities of One IP Voice, Inc. for $150,000 in order to enter the hosted VoIP Services market. These assets, net of liabilities were purchased under an order of the United States Bankruptcy Court Chapter 11 Order Authorizing Sale of Assets at Auction Out of the Ordinary Course of Business. The results of EIPV are included in the Company's consolidated financial statements beginning February 23, 2007, the date the assets were purchased.
During October 2007, the Company committed to a plan to discontinue offering EIPV Business Connect hosted products and services. Accordingly, balances and activity have been reported as discontinued operations. During the quarter ended April 30, 2008, the Company sold the assets of EIPV for approximately $90,000.
On March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco provides management for all U.S operations of eOn. Included in the management services are sales, marketing, product management, engineering, technical support, quality assurance, accounting, and information.
On December 12, 2008, the Company executed a restructured Agreement and Plan of Merger to acquire Cortelco Systems Holding Corporation ("Cortelco") for up to $11,000,000 in cash. The independent members of the Board of Directors of both eOn and Cortelco have approved the proposed merger.
The following steps are required to complete the acquisition:
- Obtaining approval of a majority of the Cortelco stockholders (excluding for purposes of the Cortelco approval the shares held by the CEO and CFO of eOn and the CEO of Cortelco);
- Receipt of evidence from Cortelco that it has less than 35 stockholders who do not meet the definition of "accredited investors" under the federal securities laws; and
- Other customary conditions of closing a merger transaction.
The Company anticipates, but cannot guarantee, that the transaction will close sometime in the Company's second or third fiscal quarter of fiscal year 2009. The proposed merger may be terminated if the conditions to closing are not fulfilled, in the event of a breach of the agreement by either party, or upon mutual agreement of the parties.
Critical Accounting Policies and Estimates
There were no material changes during the three months ended October 31, 2008 to the critical accounting policies reported in our Annual Report on Form 10-KSB for the fiscal year ended July 31, 2008.
Results of Operations
For the Three Months Ended October 31, 2008 compared to the Three Months Ended October 31, 2007
Net Revenue
Net revenue was down by approximately 26% at $1,784,000 for the three months ended October 31, 2008 compared to $2,396,000 for the same period of the previous year. The majority of the decrease was attributable to eQueue revenues declining substantially during the quarter due to decreased customer demand. In addition, sales of Millennium through our dealer channel declined due to decreased demand.
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 30% to $971,000 for the three months ended October 31, 2008 from $1,384,000 for the same period of the previous year, reflecting declines in both eQueue and Millennium margins. Gross profit for eQueue and Millennium decreased for the three months ended October 31, 2008, reflecting lower system sales over the same period of the previous year. Maintenance contract revenues declined compared to the same period of the previous year. Gross margin % decreased to approximately 54% for the three months ended October 31, 2008 compared with gross margin of approximately 58% for the same period of the previous year, primarily the result of product mix. The margin on related party revenue is significantly less than the historical margins for both the Millennium and eQueue products.
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 26% to $767,000 for the three months ended October 31, 2008, from $1,040,000 for the same period of the previous year. The decrease reflects lower compensation and related expenses, lower rent expense and lower depreciation, partially offset by higher bad debt expense and higher domestic contract services expense.
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 60% to $305,000 for the three months ended October 31, 2008 from $757,000 for the same period of the previous year. The Company closed its engineering facility in India effective April 1, 2008. and the decrease reflects lower compensation and related expenses, lower rent expense, and lower depreciation.
Other Expense
Other expense is primarily comprised of bank service charges, franchise taxes, currency differences, and gains or losses from disposal of fixed assets. Other expenses were $44,000 for the three months ended October 31, 2008 compared to $26,000 for the same period of the previous year. The increase in other expense is primarily attributable to the loss on disposal of leasehold improvements in China.
Interest Income
Interest income was $11,000 for the three months ended October 31, 2008 compared to $46,000 for the same period of the previous year. The decrease reflects a lower weighted average balance of marketable securities invested and lower interest rate earned compared to the same period of the previous year.
Liquidity and Capital Resources
As of October 31, 2008, we had cash and cash equivalents of $1,434,000 and $1,000,000 in short-term marketable securities, and working capital of $4,332,000. Our short-term marketable securities are invested in liquid treasury securities.
Our operating activities resulted in a net cash inflow of $31,000 for the three months ended October 31, 2008 compared to a net cash outflow of $465,000 for the same period of the previous year. The net operating cash inflow for the current period primarily reflects net loss (adjusted for non-cash items), lower inventories and prepaid assets and higher accounts payable partially offset by high accounts receivable and lower 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 related party accounts payable partially offset by lower accounts receivable.
Our investing activities resulted in a net cash outflow of $200,000 for the three months ended October 31, 2008 compared to a net cash outflow of $243,000 for the same period of the previous year. Cash used in investing activities for the three months ended October 31, 2008 was a result of an investment of approximately $58,000 in a joint venture in TaiCang, China, an investment in Hangzhou of approximately $138,000, and purchases of property and equipment. Cash used in investing activities for the same period of the previous year was a result of the $900,000 investment in Symbio Group and purchases of property and equipment, partially offset by net marketable securities disposals.
Our financing activities resulted in a cash inflow of $59,000 for the three months ended October 31, 2008 compared to a cash inflow of $10,000 for the same period of the previous year. Cash provided by financing activities in the current period was a result of proceeds from notes payable of approximately $58,000 to an employee and company in TaiCang, China, and purchases under the Employee Stock Purchase Plan. Cash provided by financing activities in the prior period were due to 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. Additionally, since inception, the Company has invested approximately $5,273,000 in capital expenditures.
The Company has incurred substantial net operating losses since inception and has had negative cash flows from operating activities through July 31, 2008; resulting in an accumulated deficit of $48,517,000. During the three months ended October 31, 2008, cash and cash equivalents and short-term marketable securities decreased to $2,434,000 from $2,545,000, primarily as a result of funding operating losses during the quarter.
The Company had a loss from continuing operations of $134,000 for the three months ended October 31, 2008 versus a loss from continuing operations of $393,000 for the same period in the prior year. As of October 31, 2008, the Company had $2,434,000 in cash and cash equivalents and short-term marketable securities available to fund operations, of which $56,000 was held in international bank accounts.
The Company is dependent on available cash, short-term marketable securities and operating cash flow to finance operations and meet its other capital needs. If such sources are not sufficient, alternative funding sources may not be available. The Company believes that cash on hand and short-term marketable securities 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.
The Cortelco Merger Agreement will require $500,000 in cash payments at closing.
Capital Resources
We believe that the cash and short-term marketable securities on hand 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.
Due to the current state of the credit markets, we are not able to predict with any certainty whether we could obtain debt or equity financing to provide additional sources of liquidity, should the need arise, at favorable rates.
Commitments and Contingencies
(a) Operating Leases
On September 1, 2007, the Company entered into a Shared Space Agreement ("Agreement") with Sylantro Systems Corporation for office space in Shanghai, China. Under the terms of the Agreement, the Company shared a portion of the premises consisting of 687 square meters or 75% of the premises thru November 30, 2009. The monthly rent for this space was approximately $11,000. Effective May 1, 2008, Symbio became responsible for the majority of the rent and facility costs. Sylantro notified eOn of its intent to terminate the Agreement on September 15, 2008 and terminated the lease as of October 28, 2008.
(b) Commitments
At October 31, 2008, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $235,000.
(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.
Recent Developments
On October 24, 2008, eOn China invested RMB 400,000 (approximately $58,000) into a joint venture in TaiCang, China. eOn China had borrowed RMB 300,000 from a company in TaiCang and RMB 100,000 from an employee in October to make this investment However, neither the borrowing nor the investment were authorized by eOn's Board of Directors. In November, David Lee sent eOn China $58,000 and took personal ownership of the investment. We recorded this investment on our books at October 31, 2008; the receipt of cash and elimination of the investment will be recorded in the second quarter ending January 31, 2009
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