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| EONC > SEC Filings for EONC > Form 10-Q on 12-Jun-2009 | All Recent SEC Filings |
12-Jun-2009
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 delivers proven, IP-ready products that improve business performance. 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.
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, contingent primarily on the future earnings of Cortelco. On April 1, 2009, the Company completed the acquisition of Cortelco. 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. The Company executed a note payable to Cortelco's former shareholders for $10,500,000. The note is non-interest bearing and is contingent primarily upon the level of Cortelco earnings after closing and all Cortelco shareholders are eligible to receive quarterly payments in cash until the full $11,000,000 consideration has been paid.
Critical Accounting Policies and Estimates
There were no material changes during the nine months ended April 30, 2009 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 April 30, 2009 compared to the Three Months Ended April 30, 2008
Net Revenue
Net revenue was up by approximately 63% at $2,465,000 for the three months ended April 30, 2009 compared to $1,514,000 for the same period of the previous year. The increase was attributable to the inclusion of Cortelco net revenue of $1,151,000 for the current quarter and higher international and service revenue partially offset by a decline of eQueue and Millennium product revenue. eQueue and Millennium product revenues declined during the quarter due to decreased customer 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 increased approximately 45% to $1,109,000 for the three months ended April 30, 2009 from $763,000 for the same period of the previous year, reflecting Cortelco gross profit of $344,000 and increases in eQueue gross profit partially offset by declines in Millennium gross profit. Maintenance contract revenues declined compared to the same period of the previous year. Gross margin % decreased to approximately 45% for the three months ended April 30, 2009 compared with gross margin of approximately 50% 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 26% to $852,000 for the three months ended April 30, 2009, from $1,150,000 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 the inclusion of Cortelco expenses for April 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 76% to $172,000 for the three months ended April 30 from $703,000 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. In the three months ended April 30, 2009, the Company capitalized approximately $107,000 of software development costs related to a new IP PBX. Amortization of the capitalized costs is projected to begin in the first fiscal quarter of 2010 when the product is available for general release to customers.
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 $26,000 for the three months ended April 30, 2009 compared to $123,000 for the same period of the previous year. The decrease in other expense is primarily attributable to costs related to the closure of the India engineering facility and the loss on disposal of assets in India in the previous year.
Interest Income
Interest income was $1,000 for the three months ended April 30, 2009 compared to $16,000 for the same period of the previous year. The decrease reflects a lower weighted average balance of funds invested and lower interest rate earned compared to the same period of the previous year.
For the Nine Months Ended April 30, 2009 compared to the Nine Months Ended April 30, 2008
Net Revenue
Net revenue increased approximately 3% to $5,556,000 for the nine months ended April 30, 2009 compared to $5,390,000 for the same period of the previous year. The increase was attributable to inclusion of Cortelco net revenue of $1,151,000 and higher service revenue, partially offset by declines in eQueue and Millennium product revenues over the same period of the previous year. Sales of Millennium systems were adversely impacted by slowdowns in key US government and education market segments during the nine months ended April 30, 2009. The decrease in eQueue revenues reflect lower domestic and international software sales during the nine months ended April 30, 2009 compared to the same period of the previous year.
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 10% to $2,684,000 for the nine months ended April 30, 2009 from $2,971,000 for the same period of the previous year, reflecting declines in both eQueue and Millennium margins partially offset by the inclusion of Cortelco gross profit in the current fiscal year. Gross profit for eQueue and Millennium sales decreased for the nine months ended April 30, 2009, reflecting lower system sales over the same period of the previous year. Maintenance contract revenues with higher margins declined compared to the same period of the previous year. Gross margin % decreased to approximately 48% for the nine months ended April 30, 2009 compared with gross margin of approximately 55% 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 30% to $2,307,000 for the nine months ended April 30, 2009, from $3,297,000 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 the inclusion of Cortelco's April expenses in the current year 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 65% to $754,000 for the nine months ended April 30, 2009 from $2,140,000 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. In the nine months ended April 30, 2009, the Company capitalized approximately $107,000 of software development costs related to a new IP PBX. Amortization of the capitalized costs is projected to begin in the first fiscal quarter of 2010 when the product is available for general release to customers.
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 $87,000 for the nine months ended April 30, 2009 compared to $160,000 for the same period of the previous year. The decrease in other expense is primarily attributable to expenses related to the closure of the India engineering facility and the loss on disposal of fixed assets in India in the prior fiscal year.
Interest Income
Interest income was $14,000 for the nine months ended April 30, 2009 compared to $96,000 for the same period of the previous year. The decrease reflects a lower weighted average balance of funds invested and lower interest rate earned compared to the same period of the previous year.
Liquidity and Capital Resources
As of April 30, 2009, we had cash and cash equivalents of $1,394,000 and $700,000 in short-term marketable securities, and working capital of $8,267,000. Our short-term marketable securities are invested in liquid treasury securities.
Our operating activities resulted in a net cash inflow of $97,000 for the nine months ended April 30, 2009 compared to a net cash outflow of $2,435,000 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, prepaid assets, and trade accounts receivable, excluding the assets acquired in the merger with Cortelco. The inflow is partially offset by lower accrued expenses excluding the accrued expenses assumed in the merger with Cortelco. The net operating cash outflow for the prior year period primarily reflects net loss (adjusted for non-cash items) and higher inventories and other current assets partially offset by higher accounts receivable.
Our investing activities resulted in a net cash outflow of $249,000 for the nine months ended April 30, 2009 compared to a net cash inflow of $1,426,000 for the same period of the previous year. Cash used in investing activities for the nine months ended April 30, 2009 was a result of net cash used in the acquisition of Cortelco of $400,000, an investment of approximately $136,000 in a joint venture in Hangzhou, China and purchases of property and equipment. Cash provided by investing activities for the same period of the previous year was a result of disposal of marketable securities and proceeds from the disposal of discontinued operations partially offset by the $900,000 investment in Symbio Group and purchases of property and equipment.
Our financing activities resulted in a cash inflow of $2,000 for the nine months ended April 30, 2009 compared to a cash inflow of $11,000 for the same period of the previous year. Cash provided by financing activities in the current period and 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 $5,295,000 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 at that date. During the nine months ended April 30, 2009, cash and cash equivalents and short-term marketable securities decreased to $2,094,000 from $2,545,000, primarily as a result of funding the Cortelco merger and operating losses during the period.
The Company had a loss from continuing operations of $450,000 for the nine months ended April 30, 2009 versus a loss from continuing operations of $2,530,000 for the same period in the prior year. As of April 30, 2009, the Company had $2,094,000 in cash and cash equivalents and short-term marketable securities available to fund operations, of which $79,000 was held in international bank accounts.
The Company is largely dependent on available cash, short-term marketable securities and operating cash flow to finance operations and meet its other capital needs. Cortelco has a line of credit based on an asset formula involving accounts receivable and inventory up to a maximum of $2,500,000, none of which was drawn on as of April 30, 2009. The line of credit is secured by substantially all of Cortelco's assets. The loan's interest rate is floating based on LIBOR and expires June 29, 2010. If such sources are not sufficient, alternative funding sources may not be available. The Company believes that cash on hand, short-term marketable securities, and the Cortelco line of credit 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 the cash, short-term marketable securities on hand, and Cortelco's line of credit 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 additional debt or equity financing to provide additional sources of liquidity, should the need arise, at favorable rates.
Concentrations, Commitments and Contingencies
(a) Customer Concentrations
At April 30, 2009, three customers accounted for approximately 43% of total accounts receivable and individually 20%, 12% and 11% of the total accounts receivable.
(b) Commitments
At April 30, 2009, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $1,699,000.
Cortelco has a line of credit based on an asset formula involving accounts receivable and inventory up to a maximum of $2,500,000, none of which was drawn on as of April 30, 2009. The line of credit is secured by substantially all of Cortelco's assets. The loan's interest rate is floating based on LIBOR and expires June 29, 2010.
(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.
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