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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 OCTOBER 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.

2,877,354 shares of common stock, $0.005 par value, were outstanding as of December 1, 2012.

 

 

 


Table of Contents

EON COMMUNICATIONS CORPORATION

FORM 10-Q

QUARTER ENDED APRIL 30, 2012

TABLE OF CONTENTS

 

PART I

    

FINANCIAL INFORMATION

  

Item 1.

    

Financial Statements

     3   
    

Condensed Consolidated Balance Sheets at October 31, 2012 (unaudited) and July 31, 2012

     3   
    

Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended October 31, 2012 and 2011 (unaudited)

     4   
    

Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2012 and 2011 (Unaudited)

     5   
    

Notes to Condensed Consolidated Financial Statements (unaudited)

     6   

Item 2.

    

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

     12   

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     16   

Item 4T.

    

Controls and Procedures

     16   

PART II

    

OTHER INFORMATION

  

Item 1.

    

Legal Proceedings

     17   

Item 1A.

    

Risk Factors

     17   

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     17   

Item 3.

    

Defaults Upon Senior Securities

     17   

Item 4.

    

Mine Safety Disclosures

     17   

Item 5.

    

Other Information

     17   

Item 6.

    

Exhibits

     17   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

(Unaudited)

 

     October 31,
2012
    July 31,
2012
 
     (unaudited)     (Note 1)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 1,879      $ 2,162   

Trade accounts receivable, net of allowance of $280 and $555, respectively

     4,307        4,370   

Inventories

     5,123        5,261   

Prepaid and other current assets

     263        387   
  

 

 

   

 

 

 

Total current assets

     11,572        12,180   

Property and equipment, net

     474        352   

Other non-current assets

     91        84   

Investments

     990        990   
  

 

 

   

 

 

 

Total assets

   $ 13,127      $ 13,606   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Trade accounts payable

   $ 1,719      $ 2,059   

Current maturities of notes payable

     102        37   

Current maturities of notes payable - related party

     495        709   

Accrued expenses and other

     1,572        1,622   
  

 

 

   

 

 

 

Total current liabilities

     3,888        4,427   

Notes payable - net of current maturities

     —          74   

Notes payable - related party, net of current maturities

     2,958        2,959   
  

 

 

   

 

 

 

Total liabilities

     6,846        7,460   
  

 

 

   

 

 

 

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, 3,016,758 shares issued)

     15        15   

Additional paid-in capital

     56,304        56,304   

Treasury stock, at cost (139,404 shares)

     (1,501     (1,501

Accumulated deficit

     (49,217     (49,305
  

 

 

   

 

 

 

Total eOn Communications Corp. stockholders’ equity

     5,601        5,513   

Noncontrolling interest

     680        633   
  

 

 

   

 

 

 

Total stockholders’ equity

     6,281        6,146   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 13,127      $ 13,606   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


Table of Contents

EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
October 31,
 
     2012      2011  

REVENUE

     

Products

   $ 4,808       $ 5,025   

Services

     926         1,205   
  

 

 

    

 

 

 

Net revenue

     5,734         6,230   
  

 

 

    

 

 

 

COST OF REVENUE

     

Products

     3,747         3,897   

Services

     472         605   
  

 

 

    

 

 

 

Cost of revenue

     4,219         4,502   
  

 

 

    

 

 

 

Gross profit

     1,515         1,728   

OPERATING EXPENSE

     

Selling, general and administrative

     1,292         1,275   

Research and development

     109         108   

Other operating expense (income), net

     14         (9
  

 

 

    

 

 

 

Total operating expense

     1,415         1,374   
  

 

 

    

 

 

 

Income from operations

     100         354   

OTHER INCOME

     

Interest income, net

     42         12   
  

 

 

    

 

 

 

Total other income

     42         12   
  

 

 

    

 

 

 

Income before income taxes

     142         366   

Income tax expense

     7         8   
  

 

 

    

 

 

 

Net income

     135         358   

Less: Net income attributable to noncontrolling interest

     47         12   
  

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 88       $ 346   
  

 

 

    

 

 

 

COMPREHENSIVE INCOME

     

Net income

   $ 88       $ 346   

Realized gains on available-for-sale securities

     —           5   
  

 

 

    

 

 

 

Comprehensive income

   $ 88       $ 351   
  

 

 

    

 

 

 

Weighted average shares outstanding

     

Basic

     2,877         2,868   
  

 

 

    

 

 

 

Diluted

     2,877         2,868   
  

 

 

    

 

 

 

Basic income per share

   $ 0.03       $ 0.12   
  

 

 

    

 

 

 

Diluted income per share

   $ 0.03       $ 0.12   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4


Table of Contents

EON COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     Three Months Ended
October 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 135      $ 358   

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

    

Stock-based compensation expense

     —          1   

Depreciation and amortization

     26        23   

Realized gain on available-for-sale securities

     —          (5

Provision for doubtful trade accounts receivable

     3        11   

Imputed interest benefit on notes payable

     (42     (13

Changes in net assets and liabilities:

    

Trade accounts receivable

     60        120   

Inventories

     138        (396

Prepaid and other assets

     117        (107

Trade accounts payable

     (340     (54

Accrued expenses and other

     (50     15   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     47        (47
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (148     (28
  

 

 

   

 

 

 

Net cash used in investing activities

     (148     (28
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of note payable

     (182     —     

Proceeds from employee stock purchase plan

     —          9   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (182     9   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (283     (66

Cash and cash equivalents, beginning of period

     2,162        1,542   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,879      $ 1,476   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


Table of Contents

EON COMMUNICATIONS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three Months Ended October 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 October 31, 2012, and for all periods presented.

Description of Business

eOn Communications Corporation (“we”, “us”, “our”, “eOn” or the “Company”) is a provider of communications solutions incorporated in Delaware in July 1991. Backed with over 20 years of telecommunications engineering espertise, the Company’s solutions enable its customers to use technologies in order to communicate more effectively. eOn’s offerings are built on open architectures that enable adoption of 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, 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, 2012 and 2011 and for each of the two years in the period ended July 31, 2012, 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.

 

6


Table of Contents

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).

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 October 31, 2012, the Company owns approximately four percent of Symbio Investment Corp. Symbio Investment Corp. is a holding company whose primary asset is an approximate twenty percent investment in Symbio S.A. Symbio S.A.’s principal business is to provide outsourced information technology and research and development services globally at sites located in the United States, Finland, Sweden, China and Taiwan. The Company believes, based on the most recent stock issuances by Symbio S.A. in 2011 that the fair value of the Company’s investment in Symbio Investment Corp. may be less than the Company’s cost of $990,000. There are no quoted market prices for the Company’s investment in Symbio Investment Corp., and sufficient information is not 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 Investment Corp. at October 31, 2012. Based on the Company’s evaluation of the near-term prospects of Symbio Investment Corp. 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 October 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 three months ended October 31, 2012 (in thousands):

 

Beginning fair value - August 1, 2012

   $ 3,486   

Imputed interest

     129   

Change in estimates

     (172
  

 

 

 

Interest benefit

     (43

Payments

     (173
  

 

 

 

Ending fair value - October 31, 2012

   $ 3,270   
  

 

 

 

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 October 31, 2012.

 

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 nine months ended October 31, 2012, there were no options to purchase shares of common stock and no restricted stock granted by the Company.

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 three months ended October 31, 2012, there were no shares purchased by employees under the plan.

 

7


Table of Contents

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 an analysis of the Company’s historical daily closing prices. 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 $0 and $1,000 was recognized for the three months ended October 31, 2012 and 2011, respectively. As of October 31, 2012, the Company has no unrecognized compensation costs related to unvested stock options under the Plans.

General Stock Option Information

Activity in the Company’s stock option plans since July 31, 2012 is as follows:

 

     Shares
Available
for Grant
     Options
Outstanding
     Weighted
Average
Exercise
Price
 

Options at August 1, 2012

     307,344         68,933       $ 11.19   

Granted

     —           —           —     

Exercised

     —           —           —     

Cancelled

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Options at October 31, 2012

     307,344         68,933       $ 11.19   
  

 

 

    

 

 

    

 

 

 

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

 

Range of Exercise Prices

   Outstanding
at October 31
2012
     Weighted
Average
Remaining
Contractual
Term
     Weighted
Average
Exercise
Price
     Exercisable
at October 31
2012
     Weighted
Average
Exercise
Price
 

$ 0.00 — $ 5.00

     3,800         .4 years       $ 4.24         3,800       $ 4.24   

$ 5.01 — $10.00

     34,800         3.2 years         7.45         34,800         7.45   

$15.01 — $25.00

     30,333         1.3 years         16.35         30,333         16.35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     68,933         2.2 years       $ 11.19         68,933       $ 11.19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents
3. Revenue Recognition

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

 

     Type of Revenues Earned  

Product Line

   Equipment/Software      Professional
Services
     Maintenance
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.

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 Party

Symbio Investment Corp.

On August 1, 2007 and August 27, 2007, the Company made strategic investments in Symbio Investment Corp. of $500,000 and $400,000 for 250,000 and 200,000 shares, respectively, or approximately 4% of Symbio Investment Corp. Symbio Investment Corp. is a holding company whose primary asset is an approximate twenty percent investment in Symbio S.A. Symbio S.A.’s principal business is to provide outsourced information technology and research and development services globally at sites located in the United States, Finland, Sweden, China and Taiwan. Symbio Investment Corp. 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 Investment Corp. for $400,000, the Company received a put option from David Lee, effective beginning January 1, 2008 and expiring January 1, 2011. In December 2010, the expiration of the put option was extended to 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 Investment Corp. 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 in 2007, David Lee was appointed to the board of directors of Symbio S.A. and has been elected chairman. eOn was granted 45,000 shares of Symbio Investment Corp. as compensation for Mr. Lee’s services. These shares were valued at $90,000, and were recorded as an increase in investments and a capital contribution by David Lee, in 2009.

 

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5. Inventories

Inventories consist of the following (in thousands):

 

     October 31,
2012
    July 31,
2012
 

Raw materials and purchased components

   $ 1,189      $ 1,151   

Finished goods

     6,076        6,249   
  

 

 

   

 

 

 

Total

     7,265        7,400   

Obsolescence reserve

     (2,142     (2,139
  

 

 

   

 

 

 

Inventories

   $ 5,123      $ 5,261   
  

 

 

   

 

 

 

 

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 $3,270,000 at October 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 $43,000 of imputed interest benefit during the three months ended October 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.

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 deferrals of payments due on the note; therefore, the deferred payment installments are included in short-term notes payable. The present value of the note payable at October 31, 2012 is approximately $183,000.

 

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 0.5% - 0.7% 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 three months ended October 31, 2012 and 2011 (in thousands):

 

     2012     2011  

Beginning balance

   $ 166      $ 185   

Warranty cost incurred

     (27     (18

Accrued warranty cost

     40        19   
  

 

 

   

 

 

 

Ending balance

   $ 179      $ 186   
  

 

 

   

 

 

 

 

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8. Changes in Stockholders’ Equity

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

 

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

Balance at August 1, 2012

    3,016,758      $ 15      $ 56,304        139,404      $ (1,501   $ (49,305   $ —        $ 633      $ 6,146   

Comprehensive income:

                 

Net income

    —          —          —          —          —          88        —          47        135   
                 

 

 

 

Comprehensive income

    —          —          —          —          —          —          —          —          135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 31, 2012

    3,016,758      $ 15      $ 56,304        139,404      $ (1,501   $ (49,217   $ —        $ 680      $ 6,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

9. 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.

 

(b) Commitments

At October 31, 2012, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $2,564,000.

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 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 line of credit was extended through November 30, 2013 under similar terms.

 

(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 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, 2012 and October 31, 2012.

 

10. 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

 

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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 months ended October 31, 2012 follows (in thousands):

 

     Communications
Systems and Services
    Telephony Products      Puerto Rico      Total  

Revenue

   $ 348      $ 2,981       $ 2,405       $ 5,734   

Net (loss) income from operations

     (147     150         97         100   

Total assets

     1,960        7,439         3,728         13,127   

Capital expenditures

     —          107         41         148   

Allowance for doubtful accounts

     85        15         180         280   

Depreciation and amortization

     1        10         15         26   

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

 

     Communications
Systems and Services
    Telephony Products      Puerto Rico      Total  

Revenue

   $ 375      $ 3,851       $ 2,004       $ 6,230   

Net (loss) income from operations

     (167     495         26         354   

Total assets

     2,566        7,966         3,430         13,962   

Capital expenditures

       18         10         28   

Allowance for doubtful accounts

     307        16         60         383   

Depreciation and amortization

     2        7         14         23   

Substantially all of the Company’s revenues are earned in the United States and the Commonwealth of Puerto Rico. 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.

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.

 

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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, 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 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

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 non-cash items).

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.

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 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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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.

Net Income

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 lower revenue.

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.

 

(b) Commitments

At October 31, 2012, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $2,564,000.

 

(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.

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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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 October 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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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 October 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: December 14, 2012      

/s/ Lee M. Bowling

      Lee M. Bowling
      Chief Financial Officer
     

(Duly Authorized Officer, Principal Financial and

Accounting Officer)

 

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