U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 000-26399
eOn
Communications Corporation
(Exact name of registrant as specified in its charter)
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DELAWARE
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62-1482176
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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185 Martinvale Lane, San Jose, CA 95119
(Address of principal executive offices)
(408) 694-9500
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, $0.005 par value per share
(Title of each class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act
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Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The revenues for the year ended July 31,
2008, the most recent fiscal year, were $6,994,000.
The aggregate market value of the shares of common stock held by non-affiliates of the registrant was
approximately $1,248,170 based upon the closing sale price as reported by the NASDAQ Stock Market on September 30, 2008. The number of outstanding non-affiliate shares of the registrant’s $0.005 par value common stock was 2,013,177 as of
September 30, 2008.
2,735,508 shares of Common Stock, par value $0.005, were outstanding as of September 30, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
FORWARD-LOOKING STATEMENTS
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
elsewhere in Item 6. 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
consolidated financial statements and the notes included thereto in Item 7.
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ITEM 1.
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DESCRIPTION OF BUSINESS.
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INTRODUCTION
eOn Communications Corporation™ (“eOn” or the “Company”) is a global provider of communications solutions. Backed with over 20
years of telecommunications engineering expertise, the Company’s solutions enable its customers to easily leverage flexible 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 Architectures (SOA). Whether businesses are looking to leverage the advantages of enterprise IP telephony or
contact center technologies, eOn Communications delivers proven, IP-ready products that improve business performance.
Enterprise IP Telephony
The Millennium™ Converged Communications Platform is a proven solution for small and medium-sized installations. Blending support
for VoIP, digital communications and Computer Telephony Integration (CTI) technology into one diverse telephony server platform, the Millennium’s adaptability and flexibility make it particularly suitable for multi-site networks such as school
systems, multi-tenant services, professional offices, distribution facilities, and retail stores. The Millennium provides integrated voice mail, unified messaging, fax messaging and an array of desktop telephones to help employees work more
efficiently, access information more easily, and serve customers better.
Contact Center
The multi-media queuing capability of the eQueue™ enables contact centers to more efficiently interact with their customers regardless of the
communications media. eQueue applications include multi-media routing of all interaction types with Automatic Call Distributors (ACD) functionality, complete telephony capability, email, Web chat and Web collaboration, integrated voice response,
voice mail with unified messaging, fax messaging, quality assurance recording and a range of desktop devices and applications. eQueue enables improved customer service and loyalty, increased agent productivity and lower cost of ownership.
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The Company’s principal executive offices are located at 185 Martinvale Lane, San Jose, California
95119. The telephone number at that address is (408) 694-9500. The Company also has offices located in Kennesaw, GA; Shanghai, PRC; and Beijing, PRC.
BACKGROUND
The Company was incorporated in Delaware in July 1991, and in 1993 we became a subsidiary of Cortelco Systems
Holding Corporation (“CSHC”). In March 1997, our subsidiary in the automatic call distribution products business was spun off to the CSHC stockholders, merged with Business Communications Systems, Inc., and renamed BCS Technologies, Inc.
(“BCS”). In April 1999, CSHC distributed its shares of eOn in a spin-off transaction, we acquired Cortelco Systems Puerto Rico, Inc. (“CSPR”), another subsidiary of CSHC, and we acquired BCS. CSPR was subsequently spun-off to eOn
shareholders on July 31, 2002.
On June 1, 2004, eOn acquired a controlling interest in Cortelco Shanghai Telecom Equipment
Company (“Cortelco Shanghai”), a provider of fiber optic transmission equipment, data communications systems, and network management software in China. After working with Cortelco Shanghai, we concluded that our direct eOn sales team
better fit our China strategy. Additionally, Cortelco Shanghai traditionally has kept its books and records in accordance with Chinese accounting standards instead of U.S. accounting standards. We had concerns that the costs associated with Cortelco
Shanghai meeting the Sarbanes-Oxley internal controls procedures and documentation requirements in the future would be prohibitively expensive. On December 31, 2005, the Company sold Cortelco Shanghai to the minority shareholder, and members of
management of Cortelco Shanghai.
During fiscal year 2005, the company acquired Aelix Systems Inc. (“Aelix”). Located in
Bangalore, India, Aelix was a developer of telecommunications systems and applications based on internet protocol (IP) technology. In April 2008, the facility in India was closed.
On February 23, 2007, the Company’s subsidiary, EIPV purchased certain accounts receivable, inventory and fixed assets and assumed certain
liabilities of One IP Voice, Inc. During the quarter ended April 30, 2008, the Company sold the assets of EIPV.
BUSINESS OVERVIEW
eOn focuses its resources on developing and marketing products that help businesses communicate more effectively and efficiently with their customers.
Communications technology is a critical factor for businesses in their effort to gain a competitive edge. To enable businesses to succeed in this area, eOn offers the Millennium Converged Communications Platform and the eQueue Multimedia Contact
Center Solution.
Millennium Converged Communications Platform
The Millennium is a modular, multi-shelf system combining reliable hardware design with the flexibility of easily configurable software supporting both basic and complex telephony operations. It is an extremely
flexible system that can be configured to operate as a PBX, key system, hybrid, tandem switch channel bank or as a conduit for data applications. The Millennium is digital end-to-end and VoIP compatible. Its system design is based on distributed
processing and DSP technology. It offers businesses many advantages:
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Voice over Internet Protocol (VoIP)
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Choosing the right solution for enterprise communications needs should not be constrained by technology limitations. The Millennium System offers support of VoIP, digital and analog technologies—enabling businesses to deploy
traditional, IP telephony or a combination of both when and where it’s appropriate for the organization. Whether the need is to connect several phones in an office, hundreds of phones in a campus environment or clusters of remote workers,
Millennium VoIP enables the creation of a virtual enterprise, maximizing employee productivity while reducing networking and equipment costs.
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Flexible Desktop Solutions
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The Millennium offers a broad selection of telephones and desktop appliances to meet the communications needs of any employee. Multiple models of VoIP and traditional phones as well as button expansion modules are offered that provide easy
access to the Millennium’s call processing features.
The
Millennium offers an array of call routing features necessary to intelligently route calls to the appropriate resource throughout the enterprise. Call routing plans can be simple or complex depending on business requirements. The Millennium supports
up to 64 call routing plans with each plan allowing for 60 different sequences of instructions for customized call handling needs.
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Flexible Networking Options
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The Millennium offers cost-effective results oriented solutions for a variety of unique networking applications. From campus environments to distributed call centers, the Millennium provides networking capabilities and data connectivity in
industries where a communications hub is required to provide a central point of entry into a system or network.
With the
Millennium’s unified messaging option, employees and customers can use the communications medium that they prefer or that is convenient—any combination of voice, fax, or email. The unified messaging option module provides users the ability
to access and manage all of their voice, fax and email messages together from a single, highly intuitive interface.
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Automatic Call Distribution
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Automatic Call Distribution (ACD) is an effective tool both for handling a high volume of calls and managing call center operations. It is also a tool that small to medium sized call centers need, but they often do not want the burdens that
can accompany full-featured ACD equipment. The Millennium offers a flexible solution by providing call routing capabilities that easily distribute calls to equalize the workload across employees and provide callers with prompt service.
Millennium Business Benefits
Business
communications powered by the Millennium Converged Communications Platform give employees productivity enhancing features that enable new levels of collaboration and productivity. All forms of networking technology are supported, including VoIP,
digital as well as traditional. This gives enterprises the option to deploy advanced technologies and, at the same time, preserve investment in legacy applications and investments. Lastly, since the Millennium system offers a wide variety of
communications solutions, enterprises can invest in one comprehensive platform that meets the needs of the entire enterprise. This lowers the total cost of ownership and simplifies ongoing administrative and expansion needs.
eQueue Multi-Media Contact Center Solution
The eQueue
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Multi-Media Contact Center
is our proven solution to customers who are looking to evolve from being a traditional call center company to a multimedia contact center. Unlike traditional telecom solutions, the eQueue System is designed to replace proprietary communication
devices such as Private Branch Exchanges (PBX), Automatic Call Distributors (ACD), Interactive Voice Response (IVR) systems, recording systems, workforce management systems, voice mail systems, and Computer Telephony Integration (CTI) middleware
systems with an all-in-one blended communications system. Because the eQueue platform is built on an “open” unified architecture, organizations can eliminate the need for complex communications systems integration while reducing start-up
and maintenance costs, simplifying administration, and increasing ease of customization. In
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addition, the eQueue can distribute and manage email and web-based interactions. The eQueue enables enterprises to communicate more effectively with
customers, lowers operational costs and increases agent productivity.
The eOn eQueue solution offers many advantages in the complex and
competitive customer interaction management marketplace.
The
eQueue’s universal queue approach enables contact centers to more efficiently interact with their customers regardless of the media. The capability not only provides customers with consistent interaction management across all media, but also
includes extensive skills-based routing for all contacts that can match the most appropriate resource to a customer’s need.
The eQueue
offers comprehensive applications including ACD with skills based routing, PBX with VoIP capabilities, email and web chat applications with an integrated knowledge base, integrated voice response, voice mail with unified messaging, quality assurance
recording, workforce management and a complete range of desktop devices and applications.
The eQueue is an open
standards-based solution based on the Linux™ operating system. Using an open solution not only provides for ease of integration, but also provides the contact center with support for evolving future needs.
The eQueue provides
the flexibility to add, combine and customize important features and functions to meet the individual needs of a contact center. The eQueue is compatible with most third party systems, allowing companies the ability to integrate other applications.
For contact centers
with as few as 10 agents to those with over 1000 agents, the eQueue provides the functionality required.
With a quarter century
of contact center expertise, eOn has served over 8,000 customers in a variety of markets including Multi-Media Contact Centers, Traditional Call Centers, General Business Applications, Service Providers and Emergency 911 Centers.
The eQueue
is a fully redundant solution designed to perform in a mission-critical environment.
Benefits of an eQueue Solution
The benefits of using an eQueue include improved customer satisfaction, retention and loyalty, increased agent productivity and lower total cost of
ownership.
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Improved Customer Satisfaction, Retention & Loyalty
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Outstanding customer service is the primary goal of most companies. Attaining this goal is often the direct result of how effectively voice calls, emails and web-based communications are routed and managed within the
contact center. The eQueue provides a universal queue together with a common management interface for all types of customer contacts. This, combined with skills-based routing capabilities, ensures that contact centers can match the best possible
resource to meet a customer’s need consistently across all media types. Additionally, the eQueue’s open platform provides ease of integration with customer relationship management (“CRM”) and other enterprise applications,
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allowing a high level of business-driven management of all customer interactions. This enables improved customer satisfaction and retention with consistent
service delivery across all contact channels.
Multi–media contact blending is one way to significantly improve productivity. In traditional call centers, individual agents can only handle one contact type, such as voice calls. Therefore, different pools of agents must be created
to manage different forms of media. To cover peak demand times, each unique agent pool must be staffed to maximum capacity. With the eQueue, however, all agents can effectively handle all types of contacts, coverage is more flexible, fewer agents
can handle the same demand, and idle agents can be minimized. Agent productivity is also increased through the use of features such as skills-based routing, remote agent support, unified reporting of all media types, quality monitoring and dynamic
supervisory control.
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Lower Total Cost of Ownership
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The eQueue solution offers an overall total lower cost of ownership—lower capital costs and lower operating costs, which equates to a higher return on investment. Integration costs are kept to a minimum with eQueue’s set of
applications and open platform. Because the eQueue architecture is open and modular, the contact center is also prepared for future growth.
STRATEGY
Key elements of our strategy for future growth are as follows:
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Expand International Market Presence
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eOn has had success in recent years penetrating international markets. Examples include deployment of eQueue and Millennium systems in China and Korea. The anticipated growth rates for both enterprise communications and contact center
solutions, specifically in China, are much greater than those in more traditional markets such as North America and Europe. eOn has established an operation and a customer base in China and will continue to invest in product, infrastructure and
partnerships necessary to capitalize on this emerging market opportunity.
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Provide Migration Paths to Encourage Millennium Customer VoIP Adoption
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Many existing Millennium customers require that they be able to support more VoIP based applications. Since the Millennium has an architecture that
supports traditional TDM switching and IP-based transmission technology, eOn is able to provide a solution that allows customers to migrate to IP at their own pace and ultimately reap the cost savings and business performance enhancement benefits of
converged networks. eOn offers customer migration programs to encourage IP adoption, that preserve a customer’s existing investment in the Millennium system.
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Maintain Our Investment in the eQueue Business
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In spite of the maturity of the North American market, we believe our eQueue Multi-Media Contact Center Solution offers advantages that will enable eOn to capture new customers. We will continue to broaden our core
product offering to enhance our ability to win competitive bids and provide additional solutions to our existing customers.
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Opportunistically Explore Emerging Market Opportunities
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eOn will actively pursue other business options that will favorably position shareholders to participate in emerging market opportunities.
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Our products and products under development include:
Millennium Converged Communications Platform
The Millennium is a VoIP-enabled PBX offering customer contact center and
computer telephony integration features. It can be expanded in a modular manner from 32 to 1,024 communication ports and provides enterprises with the ability to increase the number of ports and add new features through the simple installation of
add-on cards and software.
The Millennium offers a broad feature set, including:
The
Millennium system offers IP, digital, and analog technologies—allowing customers to deploy traditional, IP telephony or a combination of both when and where it’s right for their organization. Whether needing to connect several phones in an
office, hundreds of phones in a campus environment or clusters of remote workers, Millennium allows customers to create a virtual enterprise, maximizing productivity while reducing networking and equipment costs.
The modular architecture of the Millennium allows it to be configured in a variety of ways—PBX, IP gateway, key system, hybrid, tandem switch, channel bank, protocol converter, or conduit for data applications. Digital and IP switching
capability, universal ports, highly adaptable programmability, and architectural flexibility are inherent in the system design.
The Millennium’s real-time monitoring and management tools operate network-wide, with reporting capabilities that help to maximize system reliability across the entire enterprise. Extensive management and cost control features ensure
system administrators can account for costs, track phone usage patterns, and perform traffic analysis. Additionally, Millennium’s database programming interface is intuitive and easy to use making installations simple and economical to
maintain.
Bringing all the features and services of the Millennium to each desktop helps employees communicate better and improves productivity company-wide. Customers can choose from a wide selection of digital and IP telephones to match the
specific needs of each employee. If the enterprise is seeking to bring VoIP to the desktop, the eNterprise series of IP telephones provide the feature sets of traditional digital telephone with IP telephony administrative advantages. eNterprise
digital phones are a good match for users not requiring IP connectivity but who are in need of advanced call handling capabilities.
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VoIP and Traditional Networking Options
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Utilizing circuit-switched and in the future, IP networking, the Millennium’s networking capabilities facilitates communications across geographically dispersed locations. The system’s networking solutions
help businesses consolidate resources as well as ensure call answering and routing consistency throughout all locations.
Automatic
call distribution is fully integrated with the Millennium providing the enhanced call handling features required in call center environments. The Millennium coupled with its real-time reporting software allows managers to use both historical and
real time data to reallocate agents and resources, forecast future requirements, and plot the long range calling patterns to determine if service level objectives are being met.
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The Millennium offers a
standards-based computer/telephony integration (CTI) solution that includes support for native CSTA interfaces and third-party TAPI, TSAPI and CSTA applications. It provides customers with a common open-platform for building cost-effective computer
telephony solutions. Through integration with existing customer databases and third-party TAPI applications, the Millennium can provide visual call control and call monitoring to enable presentation of caller information based on Caller ID, ANI, or
DNIS.
eQueue Multi-Media Contact Center Solution
The eQueue Multi-Media Contact Center Solution is designed for mission-critical contact center environments. The eQueue incorporates a range of integrated applications, including:
We built the
eQueue with an understanding of the critical nature of call center operations, and the eQueue ACD application is at the core of the eQueue solution. It offers a single routing engine for all contact types and is designed with an extensive set of
flexible routing capabilities. These capabilities include a single multi-media queue for all contact types, skills based routing for all media types, real-time supervision, and virtual agent groups. Effective customer service is a direct result of
contact centers routing customers to the right agents quickly and efficiently.
The eQueue comes
complete with an extensive set of telephony features, telephony grade reliability, PBX capabilities, multi-featured phones, PC phones, and networking interfaces. The eQueue has a hybrid architecture that supports traditional TDM switching
infrastructure and IP-based technology, including the support of VoIP desktop phones and software phones.
eQueue Email and eQueue Chat applications are options that allow agents to interact with online customers quickly and easily. Emails and Chat sessions are received in queue with voice calls and then delivered to agents based on defined
skill sets and priorities. Using an intuitive browser-based interface, agents can respond to email contacts and web chat sessions efficiently and can select automatic responses to FAQ’s from the shared knowledge base. eQueue Email &
Chat integrate with other eQueue applications to offer real-time and historical reporting, secured multi-domain support, dynamic routing, instant messaging and more.
The eQueue
Interactive Voice Response (IVR) provides contact centers with a customer self-service option by providing voice announcements, customized greetings, variable delay messages, and interactive multi-level menu selections. With advanced scripting,
thousands of customized voice files can be selected and combined so callers hear promotional, call status, and informational updates. Additionally, the eQueue IVR offers features that give contact centers an advantage in servicing their customers,
such as real-time statistics, whisper announce, automated paging, callback and web callback capabilities.
eQueue
Recording is an application that allows agent and/or customer interactions to be recorded and stored for later review. eQueue Recording supports two distinct recording types: On-Demand Recording and Quality Assurance Recording. Agents can initiate
an On-Demand Recording session at any time during the call by simply pressing a button on their phone or screen. Quality Assurance Recording sessions, on the other hand, are automatically activated based on the agent’s group, type of
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call, number of calls previously recorded for the agent and number of calls previously recorded for the group. A client application provided with this
feature allows supervisors to schedule, maintain and administer all recordings from their desktop.
eQueue Reporting provides reports and displays, available in both real-time and historical formats. They combine to give contact centers the information needed to manage efficiency, agent performance, and service delivery levels. The
unified architecture of the eQueue uses a single, standards-based reporting engine to track contact center resources, applications and interactions. Because of this architecture, eQueue Reporting enables companies to build comprehensive, end-to-end
management reports that can also include information from multiple disparate systems. eQueue Reporting delivers consolidated data for voice, email and Web that is timely, easily accessible and presented in a form that can be customized to fit the
unique needs of a contact center.
eQueue Interfaces, including industry-standard CTI, gives companies the extensibility and integration tools necessary to customize the eQueue solution to meet the specific needs of each customer. The eQueue can be tightly integrated with
other enterprise applications—including CRM, knowledge bases, self-service applications and e-commerce systems.
In
February 2002 eOn entered into a software licensing agreement with GMT Corporation (GMT), to offer GMT’s workforce management application as eQueue Workforce. Through this initiative, eOn and GMT provide an integrated workforce scheduling and
forecasting solution that allows customers to have the ability to improve the quality of customer interactions, more closely adhere to service level goals, and lower their contact center workforce costs.
eNterprise SIP Business Telephones
The ability to
conduct real time communication and collaboration is a critical component to an organization’s success. Telephones should offer the utmost in functionality, intuitive access to advanced telephone features and deliver maximum productivity to
users all across the enterprise. eOn Communications’ eNterprise SIP Business Telephone series offers a variety of telephones which provide time saving and productivity enhancing features over IP networks.
eNterprise SIP Business Telephones leverage standards-based technologies to extend communications features of carrier class VoIP soft switch platforms to
users over IP networks. These telephones access the potential of IP networks and deliver time-proven telephony applications to the desktop. Features offered include:
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SIP for Business—support for Session Initiation Protocol provides access to advanced business IP telephony features and applications;
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Simplified Management—dynamic IP addressing allows phones to be relocated quickly and easily without a service technician or IT support;
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Multiple Power Options—support for power over Ethernet IEEE 802.3af technology;
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Excellent Voice Quality—voice compression codecs optimize bandwidth and audio quality;
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Built-in Speakerphone—enhanced voice quality and operation with acoustic echo cancellation;
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Programmable Feature Keys—optional 22 or 32 keys for customized access to advanced calling features; and
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Optional Button Expansion Module—provides up to 192 programmable feature keys.
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SALES AND MARKETING
In North America, we sell, install, maintain and support our eQueue Multi-Media Contact Center through our direct sales force and through selected value added resellers (VAR). We sell the Millennium through our
network of U.S. based dealers and VAR. Installation and support of Millennium systems is largely performed by the eOn dealer and VAR network. eNterprise SIP Business phones are to be sold through VoIP equipment suppliers and distributors. Sales and
support of products in Asia is done through eOn Communications (Beijing) Corporation Limited (“eOn China”), the Company’s wholly owned subsidiary based in Beijing, China.
Our marketing objective is to position eOn as a proven provider of enterprise communications and contact center solutions. Our target customer base
continues to be midsized businesses that are looking to deploy or replace their legacy communications systems with next generation IP telephony and multi-media contact center solutions. We will continue to promote solutions within selected market
segments, including the U.S. Federal Government, education/school systems, providers of outsourced contact center solutions, traditional and online retailers. We will continue to reach prospects in these markets via web-based marketing initiatives,
customer referral programs and joint marketing efforts with our US and international dealers and VAR.
RESEARCH AND DEVELOPMENT
The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. We believe
that our future success depends in large part upon our ability to continue to enhance the functionality and capabilities of our products. We plan to extend the functionality of our hardware and software technology by continuing to invest in research
and development.
MANUFACTURING
We
currently use two contract manufacturers to produce the Millennium—ACT Electronics, Inc., a subsidiary of private investment firm Sun Capital Partners and Innovative Circuits, Inc. Both contract manufacturers perform printed circuit board
assembly and soldering, in-circuit and functional testing and packaging. We believe that ACT Electronics and Innovative Circuits have sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advances
in technology. After final assembly by either manufacturer, we inspect and perform quality assurance testing prior to shipment to our dealers or customers. We make purchases from ACT and Innovative Circuits through purchase orders.
We currently use Clover Electronics, Inc. to perform printed circuit board assembly and soldering, in-circuit and functional testing and packaging of
boards for our eQueue product line. We believe that Clover Electronics has sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advances in technology.
We currently use IMT of Taiwan to manufacture the subcomponents of our eNterprise SIP Business Telephones. As a major manufacturer of VoIP telephone
sets, we believe IMT has sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advanced technologies.
We depend on sole source suppliers for certain components, digital signal processors and chip sets, and voice processor boards. Interruptions in the availability of components from our key suppliers could result in
delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate suppliers or modifying product designs to use alternative components could cause delays and result in
additional expenses.
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COMPETITION
We expect competition to intensify as competitors develop new products, new competitors enter the market, and companies with complementary products enter into strategic alliances.
The competitive arena for our products is changing very rapidly. Well-established companies and many emerging companies are developing products to
address the PBX, ACD, VoIP and Multi-Media Contact Center markets. While the industry remains fragmented, it is rapidly moving toward consolidation, driven by both emerging companies’ desires to expand product offerings and established
companies’ attempts to acquire new technology and reach new market segments.
We compete on the basis of providing reliable integrated
voice and data communications systems that can be customized and configured rapidly and at a low cost. Although we believe that we compete favorably with respect to these factors, we may not be successful in this rapidly changing and highly
competitive market.
Many of our current and potential competitors have significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition and a larger installed customer base than we do. Therefore, our competitors may be able to respond to new or emerging technologies and changes faster than we can. They may also be able to devote
greater resources to the development, promotion and sale of their products. Actions by our competitors could result in price reductions, reduced margins and loss of market share, any of which would damage our business.
Our current and potential competitors can be grouped into the following categories:
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VoIP Communications Equipment Suppliers
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Our major competitors for the Millennium are the companies that provide products for the traditional voice communications market. These products include PBXs, voicemail systems and related products. These companies
include Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.
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VoIP Telephone Suppliers
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Our
major competitors for the eNterprise SIP Business Telephones include Polycom, Aastra, Linksys, Grandstream among others. Each provide VoIP phones families that are compatible with major VoIP softswitch suppliers.
Our
major competitors for the eQueue are the traditional ACD or call center vendors who have large customer bases, brand recognition, reliable scaleable product offerings and have extensive experience with voice applications. However, their contact
center solutions often consist of multiple separate technologies with little integration, have proprietary system architectures, and are expensive. These competitors include Avaya, Nortel Networks, and Aspect Software. We also face competition from
other contact center competitors that feature integrated applications (all-in-one products) that are built on Intel hardware platforms. These competitors have reduced the need for systems integration and are often aggressively priced, but also lack
brand recognition and do not have the depth of telephony capability of the traditional vendors. These vendors include Interactive Intelligence and Syntellect.
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Data Communications Equipment Suppliers
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Many data communications equipment suppliers have a strategic objective of penetrating the voice communications and customer interaction management market, thereby substantially expanding their total served market.
Foremost of these data-centric companies pursuing this strategy is Cisco Systems. Although data communications companies generally do not have substantial experience with voice communications systems, these companies can be expected to compete
intensely in this market.
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Email Management and Web Center Software Suppliers
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There are many competitors that supply software for managing the rapidly increasing volumes of web and email communications for e-commerce. These competitors’ products and services manage inbound and outbound
email and web-based communications, while facilitating the delivery of specific and personalized information to each customer. They strive to enable e-businesses to enhance customer relationships, generate additional revenue opportunities, and
reduce the cost of online communications. Email and Web center software competitors include eGain, Kana Software, and Live Person. We intend to compete in the web center software and services market by providing integrated voice and data
communications in a contact center environment or providing a direct upgrade path from a Web center to an integrated contact center.
|
|
•
|
|
Application Solution or Hosted Solution Providers
|
An emerging area for competitors are firms that deliver enterprise communications and contact center functionality from a web based hosted platform. Oracle, Five9, and Packet 8 are examples of companies offering this
model in the market place. Advantages typically promoted are investment flexibility with monthly or transaction based licensing, immediate access to technology upgrades, and disaster recovery options. Business issues that must be considered include
IP voice quality, system and application scalability, and limitations in system management and control.
INTELLECTUAL PROPERTY
We rely on patent, trademark, copyright, trade secret protection and confidentiality and license agreements with our employees, clients, partners and
others to protect our proprietary rights. We currently have numerous patents issued in the United States related to our business.
Our
patent position, and that of technology companies in general, involves complex legal and factual questions and, therefore, the validity and enforceability of our patents cannot be predicted with certainty. The steps we have taken to protect our
proprietary rights might not be adequate. Third parties might infringe or misappropriate our patents, trade secrets, trademarks and similar proprietary rights. Furthermore, others might independently develop or duplicate technologies similar to
ours.
If we fail to protect our intellectual property, our business, financial condition and results of operations could be harmed. In
addition, we may have to litigate to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of
management and technical resources, which could harm our business, financial condition and results of operations.
“eOn,”
“eQueue,” “Millennium” “eNterprise” & “WorkSpace” are trademarks of eOn.
EMPLOYEES
As of July 31, 2008, we had 43 employees. We had 16 employees in the United States, 26 employees in China and 1 employee in Canada. The mix of
employees was 12 in sales and marketing, 21 in research, development, and professional services, and 10 in general and administration. On March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco will
provide management for all U.S. operations for eOn. Included in the management services are sales, marketing, product management, engineering, technical support, quality assurance, accounting, and information technology. We also employ independent
contractors and temporary employees. None of our employees are represented by a labor union and we consider our employee relations to be good.
11
EXECUTIVE OFFICERS
The following table sets forth information about our Directors and Executive Officers:
|
|
|
|
|
|
|
NAME
|
|
AGE
|
|
POSITION
|
|
David S. Lee
|
|
71
|
|
Chairman and Chief Executive Officer and Director
|
|
|
|
|
|
Stephen R. Bowling
|
|
66
|
|
Chief Financial Officer and Director
|
DAVID S. LEE,
became the Chairman of the Board of eOn in 1991 and became President and
Chief Executive Officer in November 2003. Previously Mr. Lee served as Chief Executive Officer from May 2000 through August 2001. Mr. Lee is a director of ESS Technology, Inc., a provider of semiconductor and software solutions for
multimedia applications; iBasis, Inc., a telecommunications company; and Linear Technology Corporation, a semiconductor company. Mr. Lee is also a Regent of the University of California. From 1985 to 1988, Mr. Lee was President and
Chairman of Data Technology Corporation, a computer peripheral company. Prior to 1985, he was Group Executive and Chairman of the Business Information Systems Group of ITT Corporation, a diversified company, and President of ITT Qume, formerly Qume
Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded Qume Corporation and was its Executive Vice President until the company was acquired by ITT Corporation in 1978. Mr. Lee received an M.S. from North Dakota
State University and a B.S. and an honorary doctorate from Montana State University
STEPHEN R. BOWLING,
became a director of eOn in
1993 and Chief Financial Officer in November 2003. From 1994 to 1997, he was the President of eOn and, from 1994 to 1998, he was the Chief Executive Officer of eOn. In 1993, Mr. Bowling became a director of Cortelco Systems Holding Corporation.
He was the President and Chief Executive Officer of Cortelco Systems Holding Corporation from 1993 to April 2004. He was the President and Chief Executive Officer of eManage.com, an internet web site service company in 1999 and 2000. eManage.com
filed for Chapter 11 bankruptcy in November 2000. Mr. Bowling received an M.B.A. from Stanford University and a B.A. from Williams College.
12
|
ITEM 2.
|
DESCRIPTION OF PROPERTIES.
|
The Company leases
property as detailed in the following table.
|
|
|
|
|
|
|
|
|
LOCATION
|
|
APPROXIMATE SIZE
|
|
LEASE EXPIRATION DATE
|
|
INTENDED USE
|
|
Kennesaw, Georgia, USA
|
|
11,321 sq. ft.
|
|
March 2010
|
|
Office
|
|
Beijing, Peoples Republic of China
|
|
4,171 sq. ft.
|
|
January 2009
|
|
Office
|
|
San Jose, California, USA
|
|
3,780 sq. ft.
|
|
December 2010
|
|
Office
|
Aggregate annual rental payments for the Company’s facilities are approximately $388,000. The
Company’s current facilities are generally adequate for anticipated needs over the next 12 to 24 months. The Company does not own any real property.
|
ITEM 3.
|
LEGAL PROCEEDINGS.
|
From time to time, we may be a
party to legal proceedings incidental to our business. We do not believe that any of these proceedings will have a material adverse effect on our business or financial condition.
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
On January 17, 2008, the 2007 Annual Meeting of Stockholders of eOn Communications Corporation was held to vote on the following routine items:
|
|
(1)
|
To elect two Class II directors to serve on the Company’s Board of Directors for a term of three years or until his/her successor is elected and qualified;
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes
Withheld
|
|
Robert P Dilworth
|
|
10,203,818
|
|
114,327
|
|
David S. Lee
|
|
10,187,902
|
|
130,243
|
|
|
(2)
|
To ratify the appointment of GHP Horwath, P.C. as our independent registered public accounting firm.
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
Broker
Non-Votes
|
|
10,225,390
|
|
72,865
|
|
19,890
|
|
—
|
Based upon the voting results, each of the above items was approved by shareholders.
13
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
|
Market Information
Our common stock began trading on the NASDAQ Stock Market under the symbol EONC on February 4,
2000. Prior to that date, there was no public market for our common stock. The Company split its common shares in a 5 to 1 reverse split effective at market close on April 18, 2008. Stock data for all periods presented have been adjusted to
reflect the reverse split. The following table sets forth, for the fiscal quarters indicated, the high and low sales prices of our common stock as reported by the NASDAQ Stock Market.
|
|
|
|
|
|
|
|
|
QUARTER ENDED
|
|
HIGH
|
|
LOW
|
|
July 31, 2008
|
|
$
|
1.40
|
|
$
|
0.66
|
|
April 30, 2008
|
|
$
|
2.42
|
|
$
|
1.31
|
|
January 31, 2008
|
|
$
|
4.65
|
|
$
|
1.70
|
|
October 31, 2007
|
|
$
|
5.15
|
|
$
|
3.70
|
|
|
|
|
|
July 31, 2007
|
|
$
|
5.70
|
|
$
|
4.10
|
|
April 30, 2007
|
|
$
|
7.25
|
|
$
|
4.40
|
|
January 31, 2007
|
|
$
|
9.55
|
|
$
|
6.55
|
|
October 31, 2006
|
|
$
|
9.60
|
|
$
|
5.75
|
The prices in the table above represent inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.
On June 23, 2008 the Company received a NASDAQ Staff Deficiency Letter from the
NASDAQ Stock Market. The letter stated that for the prior 30 consecutive business days, the closing bid price per share of the Company’s common stock had been below the $1.00 minimum per share requirement for continued listing as set forth in
NASDAQ Marketplace Rule 4310(c)(4). According to the Marketplace Rule 4310(c)(8)(D), the Company was provided 180 calendar days, or until December 22, 2008, to regain compliance. On October 22, 2008, pursuant to the suspension of
NASDAQ’s bid and market value rules, NASDAQ notified the Company that eOn has until March 26, 2009 to regain compliance.
The
NASDAQ letters have no effect on the listing of the Company’s common stock at this time. If, at anytime before March 26, 2009, the bid price of the Company’s common stock closes at $1.00 per share or more for ten consecutive business
days (or up to 20 consecutive business days if NASDAQ notifies the Company that the compliance period is being extended further), NASDAQ will recognize that the Company has regained compliance with the Rule, and the Company’s common stock will
remain listed on the NASDAQ Stock Exchange.
Should the Company not be able to demonstrate compliance with the rule by March 26, 2009,
the NASDAQ staff will determine whether eOn meets the initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement. If the Company meets the initial listing criteria, then it will be granted an additional 180
calendar days to comply. If not, eOn will be notified that its common stock will be delisted. At that time, the Company may appeal the determination to delist its common stock.
Holders
As of September 30, 2008, there were approximately 240 shareholders of record of our
common stock and, to the best of our knowledge, approximately 2,400 beneficial owners whose shares of common stock were held in the names of brokers, dealers, and clearing agencies.
14
Dividends
During fiscal 2008 and 2007, we did not declare any cash dividends on our capital stock. We currently intend to retain any earnings to finance the operation and expansion of our business and, therefore, do not expect to pay cash dividends
on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information with respect to Equity Compensation plans is set forth under Part III of this report under the caption “Item 11. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.”
Recent Sales of Unregistered Securities; Stock Repurchases in the
Fourth Quarter
None.
15
|
ITEM 6.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
|
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 Architectures (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 newly formed subsidiary, eOn IP Voice, Inc. (“EIPV”) purchased certain accounts receivable,
inventory and fixed asset 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.
In 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 December 11, 2007, the company executed a definitive Agreement and Plan of Merger to acquire Cortelco Systems Holding Corporation
(“Cortelco”) for up to $11,000,000 in stock and cash. The companies are discussing a possible restructuring of the merger agreement, but no agreement has been executed. There is no assurance that the new agreement will be reached or that
the merger transaction will be closed.
On March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby
Cortelco will provide management for all U.S. operations for eOn. Included in the management services are sales, marketing, product management, engineering, technical support, quality assurance, accounting, and information technology.
Cortelco’s management efforts are focused on improved financial results, improved customer service and support, and enhancing core technology utilization.
From 2003 until 2006, Cortelco provided management expertise to Cortelco Systems Puerto Rico, Inc. (CPROF.OB) and, as a result, CSPR has demonstrated sustained profitability starting in 2004. eOn anticipates that it
will continue to utilize Cortelco’s management expertise on an outsourcing basis irrespective of whether the proposed Cortelco merger closes.
Effective April 1, 2008, the Company closed its engineering facility in India. Also on April 1, Mitch Gilstrap, COO and Vijay Sharma, CTO, left the Company.
On June 13, 2008, David Lee purchased the Company’s 300,000 share investment in Spark for $300,000.
CRITICAL ACCOUNTING POLICIES
Critical accounting
policies are defined as those that are reflective of significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting
policies are limited to those described below. For a detailed description of our accounting policies, see Footnote 2, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements.
16
Revenue Recognition
The Company’s revenues from its three 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
|
|
|
|
|
Because the eQueue system is very flexible in its applications, 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 booked quarterly for each maintenance period as provided. The VOIP phones 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.
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 collectibility is reasonably assured. Generally, revenue is recognized
(1) upon shipment for equipment and software, (2) as work is performed for professional services, and (3) in equal periodic amounts over the term of the contract for software and hardware maintenance. The Company’s revenue
recognition policies are in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition
, and Statement of Position No. 97-2,
Software Revenue Recognition
.
Product Warranties
We generally provide customers a
one year product warranty from the date of purchase. We estimate the costs of satisfying warranty claims based on analysis of past claims experience and provide for these future claims in the period that revenue is recognized. The cost of satisfying
warranty claims, which approximates 2% – 3% of product revenues, has historically been comprised of materials and direct labor costs. We perform 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.
Inventory Obsolescence
We carry inventories at the lower of cost or market. This policy depends on the timely identification of those items included in inventory whose market
price may have declined below carrying value, such as slow-moving or obsolete items, and we record any necessary valuation reserves. We perform an analysis of slow-moving or obsolete inventory on a quarterly basis and any necessary valuation
reserves, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.
Allowance for
Uncollectible Accounts Receivable
We typically grant standard credit terms to customers in good credit standing. As a result, we must
estimate the portion of our accounts receivable that are uncollectible and record any necessary valuation reserves. We generally reserve for estimated uncollectible accounts on a customer-by-customer basis, which requires us to make judgments about
each individual customer’s ability and intention to fully pay balances payable to us. We make these judgments based on our knowledge of and relationships with our customers and we update our estimates on a monthly basis. Any changes in
estimate, which can be significant, are included in earnings in the period in which the change in estimate occurs.
17
Stock-Based Compensation
We adopted the provisions of, and account for stock-based compensation in accordance with, Statement of Finanical Accounting Standards No. 123R (“SFAS 123R”),
Share Based Payment
on
August 1, 2006. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the
date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual
and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
The fair value of each option
award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical daily closing prices adjusted for our expected future volatility. The Company believes that implied volatility is
more reflective of market conditions and a better indicator of expected volatility than historical volatility. The Company uses historical information to calculate the expected life of option grants. The Company believes that historical information
is currently reflective of the economic life of outstanding option grants. The dividend yield is determined by dividing the expected per share dividend during the coming year by the average fair market value of the stock during the period. The
Company has not historically declared any cash dividends on our common stock. We currently intend to retain any earnings to finance the operation and expansion of our business and therefore do not expect to pay cash dividends on our 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.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or
if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are
fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of
our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration,
early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial
statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual
values.
The guidance in SFAS 123R and Staff Accounting Bulletin 107 (“SAB 107”) is relatively new. The application of these
principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and may materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.
18
See Note 13 Stock—Based Compensation to the consolidated financial statements for further
information regarding SFAS 123R.
Deferred Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Because of substantial losses from inception
through fiscal year 2008, the Company has available net operating loss (“NOL”) carry-forwards of approximately $25,000,000.
Accounting principles generally accepted in the United States of America require the recording of a valuation allowance against the net deferred tax asset associated with this NOL and other timing differences if it is “more likely than
not” that the Company will not be able to utilize the NOL to offset future taxes. Due to the size of the NOL carry-forward in relation to the Company’s taxable income in recent years and to the continuing uncertainties surrounding future
earnings, management has not recognized any of its net deferred tax asset. Because this asset has been offset by a valuation allowance, the Company currently provides for income taxes only to the extent of expected cash payments of taxes, primarily
state and foreign income taxes, for current income.
Should the Company’s earnings trend cause management to conclude that it is more
likely than not the Company will realize all or a material portion of the NOL carry-forward, management would record the estimated net realizable value of its deferred tax asset at that time. The Company would then provide for income taxes at a rate
equal to its combined federal and state effective rates, which would approximate 39% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary
significantly from period to period, although the Company’s cash tax payments would remain unaffected until the benefit of the NOL is utilized.
RESULTS OF OPERATIONS
The following table presents our operating ratios for fiscal years 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended July 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of revenue
|
|
45.1
|
%
|
|
42.7
|
%
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
54.9
|
%
|
|
57.3
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
55.7
|
%
|
|
42.3
|
%
|
|
Research and development
|
|
37.8
|
%
|
|
27.0
|
%
|
|
Other expense
|
|
4.0
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
97.5
|
%
|
|
69.4
|
%
|
|
|
|
|
|
|
|
|
|
(Loss) from continuing operations
|
|
(42.6
|
)%
|
|
(12.1
|
)%
|
|
Interest income
|
|
1.7
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes and discontinued operations
|
|
(40.9
|
)%
|
|
(9.5
|
)%
|
|
Income taxes
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
(Loss) before discontinued operations
|
|
(40.9
|
)%
|
|
(9.5
|
)%
|
|
Discontinued operations
|
|
(8.5
|
)%
|
|
(3.0
|
)%
|
|
Foreign currency translation adjustment
|
|
1.5
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
(47.9
|
)%
|
|
(12.5
|
)%
|
|
|
|
|
|
|
|
|
19
NET REVENUE
Revenue is comprised of product revenue generated by our Millennium product line and product and maintenance and professional service revenue generated by our eQueue product line. Net revenue decreased approximately 34% to $6,994,000 for
the year ended July 31, 2008 from $10,625,000 for the previous fiscal year. The decrease reflects lower eQueue revenue from products, maintenance and professional services, and lower Millennium revenue compared to the prior year. Sales of
Millennium systems and eQueue systems were adversely impacted by slowdowns in key U.S. government and education markets and increased competition.
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 37% to 3,839,000 for the year ended July 31, 2008 compared to $6,093,000 for the previous fiscal year. The decrease in gross profit reflects lower eQueue
product, maintenance and professional service revenues. Our gross margins were 55% and 57% for fiscal years 2008 and 2007, respectively. The decrease in margin percentage reflects lower maintenance and professional services revenue, which
historically have higher margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $3,893,000 for the year ended July 31, 2008, a decline of 13% from $4,491,000 in the prior fiscal
year. The decrease reflects lower personnel costs, lower travel and entertainment expenses, lower bad debt expense, and lower SFAS 123R compensation expense partially offset by higher subcontract and professional fees.
RESEARCH AND DEVELOPMENT EXPENSE
Research and
development expenses are primarily comprised of personnel and related expenses for our engineering staff. Our research and development efforts are currently concentrated on enhancements for our eQueue and Millennium product lines. Research and
development expenses were $2,641,000 for the year ended July 31, 2008, which represents a decrease of approximately 8% from $2,872,000 in fiscal year 2007. The decrease primarily reflects lower personnel costs and related travel expenses. The
Company closed its engineering facility in India effective April 1, 2008. The decrease in development costs has been offset by approximately $244,000 in severance expenses.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net is primarily comprised of bank service
charges, franchise taxes, currency differences and gains or losses from disposal of fixed assets. Other expense, net was $283,000 in fiscal 2008 compared to $11,000 in fiscal year 2007. The increase is primarily a result of losses related to the
closure of the India engineering facility, losses on disposal of assets in India, and currency exchange losses.
INTEREST INCOME, NET
Interest income was $117,000 and $272,000 in fiscal years 2008 and 2007, respectively. The decrease in fiscal year 2008 reflects a lower weighted average
balance of marketable securities invested compared to the same period of the pervious year.
INCOME TAX EXPENSE
No income tax benefit from continuing operations was recorded for the years ended July 31, 2008 and 2007 as management was unable to conclude that it
was more likely than not that the income tax benefit would be realized.
20
DISCONTINUED OPERATIONS
Discontinued operations for the year ended July 31, 2008 is comprised of $604,000 of losses from eOn IP Voice, Inc. and a $13,000 gain on disposal during the third fiscal quarter of 2008. Discontinued operations
for the year ended July 31, 2007 is comprised of $321,000 of losses from eOn IP Voice, Inc. beginning February 23, 2007, the date the assets were purchased, until July 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31,
2008, we had cash and cash equivalents of $1,545,000, $1,000,000 in short-term investments, and a working capital balance of $4,616,000. At July 31, 2008, our short-term investments were invested in auction rate securities. These securities
were sold at par in October 2008 and now invested in liquid treasury securities.
Our operating activities resulted in net cash outflows of
$2,731,000 for fiscal year 2008 compared to net cash outflows of $867,000 for fiscal year 2007. The decrease in net operating cash flow for the current fiscal year primarily reflects net loss (adjusted for non cash items) for the year, higher
inventories and prepaid assets and lower accounts payable partially offset by lower accounts receivable. Net operating cash flow for fiscal year 2007 was primarily the result of net loss (adjusted for non cash items) for the year, lower accrued
expenses, higher inventory and accounts receivable, partially offset by increased related party payables and lower prepaid and other assets.
Our investing activities resulted in net cash inflows of $1,776,000 for fiscal year 2008 compared to net cash inflows of $2,159,000 in fiscal year 2007. Cash provided by investing activities during fiscal year 2008 was primarily related to
net sales of marketable securities and proceeds from the disposal of Spark stock, partially offset by the investment in Symbio and capital expenditures. Cash provided by investing activities during fiscal year 2007 consisted primarily of net sales
of marketable securities and final payment of proceeds from the disposal of Cortelco Shanghai, partially offset by the purchase of EIPV and capital expenditures.
Our financing activities resulted in net cash inflows of $149,000 and $30,000 in fiscal years 2008 and 2007, respectively. Cash provided by financing activities during fiscal year 2008 was attributable to proceeds
from the employee stock purchase plan and proceeds from a note payable. Cash provided by financing activities during fiscal year 2007 was attributable to proceeds from the employee stock purchase plan and proceeds from the exercise of options to
purchase common stock under the equity incentive plan.
We believe that our available funds will satisfy our projected working capital and
capital expenditure requirements for at least the next twelve months. To the extent future revenues are not realized or we grow more rapidly than expected, we may need additional cash to finance our operating activities and capital expenditures.
Should we need financing, there can be no assurances that financing will be available to us on economically 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.
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 $5,270,000 in capital expenditures.
21
On February 23, 2007, the Company’s newly formed subsidiary, eOn IP Voice, Inc. 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.
In 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.
The Company has incurred substantial net operating losses since inception and negative cash flows from operating activities through July 31, 2008
resulting in an accumulated deficit of $48,517,000. During fiscal year 2008, cash and cash equivalents and short-term investments decreased from $5,656,000 to $2,545,000, largely as a result of funding operating losses during fiscal year 2008.
The Company recorded a net loss of $3,452,000 in fiscal year 2008. As of July 31, 2008, the Company had $2,545,000 in cash and cash
equivalents and short-term marketable securities available to fund operations, of which $263,000 was held in international bank accounts.
The Company is dependent on available cash, short-term investments and operating cash flow to finance operations and meet its other capital needs. If such sources are not sufficient, alternative sources of funding 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 needs and fund expected capital expenditures over at
least the next twelve months.
Capital Resources
We believe that the cash and short-term investment 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.
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
The
Company is obligated to make future payments under various contracts it has entered into, including amounts pursuant to non-cancelable operating lease agreements for office and warehouse space and inventory purchase obligations. Expected future
minimum contractual cash obligations for the next five years and in the aggregate at July 31, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period for the Years Ending July 31,
|
|
|
|
Total
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Operating leases (1)
|
|
$
|
309
|
|
$
|
183
|
|
$
|
108
|
|
$
|
18
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Purchase obligations (2)
|
|
|
196
|
|
|
196
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
505
|
|
$
|
379
|
|
$
|
108
|
|
$
|
18
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-cancelable operating leases do not include payments due under renewals to the original lease term.
|
|
(2)
|
Outstanding commitments for purchases of inventory under open purchase orders.
|
22
On April 1, 2007, the Company’s lease was amended reducing the leased square footage to 11,321
sq. ft. of office and warehouse space in Kennesaw, Georgia. The amendment extended the lease for three years and provided for rent expense of approximately $8,000 per month.
The Company leases approximately 3,780 square feet of office space in San Jose, California. This joint lease with Spark Technologies has monthly rent of
approximately $3,600 and expires December 31, 2010.
On March 31, 2006,
the Company entered into an Acquisition Option Agreement (“the Agreement”) with Spark Technologies, Inc. Spark designs and markets accessories for wireless telephones. Its primary product, Cellstick
TM
, is a small device that allows users to backup, enter, edit and transfer their cell phone contacts. Under the terms of the Agreement, the Company converted notes receivable of
$300,000 to 300,000 shares or 3% of Spark Common Stock and had the option to purchase all remaining outstanding Spark Common Stock, including options, by issuing 8,665,000 (or 1,733,000 after the 1:5 reverse stock split of the Company’s stock
in April 2008) shares of the Company’s Common Stock. In March 2008, after evaluating the current status of Spark and the option, the eOn Board of Directors decided to not exercise the option.
The Agreement further provided that in the event the Company does not exercise this option, the Company could require Spark or David Lee, the
Company’s Chief Executive Officer and a major shareholder, to repurchase the Company’s Spark shares for $300,000 within 60 days. David Lee purchased the shares and paid the Company $300,000 on June 13, 2008.
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.
SUBSEQUENT EVENT
On September 9, 2008, eOn invested 900,000 RMB (approximately $136,000) into Symbio-East Software Park Business Process Outsourcing
Joint Venture in Hangzhou, China for a 9% ownership interest in the Joint Venture. In July, the Company had received this amount as prepayment for eQueue equipment to be shipped to the joint venture and executed a note payable due January 19, 2009.
We expect to ship the equipment in our second quarter, collect $136,000 as payment for the equipment and repay the note. We will record this investment at our cost basis in the equipment, approximately $15,000.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The following risk factors and other information contained in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
that are not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occurs, our business, financial condition, and operating results could be materially adversely
affected.
In addition to the other information included in this report, the following factors should be considered in evaluating our
business and future prospects.
Downturns in the U.S. economy could adversely affect operating results.
Weakness in the U.S. economy has had a negative effect on our operating results. In an economic slowdown, we may also experience the negative effects
of increased competitive pricing pressure and customer turnover. Worsening economic conditions or a prolonged or recurring recession could adversely affect our operating results. Further, we cannot assure you that an improvement in
economic conditions will result in an immediate, if at all positive, improvement in our operating results or cash flows.
Fluctuations in our quarterly
operating results could cause our stock price to decline.
Future operating results are likely to fluctuate significantly from quarter
to quarter. Factors that could affect our quarterly operating results include:
|
|
•
|
|
Delays or difficulties in introducing new products;
|
|
|
•
|
|
Increasing expenses without commensurate revenue increases;
|
|
|
•
|
|
Variations in the mix of products sold;
|
23
|
|
•
|
|
Variations in the timing or size of orders from our customers;
|
|
|
•
|
|
Delayed deliveries from suppliers and
|
|
|
•
|
|
Price decreases and other actions by our competitors.
|
Our quarterly operating results are also likely to fluctuate due to seasonal factors. Some of our vertical markets, such as the U.S. government, educational and retail buyers, follow seasonal buying patterns and do
not make substantial purchases during the quarters ending January 31. Thus, revenues in the quarters ending January 31 are often lower than in the previous quarters. Because of these and other factors, our operating results may not meet
expectations in some future quarters, which could cause our stock price to decline.
Our communications servers face intense competition from many
companies that have targeted our markets.
The competitive arena for our products is changing very rapidly and we face intense
competition in our markets. Well-established companies and many emerging companies continue to develop products that improve communications, increase employee productivity and lower costs. While the industry remains fragmented, it is rapidly moving
toward consolidation. A number of our current competitors have been recently acquired by companies seeking to increase market share and their ability to compete. Additionally, robust open-source products have recently emerged in the market further
lowering barriers to market entry and increasing competition.
We expect competition to intensify as competitors develop new products, new competitors
enter the market, and companies with complementary products enter into strategic alliances.
Our current and potential competitors can
be grouped into the following categories:
|
|
•
|
|
Contact center vendors, such as Avaya, Nortel Networks and Aspect Software;
|
|
|
•
|
|
Data communication equipment suppliers, such as Cisco Systems and Huawei;
|
|
|
•
|
|
VoIP telephone manufacturers, such as Polycom, Linksys, Grand Stream and Aastra;
|
|
|
•
|
|
Hosted solution providers including Packet 8, Five9, Echopass and Oracle;
|
|
|
•
|
|
Email management and web center software suppliers, such as eGain Communications, Kana Software, and Live Person;
|
|
|
•
|
|
Voice communications equipment suppliers, such as Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens; and
|
|
|
•
|
|
Customer relationship management (CRM) suppliers such as Oracle, and SalesForce.com.
|
Many of our current and potential competitors have significantly greater financial, technical, marketing, customer service and other resources, greater
name and brand recognition and a larger installed customer base than we do. Therefore, our competitors may be able to respond to new or emerging technologies and changes faster than we can. They may also be able to devote greater resources to the
development, promotion and sale of their products.
Actions by our competitors could result in price reductions, reduced margins and loss
of market share, any of which would damage our business. We cannot assure you that we will be able to compete successfully against these competitors.
If we cannot maintain our indirect sales channels our ability to generate revenue would be harmed.
A significant portion of
our revenues are derived from dealers and value added resellers who have no obligation to sell our products. Therefore, dealers and value added resellers could discontinue selling our products at any time in favor of our competitors’ products
or for any other reason. A reduction or loss of orders from our dealers and value added resellers could harm our business, operating results and financial condition.
24
The lengthy sales cycles of some of our products and the difficulty in predicting the timing of our sales may cause
fluctuations in our quarterly operating results.
The uncertainty of our sales cycle makes the timing of sales difficult to predict and
may cause fluctuations in our quarterly operating results. Our sales cycles generally vary from four to twelve months for our eQueue products and from one to six months for our Millennium voice switching platform. The purchase of our products may
involve a significant commitment of our customers’ time, personnel, and financial and other resources. Also, it is difficult to predict the timing of indirect sales because we have little control over the selling activities of our dealers and
value added resellers.
We incur substantial sales and marketing expenses and spend significant management time before customers place
orders with us, if at all. Revenues from a specific customer may not be recognized in the quarter in which we incur related sales and marketing expense, which may cause us to miss our revenues or earnings expectations.
We face many risks from expanding into foreign markets.
The Company expects to increase sales to customers outside of the United States and establish additional distribution channels in Asia. However, foreign markets for our products may develop more slowly than currently anticipated. eOn may
not be able to successfully establish international distribution channels, or may not be able to hire the additional personnel necessary to support such distribution channels.
Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.
Because our growth initiatives include expansion into foreign markets, we are subject to the risks of conducting business outside of the United States,
including:
|
|
•
|
|
Changes in a specific country’s or region’s political or economic conditions;
|
|
|
•
|
|
Trade protection measures and import or export licensing requirements;
|
|
|
•
|
|
Potentially negative consequences from changes in tax laws;
|
|
|
•
|
|
Difficulty in managing widespread sales and customer service operations and
|
|
|
•
|
|
Less effective protection of intellectual property.
|
Our products must respond to rapidly changing market needs and integrate with changing protocols to remain competitive.
The
markets for our products are characterized by rapid technological change, frequent new product introductions, uncertain product life cycles and changing customer requirements. If we are not able to rapidly and efficiently develop new products and
improve existing products to meet the changing needs of our customers and to adopt changing communications standards, our business, operating results and financial condition would be harmed.
Key features of our products include integration with standard protocols, computer telephony integration and automatic call distribution applications and
protocols, operating systems and databases. If our products cannot be integrated with third-party technologies or if they do not respond to changing market needs, we could be required to redesign our products. Redesigning any of our products may
require significant resources and could harm our business, operating results and financial condition.
25
Delayed deliveries of components from our single source suppliers or third-party manufacturers could reduce our
revenues or increase our costs.
We depend on sole source suppliers for certain components, digital signal processors and chip sets, and
voice processor boards. Interruptions in the availability of components from our key suppliers could result in delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate
suppliers or modifying product designs to use alternative components may cause delays and expenses. Further, a significant increase in the price of one or more third-party components or subassemblies could reduce our gross profit.
We depend upon our primary contract manufacturers ACT Electronics, Innovative Circuits, and Clover Electronics. We may not be able to deliver our
products on a timely basis if any of these manufacturers fail to manufacture our products and deliver them to us on time. In addition, it could be difficult to engage other manufacturers to build our products. Our business, results of operations and
financial condition could be harmed by any delivery delays.
We may be unable to hire and retain engineering and sales and marketing personnel necessary
to execute our business strategy.
Competition for highly qualified personnel is intense due to the limited number of people available
with the necessary technical skills, and we may not be able to attract, assimilate or retain such personnel. If we cannot attract, hire and retain sufficient qualified personnel, we may not be able to successfully develop, market and sell new
products.
Our business could be harmed if we lose principal members of our management team.
We are highly dependent on the continued service of our management team. The loss of any key member of our management team may substantially disrupt our
business and could harm our business, results of operations and financial condition. In addition, replacing management personnel could be costly and time consuming.
We are effectively controlled by our principal stockholders and management, which may limit your ability to influence stockholder matters.
As of September 30, 2008, our executive officers, directors and principal stockholders and their affiliates beneficially owned 722,331 shares, or
29.6% of the outstanding shares of common stock. Thus, they effectively control us and direct our affairs, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of our company and some transactions may be more difficult or impossible without the support of these stockholders. The interests of these stockholders may conflict with those of other
stockholders. We also conduct transactions with businesses in which our principal stockholders maintain interests. We believe that these transactions have been conducted on an arm’s length basis, but we cannot assure you that these transactions
would have the same terms if conducted with unrelated third parties.
We may not be able to protect our intellectual property, and any intellectual
property litigation could be expensive and time consuming.
Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent applications, we are not certain that our patent applications will result in the issuance of patents, or that any patents issued will provide commercially significant
protection to our technology. In addition, as we grow and gain brand recognition, our products are more likely to be subjected to infringement litigation. We could incur substantial costs and may have to divert management and technical resources in
order to respond to, defend against, or bring claims related to our intellectual property rights. In addition, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual
26
restrictions to establish and protect our proprietary rights. These statutory and contractual arrangements may not provide sufficient protection to prevent
misappropriation of our technology or to deter independent third-party development of similar technologies. Any litigation could result in our expenditure of funds, management time and resources.
Our products may have undetected faults leading to liability claims, which could harm our business.
Our products may contain undetected faults or failures. Any failures of our products could result in significant losses to our customers, particularly in
mission-critical applications. A failure could also result in product returns and the loss of, or delay in, market acceptance of our products. In addition, any failure of our products could result in claims against us. Our purchase agreements with
our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in our purchase agreements may not be effective as a result of federal, state
or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately
cover all possible claims asserted against us. In addition, even claims that ultimately are unsuccessful could be expensive to defend and consume management time and resources.
Our charter contains certain anti-takeover provisions that may discourage take-over attempts and may reduce our stock price.
Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Certain provisions of our certificate of incorporation and bylaws may make it more difficult
for a third party to acquire control of us without the consent of our board of directors, even if such changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.
Future sales of shares may
decrease our stock price.
Sales of substantial amounts of our common stock in the public market, including shares issued upon the
exercise of outstanding options, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(“SFAS 157”) which defines fair value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating what impact, if any the adoption of SFAS 157 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS
159”). SFAS 159 permits companies to elect to measure eligible financial instruments, commitments and certain arrangements at fair value at specified election dates, with changes in fair value recognized in earnings at each subsequent reporting
period. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its consolidated financial statements.
27
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations,
(“SFAS No. 141R”). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will also change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and
disclosed following existing GAAP until July 31, 2009. The Company expects SFAS No. 141R will have an impact on accounting for business combinations once adopted and the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial Statements—An Amendment of ARB
No. 51, or SFAS No. 160.
SFAS no. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for the fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating what impact, if any the adoption of SFAS No. 160 will have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133
(“SFAS 161”) effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 requires an entity to provide enhanced disclosures about derivative instruments
and hedging activities. The Company does not expect SFAS 161 to have a material impact on its consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position FAS No. 142-3,
Determination of the Useful Life of Intangible Assets
(“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and
the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is evaluating
the potential impact of this FASB Staff Position on its consolidated financial statements.
In June 2008, the FASB issued EITF
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock
effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. EITF
No.07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a material effect on the
Company’s consolidated financial statements.
28
|
ITEM 7.
|
FINANCIAL STATEMENTS.
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
eOn Communications Corporation
We have audited the accompanying consolidated balance sheets of eOn Communications Corporation and subsidiaries as of July 31, 2008 and 2007 and the
related consolidated statements of operations, cash flows and stockholders’ equity and comprehensive income, for each of the two years in the period ended July 31, 2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eOn
Communications Corporation and subsidiaries as of July 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
|
|
|
/s/ GHP Horwath, P.C.
|
|
|
|
Denver, Colorado
|
|
|
|
October 28, 2008
|
30
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,545
|
|
|
$
|
2,256
|
|
|
Marketable securities
|
|
|
1,000
|
|
|
|
3,400
|
|
|
Trade accounts receivable, net of allowance of $680 and $694, respectively
|
|
|
932
|
|
|
|
1,781
|
|
|
Trade accounts receivable—related party
|
|
|
84
|
|
|
|
117
|
|
|
Inventories
|
|
|
2,501
|
|
|
|
2,348
|
|
|
Prepaid and other current assets
|
|
|
177
|
|
|
|
118
|
|
|
Current assets of discontinued operations
|
|
|
—
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,239
|
|
|
|
10,139
|
|
|
Property and equipment, net
|
|
|
176
|
|
|
|
298
|
|
|
Intangibles, net
|
|
|
251
|
|
|
|
334
|
|
|
Investments
|
|
|
900
|
|
|
|
300
|
|
|
Other non-current assets
|
|
|
88
|
|
|
|
—
|
|
|
Non-current assets of discontinued operations
|
|
|
—
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,654
|
|
|
$
|
11,206
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
214
|
|
|
$
|
432
|
|
|
Trade accounts payable—related party
|
|
|
126
|
|
|
|
337
|
|
|
Note payable
|
|
|
138
|
|
|
|
—
|
|
|
Accrued expenses and other
|
|
|
1,145
|
|
|
|
1,205
|
|
|
Current liabilities of discontinued operations
|
|
|
—
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,623
|
|
|
|
1,990
|
|
|
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, 2,869,608 and 2,849,629 shares issued, respectively)
|
|
|
14
|
|
|
|
14
|
|
|
Additional paid-in capital
|
|
|
55,931
|
|
|
|
55,769
|
|
|
Treasury stock, at cost (135,380 shares)
|
|
|
(1,502
|
)
|
|
|
(1,502
|
)
|
|
Accumulated deficit
|
|
|
(48,517
|
)
|
|
|
(45,065
|
)
|
|
Accumulated other comprehensive income
|
|
|
105
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
6,031
|
|
|
|
9,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
7,654
|
|
|
$
|
11,206
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
31
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended July 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
Third party revenue
|
|
$
|
6,646
|
|
|
$
|
10,039
|
|
|
Related party revenue
|
|
|
348
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
6,994
|
|
|
|
10,625
|
|
|
COST OF REVENUE
|
|
|
|
|
|
|
|
|
|
Third party cost of revenue
|
|
|
2,832
|
|
|
|
4,043
|
|
|
Related party cost of revenue
|
|
|
323
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,155
|
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,839
|
|
|
|
6,093
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,893
|
|
|
|
4,491
|
|
|
Research and development
|
|
|
2,641
|
|
|
|
2,872
|
|
|
Other expense, net
|
|
|
283
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
6,817
|
|
|
|
7,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(2,978
|
)
|
|
|
(1,281
|
)
|
|
Interest income
|
|
|
117
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,861
|
)
|
|
|
(1,009
|
)
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations after income taxes
|
|
|
(2,861
|
)
|
|
|
(1,009
|
)
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(604
|
)
|
|
|
(321
|
)
|
|
Gain on disposal of discontinued operations, net of tax of $0
|
|
|
13
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(591
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,452
|
)
|
|
$
|
(1,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,452
|
)
|
|
$
|
(1,330
|
)
|
|
Foreign currency translation adjustment
|
|
|
105
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(3,347
|
)
|
|
$
|
(1,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,725
|
|
|
|
2,712
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.05
|
)
|
|
$
|
(0.37
|
)
|
|
From discontinued operations, net of tax
|
|
|
(0.22
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.27
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
32
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended July 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,452
|
)
|
|
$
|
(1,330
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities of discontinued operations
|
|
|
161
|
|
|
|
—
|
|
|
Gain on disposal of discontinued operations
|
|
|
(13
|
)
|
|
|
—
|
|
|
Stock based compensation expense
|
|
|
151
|
|
|
|
312
|
|
|
Depreciation and amortization
|
|
|
223
|
|
|
|
284
|
|
|
Allowance for doubtful accounts
|
|
|
14
|
|
|
|
143
|
|
|
Loss (gain) on disposal of fixed assets
|
|
|
106
|
|
|
|
(11
|
)
|
|
Changes in net assets and liabilities, net of effects of business acquisition
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
835
|
|
|
|
(123
|
)
|
|
Inventories
|
|
|
(153
|
)
|
|
|
(175
|
)
|
|
Prepaid and other current assets
|
|
|
(147
|
)
|
|
|
151
|
|
|
Trade accounts payable
|
|
|
(218
|
)
|
|
|
(20
|
)
|
|
Trade accounts receivable/payable—related party
|
|
|
(178
|
)
|
|
|
175
|
|
|
Accrued expenses and other
|
|
|
(60
|
)
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,731
|
)
|
|
|
(867
|
)
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(114
|
)
|
|
|
(146
|
)
|
|
Proceeds from disposal of property and equipment
|
|
|
—
|
|
|
|
15
|
|
|
Investment in Chinese joint venture
|
|
|
—
|
|
|
|
1
|
|
|
Investment in Symbio
|
|
|
(900
|
)
|
|
|
—
|
|
|
Proceeds from disposal of Spark stock
|
|
|
300
|
|
|
|
—
|
|
|
Purchases of marketable securities
|
|
|
—
|
|
|
|
(4,775
|
)
|
|
Sales of marketable securities
|
|
|
2,400
|
|
|
|
7,125
|
|
|
Net cash used in business acquisition
|
|
|
—
|
|
|
|
(150
|
)
|
|
Proceeds from disposal of discontinued operations
|
|
|
90
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
1,776
|
|
|
|
2,159
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
138
|
|
|
|
—
|
|
|
Proceeds from employee stock purchase plan and stock option exercises
|
|
|
11
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
149
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
95
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(711
|
)
|
|
|
1,322
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,256
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,545
|
|
|
$
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
33
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Treasury Stock
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 1, 2006
|
|
2,826,003
|
|
$
|
14
|
|
$
|
55,030
|
|
(135,380
|
)
|
|
$
|
(1,502
|
)
|
|
$
|
(43,735
|
)
|
|
$
|
—
|
|
$
|
9,807
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
5,451
|
|
|
—
|
|
|
29
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
29
|
|
|
Issuance of stock for employee stock options
|
|
175
|
|
|
—
|
|
|
1
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
1
|
|
|
Issuance of common stock, options and warrants for deferred acquisition payment
|
|
18,000
|
|
|
—
|
|
|
397
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
397
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
|
—
|
|
|
|
(1,330
|
)
|
|
|
—
|
|
|
(1,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007
|
|
2,849,629
|
|
$
|
14
|
|
$
|
55,769
|
|
(135,380
|
)
|
|
$
|
(1,502
|
)
|
|
$
|
(45,065
|
)
|
|
$
|
—
|
|
$
|
9,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
3,879
|
|
|
—
|
|
|
11
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
11
|
|
|
Stock based compensation expense, stock grants
|
|
16,100
|
|
|
—
|
|
|
35
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
35
|
|
|
Stock based compensation expense, stock options and ESPP
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
105
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
|
—
|
|
|
|
(3,452
|
)
|
|
|
—
|
|
|
(3,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
(3,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2008
|
|
2,869,608
|
|
$
|
14
|
|
$
|
55,931
|
|
(135,380
|
)
|
|
$
|
(1,502
|
)
|
|
$
|
(48,517
|
)
|
|
$
|
105
|
|
$
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
All amounts have been adjusted to reflect the reverse stock split (Note 1)
|
See accompanying notes to the consolidated financial statements.
34
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2008 and 2007
|
1.
|
Description of Business
|
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 customers to
leverage advanced technologies in order to communicate more effectively. eOn’s offerings are built on open architectures that enable adoption of emerging technologies, such as Voice over Internet Protocol (VoIP) and concepts, such as Service
Oriented Architectures (SOA). Whether businesses are looking to leverage the advantages of enterprise IP telephony or advanced contact center technologies, eOn Communications delivers, IP-ready products to improve business performance.
The Company split its common shares in a 5 to 1 reverse stock split effective April 18, 2008. Stock and stock option data for all periods
presented have been adjusted to reflect the reverse stock split.
|
2.
|
Summary of Significant Accounting Policies
|
|
(a)
|
Principles of Consolidation
|
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include the accounts of eOn Communications Corporation, eOn Communications (Beijing) Corporation Limited
(“eOn China”) formed on June 20, 2006, Cortelco China Corporation, and eOn IP Voice, Inc. (“EIPV”) formed on February 23, 2007. All significant inter-company accounts and transactions have been eliminated in
consolidation.
|
(b)
|
Cash and Cash Equivalents
|
All highly liquid investments
with a maturity date of three months or less when purchased are considered to be cash equivalents. At July 31, 2008 there was approximately $263,000 held in foreign bank accounts.
|
(c)
|
Marketable Securities
|
Marketable securities are
classified as available for sale and are reported at fair value. Unrealized holding gains and losses, if any, net of the related income tax effect, are excluded from income and are reported in other comprehensive income. Realized gains and losses
are included in income on the specific identification method.
Accounts receivable are stated net of
allowances for doubtful accounts. The Company typically grants standard credit terms to customers in good credit standing. As a result, the Company must estimate the portion of accounts receivable that are uncollectible and record any necessary
valuation reserves. The Company generally reserves for estimated uncollectible accounts on a customer-by-customer basis, which requires judgment about each individual customer’s ability and intention to fully pay account balances. The Company
makes these judgments based on knowledge of and relationships with customers, and updates estimates on a monthly basis. Any changes in estimate, which can be significant, are included in earnings in the period in which the change in estimate occurs.
Inventories consist of phones, systems,
system cards and component parts for final assembly of our systems and are valued at the lower of cost or market with cost determined utilizing standard cost which approximates the
35
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
first-in, first-out (“FIFO”) method. The Company performs an analysis of slow-moving or obsolete inventory on a quarterly basis and any necessary
valuation reserves, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.
|
(f)
|
Property and Equipment
|
Property and equipment are stated
at cost. Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the assets, generally three to five years. Maintenance and
repair costs are charged to expense as incurred.
Intangibles represent process
technology acquired from Aelix Systems Inc. (Aelix). In accordance with Financial Accounting Standards (“SFAS”) No. 144, “
Accounting for the Impairment or Disposal of Long-lived Assets
,” management of the Company
evaluates the carrying value of intangibles annually or when a possible impairment is indicated. Originally, this amount was recorded as goodwill. During our evaluation for impairment at July 31, 2007, we concluded that the goodwill originally
recorded was instead process technology and had a finite life of approximately five years. Accordingly, the balance in goodwill was reclassified to intangible asset at July 31, 2007. The company recorded amortization of $84,000 in each of the
last two fiscal years, and expects to record approximately $84,000 of amortization in each of the next three years.
|
(h)
|
Stock Compensation Plans
|
Effective August 1, 2006,
the Company adopted the provisions of SFAS No. 123R (“SFAS 123R”),
Share Based Payments,
using the modified prospective method. SFAS 123R requires the measurement and recognition of compensation expense for all share-based
payment awards based on estimated fair values. For share-based payments to non-employees, the Company also considers the provisions of Emerging Issues Task Force (“EITF”) Issue No. 96-18,
Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services
.
On November 10, 2005, the
Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 123R-3,
Transition Election related to Accounting for Tax Effects of Share-Based Payment Awards
(“FSP 123R-3”). The Company has elected to
adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of
the additional paid-in capital pool (“APIC Pool”) related to the tax and consolidated statements of cash flows presentation of the tax effects of employee and director share-based awards that are outstanding upon adoption of SFAS 123R.
The Company generally provides
customers a one year product warranty from the date of purchase. The Company estimates the costs of satisfying warranty claims based on analysis of past claims experience and provide for these future claims in the period that revenue is recognized.
The cost of satisfying warranty claims, which approximates 2% – 3% of product revenues, has historically been comprised of materials and direct labor costs. The Company performs quarterly evaluations of these estimates and any changes in
estimates, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.
36
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets when management is
unable to conclude that it is more likely than not that the asset will be realized.
On August 1, 2007, the Company adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109
(“FIN 48”). Based on management’s evaluation, the Company did not
have any unrecognized tax benefits, and there was no effect on the Company’s opening equity, current operations or cash flows, or its net operating loss carryforwards and related deferred tax valuation allowance as a result of implementing FIN
48. The Company will recognize any tax-related interest and penalties as a component of income tax expense.
The Company’s revenues from its
three 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
|
|
|
|
|
Because the eQueue system is very flexible in its applications, 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 booked quarterly for each maintenance period as provided.
The VoIP telephones can be deployed with either the Millennium or the 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.
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 collectibility is reasonably assured. Generally, revenue is
recognized (1) upon shipment for equipment and software, (2) as work is performed for professional services and (3) in equal periodic amounts over the term of the contract for software and hardware maintenance. The Company’s
revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 104, “
Revenue Recognition
,” and Statement of Position No. 97-2, “
Software Revenue Recognition
.”
The Company follows SFAS No. 128,
“Earnings Per Share,” which requires disclosure of basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted EPS is similar to basic EPS
37
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares, such as options, had been issued. Basic weighted average shares outstanding were 2,725,280 and 2,711,659, for the years ended July 31, 2008 and 2007, respectively. During fiscal years ended
July 31 2008 and 2007, potentially dilutive shares were excluded from the computation of diluted loss per share because the Company has a net loss from operations for the periods and their effect would have been anti-dilutive.
|
(m)
|
Fair Value of Financial Instruments
|
The carrying amounts
of financial instruments such as cash, marketable securities, accounts receivable, accounts payable, and note payable approximate their fair value due to the short term nature of the instruments. The fair value of related party accounts receivable
and related party accounts payable are not practical to estimate based upon the related party nature of the underlying transactions.
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.
SFAS 130, “
Reporting
Comprehensive Income
,” establishes standards for reporting and display of comprehensive income and its components and requires a separate statement to report the components of comprehensive income for each period reported. For the fiscal
year ended July 31, 2008, comprehensive income consists of foreign currency translation adjustments. The functional currency of the Company’s China operations is the Renminbi Yuan. The financial statements of the operations were translated
into United States dollars using year end rates of exchange for the assets and liabilities and average rates of exchange during the year for revenues, costs and expenses. Translation gains and losses were treated as a component of shareholders
equity. Foreign currency transaction gains and losses are included in determining net (loss) income.
|
(p)
|
Research and Development Costs
|
The Company allocates
expenses to Research and Development costs based on headcount that is dedicated to Research and Development activities.
The Company expenses advertising
expenses as incurred. Advertising expenses for fiscal years 2008 and 2007 were not significant.
|
(r)
|
Recently Issued Accounting Standards
|
In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(“SFAS 157”) which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating what impact, if any the adoption of SFAS 157 will have on its consolidated financial statements.
38
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and
Financial Liabilities
(“SFAS 159”). SFAS 159 permits companies to elect to measure eligible financial instruments, commitments and certain arrangements at fair value at specified election dates, with changes in fair value recognized in
earnings at each subsequent reporting period. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations,
(“SFAS No. 141R”). SFAS No. 141R
will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141R will also change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until July 31, 2009. The
Company expects SFAS No. 141R will have an impact on accounting for business combinations once adopted and the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial Statements—An Amendment of ARB No. 51, or SFAS No. 160.
SFAS no. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for the fiscal years beginning on or after December 15, 2008. The Company is
currently evaluating what impact, if any the adoption of SFAS No. 160 will have on its consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS 161”) effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. SFAS 161 requires an entity to provide enhanced disclosures about derivative instruments and hedging activities. The Company does not expect SFAS 161 to have a material impact on its
consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position FAS No. 142-3,
Determination of the Useful
Life of Intangible Assets
(“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement
No. 142. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP
142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is evaluating the potential impact of this FASB Staff Position on its consolidated financial
statements.
In June 2008, the FASB issued EITF No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock
effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. EITF No.07-5 provides guidance for determining whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a material effect on the Company’s consolidated financial statements.
39
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
On February 23, 2007, the
Company’s newly formed subsidiary, 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. The Company accounted for the purchase in accordance with SFAS No. 141, “
Business Combinations
.” A summary of the net assets acquired as
of February 23, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
Current assets acquired
|
|
$
|
114
|
|
|
Property and equipment acquired
|
|
|
153
|
|
|
Current liabilities assumed
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
150
|
|
|
|
|
|
|
|
During the quarter ended April 30, 2008, the Company sold the assets of EIPV for
approximately $90,000. EIPV assets and liability balances are included in assets and liabilities of discontinued operations as of July 31, 2007 and EIPV activities for the twelve months ended July 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
As of July 31,
2007
|
|
|
Accounts receivable, net
|
|
$
|
50
|
|
|
Inventories
|
|
|
34
|
|
|
Prepaid and other assets
|
|
|
35
|
|
|
Property and equipment, net
|
|
|
135
|
|
|
|
|
|
Accounts payable
|
|
|
1
|
|
|
Accrued and other expenses
|
|
|
15
|
|
|
|
|
|
|
|
|
Net assets of discontinued operations
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
July 31, 2008
|
|
|
Revenue
|
|
$
|
43
|
|
|
Cost of revenue
|
|
|
120
|
|
|
Impaired user licenses
|
|
|
28
|
|
|
Inventory obsolescence
|
|
|
39
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(144
|
)
|
|
General and administrative expense
|
|
|
348
|
|
|
Impaired property and equipment
|
|
|
57
|
|
|
Allowance for bad debts
|
|
|
55
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(604
|
)
|
|
Gain on disposal
|
|
|
13
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(591
|
)
|
|
|
|
|
|
|
40
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
During the quarter ended
April 30, 2005, the Company completed its purchase of Aelix Systems Inc. (“Aelix”), for 10,000 shares of eOn common stock valued at $14,100. Aelix was a Bangalore, India based developer of telecommunications systems and applications
which utilize internet protocol (“IP”) technology.
Under the agreement, the Company could issue up to an additional 215,000
shares over the six quarters after the closing date if Aelix were to attain specified product release schedules and eOn were to achieve specified product revenues. As of July 31, 2006, management concluded that the outcome of this contingency
associated with the Aelix acquisition was likely and accordingly, the Company recorded a deferred payment and additional goodwill of $397,000 (see note 2(g)). During July 2007, the Company issued 90,000 shares of common stock, 50,000 fully vested
options to purchase common stock and 75,000 warrants to purchase common stock as final payment for the purchase.
Effective April 1,
2008, the Company closed its engineering facility in India.
|
5.
|
Concentrations of Credit Risk, Major Customers, Major Suppliers and Geographic Information
|
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of cash, marketable securities and
trade accounts receivable. The Company maintains its cash balances with large regional U.S. and foreign financial institutions and has not experienced losses. The Company’s marketable securities are invested in accounts at large national
brokerage firms, which maintain insurance coverage. The Company’s products are sold principally to dealers, value added resellers, national accounts, the U.S. government and foreign telecommunications companies. The Company’s credit risk
is limited principally to trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. No additional risk beyond amounts provided for collection losses is believed inherent in
the Company’s trade accounts receivable.
During fiscal years 2008 and 2007, the Company recognized revenue from the federal
government of $1,386,938, or 20% of total revenue and $2,542,000, or 24% of total revenue, respectively. As of July 31, 2008 and 2007, the Company had receivables from the federal government of $223,000 and $609,000, respectively.
The Company purchases approximately 76% of its Millennium phones, systems and system cards from one contract manufacturer. Although the Company
utilizes another contract manufacturer, a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which could adversely affect operating results. During fiscal years 2008 and 2007, purchases from this vendor totaled
approximately $972,071 and $1,181,000, respectively. As of July 31, 2008 and 2007, the balances payable to this contract manufacturer were $90,000 and $143,000, respectively.
During fiscal year 2008, the Company had revenue in the Peoples Republic of China (“PRC”) of $776,000 or 11.1% of total revenue. During fiscal
year 2007, revenue in the PRC was $1,125,000 or 10.6% of total revenue.
41
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
Marketable securities
consist of the following as of July 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
Cost
|
|
Market
Value
|
|
Cost
|
|
Market
Value
|
|
Municipal bonds
|
|
$
|
1,000
|
|
$
|
1,000
|
|
$
|
3,400
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,000
|
|
$
|
1,000
|
|
$
|
3,400
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The municipal bond investments are comprised solely of taxable auction-rate securities
(“ARS”) with stated maturities ranging from 24-40 years, which are variable-rate debt securities and have a long-term maturity with the interest being reset through Dutch auctions that are typically held every 7, 28, or 35 days. These
securities were rated AAA and are collateralized by student loans guaranteed by the U.S. Department of Education; they have historically traded at par and are callable at par at the option of the issuer. Interest is typically paid at the end of each
auction period.
At April 30, 2008, there was insufficient observable ARS market information available to determine the fair value of
these securities. Management determined that the estimated market value of the Company’s ARS at April 30, 2008 was $925,000, which reflected an approximate temporary impairment of $75,000 to the carrying value of $1,000,000.
In October 2008, the Company received $1,000,000 in cash as full payment for the ARS at par value. During the fourth quarter, the temporary impairment of
$75,000 was reversed.
Inventories consist of the following
as of July 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials and purchased components
|
|
$
|
961
|
|
|
$
|
997
|
|
|
Finished goods
|
|
|
2,759
|
|
|
|
2,428
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,720
|
|
|
|
3,425
|
|
|
Inventory obsolescence reserve
|
|
|
(1,219
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
2,501
|
|
|
$
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Prepaid and Other Current Assets
|
Prepaid and other
current assets consist of the following as of July 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Refundable facility deposits
|
|
$
|
57
|
|
$
|
41
|
|
Prepaid expenses
|
|
|
103
|
|
|
72
|
|
Other
|
|
|
17
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
177
|
|
$
|
118
|
|
|
|
|
|
|
|
|
42
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
|
9.
|
Property and Equipment
|
Property and equipment
consist of the following as of July 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Leasehold improvements
|
|
$
|
350
|
|
|
$
|
384
|
|
|
Equipment
|
|
|
1,572
|
|
|
|
1,578
|
|
|
Furniture and fixtures
|
|
|
375
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,297
|
|
|
|
2,332
|
|
|
Less: accumulated depreciation
|
|
|
(2,121
|
)
|
|
|
(2,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
176
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Accrued Expenses and Other
|
Accrued expenses and
other consist of the following as of July 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Employee compensation
|
|
$
|
288
|
|
$
|
88
|
|
Vacation
|
|
|
38
|
|
|
52
|
|
Deferred income
|
|
|
338
|
|
|
524
|
|
Warranty reserve
|
|
|
82
|
|
|
133
|
|
Professional fees
|
|
|
207
|
|
|
187
|
|
Other
|
|
|
192
|
|
|
221
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,145
|
|
$
|
1,205
|
|
|
|
|
|
|
|
|
FASB Interpretation No. 45, “
Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes
under that guarantee.
The requirements of FIN 45 are applicable to the Company’s product warranty liability. As of July 31, 2008
and 2007, the Company’s product warranty liability recorded in other accrued liabilities was $82,000 and $133,000, respectively. The following table summarizes the activity related to the product warranty liability during fiscal years 2008 and
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of period
|
|
$
|
133
|
|
|
$
|
150
|
|
|
Accruals for warranty liability
|
|
|
(4
|
)
|
|
|
77
|
|
|
Warranty expense
|
|
|
(47
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
82
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
On June 20, 2008, eOn China
issued a note to Hangzhou Nature Opto Company, an unrelated third party, in exchange for RMB 945,000, or approximately $138,000 U.S. dollars. The note payable is non-interest bearing and is due January 19, 2009. See Note 17.
43
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
No income tax benefit from continuing
operations was recorded for the year ended July 31, 2008 and 2007 as management was unable to conclude that it was more likely than not that the income tax benefit would be realized.
No provision has been made for income taxes which may become payable upon distribution of foreign subsidiary’s earnings since management considers
essentially all of these earnings to be permanently invested. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable.
A reconciliation between the income tax (benefit) expense recognized in the Company’s consolidated statements of operations and the income tax
benefit computed by applying the domestic federal statutory income tax rate to loss before income taxes for fiscal years 2008 and 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Income tax benefit at federal statutory rate (35%)
|
|
$
|
(1,208
|
)
|
|
$
|
(465
|
)
|
|
State income taxes, net of federal benefit
|
|
|
(207
|
)
|
|
|
(81
|
)
|
|
Change in valuation allowance
|
|
|
1,274
|
|
|
|
971
|
|
|
Other, net
|
|
|
141
|
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The deferred tax effects of the Company’s principal temporary differences at July 31,
2008 and 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance for doubtful receivables
|
|
$
|
273
|
|
|
$
|
293
|
|
|
Inventories
|
|
|
519
|
|
|
|
481
|
|
|
Basis difference in property and equipment
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
Accrued warranty costs
|
|
|
31
|
|
|
|
52
|
|
|
Accrued expenses and other
|
|
|
62
|
|
|
|
29
|
|
|
Deferred revenue
|
|
|
131
|
|
|
|
177
|
|
|
Net operating loss carryforwards
|
|
|
9,357
|
|
|
|
8,061
|
|
|
Valuation allowance
|
|
|
(10,362
|
)
|
|
|
(9,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax
attributes in future tax returns, the Company has recorded a valuation allowance against its deferred tax assets at July 31, 2008 and 2007.
At July 31, 2008, the Company has federal and state net operating loss carry-forwards of approximately $25,000,000 which expire on various dates through 2027.
44
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
|
13.
|
Stock-Based Compensation
|
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. Incentive stock options are granted only to employees and are issued at prices not less than 100% of 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. Stock bonuses and 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.
Equity Incentive Plans
No grants were made under the
1997 Equity Incentive Plan during fiscal years 2008 and 2007. The board of directors has declared that no future grants will be made under this plan.
During fiscal year 1999, the board of directors authorized up to an aggregate of 400,000 shares of the Company’s common stock for issuance under the 1999 Equity Incentive Plan. During fiscal years 2008, 16,100
fully vested shares of stock were granted to twenty-two non executive employees at no cost to the employee and, on the grant date, had a fair market value of approximately $35,000. During 2007, 10,000 fully vested options were issued under this plan
with an exercise price of $0.00 per share.
During fiscal year 2001, the board of directors authorized up to an aggregate of 100,000 shares
of the Company’s common stock for issuance under the 2001 Equity Incentive Plan. Grants to officers or directors are prohibited under the terms of this plan. During fiscal year 2008, no options were issued under this plan, and during fiscal
year 2007, 1,000 options were issued under this plan with an exercise price of $7.30 per share.
Employee Stock Purchase Plan
During 1999, the board of directors adopted an Employee Stock Purchase Plan, which permits employees to purchase up to 50,000 shares of the Company’s
common stock. The plan was amended in 2005 to increase the number of shares available under the plan to 200,000. 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 fiscal years 2008 and 2007, employees purchased 3,879 and 5,451 shares of common
stock respectively, under this plan. During September 2008, employees purchased 1,280 shares under this plan.
Stock Compensation
Beginning August 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. Under the modified prospective transition
method, prior periods are not restated for the effect of SFAS 123R. Under SFAS 123R, compensation cost is calculated on the date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation
cost is then amortized straight-line over the vesting period. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as expected term, volatility and forfeiture rates to determine the stock options fair value.
The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.
45
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
Determining Fair Value
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical daily closing prices adjusted for expected future
volatility. The Company believes that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The Company uses historical information to calculate 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.
The assumptions used to value option grants and
the Employee Stock Purchase Plan for the years ended July 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Volatility
|
|
107
|
%
|
|
107
|
%
|
|
Expected term (in years)
|
|
6.25
|
|
|
6.25
|
|
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
Risk free interest rate
|
|
1.83
|
%
|
|
4.43% – 4.86
|
%
|
Total stock-based compensation recognized for the year ended July 31, 2008, related to stock
options vested, stock grants and ESPP shares issued during the year, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Classification
|
|
Option
Grants
|
|
Stock
Grants
|
|
ESPP
|
|
Total
|
|
Selling, general and administrative
|
|
$
|
98
|
|
$
|
8
|
|
$
|
2
|
|
$
|
108
|
|
Research and development
|
|
|
12
|
|
|
27
|
|
|
4
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110
|
|
$
|
35
|
|
$
|
6
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2008, the Company has total unrecognized compensation costs of $22,000 related
to unvested stock options outstanding under the Plans. These costs are expected to be recognized over a weighted average period of 1.1 years ending during fiscal year 2010.
46
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
General Stock Option Information
Activity in the Company’s stock option plans during fiscal years 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Shares
Available
for
Grant
|
|
|
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Beginning of year
|
|
87,332
|
|
|
330,728
|
|
|
$
|
15.63
|
|
Granted
|
|
(16,100
|
)
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
120,632
|
|
|
(120,632
|
)
|
|
|
12.72
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
191,864
|
|
|
210,096
|
|
|
$
|
17.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Shares
Available
for
Grant
|
|
|
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Beginning of year
|
|
89,383
|
|
|
328,852
|
|
|
$
|
15.85
|
|
Granted
|
|
(11,000
|
)
|
|
11,000
|
|
|
|
4.95
|
|
Exercised
|
|
—
|
|
|
(175
|
)
|
|
|
5.00
|
|
Cancelled
|
|
8,949
|
|
|
(8,949
|
)
|
|
|
10.95
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
87,332
|
|
|
330,728
|
|
|
$
|
15.63
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the stock options outstanding under the Company’s stock option plans at
July 31, 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
at July 31,
2008
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Exercisable
at July 31,
2008
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$ 0.00 – $ 25.00
|
|
170,669
|
|
5.4 years
|
|
$
|
10.69
|
|
166,434
|
|
$
|
10.80
|
|
$25.01 – $ 50.00
|
|
27,907
|
|
.6 years
|
|
|
40.86
|
|
27,907
|
|
|
40.86
|
|
$50.01 – $ 75.00
|
|
10,920
|
|
1.1 years
|
|
|
54.64
|
|
10,920
|
|
|
54.64
|
|
$75.01 – $125.00
|
|
600
|
|
1.6 years
|
|
|
121.25
|
|
600
|
|
|
121.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,096
|
|
4.6 years
|
|
$
|
17.30
|
|
205,861
|
|
$
|
17.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the Company’s nonvested options during fiscal year 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nonvested
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Beginning Balance
|
|
32,049
|
|
|
$
|
16.35
|
|
Options vested
|
|
(13,143
|
)
|
|
$
|
8.45
|
|
Options cancelled
|
|
(14,671
|
)
|
|
$
|
10.57
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
4,235
|
|
|
$
|
6.23
|
|
|
|
|
|
|
|
|
47
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
The aggregate intrinsic value of both options outstanding and options exercisable as of July 31,
2008 was $0. The aggregate intrinsic value of the 13,143 options which vested during the year ended July 31, 2008 was $0.
Cortelco, Inc. and Cortelco Systems Holding
Corporation
Cortelco, Inc., formerly Cortelco International, Inc., (“CI”) is a subsidiary of Cortelco Systems Holding
Corporation (“CSHC”) and a supplier of Millenium and eQueue peripheral hardware. In addition, on March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco will provide management for all U.S.
operations for eOn. Included in the management services are sales, marketing, product management, engineering, technical support, quality assurance, accounting, and information technology. Charges incurred under this agreement in the fiscal year
ended July 31, 2008 were approximately $192,000 and approximately $26,000 is included in the accounts payable balance at July 31, 2008.
David Lee, the Company’s Chief Executive Officer is a significant shareholder of CSHC. Accounts payable are paid on thirty to sixty day terms. The following represent related party transactions for the each of the fiscal years ended
July 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Payable to CI
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
300
|
|
|
$
|
71
|
|
|
eNterprise product line purchases from CI
|
|
|
98
|
|
|
|
1,264
|
|
|
Existing products and services provided by CI
|
|
|
1,011
|
|
|
|
673
|
|
|
Payments to CI
|
|
|
(1,283
|
)
|
|
|
(1,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
126
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
Cortelco Systems Puerto Rico
Cortelco Systems Puerto Rico (“CSPR”) was a wholly-owned subsidiary of the Company until July 31, 2002, when it was spun off to the shareholders of eOn. David Lee is a significant shareholder of CSPR.
Since the spin-off, the Company has not had significant transactions with CSPR. The following represent related party transactions for each of the fiscal years ended July 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Receivable from CSPR
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9
|
|
|
$
|
—
|
|
Purchases from CSPR
|
|
|
7
|
|
|
|
9
|
|
Payments to CSPR
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
Spark Technologies, Inc.
Aelix and eOn China performed engineering development projects for Spark Technologies, Inc (“Spark”), a California company that is majority owned by David Lee, the Chief Executive Officer and major
shareholder of eOn. On November 1, 2006, the Company entered into a professional services agreement with Spark. Under the terms of the agreement, Spark was charged based upon actual personnel, actual operating costs and allocated general
overhead based upon pro rata head count, plus a margin of 10% for these services. Prior to this
48
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
agreement, under the terms of an engineering development agreement, Aelix billed Spark for personnel and operating costs directly attributable to engineering
work on Spark projects and allocated general overhead based upon pro rata head count. On April 1, 2008, an outsourcing services transfer agreement was entered into and eOn transferred all of its rights and obligations under the professional
services agreement with Spark to Symbio Investment Corporation. eOn holds an equity interest in Symbio. The following represent related party transactions for each of the fiscal years ended July 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Receivable from Spark
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
108
|
|
|
$
|
27
|
|
|
Engineering development and costs
|
|
|
370
|
|
|
|
759
|
|
|
Payments received from Spark
|
|
|
(344
|
)
|
|
|
(678
|
)
|
|
Payables offset against accounts receivable
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Payable to Spark
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
37
|
|
|
$
|
1
|
|
|
Deposit received from Spark
|
|
|
—
|
|
|
|
71
|
|
|
Operating costs billed to eOn
|
|
|
97
|
|
|
|
—
|
|
|
Payments to Spark
|
|
|
|
|
|
|
(35
|
)
|
|
Balance offset against receivable from Spark
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
During July 2007, Spark gave notice of its intent to terminate the engineering development work
performed by Aelix in India. As a result of this termination, the Company reduced the balance due from Spark by $26,000. This credit represents unamortized leasehold costs as of January 2008 and a facility lease deposit, offset by lost Aelix profits
and rent through January 2008.
Symbio Group
On August 1, 2007 and August 27, 2007, the Company made strategic investments in Symbio Group (“Symbio”) of $500,000 and $400,000 for 250,000 and 200,000 shares, respectively, or approximately 3% of Symbio Investment
Corporation. Symbio is a leading China-based provider of software development, testing, and globalization outsourcing services to multinational companies. The investment is expected to establish eOn as the preferred provider of telephony and contact
center solutions for Symbio’s outsourcing engagements requiring customer interaction management. eOn also gains the ability to provide Symbio outsourcing services to its customer base. Symbio is a privately held entity and the Company accounts
for its 3% investment by the cost method.
At the time of the second investment in Symbio for $400,000, the Company received a put option
from David Lee, effective beginning January 1, 2008 and expiring January 1, 2011. The put option allows the Company to sell to David Lee a maximum aggregate of 200,000 shares of its investment in Symbio for a per share price of $2.00.
In consideration of the put option, in the event that the 200,000 shares are sold without exercise of the put option before
January 1, 2011, the Company has agreed to pay David lee 50% of the proceeds in excess of $1,000,000.
In conjunction with the
purchase of these shares, David Lee was appointed to the board of directors of Symbio and has been elected chairman.
49
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
Symbio currently shares office space and personnel with eOn in China and is billed for expenses
attributable to Symbio’s business. The following represent related party transactions for the fiscal year ended July 31, 2008 (in thousands):
|
|
|
|
|
|
|
Receivable from Symbio
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
Billings & Accruals for operating expenses
|
|
|
128
|
|
|
Payments received from Symbio
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
84
|
|
|
|
|
|
|
|
|
15.
|
Employee Savings Plan
|
Substantially all U.S.
employees of the Company can participate in the eOn Communications Corporation Profit Sharing Savings Plan, which is qualified under Section 401 of the Internal Revenue Code. Under the provisions of the plan, all participants may contribute up
to 60% of their compensation, subject to limitations established by the Internal Revenue Service. The Company may contribute a matching contribution of not less than 50% of the employee contributions up to 6% of the employee’s compensation. The
Company may also provide special discretionary contributions equal to a percentage of an employee’s annual compensation and/or an amount determined by management. During fiscal years 2008 and 2007, contributions made by the Company totaled
$35,000 and $57,000, respectively.
|
16.
|
Commitments and Contingencies
|
The Company is obligated under
non-cancelable operating lease agreements for its primary warehouse, office facilities and certain office equipment. Future minimum annual lease payments totaling $309,000 under non-cancelable operating lease agreements with remaining terms greater
than one year are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
July 31,
|
|
2009
|
|
$
|
183
|
|
2010
|
|
$
|
108
|
|
2011
|
|
$
|
18
|
|
|
|
|
|
|
Total
|
|
$
|
309
|
|
|
|
|
|
Rent expense for operating leases for the years ended July 31, 2008 and 2007 totaled $388,000
and $404,000, respectively.
On March 18, 2007, the Company’s lease for 40,000 sq. ft. of office and warehouse space in Kennesaw,
Georgia expired. Effective April 1, 2007, the lease on the existing facility was amended to extend the lease for three years and reduce the leased square footage to 11,321 sq. ft., and provided for rent expense of approximately $8,000 per
month.
The Company entered into leases for approximately 4,171 sq. ft. of office space in Beijing China. The lease terms are 32 months
ending January 6, 2009. The monthly rent expense is approximately $7,000.
50
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
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 shares 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 is 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. On October 27, 2008, a new lease was signed for 289.5 square meters of office space in Shanghai. The new lease has a term of six months with monthly
rent of approximately $6,000. Rentals under the Agreement and the October 27
th
lease are not included in the 2009 commitments in the operating
lease schedule above.
The Company leases approximately 3,780 square feet of office space in San Jose, California. This joint lease with
Spark Technologies has monthly rent of approximately $3,600 and expires December 31, 2010.
At July 31, 2007, the Company had
outstanding commitments for inventory purchases under open purchase orders of $196,000.
|
(c)
|
Spark Purchase Option
|
On March 31, 2006, the Company
entered into an Acquisition Option Agreement (“the Agreement”) with Spark Technology Corporation. Spark designs and markets accessories for wireless telephones. Its primary product, CellStik™, is a small memory device that allows the
user to backup, enter, edit and transfer their cell phone contacts. Under the terms of the Agreement, the Company converted notes receivable of $300,000 to 300,000 shares or 3% of Spark Common Stock and had the option to purchase all remaining
outstanding Spark Common Stock, including options, by issuing 8,665,000 (or 1,733,000 after the effect of the Company’s 1:5 reverse stock split) shares of the Company’s common stock. In March 2008, after evaluating the current status of
Spark and the option, the eOn Board of Directors decided to not exercise the option.
The Agreement further provided that in the event the
Company did not exercise this option, the Company could require Spark or David Lee, the Company’s Chief Executive Officer and major shareholder, to repurchase the Company’s Spark shares for $300,000 within 60 days. David Lee purchased the
shares and paid the Company $300,000 on June 13, 2008.
On December 11, 2007, the
Company executed a definitive Agreement and Plan of Merger to acquire Cortelco Systems Holding Corporation (“Cortelco”) for up to $11,000,000 in stock and cash. Cortelco is a privately held company that designs and sells telephones in the
US and Latin America. David Lee, the Company’s Chief Executive Officer is the controlling shareholder of Cortelco.
The companies are
discussing a possible restructuring of the merger agreement, but no revised agreement has been executed. There is no assurance that a new agreement will be reached or that the merger transaction will be closed.
On March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco will provide 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 technology.
51
EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended July 31, 2008 and 2007
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.
On August 12, 2008, Hangzhou East
Software Park (“Hangzhou”), Symbio and eOn formed Symbio-ESPark Business Processing Outsourcing Joint Venture (the “Joint Venture”) located in Hangzhou, China.
On September 9, 2008, eOn invested RMB900,000 (approximately $136,000) into the Joint Venture for a 9% ownership interest in the Joint Venture. On June
20, 2008, the Company received approximately $138,000 from an entity related to Hangzhou and executed a promissory note due January 19, 2009 (Note 11).
52
|
ITEM 8.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
None.
|
ITEM 8A.
|
CONTROLS AND PROCEDURES.
|
Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of
our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such
evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under Securities Exchange Act of 1934, as amended (the Exchange Act).
As
of July 31, 2008, management, with the assistance of a professional accounting firm (not our auditors), assessed the effectiveness of the Company’s internal control over financial reporting based on criteria for effective internal control
over financial reporting established in
Internal Control – Integrated Framework
, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the
Company’s internal control over financial reporting as of July 31, 2008 is effective.
This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit the Corporation to provide only management’s report in this annual report.
|
ITEM 8B.
|
OTHER INFORMATION.
|
There were no events that
occurred in the fourth quarter that were not previously disclosed in a form 8-K.
53
PART III
|
ITEM 9.
|
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 10(a) OF THE EXCHANGE ACT.
|
Directors and Executive Officers
The Board of
Directors of the Company currently consists of five directors divided into three classes designated Class I, Class II and Class III. A single class of directors is elected each year at the annual meeting. Subject to transition provisions, each class
of directors serves until the third annual meeting of stockholders after his/her election or until a successor has been elected and duly qualified.
The following table sets forth information about our Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
AGE
|
|
POSITION
|
|
DESIGNATED
CLASS
|
|
TERM
EXPIRATION
|
|
David S. Lee
|
|
71
|
|
Chairman and Chief Executive Officer and Director
|
|
CLASS II
|
|
2010
|
|
|
|
|
|
|
|
Stephen R. Bowling
|
|
66
|
|
Chief Financial Officer and Director
|
|
CLASS III
|
|
2009
|
|
|
|
|
|
|
|
Robert P. Dilworth
|
|
66
|
|
Director
|
|
CLASS II
|
|
2010
|
|
|
|
|
|
|
|
Frederick W. Gibbs
|
|
76
|
|
Director
|
|
CLASS III
|
|
2009
|
|
|
|
|
|
|
|
W. Frank King
|
|
68
|
|
Director
|
|
CLASS I
|
|
2008
|
DAVID S. LEE
, became the Chairman of the Board of eOn in 1991 and became President and
Chief Executive Officer in November 2003. Previously Mr. Lee served as Chief Executive Officer from May 2000 through August 2001. Mr. Lee is a director of ESS Technology, Inc., a provider of semiconductor and software solutions for
multimedia applications; iBasis, Inc., a telecommunications company; and Linear Technology Corporation, a semiconductor company. Mr. Lee is also a Regent of the University of California. From 1985 to 1988, Mr. Lee was President and
Chairman of Data Technology Corporation, a computer peripheral company. Prior to 1985, he was Group Executive and Chairman of the Business Information Systems Group of ITT Corporation, a diversified company, and President of ITT Qume, formerly Qume
Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded Qume Corporation and was its Executive Vice President until the company was acquired by ITT Corporation in 1978. Mr. Lee received an M.S. from North Dakota
State University and a B.S. and an honorary doctorate from Montana State University.
STEPHEN R. BOWLING
, became a director of eOn
in 1993 and Chief Financial Officer in November 2003. From 1994 to 1997, he was the President of eOn and, from 1994 to 1998, he was the Chief Executive Officer of eOn. In 1993, Mr. Bowling became a director of Cortelco Systems Holding
Corporation. He was the President and Chief Executive Officer of Cortelco Systems Holding Corporation from 1993 to April 2004. He was the President and Chief Executive Officer of eManage.com, an internet web site service company in 1999 and 2000.
eManage.com filed for Chapter 11 bankruptcy in November 2000. Mr. Bowling received an M.B.A. from Stanford University and a B.A. from Williams College.
ROBERT P. DILWORTH
, became a director of eOn in 1998. He served on the board of Metricom Inc., a wireless data communications company, and was its President from 1987 to 1997, its Chief Executive Officer from
1987 to 1998, and its Chairman from 1997 to 2000. He is a director of Amber Systems, a wireless site provider and Amphbus, Inc., a semiconductor design company. Mr. Dilworth is currently Chairman and CEO of GraphOn Corporation, a computer
software company. Mr. Dilworth received a B.S. from Los Angeles State University.
FREDERICK W. GIBBS
, became a director of eOn
in 2002. In 1988, Mr. Gibbs founded Mulberry Hill Enterprises, a consulting firm specializing in telecommunications and electronics, business acquisition analysis, and international business. Previously, Mr. Gibbs served in various
management and consultant roles for
54
International Telephone and Telegraph Corporation (ITT) over a 23 year period, including Executive Vice President of ITT and Senior Group Executive of
Telecommunications and Electronics, a division of ITT Corporation. Mr. Gibbs also served on the boards of CMC Industries and ACT Manufacturing. Currently, Mr. Gibbs is a practicing attorney. Mr. Gibbs earned a B.A. from Alfred
University and a J.D. from Rutgers University.
W. FRANK KING
, became a director of eOn in 1998. Mr. King is also a director of
iBasis, Inc., a telecommunications company; Aleri Inc., a software company; and NMS Communications, a telecommunications company. Dr. King earned a Ph.D. from Princeton University, an M.S. from Stanford University and a B.S. from the University
of Florida.
Board of Directors and Committee Meetings
During fiscal year 2008, 6 meetings of the Board of Directors were held. Each of the directors during the term of their tenure attended or participated in at least 75% of the aggregate of (i) the total number of
meetings of the Board of Directors and (ii) the total number of meetings held by all committees of the Board of Directors on which such director served during the year. The Board of Directors does have an Audit Committee, a Compensation
Committee and a Corporate Governance and Nominating Committee, the members of which are appointed by the Board of Directors. The Board of Directors established an Independent Committee of the Board of Directors, which met 5 times during fiscal year
2008.
Audit Committee
The Audit
Committee consists of Robert P. Dilworth, W. Frank King, and Frederick W. Gibbs. The Audit Committee makes recommendations to the Board regarding the selection of independent auditors, reviews the scope and results of the audit engagement, approves
the fees for the auditors, reviews and evaluates eOn’s internal control functions, and reviews all potential conflict of interest situations. See “Item 12. Certain Relationships and Related Party Transactions.” The Audit Committee has
adopted a written charter in accordance with Section 3(a) (58) (A) of the Securities Exchange Act of 1934. The Board of Directors has determined that Mr. Dilworth is an “audit committee financial expert” as defined in
Item 401(h) of Regulation S-K. Mr. Dilworth and each of the other members of this committee is an “independent director” as defined in Rule 4200 of the Marketplace Rules of the National Association of Securities Dealers, Inc. The
Audit Committee met 3 times during fiscal year 2008.
Compensation Committee
The Compensation Committee consists of Robert P. Dilworth, W. Frank King, and Frederick W. Gibbs. The Compensation Committee reviews, determines, and
establishes the salaries, bonuses and other compensation of the Company’s executive officers and administers the Company’s Equity Incentive Plans in which executive officers and other key employees participate. The Compensation Committee
met 2 times during fiscal year 2008.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee (the “CGN Committee”) consists of Robert P. Dilworth, W. Frank King, and Frederick W. Gibbs.
The CGN Committee has the responsibility for matters relating to the organization and membership of the board of directors and for issues relating to the Company’s corporate governance. The CGN Committee did not meet during fiscal year 2008.
The CGN Committee does not have a separate charter. The Board of Directors will consider all potential candidates for nomination by the
Board of Directors for election as directors who are recommended by the Company’s stockholders, directors, officers and employees. All director recommendations must be made in accordance with the provisions of Section 5(b) of our bylaws.
All director recommendations should be sent to the
55
CGN Committee, c/o Corporate Secretary. The CGN Committee will screen all potential director candidates in the same manner, regardless of the source of the
recommendation. The CGN Committee’s review typically will be based on the written materials provided with respect to a potential director candidate. The CGN Committee will evaluate and determine whether a potential candidate meets our minimum
qualifications and specific qualities and skills for directors and whether requesting additional information or an interview is appropriate.
The Board of Directors has adopted the following series of minimum qualifications and specific qualities and skills for our directors, which will serve a the basis upon which potential director candidates are evaluated by the CGN Committee:
|
|
•
|
|
Directors should possess the highest personal and professional ethics, integrity and values.
|
|
|
•
|
|
Directors should have expertise and experience at policy-making levels in areas that are relevant to our business.
|
|
|
•
|
|
Directors should have, or demonstrate an ability and willingness to acquire in short order, a clear understanding of the fundamental aspects of our business.
|
|
|
•
|
|
Directors should be committed to representing the long-term interests of our stockholders.
|
|
|
•
|
|
Directors should be willing to devote sufficient time to carry out their duties and responsibilities effectively and should be committed to serving on the Board of
Directors for an extended period of time.
|
|
|
•
|
|
Directors should offer their resignation in the event of any significant change in their personal circumstances, including a change in their principal job
responsibilities.
|
Compensation of Directors
Salaried officers of the Company or its subsidiaries do not receive additional compensation for serving as members of the Board of Directors. No additional compensation is paid if a full-time officer serves on any
committee of the Board of Directors.
Annual cash payments of $15,000 are paid to each non-employee serving as a member of the Board of
Directors. Directors are also entitled to reimbursement of expenses incurred to attend meetings. Non-employees serving as members of the Board of Directors are eligible to receive stock option grants under eOn’s 1999 Equity Incentive Plan (the
“1999 Plan”), which was adopted by the Board of Directors and approved by a majority of stockholders in April 1999. As of September 30, 2008, there were three non-employee directors eligible to participate in the 1999 Plan: Robert P.
Dilworth, W. Frank King, and Frederick W. Gibbs. During fiscal year 2008, there were no options to purchase common stock issued to non-employee directors.
In order to recruit and retain qualified directors, the Board’s intent is to make annual grants of stock options to each director. Exercise prices will be equal to the fair market value on the date of grant. Each
stock option will become exercisable one year following the date of grant and expire ten years from the date of grant. Options granted under the 1999 Plan to directors may be exercised only if the holder has been in continuous service on the Board
of Directors at all times since the date of the grant of the option.
Stockholder Communications
Stockholders may communicate with the Board of Directors or any individual director regarding any matter relating to the Company that is within the
responsibilities of the Board of Directors. Stockholders, when acting solely in such capacity, should send their communications to the Board of Directors or an individual director c/o Corporate Secretary, 185 Martinvale Lane, San Jose, California
95119. The Corporate Secretary will discuss with the chairman of the Board or the individual director whether the subject matter of a stockholder communication is within the responsibilities of the Board of Directors. The Corporate Secretary will
forward a stockholder communication to the Chairman of the Board or individual director if such person determines that the communication meets this standard.
56
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers and the
beneficial owners of more than 10% of the outstanding shares of the Company’s common stock (the “Reporting Persons”) file initial reports of, and subsequent reports of changes in, beneficial ownership of the common stock with the
Securities and Exchange Commission (the “SEC”). The Reporting Persons are required to furnish the Company with copies of all Section 16(a) reports filed with the SEC. Based solely on the Company’s review of the copies of such
reports and written representations from certain Reporting Persons furnished to the Company, the Company believes that the Reporting Persons complied with all applicable Section 16(a) filing requirements during fiscal 2008.
The Company has adopted a Code of Ethics that applies to all employees. We intend to satisfy the disclosure requirement under Item 9 of Form 10-KSB
regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our investor relations website—investor.eoncc.com.
|
ITEM 10.
|
EXECUTIVE COMPENSATION.
|
The following table sets
forth certain information concerning compensation earned for the fiscal years ended July 31, 2008, 2007, and 2006, by the Company’s Chief Executive Officer, and by executive officers who earned more than $100,000 in salary and bonus during
fiscal 2008 (the “named executive officers”).
SUMMARY COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
|
Long-Term
Compensation
Awards
|
|
All Other
Compensation
($)
|
|
|
|
|
Annual Compensation
|
|
Securities
Underlying
Options
|
|
|
|
|
Salary
|
|
Bonus
|
|
|
|
David S. Lee (1)
|
|
2008
|
|
$
|
157,500
|
|
$
|
—
|
|
—
|
|
|
|
|
|
President; Chief Executive Officer
|
|
2007
|
|
$
|
95,192
|
|
$
|
—
|
|
—
|
|
$
|
1,640
|
(2)
|
|
|
|
2006
|
|
$
|
—
|
|
$
|
10,000
|
|
50,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Stephen R. Bowling (3)
|
|
2008
|
|
$
|
213,431
|
|
$
|
—
|
|
—
|
|
$
|
2,944
|
(4)
|
|
Chief Financial Officer; Secretary
|
|
2007
|
|
$
|
225,000
|
|
$
|
—
|
|
—
|
|
$
|
4,125
|
(5)
|
|
|
|
2006
|
|
$
|
225,000
|
|
$
|
10,000
|
|
50,000
|
|
$
|
3,386
|
(6)
|
|
|
|
|
|
|
|
|
Mitch C. Gilstrap (7)
|
|
2008
|
|
$
|
91,903
|
|
$
|
—
|
|
—
|
|
$
|
1,719
|
(8)
|
|
Vice President; Chief Operating Officer
|
|
2007
|
|
$
|
135,000
|
|
$
|
—
|
|
—
|
|
$
|
2,153
|
(9)
|
|
|
|
2006
|
|
$
|
135,000
|
|
$
|
28,305
|
|
34,000
|
|
$
|
2,165
|
(10)
|
|
|
|
|
|
|
|
|
Vijay Sharma (11)
|
|
2008
|
|
$
|
196,923
|
|
$
|
—
|
|
—
|
|
$
|
2,419
|
(12)
|
|
Chief Technology Officer
|
|
2007
|
|
$
|
200,000
|
|
$
|
—
|
|
—
|
|
$
|
2,413
|
(13)
|
|
|
|
2006
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Troy E. Lynch (14)
|
|
2008
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
President eOn Asia
|
|
2007
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
|
|
2006
|
|
$
|
32,365
|
|
$
|
112,500
|
|
—
|
|
$
|
—
|
|
|
(1)
|
On January 1, 2007, the Company began paying an annual salary of $165,000. On June 16, 2008, Mr. Lee’s salary was reduced to $100,000.
|
|
(2)
|
Consists of $1,640 of term insurance premiums paid by the Company.
|
|
(3)
|
On April 1, 2005, the Company increased annual compensation from $140,000 to $225,000. On June 16, 2008, Mr. Bowling’s salary was reduced to $125,000.
|
|
(4)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $944 of term insurance premiums paid by the Company.
|
57
|
(5)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $2,125 of term insurance premiums paid by the Company.
|
|
(6)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $1,386 of term life insurance premiums paid by the Company.
|
|
(7)
|
Mr. Gilstrap served as Vice President and Chief Operating Officer until April 1, 2008.
|
|
(8)
|
Consists of $923 in matching contributions to the Company’s 401(k) plan, $796 in term life insurance premiums paid by the Company.
|
|
(9)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $153 of term life insurance premiums paid by the Company.
|
|
(10)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $165 of term life insurance premiums paid by the Company.
|
|
(11)
|
Appointed Chief Technology Officer of the Company on October 23, 2006 and served until March 31, 2008.
|
|
(12)
|
Consists of $1,908 in matching contributions to the Company’s 401(k) plan and $511 of term life insurance premiums paid by the Company.
|
|
(13)
|
Consists of $2,000 in matching contributions to the Company’s 401(k) plan and $413 of term life insurance premiums paid by the Company.
|
|
(14)
|
Acted as President and Chief Executive Officer during fiscal year 2002, 2003 and from August 1, 2003 thru November 7, 2003.
|
Stock Option Grants In Fiscal Year 2008
During
fiscal year 2008, no options to purchase shares of the Company’s common stock were issued to directors or executive officers.
Aggregated Option
Exercises in Fiscal 2008 and Fiscal Year-End Option Values
The following table sets forth, for the named executive officers, the shares
acquired and the value realized on each exercise of stock options during the year ended July 31, 2008, and the number and value of securities underlying unexercised options held by the named executive officers at July 31, 2008. Options
generally vest at either a rate of (1) 12.5% six months after the grant date and equal monthly installments thereafter over a 42 month period, or (2) 25% one year after the grant date and equal monthly installments thereafter over a three
year period. These options have a term of 10 years. The value of unexercised in-the-money options have been calculated using the closing price of the Company’s Common Stock on July 31, 2008 of $0.70.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Shares
Acquired
On
Exercise
|
|
Value
Realized
|
|
Number of Securities Underlying
Unexercised Options
|
|
Value of Unexercised In-The-Money
Options
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
David S. Lee
|
|
—
|
|
—
|
|
33,333
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Stephen R. Bowling
|
|
—
|
|
—
|
|
20,499
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
ITEM 11.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
The following table sets forth information regarding the beneficial ownership of shares of our Common Stock as of September 30, 2008. The table shows
ownership by:
|
|
•
|
|
Each person or entity known to us to beneficially own five percent (5%) or more of the shares of our outstanding stock;
|
|
|
•
|
|
Each of our Named Executive Officers;
|
58
|
|
•
|
|
Each nominee for director, if such person is not currently a director or executive officer; and
|
|
|
•
|
|
All of our directors, executive officers, and director nominees as a group.
|
This information is based on information received from or on behalf of the named individuals. The column entitled “Options” consists of shares
of common stock subject to options exercisable or currently exercisable within 60 days of September 30, 2008, which are deemed to be outstanding for the purpose of computing the percentage ownership of the person holding the options. As of
September 30, 2008, eOn had 2,735,508 shares outstanding.
Unless otherwise indicated, the principal address of each of the
stockholders below is: c/o eOn Communications Corporation, 185 Martinvale Lane, San Jose, California 95119. Except as otherwise indicated in the footnotes to this table, and subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of our Common Stock beneficially owned by them.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Principal Position
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Options
|
|
Percent of
Class
|
|
|
David S. Lee
|
|
President and Chairman of the Board
|
|
713,781
|
(1)
|
|
33,333
|
|
26.13
|
%
|
|
|
|
|
|
|
|
Stephen R. Bowling
|
|
Chief Financial Officer, Secretary and Director
|
|
6,550
|
(2)
|
|
20,499
|
|
*
|
|
|
|
|
|
|
|
|
Robert P. Dilworth
|
|
Director
|
|
—
|
|
|
24,406
|
|
*
|
|
|
|
|
|
|
|
|
Frederick W. Gibbs
|
|
Director
|
|
—
|
|
|
18,000
|
|
*
|
|
|
|
|
|
|
|
|
W. Frank King
|
|
Director
|
|
2,000
|
|
|
28,006
|
|
*
|
|
|
|
|
|
|
|
|
All Directors and executive officers as a group (6 persons)
|
|
|
|
722,331
|
|
|
124,244
|
|
29.60
|
%
|
|
(1)
|
Consists of 632,586 shares held directly by David S. Lee, 45,998 shares held by the Lee Family Trust, 35,197 shares held by Cortelco Systems Puerto Rico, and 33,333 options
exercisable within 60 days of September 30, 2008.
|
|
(2)
|
Consists of 6,550 shares held directly and 20,499 options exercisable within 60 days of September 30, 2008.
|
The following table summarizes the securities authorized for issuance under the Company’s equity compensation plans as of July 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants,
and
rights
|
|
Weighted-
average exercise
price of
outstanding
options,
warrants, and
rights
|
|
Number of
securities
remaining
available for
future issuance
under plan
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
1997 Equity Incentive Plan
|
|
15,690
|
|
$
|
25.77
|
|
—
|
|
1999 Equity Incentive Plan
|
|
169,593
|
|
$
|
18.15
|
|
129,963
|
|
1999 Employee Stock Purchase Plan
|
|
1,280
|
|
$
|
0.98
|
|
70,930
|
|
Equity compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
2001 Equity Incentive Plan
|
|
24,813
|
|
$
|
6.12
|
|
67,997
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
211,376
|
|
$
|
17.20
|
|
268,890
|
|
|
|
|
|
|
|
|
|
59
The 2001 Equity Incentive Plan contains provisions similar to the 1999 Equity Incentive Plan, with the
notable exception that grants to officers and directors are prohibited.
|
ITEM 12.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
|
Cortelco,
Inc. and Cortelco Systems Holding Corporation
Cortelco, Inc., (“CI”) is a subsidiary of Cortelco Systems Holding Corporation
(“CSHC”) and a supplier of Millenium and eQueue peripheral hardware. In addition, on March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco will provide 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 technology. Charges incurred under this agreement in the fiscal year ended July 31,
2008 were approximately $192,000 and approximately $26,000 is included in the accounts payable balance at July 31, 2008.
David Lee,
the Company’s Chief Executive Officer is a significant shareholder of CSHC. Accounts payable are paid on thirty to sixty day terms. The following represent related party transactions for each of the fiscal years ending July 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Payable to CI
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
300
|
|
|
$
|
71
|
|
|
eNterprise product line purchases from CI
|
|
|
98
|
|
|
|
1,264
|
|
|
Existing products and services provided by CI
|
|
|
1,011
|
|
|
|
673
|
|
|
Payments to CI
|
|
|
(1,283
|
)
|
|
|
(1,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
126
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
Cortelco Systems Puerto Rico
Cortelco Systems Puerto Rico (“CSPR”) was a wholly-owned subsidiary of the Company until July 31, 2002, when it was spun off to the shareholders of eOn. David Lee is a significant shareholder of CSPR.
Since the spin-off, the Company has not had significant transactions with CSPR. The following represent related party transactions for each of the fiscal years ending July 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Receivable from CSPR
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9
|
|
|
$
|
—
|
|
Purchases from CSPR
|
|
|
7
|
|
|
|
9
|
|
Payments to CSPR
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
60
Spark Technologies, Inc.
Aelix and eOn China performed engineering development projects for Spark Technologies, Inc (“Spark”), a California company that is majority owned by David Lee, the Chief Executive Officer and major
shareholder of eOn. On November 1, 2006, the Company entered into a professional services agreement with Spark. Under the terms of the agreement, Spark was charged based upon actual personnel, actual operating costs and allocated general
overhead based upon pro rata head count, plus a margin of 10% for these services. Prior to this agreement, under the terms of an engineering development agreement, Aelix billed Spark for personnel and operating costs directly attributable to
engineering work on Spark projects and allocated general overhead based upon pro rata head count. On April 1, 2008, an outsourcing services transfer agreement was entered into and eOn transferred all its rights and obligations under the
professional services agreement with Spark to Symbio Investment Corporation. eOn holds an equity interest in Symbio. The following represent related party transactions for each of the fiscal years ending July 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Receivable from Spark
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
108
|
|
|
$
|
27
|
|
|
Engineering development and costs
|
|
|
370
|
|
|
|
759
|
|
|
Payments received from Spark
|
|
|
(344
|
)
|
|
|
(678
|
)
|
|
Payables offset against accounts receivable
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Payable to Spark
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
37
|
|
|
$
|
1
|
|
|
Deposit received from Spark
|
|
|
—
|
|
|
|
71
|
|
|
Operating costs billed to eOn
|
|
|
97
|
|
|
|
—
|
|
|
Payments to Spark
|
|
|
|
|
|
|
(35
|
)
|
|
Balance offset against receivable from Spark
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
During July 2007, Spark gave notice of its intent to terminate the engineering development work
performed by Aelix in India. As a result of this termination, the Company reduced the balance due from Spark by $26,000. This credit represents unamortized leasehold costs as of January 2008 and a facility lease deposit, offset by lost Aelix profits
through October 2007 and rent through January 2008.
On March 31, 2006, the Company entered into an Acquisition Option Agreement
(“the Agreement”) with Spark Technology Corporation. Spark designs and markets accessories for wireless telephones. Its primary product, CellStik™, is a small memory device that allows the user to backup, enter, edit and transfer
their cell phone contacts. Under the terms of the Agreement, the Company converted notes receivable of $300,000 to 300,000 shares or 3% of Spark Common Stock and had the option to purchase all remaining outstanding Spark Common Stock, including
options, by issuing 8,665,000 (or 1,733,000 after the effect of the Company’s 1:5 reverse stock split) shares of the Company’s common stock. In March 2008, after evaluating the current status of Spark and the option, the eOn Board of
Directors decided to not exercise the option.
The Agreement further provided that in the event the Company did not exercise this option,
the Company could require Spark or David Lee, the Company’s Chief Executive Officer and major shareholder, to repurchase the Company’s Spark shares for $300,000 within 60 days. David Lee purchased the shares and paid the Company $300,000
on June 13, 2008.
61
Symbio Group
On August 1, 2007 and August 27, 2007, the Company made strategic investments in Symbio Group (“Symbio”) of $500,000 and $400,000 for 250,000 and 200,000, respectively, shares or approximately 3% of Symbio Investment
Corporation. Symbio is a leading China-based provider of software development, testing, and globalization outsourcing services to multinational companies. The investment is expected to establish eOn as the preferred provider of telephony and contact
center solutions for Symbio’s outsourcing engagements requiring customer interaction management. eOn also gains the ability to provide Symbio outsourcing services to its customer base. Symbio is a privately held entity and the Company accounts
for its 3% investment by the cost method.
At the time of the second investment in Symbio for $400,000, the Company received a put option
from David Lee, effective beginning January 1, 2008 and expiring January 1, 2011. The put option allows the Company to sell to David Lee a maximum aggregate of 200,000 shares of its investment in Symbio for a per price share 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, 2011, the Company has agreed to pay David Lee 50% of the proceeds in excess of $1,000,000.
In conjunction with the
purchase of these shares, David Lee was appointed to the board of directors of Symbio and has been elected chairman.
Symbio currently
shares office space and personnel with eOn in China and is billed for expenses attributable to Symbio’s business. The following represents related party transactions for the fiscal year ended July 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
2008
|
|
|
Receivable from Symbio
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
Billings & Accruals for operating expenses
|
|
|
128
|
|
|
Payments received from Symbio
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
84
|
|
|
|
|
|
|
|
|
(A)
|
(1) Financial Statements
|
The following
information appears in Item 7 of Part II of this Report:
|
|
•
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
•
|
|
Consolidated Balance Sheets as of July 31, 2008 and 2007
|
|
|
•
|
|
Consolidated Statements of Operations for the Years Ended July 31, 2008 and 2007
|
|
|
•
|
|
Consolidated Statements of Cash Flows for the Years Ended July 31, 2008 and 2007
|
|
|
•
|
|
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended July 31, 2008 and 2007
|
|
|
•
|
|
Notes to Consolidated Financial Statements
|
The exhibits listed in the Exhibit Index
following the signature page of this report are filed as part of this report or are incorporated by reference herein.
62
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|
Audit Fees
Audit Fees represent aggregate fees billed for professional services rendered in connection with the audit of the Company’s annual
financial statements and for reviews of the financial statements included in our Quarterly Reports on Form 10-Q/10-QSB. The aggregate fees billed for professional services rendered for the audit and review of the Company’s annual financial
statements was approximately $118,000 for each of the years ended July 31, 2008 and 2007.
Audit Related Fees
Audit Related Fees represent aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the
performance of the audit or review of the Company’s financial statements that are not included under the caption “Audit Fees” above. There were no audit related fees billed by GHP Horwath, P.C. for fiscal years ended 2008 or 2007.
Tax Fees
Tax Fees represent aggregate
fees billed for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning. There were no tax fees billed by GHP Horwath, P.C. for fiscal years ended 2008 or 2007.
All Other Fees
All Other Fees represent aggregate
fees billed for all other products and services provided by the principal accountant not otherwise disclosed above. There were no other fees from GHP Horwath, P.C. for services rendered to the Company, other than for services described above, for
the years ended July 31, 2008 or 2007.
The audit committee has adopted a policy for the pre-approval of all audit and non-audit
services provided by our independent auditor. Under this policy, any audit or non-audit service performed by the independent auditor must receive either specific or general pre-approval by the audit committee. Specific pre-approval is the action
whereby the audit committee explicitly pre-approves the engagement of the independent auditor to perform specific audit or non-audit services. General pre-approval entails the pre-approval of the engagement of the independent auditor to perform
services pursuant to pre-approval policies and procedures established by the audit committee that are detailed as to the specific types of services so pre-approved. Any service performed by the independent auditor that exceeds its pre-approved fee
level must receive specific pre-approval by the audit committee. All of the services provided by GHP Horwath, P.C. during fiscal years 2008 and 2007 were approved by the audit committee pursuant to this policy.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EON COMMUNICATIONS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Date: October 30, 2008
|
|
|
|
By
|
|
/s/ S
TEPHEN
R.
B
OWLING
|
|
|
|
|
|
|
|
|
|
Stephen R. Bowling, Vice President,
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer, Secretary
|
|
|
|
|
|
|
|
|
|
(Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/
S
/ D
AVID
S.
L
EE
David S. Lee
|
|
President, Chief Executive Officer and Chairman (Principal Executive Officer)
|
|
October 30, 2008
|
|
|
|
|
|
/
S
/ S
TEPHEN
R.
B
OWLING
Stephen R. Bowling
|
|
Vice President, Chief Financial Officer, Director (Principal Financial Officer)
|
|
October 30, 2008
|
|
|
|
|
|
/
S
/ R
OBERT
P.
D
ILWORTH
Robert P. Dilworth
|
|
Director
|
|
October 30, 2008
|
|
|
|
|
|
/
S
/ W. F
RANK
K
ING
W. Frank King
|
|
Director
|
|
October 30, 2008
|
|
|
|
|
|
/
S
/ F
REDERICK
W.
G
IBBS
Frederick W. Gibbs
|
|
Director
|
|
October 30, 2008
|
64
EXHIBIT INDEX
Documents listed below are being filed as exhibits herewith. Exhibits identified by asterisks (*) are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the
Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed exhibits with the Commission.
|
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
2.1(&)
|
|
Plan of Acquisition for Cortelco Shanghai Telecom Equipment Company
|
|
|
|
|
3.1*
|
|
Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999
|
|
|
|
|
3.2*
|
|
Amended and Restated Bylaws of eOn
|
|
|
|
|
4.1*
|
|
Reference is made to Exhibits 3.1 and 3.2
|
|
|
|
|
10.1*
|
|
Form of Indemnity Agreement between eOn and its officers and directors
|
|
|
|
|
14(@)
|
|
Code of Ethics
|
|
|
|
|
21.1
|
|
Subsidiaries of eOn Communications Corporation
|
|
|
|
|
23.1
|
|
Consent of GHP Horwath, P.C.
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
32.1
|
|
Section 1350 Certifications
|
|
(&)
|
Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 8-K dated June 1, 2004
|
|
(*)
|
Incorporated by reference to the Company’s Registration Statement on Form S-1 (No. 333-77021) or amendments thereto, filed with the Securities and Exchange Commission on April
26, 1999
|
|
(@)
|
Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 10-K’s or Form 10-Q’s
|
65
Inventergy Global (CE) (USOTC:INVT)
過去 株価チャート
から 6 2024 まで 7 2024
Inventergy Global (CE) (USOTC:INVT)
過去 株価チャート
から 7 2023 まで 7 2024
