UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended: June 30, 2008
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Or
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o
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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
_____________
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Commission
File Number: 000-27376
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Elcom
International, Inc.
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|
(Exact
name of small business issuer as specified in its
charter)
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Delaware
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04-3175156
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(State
or other jurisdiction of incorporation
or
organization)
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(I.R.S.
Employer Identification No.)
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|
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10
OCEANA WAY
NORWOOD,
MASSACHUSETTS
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02062
|
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(Address
of principal executive offices)
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(Zip
Code)
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1-781-501-4000
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(Issuer's
telephone number)
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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
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
o
|
Accelerated
filer
o
|
|
Non-accelerated filer
o
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 552,177,450
as
of
November 12, 2008.
INDEX
Part
I -
FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
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|
Unaudited
Consolidated Balance Sheets as of June 30, 2008
and
December 31, 2007
|
1
|
|
|
|
|
|
|
|
|
Unaudited
Consolidated Statements of Operations and Other Comprehensive
Loss
for the Three- and Six-Month Periods
Ended
June 30, 2008 and 2007
|
2
|
|
|
|
|
|
|
|
|
Unaudited
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended
June 30, 2008 and 2007
|
3
|
|
|
|
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
4
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
7
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
12
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|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
12
|
|
|
|
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|
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Part
II - OTHER INFORMATION
|
|
|
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|
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|
Item
4.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
12
|
|
|
|
|
|
|
Item
5.
|
Exhibits
|
13
|
|
|
|
|
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Signatures
|
|
13
|
PART
I - FINANCIAL INFORMATION
Item
1.
Financial
Statements
ELCOM
INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
(unaudited)
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,578
|
|
$
|
947
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
557
|
|
|
1,752
|
|
|
Less
allowance for doubtful accounts
|
|
|
(18
|
)
|
|
(27
|
)
|
|
Accounts
receivable, net
|
|
|
539
|
|
|
1,725
|
|
|
Prepaid
expenses and other current assets
|
|
|
443
|
|
|
494
|
|
|
Total
current assets
|
|
|
2,560
|
|
|
3,166
|
|
|
PROPERTY,
EQUIPMENT AND SOFTWARE, AT COST:
|
|
|
|
|
|
|
|
|
Computer
hardware and software
|
|
|
21,499
|
|
|
21,480
|
|
|
Furniture,
equipment and leasehold improvements
|
|
|
3,088
|
|
|
3,088
|
|
|
|
|
|
24,587
|
|
|
24,568
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(24,107
|
)
|
|
(23,897
|
)
|
|
|
|
|
480
|
|
|
671
|
|
|
OTHER
ASSETS
|
|
|
14
|
|
|
14
|
|
|
Total
assets
|
|
$
|
3,054
|
|
$
|
3,851
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current
portion of capital lease obligations
|
|
$
|
111
|
|
$
|
135
|
|
|
Convertible
notes payable, net of unamortized discount of $707
|
|
|
|
|
|
|
|
|
and
$637, respectively
|
|
|
1,834
|
|
|
914
|
|
|
Accounts
payable
|
|
|
708
|
|
|
864
|
|
|
Deferred
revenue
|
|
|
773
|
|
|
1,285
|
|
|
Related
party accrued salary, bonuses and interest
|
|
|
756
|
|
|
906
|
|
|
Accrued
expenses and other current liabilities
|
|
|
625
|
|
|
724
|
|
|
Current
liabilities of discontinued operations
|
|
|
30
|
|
|
30
|
|
|
Total
current liabilities
|
|
|
4,837
|
|
|
4,858
|
|
|
CAPITAL
LEASE OBLIGATION, NET OF CURRENT PORTION
|
|
|
10
|
|
|
48
|
|
|
OTHER
LONG TERM LIABILITY
|
|
|
87
|
|
|
135
|
|
|
Total
liabilities
|
|
|
4,934
|
|
|
5,041
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
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|
|
|
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|
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|
|
|
|
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STOCKHOLDERS'
DEFICIT:
|
|
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|
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Preferred
stock, $.01 par value; Authorized -- 10,000,000 shares --
|
|
|
|
|
|
|
|
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Issued
and outstanding - none
|
|
|
--
|
|
|
--
|
|
|
Common
stock, $.01 par value; Authorized - 700,000,000 shares -
|
|
|
|
|
|
|
|
|
Issued
- 552,177,450 shares at June 30, 2008
|
|
|
|
|
|
|
|
|
and
December 31, 2007
|
|
|
5,522
|
|
|
5,522
|
|
|
Additional
paid-in capital
|
|
|
127,588
|
|
|
126,957
|
|
|
Accumulated
deficit
|
|
|
(134,383
|
)
|
|
(133,080
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(607
|
)
|
|
(589
|
)
|
|
Total
stockholders' deficit
|
|
|
(1,880
|
)
|
|
(1,190
|
)
|
|
|
|
$
|
(3,054
|
)
|
$
|
(3,851
|
)
|
The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
ELCOM
INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
OTHER COMPREHENSIVE INCOME (LOSS)
(in
thousands, except per share data)
(unaudited)
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
License,
hosting services and other fees
|
|
$
|
1,449
|
|
$
|
900
|
|
$
|
2,378
|
|
$
|
1,532
|
|
|
Professional
services
|
|
|
251
|
|
|
802
|
|
|
546
|
|
|
996
|
|
|
Total
net revenues
|
|
|
1,700
|
|
|
1,702
|
|
|
2,924
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
189
|
|
|
268
|
|
|
449
|
|
|
534
|
|
|
Gross
profit
|
|
|
1,511
|
|
|
1,434
|
|
|
2,475
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
1,631
|
|
|
1,858
|
|
|
3,475
|
|
|
3,889
|
|
|
Research
and development
|
|
|
51
|
|
|
226
|
|
|
98
|
|
|
441
|
|
|
Total
operating expenses
|
|
|
1,682
|
|
|
2,084
|
|
|
3,573
|
|
|
4,330
|
|
|
Operating
loss
|
|
|
(171
|
)
|
|
(650
|
)
|
|
(1,098
|
)
|
|
(2,336
|
)
|
|
Interest
and other income, net
|
|
|
9
|
|
|
18
|
|
|
21
|
|
|
82
|
|
|
Interest
expense
|
|
|
(39
|
)
|
|
(7
|
)
|
|
(72
|
)
|
|
(15
|
)
|
|
Loss
on debt extinguishment
|
|
|
(155
|
)
|
|
--
|
|
|
(155
|
)
|
|
--
|
|
|
Net
loss before income taxes
|
|
|
(356
|
)
|
|
(639
|
)
|
|
(1,304
|
)
|
|
(2,269
|
)
|
|
Income
taxes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Net
loss
|
|
|
(356
|
)
|
|
(639
|
)
|
|
(1,304
|
)
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax
|
|
|
(7
|
)
|
|
12
|
|
|
(18
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(363
|
)
|
$
|
(627
|
)
|
$
|
(1,322
|
)
|
$
|
(2,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(--)
|
|
$
|
(--
|
)
|
$
|
(--
|
)
|
$
|
(--
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of basic and diluted shares outstanding
|
|
|
552,177
|
|
|
552,177
|
|
|
552,177
|
|
|
538,017
|
|
The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
ELCOM
INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,304
|
)
|
$
|
(2,269
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Accretion
of debt discount
|
|
|
66
|
|
|
-
|
|
|
Loss
on debt extinguishment
|
|
|
155
|
|
|
-
|
|
|
Depreciation
and amortization
|
|
|
210
|
|
|
233
|
|
|
Stock-based
compensation
|
|
|
339
|
|
|
497
|
|
|
Provision
for doubtful accounts receivable
|
|
|
(10
|
)
|
|
11
|
|
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,195
|
|
|
(508
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
51
|
|
|
78
|
|
|
Accounts
payable
|
|
|
(154
|
)
|
|
81
|
|
|
Deferred
revenue
|
|
|
(512
|
)
|
|
549
|
|
|
Accrued
expenses and other current liabilities
|
|
|
(249
|
)
|
|
(228
|
)
|
|
Net
cash used in operating activities
|
|
|
(213
|
)
|
|
(1,556
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions
to property, equipment and software
|
|
|
(19
|
)
|
|
(54
|
)
|
|
Net
cash used in investing activities
|
|
|
(19
|
)
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from issue of common stock, net
|
|
|
--
|
|
|
2,496
|
|
|
Proceeds
from convertible notes
|
|
|
1,344
|
|
|
--
|
|
|
Payments
of convertible notes payable
|
|
|
(354
|
)
|
|
--
|
|
|
Repayments
of capital lease obligations
|
|
|
(61
|
)
|
|
(60
|
)
|
|
Decrease
in other long term liability
|
|
|
(48
|
)
|
|
(72
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
881
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN
EXCHANGE EFFECT ON CASH
|
|
|
(18
|
)
|
|
(1
|
)
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
631
|
|
|
753
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
947
|
|
|
1,086
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
1,578
|
|
$
|
1,839
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH FINANCING ACTIVIES:
|
|
|
|
|
|
|
|
|
Debt
discount arising from imputed interest
|
|
$
|
290
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
5
|
|
$
|
15
|
|
|
Income
taxes paid
|
|
$
|
--
|
|
$
|
--
|
|
|
Acquisition
of equipment under capital leases
|
|
$
|
--
|
|
$
|
29
|
|
The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
ELCOM
INTERNATIONAL, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Consolidation
The
consolidated financial statements include the accounts of Elcom International,
Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “Elcom”).
Basis
of Presentation
In
the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Elcom as
of
June 30, 2008, the results of its operations for the three- and six-month
periods ended June 30, 2008 and 2007, and cash flows for the six-month periods
ended June 30, 2008 and 2007. All significant intercompany accounts and
transactions have been eliminated. The results of operations for these periods
are not necessarily comparable to, or indicative of, results of any other
interim period or for the year as a whole. Certain financial information that
is
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States, but which is not required
for interim reporting purposes, has been omitted. For further information,
reference should be made to the consolidated financial statements and
accompanying notes included in Elcom’s Annual Report on Form 10-KSB, for the
year ended December 31, 2007.
Going
Concern
Elcom’s
consolidated financial statements as of December 31, 2007 and June 30, 2008
have
been prepared under the assumption that Elcom will continue as a going concern.
Elcom has incurred net losses every year since 1998, has an accumulated deficit
of $134,383,000 as of June 30, 2008, and expects to incur a loss in fiscal
year
2008. However, this loss is forecast to be substantially lower than that
incurred in 2007. As of June 30, 2008, Elcom had $1.6 million of cash and cash
equivalents, current assets of approximately $2.56 million and current
liabilities of approximately $4.8 million. The ultimate success of Elcom is
dependent upon achieving additional revenues by marketing its eCommerce software
solutions, typically through channel partners, until Elcom is operating
profitably. Elcom has incurred significant operating losses and has used cash
in
operating activities in each of the last several years, including $3.7 million
of cash used in operating activities in fiscal year 2007, and $213,000 of cash
used in operating activities in the first six months of fiscal year 2008.
Elcom’s ability to continue as a going concern is primarily dependent upon its
ability to grow revenue and attain further operating efficiencies and, if
necessary, to also attract additional capital. Elcom will incur a net loss
in
fiscal year 2008; however, this loss will be significantly lower than the net
loss incurred in fiscal year 2007. In order to achieve profitable operations,
Elcom is dependent upon generating significant new revenues from existing and
future contracts. During March, May and June 2008, Elcom received convertible
loans from a non-US investor of £500,000 (approximately $1,000,000 and net of
repayments). The loans are repayable upon demand and convertible at the option
of the Payee into shares of common stock, at the price of 3.5p per share,
subject to adjustment, downwards only, in the event that common stock or any
equity instruments are issued at a price lower than 3.5p at anytime. The loans
are expected to be converted into shares prior to their maturity in
2012.
Elcom
believes that as a result of these loans, it has the funds required to perform
under its current contracts. Elcom cannot assure that additional financing
will
be available on favorable terms, or at all. If funds are not available when
required for working capital needs or other transactions, Elcom’s ability to
carry out its business plan could be adversely affected, and Elcom may be
required to further scale back its operations to reflect the extent of available
funding. If Elcom is able to arrange for additional credit facilities from
lenders, the debt instruments are likely to include limitations on Elcom’s
ability to incur other indebtedness, to pay dividends, to create liens, to
sell
its capital stock, or enter into other transactions. Such restrictions may
adversely affect Elcom’s ability to finance its future operations or capital
needs or to grow its business. If Elcom raises additional funds by issuing
equity or convertible debt securities, the percentage ownership of the Company’s
existing stockholders will be reduced. These securities may have rights,
preferences or privileges senior to those of the common
stockholders.
If
Elcom
is unable to consummate any equity financing or receive additional loaned monies
to provide sufficient working capital, Elcom would likely be forced to curtail
operations and/or seek protection under bankruptcy laws. The consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
|
2.
|
Stock
Based Compensation
|
The
following table summarizes amounts charged to expense for stock-based
compensation related to employee and director stock option grants:
|
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director stock option grants:
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
15,711
|
|
$
|
20,375
|
|
$
|
34,738
|
|
$
|
40,885
|
|
|
Selling,
general and administrative
|
|
|
120,134
|
|
|
94,190
|
|
|
292,672
|
|
|
395,623
|
|
|
Research
and development
|
|
|
5,463
|
|
|
29,958
|
|
|
11,091
|
|
|
60,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation
|
|
$
|
141,308
|
|
$
|
144,523
|
|
$
|
338,501
|
|
$
|
496,720
|
|
Elcom
uses the Black-Scholes valuation model to estimate the fair value of stock-based
compensation awarded after January 1, 2006. There were no stock-based
compensation awards granted during the three or six month periods ended June
30,
2008.
The
weighted-average gross fair value of awards under Elcom’s stock option plans in
the first six months of 2008 was $0.08 for each share covered by an option
grant, utilizing the following assumptions:
|
Volatility
|
|
|
154.35
|
%
|
|
Risk-free
interest rate
|
|
|
4.83
|
%
|
|
Expected
life of options
|
|
|
5.75
years
|
|
|
Expected
dividend yield
|
|
|
0
|
%
|
Elcom
has
generally relied upon its historical information as the most reasonable basis
to
determine its valuation assumptions with respect to share-based payments,
because it has no reason to believe that its future experience will differ
from
its historical experience. The volatility figure is based on the daily actual
historical volatility of Elcom’s common stock over the five year period
(consistent with the expected life of the options) ended June 30, 2008. The
volatility calculation is based on the reported trading of Elcom’s common stock
on the Over The Counter Bulletin Board (“OTCBB”), and Nasdaq Small Cap Market,
as applicable. The risk-free interest rate is based on the U.S. Government
five-year Treasury Constant Maturity rate, with a five-year term. The expected
life of options is based on Elcom’s historical experience since January 1, 1996,
shortly after it became a public company. The expected dividend yield is zero
based on the fact that Elcom has never paid a dividend and does not presently
have an intention to pay cash dividends.
Based
on
Elcom’s historical turnover rates, an overall annualized estimated forfeiture
factor of 15% has been utilized, and in certain specific instances when it
is
known that options will be forfeited, such forfeitures are taken into
consideration. Under the provisions of SFAS 123R, additional expense will be
recorded in future periods if the actual forfeiture rate is lower than
estimated, and a recovery of prior expense will be recorded if the actual
forfeiture rate is higher than estimated.
As
of
June 30, 2008, Elcom had unamortized stock-based compensation, net of expected
forfeitures, aggregating approximately $533,456, which will be amortized to
expense over the requisite service periods, currently through January of 2009.
The unamortized stock-based compensation will be recognized over a weighted
average period of approximately 18 months.
A
summary
of stock option activity for the six months ended June 30, 2008 is presented
below:
|
|
|
Options
Outstanding
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contracted
Term
in
Years
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at December 31, 2007
|
|
|
22,642,864
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
1,528,885
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
21,113,979
|
|
$
|
0.25
|
|
|
6.92
|
|
|
—
|
|
|
Vested
or expected to vest at June 30, 2008
|
|
|
19,203,650
|
|
$
|
0.36
|
|
|
6.54
|
|
|
—
|
|
|
Exercisable
at June 30, 2008
|
|
|
14,048,979
|
|
$
|
0.32
|
|
|
6.49
|
|
|
—
|
|
The
aggregate intrinsic value of options outstanding is calculated based on the
positive difference between the closing market price of Elcom’s common stock at
the end of the respective period and the exercise price of the underlying
options.
|
|
|
The
total grant-date fair value of stock options that vested during the
six
months ended June 30, 2008 was approximately
$338,501.
|
In
March
of 2008, Elcom received convertible loans from a non-US inventor of £250,000
(approximately $497,000).
In
May
and June 2008, Elcom received convertible loans from the same non-US investor
of
£100,000 (approximately $198,000) and £330,000 (approximately $649,000). The
proceeds of the loans received in June 2008 were used to repay the £100,000
(approximately $197,000) loan received in May 2008 with £80,000 (approximately
$157,000) being used to repay a loan received in March 2008, the balance of
proceeds £150,000 (approximately $295,000) was received in cash. The loans are
repayable upon demand and convertible at the option of the Payee into shares
of
common stock, at the price of 3.5p (approx. $0.07) per share.
The
loans
are expected to be converted into shares at some stage in the future.
A
discount of $80,437
was
recorded for the imputed interest rate upon issuance of the May 2008 convertible
notes. The discount is amortized utilizing the effective interest method over
the period commencing on the issuance date to the stated maturity date. Elcom
is
utilizing an average interest rate of 11% derived from its capital lease
obligations in calculating imputed interest. A loss on extinguishment of debt
of
$155,000 was recognized upon partial settlement of a March 2008 loan and full
settlement of the May 2008 loan representing the write-off of unamortized
discount balances at the time of settlement.
The
following table summarizes the issuance of convertible loans payable (in
thousands) during the six months ended June 30, 2008:
|
Description
|
|
Interest
Rate
|
|
Date
of Maturity
|
|
2008
|
|
|
Principal
issuances
|
|
|
|
|
|
|
|
|
|
|
|
Principal
balance, December 31, 2007
|
|
|
|
|
|
|
|
$
|
1,551
|
|
|
£250,000
convertible loans
|
|
|
11
|
%
|
|
12/19/12
|
|
|
497
|
|
|
£100,000
convertible loans
|
|
|
11
|
%
|
|
12/19/12
|
|
|
198
|
|
|
£330,000
convertible loans
|
|
|
12
|
%
|
|
12/19/12
|
|
|
649
|
|
|
Total
issuances during the period
|
|
|
|
|
|
|
|
|
1,344
|
|
|
Principal
Repayments
|
|
|
|
|
|
|
|
|
(354
|
)
|
|
Principal
balance, June 30, 2008
|
|
|
|
|
|
|
|
|
2,541
|
|
|
Unamortized
discount, December 31, 2007
|
|
|
|
|
|
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
on new loan
|
|
|
|
|
|
|
|
|
(290
|
)
|
|
Amortization
and write-off of debt discount
|
|
|
|
|
|
|
|
|
220
|
|
|
Unamortized
discount, June 30, 2008
|
|
|
|
|
|
|
|
|
(707
|
)
|
|
Total
debt, net of discount
|
|
|
|
|
|
|
|
|
1,834
|
|
|
4.
|
Business
Segment Information
|
Elcom’s
operations are classified as a single business segment, specifically the
development and sale of automated procurement and electronic marketplace
Internet-based software solutions which automate many supply chain and financial
settlement functions associated with procurement. Elcom operates both in the
U.S. and U.K. and geographic financial information for the three- and six-month
periods ended June 30, 2008 and 2007, is set forth below (in
thousands):
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
191
|
|
$
|
193
|
|
$
|
366
|
|
$
|
347
|
|
|
U.K.
|
|
|
1,509
|
|
|
1,509
|
|
|
2,558
|
|
|
2,180
|
|
|
Net
revenues
|
|
$
|
1,700
|
|
$
|
1,702
|
|
$
|
2,924
|
|
$
|
2,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(1,086
|
)
|
$
|
(1,723
|
)
|
$
|
(2,475
|
)
|
$
|
(3,636
|
)
|
|
U.K.
|
|
|
915
|
|
|
1,073
|
|
|
1,377
|
|
|
1,300
|
|
|
Operating
loss
|
|
$
|
(171
|
)
|
$
|
(650
|
)
|
$
|
(1,098
|
)
|
$
|
(2,336
|
)
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
|
|
Identifiable
assets:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,255
|
|
$
|
1,472
|
|
|
|
|
|
|
|
U.K.,
including cash and cash equivalents
of $1,366 and $880 in 2008
and
2007,
respectively
|
|
|
1,799
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
|
$
|
3,054
|
|
$
|
3,851
|
|
|
|
|
|
|
|
Elcom
was
a member of a consortium led by PA Consulting Group UK Plc (“PA) which had been
awarded a contract, including a Framework Agreement between ProcServe Shared
Services Ltd. (“PASSL”), a wholly-owned subsidiary of PA, and a U.K. government
agency, for the creation and deployment of an eMarketplace for U.K. Public
Entities. The agreements were signed on August 12, 2005 for a primary term
of five years. On September 3, 2008, Elcom and ProcServe entered into a
contract, which governs the termination of the Sub Framework Agreement by mutual
consent.
Item
2.
Management’s
Discussion and Analysis or Plan of Operation
Introduction
Elcom
International, Inc. (“Elcom”), a corporation formed in Delaware in December
1992, is a leading provider of Internet-based remotely hosted, integrated
eCommerce solutions and services. Our PECOS™ (“Professional Electronic Commerce
Online System”) solution is typically remotely hosted by Elcom, providing rapid
deployment and single point responsibility for clients. In total, over 100
organizations are currently using or accessing Elcom’s solution under these
arrangements. Since January 16, 2003, our Common Stock has been quoted on the
Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol ELCO. On May 18,
2007, our stock was suspended from the OTCBB due to a delay in our filing the
annual report for the year ended December 31, 2006 with the SEC and since then
our stock has been listed in the Pink Sheets under the symbol ELCO. In addition,
since April 16, 2004, our common stock was traded on the AIM Exchange under
the
symbols ELC and ELCS (designating the Regulation S Shares); however, the stock
was cancelled from admission on April 1
st
,
2008.
We operate in the U.S. and U.K.
Overview
Prior
to
the divestiture of its information technology (“IT”) products and services
business in the U.K. and U.S., Elcom had previously marketed over 130,000 IT
products to commercial, educational and governmental accounts via several
innovative eCommerce solutions. During 2001, Elcom carefully reviewed its
business operations, and in order to reduce operational and financial risks
and
properly align Elcom’s operations with the slowing demand for IT products and
the overall economic environment, Elcom decided to divest its IT products and
services business to reduce costs and allow Elcom to focus exclusively on its
core business of providing large scale eCommerce solutions. On December 31,
2001, Elcom divested itself of its U.K. IT products business and on March 29,
2002, Elcom divested itself of its U.S. IT products and services business.
Commencing during the second quarter of 2002, Elcom’s sole source of revenue has
been the implementation of eCommerce solutions and associated usage and
professional services and monthly hosting services, usage and data maintenance
fees.
In
the
U.K., Elcom has a substantial contract with Capgemini UK Plc (“Capgemini”)
associated with the Scottish Executive’s eProcurement Scotland Programme, where
Elcom provides its solutions to agencies, councils, universities and National
Health Service of Scotland (hospitals) Trusts (“Public Entities”) in Scotland.
Elcom signed agreements with one (1) Public Entity in 2006, nine (9) in 2007
and
for the first 6 months of 2008 a further two (2), bringing the total number
of
Public Entities in the eProcurement Scotland program to 38. There are
approximately 47 Public Entities potentially available to join the eProcurement
Scotland Programme, and possibly more, depending upon the Scottish Executive’s
definition of eligibility. Elcom earns implementation fees and monthly hosting
services fees for each Public Entity that joins the eProcurement Scotland
Programme. Capgemini is the prime contractor in the Scottish Executive
Agreement. Elcom subcontracts under this Agreement as the technology service
provider. During 2007, this contract accounted for over 75% of Elcom’s revenues,
and during the first 6 months of 2008, this represented over 79% of Elcom’s
revenues.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements requires Elcom to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, Elcom evaluates its estimates, including
those related to income taxes, impairment of long-lived assets, and revenue
recognition. Elcom bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Off-Balance
Sheet Financings
Elcom
does not have any off-balance sheet financings. Elcom has no majority-owned
subsidiaries that are not included in its consolidated financial
statements.
Results
of Operations
Quarter
ended June 30, 2008 compared to the quarter ended June 30,
2007.
Net
Revenues.
Net
revenues for the quarter ended June 30, 2008 decreased to $1,700,000, from
$1,702,000 in the same period of 2007, a slight decrease of $2,000. License,
hosting services and other fees increased from $900,000 in the 2007 quarter
to
$1,449,000 in the 2008 quarter, an increase of $549,000, or 61%. This increase
is primarily due to additional customers joining the eProcurement Scotland
Programme. License, hosting services and other fees include license fees,
hosting services fees, test system fees, supplier fees, usage fees, and
eMarketplace agent and affiliated fees. Professional services fees decreased
from $802,000, to $251,000 in the 2008 quarter, a decrease of $551,000 in the
2008 quarter. This was predominately due to the fact that the 2007 period
included two specific projects of a non-recurring nature.
Gross
Profit
.
Gross
profit for the quarter ended June 30, 2008 increased to $1,511,000 from
$1,434,000 in the comparable 2007 quarterly period, an increase of $77,000,
or
5%. This increase is primarily a result of a reduction in third party cost
of
sales.
Selling,
General and Administrative Expenses
.
Selling, general and administrative (“SG&A”) expenses for the quarter ended
June 30, 2008 were $1,631,000 compared to $1,858,000 in the second quarter
of
2007, a decrease of $227,000, or 12%. This decrease was a combination of a
reduction in general expenses of reduced payroll costs following a reduction
in
headcount.
Research
and Development Expense.
Research
and development expense for the quarters ended June 30, 2008 and 2007 were
$51,000 and $226,000, respectively, reflecting a decrease in the 2008 quarter
of
$175,000 over the expense recorded in the second quarter of 2007. The expense
in
the 2007 quarter primarily related to ongoing work associated with Elcom’s PECOS
technology and work for the Zanzibar eMarketplace contract.
Operating
Loss.
Elcom
reported an operating loss of $171,000 for the quarter ended June 30, 2008
compared to a loss of $650,000 reported in the comparable quarter of 2007,
a
reduction of $479,000 in the loss reported. This reduced operating loss in
the
second quarter of 2008 compared to the same quarter in 2007 was primarily due
to
continued focus in the area of cost control.
Interest
Income.
Interest
income for the quarter ended June 30, 2008 was $9,000 compared to $18,000 in
the
second quarter of 2007. The decrease is primarily related to interest income
earned on the funds raised in February of 2007.
Interest
Expense
.
Interest expense for the quarter ended June 30, 2008 was $39,000, compared
to
$7,000 in the same period of 2007. The increase is due to the interest on the
promissory notes payable.
Loss
on Debt Extinguishment
.
Loss on
debt extinguishment arose from the partial settlement of the March 2008
convertible note payable and full payment of the May 2008 convertible note.
No
such transaction occurred in 2007.
Net
Loss
.
Elcom’s
net loss for the quarter ended June 30, 2008 was $356,000, a decrease in the
loss of $83,000 from the loss recorded in the second quarter 2007 of $639,000,
as a result of the factors discussed above.
Six
Months ended June 30, 2008 compared to six months ended June 30,
2007.
Net
Revenues.
Net
revenues for the 6 months ended June 30, 2008 increased to $2,924,000, from
$2,528,000 in the same period of 2007, an increase of $396,000, or 16%. License,
hosting services and other fees increased from $1,532,000 in the 2007 period
to
$2,378,000 in the 2008 period, an increase of $846,000, or 55%. License, hosting
services and other fees include license fees, hosting services fees, test system
fees, supplier fees, usage fees, and eMarketplace agent and affiliated fees.
Professional services fees decreased by $450,000, to $546,000 in the 2008
period, from $996,000 in the 2007 period. This reduction was predominantly
due
to the fact that the 2007 period included two specific projects of a
non-recurring nature.
Gross
Profit
.
Gross
profit for the 6 months ended June 30, 2008 increased to $2,475,000 from
$1,994,000 in the comparable 2007 period, an increase of $481,000, or 24%.
This
increase is a direct result of the increase in revenue.
Selling,
General and Administrative Expenses
.
Selling, general and administrative (“SG&A”) expenses for the 6 months ended
June 30, 2008 were $3,475,000 compared to $3,889,000 in the same period of
2007,
a decrease of $414,000, or 11%. The primary reasons for the decrease are a
combination of continued cost control and a reduction in payroll costs, which
included a reduction in stock option expenses which totaled $293,000 for the
6
months ended June 30, 2008 versus $396,000 in the comparable period in
2007.
Research
and Development Expense.
Research
and development expense for the 6 months ended June 30, 2008 and 2007 were
$98,000 and $441,000, respectively, reflecting a decrease in the 2008 period
of
$343,000 over the expense recorded in the same period of 2007. The expense
in
the 2007 period primarily relates to new development work associated with a
new
version release of Elcom’s PECOS technology and work for the Zanzibar
eMarketplace contract.
Operating
Loss.
Elcom
reported an operating loss of $1,098,000 for the 6 months ended June 30, 2008
compared to a loss of $2,336,000 reported in the comparable period of 2007,
a
decrease of $1,238,000 in the loss reported. The decrease in operating loss
is a
combination of the increase in sales revenue and continued cost
control.
Interest
and Other Income, Net.
Interest
and other income, net for the 6 months ended June 30, 2008 was $21,000 compared
to $82,000 in the same period of 2007 and is a result of a reduction in cash
balances following the fund raise in February 2007.
Interest
Expense
.
Interest expense for the 6 months ended June 30, 2008 was $72,000, compared
to
$15,000 in the same period of 2007. This is due to the interest expense related
to loan notes.
Loss
on Debt Extinguishment
.
Loss on
debt extinguishment arose from the partial settlement of the March 2008
convertible note payable and full payment of the May 2008 convertible note.
No
such transaction occurred in 2007.
Net
Loss
.
Elcom’s
net loss for the 6 months ended June 30, 2008 was $1,304,000, a decrease in
the
loss of $965,000 from the loss recorded in the same period of 2007 of
$2,269,000.
Liquidity
and Capital Resources
Net
cash
used in operating activities for the six months ended June 30, 2008 was
$213,000, which is attributable primarily to the Company’s net loss of
$1,304,000, which was offset by a reduction in accounts receivable of $1,195,000
and non-cash depreciation, amortization and stock based compensation expenses
aggregating $549,000 which in turn were offset by a decrease in deferred
revenues and accrued expenses of $761,000.
Net
cash
used in investing activities for the six-month period ended June 30, 2008 was
$19,000 due to the purchase of property, equipment and software.
Net
cash
provided by financing activities for the six-month period ended June 30, 2008
was $881,000 of which the majority related to the proceeds from a convertible
loan note issued to a non-US investor (see Item 2).
The
Company’s principal commitments consist of a lease on its headquarters office
facility, capital lease obligations and a long-term software license payable.
The Company will also require ongoing investments in research and development,
and equipment and software in order to further increase operating revenues
and
meet the requirements of its customers.
Risk
Factors Relating to Liquidity
Elcom’s
consolidated financial statements as of June 30, 2008 have been prepared under
the assumption that Elcom will continue as a going concern. Elcom’s independent
registered public accounting firm, Malone & Bailey PC, has issued a report
dated August 20, 2008 (except for Note 10 which is as of September 3, 2008)
that
included an explanatory paragraph referring to Elcom’s significant operating
losses and substantial doubt in its ability to continue as a going concern
(See
Note 1 - Basis of Presentation - Going Concern, to the June 30, 2008
Consolidated Financial Statements for additional information), without
generating incremental operating revenues or, if required, additional capital
becoming available.
We
cannot
assure you that additional financing will not be needed, or if needed be
available on favorable terms, or at all. If funds are not available when
required for working capital needs or other transactions, our ability to carry
out our business plan could be adversely affected, and we may be required to
scale back our operations to reflect the extent of available funding. If we
are
able to arrange for additional credit facilities from lenders, the debt
instruments are likely to include limitations on our ability to incur other
indebtedness, to pay dividends, to create liens, to sell our capital stock,
or
enter into other transactions. Such restrictions may adversely affect our
ability to finance our future operations or capital needs or to grow our
business. If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced. These
securities may have rights, preferences or privileges senior to those of the
common stockholders.
If
we are
unable to consummate any equity financing or receive additional loaned monies
to
provide sufficient working capital, we would likely be forced to curtail
operations and/or seek protection under bankruptcy laws. The consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
Factors
Affecting Future Performance
A
significant portion of Elcom’s revenues are from hosting services and associated
fees received from Capgemini under a back-to-back contract between Elcom and
Capgemini which essentially mirrors the primary agreement between Capgemini
and
the Scottish Executive, executed in November 2001. Future revenue under this
arrangement is contingent on the following significant factors: the rate of
adoption of Elcom’s software system by Public Entities associated with the
Scottish Executive; renewal by existing Public Entity clients associated with
the Scottish Executive of their rights to use the software system; the
procurement of additional services from Elcom by Public Entities associated
with
the Scottish Executive; Capgemini’s relationship with the Scottish Executive;
their compliance with the terms and conditions of their agreement with the
Scottish Executive; and the ability of Elcom to perform under its agreement
with
Capgemini.
If
further business fails to develop under the Capgemini agreement or if the U.S.
eMarketplaces do not expand as expected, or if Elcom is unable to perform under
any of these agreements, it would have a material adverse affect on Elcom’s
future financial results.
Outlook
Elcom
expects that its operating loss will continue through 2008, however progress
has
been made in a number of areas and the level of losses will be significantly
lower than 2007. Improvements in revenues and operating results from operations
in future periods will not occur without Elcom being able to generate
incremental operating revenues from existing and new clients.
STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q could include forward-looking statements or
information. All statements, other than statements of historical fact,
including, without limitation, those with respect to Elcom's objectives, plans
and strategies set forth herein and those preceded by or that include the words
"believes," "expects," "targets," "intends," "anticipates," "plans," or similar
expressions, are forward-looking statements. Although Elcom believes that such
forward-looking statements are reasonable, it can give no assurance that Elcom's
expectations are, or will be, correct. These forward-looking statements involve
a number of risks and uncertainties which could cause Elcom's future results
to
differ materially from those anticipated, including: (i) the necessity for
Elcom
to generate incremental operating revenues and whether this objective can be
met
given the overall marketplace and client's acceptance and usage of eCommerce
software systems, eProcurement and eMarketplace solutions, including corporate
demand therefore; the impact of competitive technologies, products and pricing,
particularly given the substantially larger size and scale of certain
competitors and potential competitors; control of operating expenses; and
revenue growth; (ii) the consequent results of operations given the
aforementioned factors; and (iii) the necessity of Elcom to achieve profitable
operations within the constraints of its existing resources, and if it can
not,
the availability of incremental capital funding to Elcom, particularly in light
of the audit opinion from Elcom's independent registered public accounting
firm
in Elcom’s 2007 Annual Report on Form 10-KSB, and other risks detailed from time
to time in this Quarterly Report on Form 10-Q and in Elcom’s other SEC reports
and statements.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risks
As
a
smaller reporting company, we are not required to provide the information
required by this Item.
Item
4.
Controls
and Procedures
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures.
|
Elcom's
Chief Executive Officer and Executive Vice President of Finance, after
evaluating the effectiveness of Elcom's disclosure controls and procedures
(as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of
1934) as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2008 (the
"Evaluation Date"), have concluded that as of the Evaluation Date, Elcom's
disclosure controls and procedures were not effective in ensuring that
information required to be disclosed by Elcom in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms, because of
the
untimely filing of the interim reports.
|
(b)
|
Changes
in Internal Controls
|
There
was
no change in Elcom’s internal controls over financial reporting that occurred
during the first six months of 2008 that has materially affected, or is
reasonably likely to materially affect, Elcom’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
4.
Unregistered
Sales of Equity Securities and Use of Proceeds
During
March, May and June 2008, Elcom received loans from a non-US investor of
£500,000 (approximately $1,000,000 and net of repayments). The loans are
repayable upon demand and convertible at the option of the Payee into shares
of
common stock, at the price of 3.5p per share, subject to adjustment, downwards
only, in the event that Common Stock or any equity instruments are issued at
a
price lower than 3.5p at anytime. The convertible notes that were issued in
connection with these loans were issued in reliance on the exemption from
registration under Regulation S promulgated under the Securities Act of 1993,
as
amended.
Item
5.
Exhibits
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
31.2
|
Rule
13a-14(a) Certification of Executive Vice President of
Finance
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer
|
|
32.2
|
Section
1350 Certification of Executive Vice President of
Finance
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
Elcom
International, Inc.
(Registrant)
|
|
|
|
|
Date:
November 12,
2008
|
By:
|
/s/Gregory
King
|
|
|
Gregory
King
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
November 12,
2008
|
By:
|
/s/David
Elliott
|
|
|
David
Elliott
Executive
Vice President of Finance
(Principal
Financial and Accounting
Officer)
|
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