NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
NATURE OF OPERATIONS
Since
early 2002, Elcom International, Inc. has operated solely as a leading provider
of remotely-hosted, electronic procurement and electronic marketplace
Internet-based software solutions (collectively, “ePurchasing”). Elcom’s
ePurchasing solutions combine robust integrated eProcurement and eMarketplace
capabilities and are remotely-hosted in our data center. Management believes
the
combination of eProcurement and eMarketplace functionality capabilities in
a
single code base gives Elcom a strong low-cost offering and importantly,
can be
offered to potential clients from either functional viewpoint.
Since
its
inception in 1992, Elcom has developed its PECOS™ (Professional Electronic
Commerce Online System) software, which automates many supply chain and
financial settlement functions associated with procurement. Elcom intends
to
augment its core ePurchasing solutions with other supply chain and
supplier-oriented systems to enable the conduct of interactive procurement,
supplier relationship management, and financial settlement. Elcom has licensed
a
dynamic trading system platform to provide auction, reverse auction, and
other
electronic negotiation, or eNegotiation, functions from a third party, which
module is offered as optional functionality to clients. Our PECOS™ solution can
support large numbers of end-user clients, products, suppliers and transactions
and its transaction server middleware provides a scalable foundation for
robust
system performance.
Going
Concern
As
of
December 31, 2006, Elcom had approximately $1,086,000 of cash and cash
equivalents and current assets of approximately $1,996,000. Current liabilities
amounted to approximately $3,854,000. Elcom has incurred significant losses
and
has used cash in operating activities in each of the last several years,
including $6,832,000 in 2006, which raises substantial doubt about Elcom’s
ability to continue as a going concern. The accompanying consolidated financial
statements have been prepared on a going concern basis which contemplates
the
realization of assets and the satisfaction of liabilities in the normal course
of business. The consolidated financial statements do not include any
adjustments relating to the recoverability of assets and satisfaction of
liabilities that might be necessary should Elcom be unable to continue as
a
going concern.
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 believes that as a result of its recent
issuances of common stock (see Notes 6 and 11), including common stock listed
on
the Alternative Investment Market of the London Stock Exchange (“AIM Exchange”),
that it has the funds required to perform under its current contracts; however
it expects to incur a net loss in 2007. In order to achieve profitable
operations Elcom is dependent upon generating significant new revenues from
existing and future contracts. There can be no assurance that such incremental
revenues can be realized by Elcom.
If
Elcom
is unable to generate incremental operating revenues over the course of the
next
year, it will likely require additional capital investment.
Elcom
cannot assure you that additional financing will be available on favorable
terms, or at all.
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)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Consolidation
The
accompanying consolidated financial statements include the accounts Elcom
and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation. Elcom has no material
interests in variable interest entities and therefore, none which require
consolidation.
(b)
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported in the
consolidated financial statements and accompanying notes. Actual results
may
differ from such estimates.
(c)
Cash and Cash Equivalents
Cash
and
cash equivalents at December 31, 2006 and 2005 consisted of $1,086,000 and
$6,399,000 respectively, of deposits with banks and financial institutions,
which were unrestricted as to withdrawal or use and had original maturities
of
less than three months. Cash and cash equivalents are stated at cost, which
approximates market value.
(d)
Accounts Receivable
Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. An allowance for doubtful accounts is provided for
those
accounts receivable considered to be uncollectible based upon historical
experience and management’s evaluation of outstanding accounts receivable at the
end of the year. Bad debts are written off against the allowance when
identified. At December 31, 2006 and 2005, the allowance for doubtful accounts
was $10,000 and $45,000, respectively.
(e)
Property, Equipment and Software
Property,
equipment and software are stated at cost. Additions and improvements are
capitalized and ordinary repairs and maintenance are expensed as incurred.
Equipment and software are depreciated and amortized on a straight-line basis
over the estimated useful lives of the assets or lease term, which are three
to
five years. The capitalized cost of leased equipment and leasehold improvements
are amortized over the shorter of the estimated useful life of the related
assets, or related life of the lease.
During
2006 and 2005 Elcom did not capitalize any software development costs under
SOP
98-1. There were no previously capitalized software development costs written
off in 2006 or 2005.
(f)
Impairment of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
Elcom
evaluates for impairment its long-lived assets to be held and used or to
be
disposed of other than by sale whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the
carrying amount of any asset to future undiscounted net cash flows expected
to
be generated by the asset. Elcom cash flow estimates are made for the remaining
useful life of the assets and are based on historical results adjusted to
reflect the best estimate of future market and operating conditions. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed
the
fair value of the assets. Elcom’s estimates of fair value represent the best
estimate based on industry trends and market rates and transactions. Assets
to
be disposed of by sale are reported at the lower of the carrying amount or
fair
value, less costs to sell, and depreciation of such assets ceases. As of
December 31, 2006 and 2005, we believe no impairment of long-lived assets
exists.
(g)
Revenue Recognition
Elcom
markets both an enterprise and non-enterprise (hosted) version of its PECOS
software system. Revenue consists principally of fees for licenses, and hosting
services and Elcom also earns fees from certain clients by providing a separate,
test instance of its hosted software system for specified periods of time,
for
the client’s use in evaluating various operational aspects of the system. Test
system fees are recognized in revenue over the term the test system is
maintained for a client. In addition, Elcom earns usage and volume related
fees
derived from “eMarketplace” activities, which are recognized in revenue when
earned. Elcom also earns fees from certain suppliers for maintaining their
data
in the ePurchasing software system for mutual customers, which are recognized
in
revenue over the term that the data is maintained. Elcom earns professional
service fees for implementation and other technical professional services.
As
part of the revenue recognition process, complex accounting pronouncements
must
be interpreted and significant management judgments and estimates must be
made
and applied to determine the revenue recognized in any accounting period.
Material differences may result in the amount and timing of revenue recognized
for any period if different judgments or estimates were made.
All
but
one of Elcom’s hosted services clients do not have an unfettered right to take
possession of the hosted PECOS software. The hosting services agreements
typically require Elcom to establish a functional instance of its software
system specific to the client before the hosting term begins. Hosting services
agreements also generally call for Elcom to provide technical support and
software updates and upgrades to customers during the term of the agreement.
Elcom recognizes these hosting services revenues over the hosting term, which
is
typically one year, consistent with Emerging Issues Task Force 00-3,
Application
of AICPA Statement of Position 97-2, Software Revenue Recognition, Arrangements
That Include the Right to Use Software Stored on Another Entity’s Hardware,
and
SEC
Staff
Accounting Bulleting Topic 13,
Revenue Recognition
.
Elcom
recognizes revenue on this basis because its customers do not have (except
as
noted below) the contractual right to take possession of the software at
any
time during the hosting period. Certain of these agreements provide for an
initial implementation fee for creating and bringing a client’s PECOS system
live and then provided for time-based hosting services fees thereafter. If
a
hosting services agreement accounted for under EITF 00-3 and SAB 13 provides
for
the payment of fees that are required in order for the customer to use the
software system, beyond those for hosting services, including implementation
fees, these additional fees are typically recognized ratably over the first
year
of the arrangement, if the related hosting services agreement is subject
to
annual renewal by customer. Otherwise, such fees are typically recognized
over
the term of the related agreement. Elcom entered into a large hosting services
contract that will be accounted for under EITF 00-3 and SAB 13, as the client(s)
do not have an unfettered right to take possession of the hosted PECOS software
system. The initial hosted software system has been accepted by the client,
and
the first customer began using the system in late June of 2006. In this
particular contract, Elcom will be paid certain development fees for providing
each of three phases of the specified software system, implementation fees
for
each customer that contracts to use the software system, and ongoing hosting
service fees. Because the development and implementation fees are for Elcom
professional services that are required in order for the customer(s) to use
the
hosted software system, once such professional services are complete, Elcom
will
recognize the associated fees in revenue over the remaining contract life
(initially five years) as clients in this certain arrangement do not have
annual
opportunities to cancel the arrangement. As of December 31, 2006, due to
the
limited level of use of the software system, no revenue has been recognized
under this contract.
One
of
Elcom’s customers, Capgemini UK Plc (“Capgemini”), has an unfettered contractual
right to take possession of a certain version of the eProcurement software
at
any time, and Elcom and Capgemini jointly maintain a “hot back-up site” to
support certain customer requirements. Elcom has concluded that, due to
Capgemini’s technological expertise, and the jointly maintained back-up site, it
is feasible for this customer to run the software on its own without significant
penalty. Accordingly, Elcom accounts for this contract in accordance with
SOP
97-2,
Software
Revenue Recognition
,
as
amended by SOP 98-9,
Modification
of SOP 97-2
,
Software
Revenue Recognition with Respect to Certain Transactions
(
“SOP
97-2, as amended”) using the residual method. In this case the contract calls
for a license fee, specific fees for initial professional services as locations
are brought live (implementation fees) and ongoing hosting services for each
location. Under the residual method, the total contract fee for this contract
was first allocated to the fair value of the undelivered elements (i.e.,
implementation services and hosting fees) based on their vendor specific
objective evidence (“VSOE”) and the remaining portion of the total contract fee
was allocated to the software license. Elcom determined the VSOE of fair
value
for the implementation services based upon its current and historical pricing
for those services when sold separately and VSOE of fair value for hosting
services based upon substantive renewals by clients at contractually agreed
rates. Per the terms of this contract, the timing of the payment of the license
fee for this contract was based upon the number of public entities signing
agreements. Accordingly, the license fee revenue was recognized as the
milestones were met and the license payments became due. The final milestone
was
achieved in 2004. Implementation fees for this contract are recognized as
revenue upon completion of the professional services, in accordance with
the
client specifications and hosting services fees are recognized over the hosting
services term, generally one year.
Deferred
revenue includes amounts received from customers for which revenue has not
been
recognized and generally results from advance customer payments for hosting
services fees not yet rendered and, in 2006 includes amounts related to
development and implementation services, which are being deferred until all
requirements under EIFT 00-3 and SAB 13 or SOP 97-2, as amended, as applicable,
are met. Deferred revenue is recognized upon delivery of the product, over
contract periods as services are rendered, or as other accounting requirements
underlying deferral are satisfied.
(h)
Advertising and Marketing
Elcom
expenses advertising and marketing costs as incurred. Advertising expenses,
which relate to Elcom’s ePurchasing technology product, were approximately
$140,000 and $26,000 for the years ended December 31, 2006 and 2005,
respectively.
(i)
Research
and Development
Expenditures
for the research and development of Elcom’s products to be marketed are expensed
as incurred, except for certain software development costs. There were no
software development costs capitalized during 2006 and 2005. All software
costs
are amortized as a cost of software distribution either on a straight-line
basis, or on the basis of each product’s projected revenues, whichever results
in greater amortization, over the remaining estimated economic life of the
product, which is generally estimated to be eighteen months. Elcom assesses
the
recoverability of capitalized software costs by comparing the cost capitalized
for each product, to the net of estimated future gross revenues less the
estimated future cost of completing, maintaining, supporting and disposing
of
the product.
(j)
Foreign Currency Translation
The
accounts of Elcom’s foreign subsidiary are translated in accordance with SFAS
No. 52,
Foreign
Currency Translation
.
Accordingly, assets and liabilities of these foreign subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet date. Income
and
expense accounts are translated using an average rate of exchange during
the
period. Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity and reported as part of other comprehensive
income (loss) in the statement of operations and other comprehensive income
(loss).
(k)
Income Taxes
Elcom
provides for income taxes in accordance with SFAS No. 109,
Accounting
for Income Taxes
.
Under
the asset and liability method specified by SFAS No. 109, a deferred tax
asset
or liability is determined, net of valuation allowances, based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted tax rates in effect when these differences
are
expected to be secured or settled. The effect on the deferred tax assets
and
liabilities of a change in tax rates is recognized in income in the period
that
includes the enactment date.
(l)
Stock-Based Compensation
Elcom’s
Board of Directors has adopted nine stock option plans and stockholders have
approved the adoption of all such stock option plans. As of December 31,
2006,
the Option Plans provided that up to an aggregate of 31,406,558 incentive
stock
options (ISOs) and nonqualified options may be granted to key personnel,
directors and consultants of Elcom, as determined by the compensation committee
of the board of directors. Under the terms of the option plans, ISOs are
granted
at not less than the estimated fair market value of Elcom's common stock
on the
date of grant and at 110% for shareholders who own more than 10% of the
outstanding shares. The option plans also provide that the options are
exercisable on varying dates, as determined by the compensation committee
for
each plan, and have terms not to exceed 10 years. In addition, three of Elcom’s
Option Plans allow for the exercise of vested options for a 180-day period
commencing on the date of employee termination, provided that such termination
is without “cause”. Under all other stock option plans, upon an optionee’s
termination without cause, unless an option agreement contains differing
terms
with respect to vesting and exercisability which supersedes the provisions
of
the applicable plan, all unexercisable portions of the optionee’s options lapse
and the optionee may exercise his or her vested options for up to 90 days
following the date of termination.
One
of
the option plans, the 1995 Non-employee Director Stock Option Plan (the “1995
Non-employee Director Plan”) provided for up to 250,000 nonqualified stock
options to acquire Elcom’s common stock to be reserved for grant to outside
directors of Elcom. In April 2006, all of Elcom’s then Non-Employee Directors
resigned and all outstanding options under the 1995 Non-employee Director
Plan
have lapsed. No further options may be granted under this plan, which expired
in
2005. The 1995 Non-employee Director Plan provided that upon joining the
Board
of Directors, any new non-employee director was automatically granted 5,000
nonqualified stock options, and also provided that non-employee directors
be
granted up to an additional 15,000 nonqualified stock options annually
thereafter, while remaining on the Board of Directors. The 1995 Non-employee
Director Plan provided that options be granted at fair market value on the
date
of grant, vest ratably over three years, and have terms not to exceed 10
years.
Elcom
issues stock options to its employees and outside directors pursuant to
stockholder approved stock option plans. Effective January 1, 2006, Elcom
adopted the provisions of SFAS No. 123 (Revised 2004),
Share-Based
Payments
using
the statement’s modified prospective transition method, in accordance with SAB
Topic 14:
Share-Based Payments
. Prior
to January 1, 2006, Elcom followed SFAS No. 123,
Accounting
for Stock-Based Compensation
(“SFAS
123”), as amended by SFAS No. 148,
Accounting
for Stock Based Compensation Transition and Disclosure, an amendment to FASB
Statement No. 123
which
required entities to recognize as expense over the vesting period the fair
value
of stock-based awards on the date of grant or measurement date. For employee
stock-based awards, however, SFAS Nos. 123 and 148 allowed entities to continue
to apply the intrinsic value method under the provisions of Accounting
Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
provide pro forma net earnings disclosures as if the fair-value-based method
defined in SFAS No. 123 had been applied. Elcom elected to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures in accordance
with
SFAS Nos. 123 and 148 for periods prior to January 1, 2006.
The
adoption of SFAS 123R on January 1, 2006 had the following impact on fiscal
2006 results: net loss was higher by $666,000, with no change to diluted
net
loss per share, than if Elcom had continued to account for stock-based
compensation under APB 25.
Under
the
provisions of SFAS 123R, Elcom recognizes the estimated fair value of
stock-based compensation in the consolidated statement of operations over
the
requisite service period of each option granted, which service period is
represented by each option’s vesting provisions, all of which are time-based.
All of Elcom’s stock-based compensation is accounted for as equity instruments
and there have been no liability awards granted. Under the modified prospective
transition method of SFAS 123R, Elcom applies the provisions of SFAS 123R
to all
awards granted or modified after January 1, 2006. The unrecognized expense
of
awards not yet vested as of January 1, 2006 is being recognized in the
consolidated statement of operations using the same valuation method
(Black-Scholes option pricing model) and assumptions determined under the
original provisions of SFAS 123, as disclosed in Elcom’s previous consolidated
financial statements. For the year ended December 31, 2006, Elcom recorded
stock-based compensation expense in the consolidated statement of operations
as
follows:
|
Cost
of revenues
|
|
$
|
65,000
|
|
|
Selling,
general and administrative
|
|
|
462,000
|
|
|
Research
and development
|
|
|
139,000
|
|
|
|
|
$
|
666,000
|
|
No
stock-based compensation expense for employees has been recorded for the
year
ended December 31, 2005, as all awards granted through that date had an exercise
price equal to the market value of the underlying stock at the date of award.
Prior period results have not been restated. SFAS 123R requires the presentation
of pro forma information for comparative periods presented which are prior
to
the adoption of SFAS 123R. Had compensation cost for awards under the Option
Plans (including shares from the elcom, inc
.
plan)
been determined based on the fair value method set forth in SFAS No. 123,
the
effect on Elcom’s 2005 net loss and per share amounts would have been as
follows:
|
|
|
2005
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
Net
loss:
|
|
|
|
|
As
reported
|
|
$
|
(5,840
|
)
|
|
|
|
|
|
|
|
Plus
- stock-based compensation under APB Opinion No. 25
|
|
|
1
|
|
|
|
|
|
|
|
|
Less
- stock-based compensation under SFAS 123
|
|
|
(317
|
)
|
|
Pro
forma
|
|
$
|
(6,156
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
As
reported - basic and diluted
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
Pro
forma - basic and diluted
|
|
$
|
(0.09
|
)
|
The
adoption of SFAS 123R had no impact on Elcom’s cash flows for 2006. Elcom used
the Black-Scholes valuation model to estimate the fair value of stock-based
compensation awarded after January 1, 2006. Stock option awards were made
in
both 2006 and 2005. The weighted-average gross fair value of awards under
Elcom’s stock option plans in 2006 was $0.09 per share.
The
following table summarizes assumptions used for options granted to employees
and
directors in the periods indicated:
|
|
|
2006
|
|
2005
|
|
Volatility
range
|
|
154.35
to 161.4%
|
|
163.1%
|
|
Risk-free
interest rate range
|
|
4.59
to 4.82%
|
|
4.33%
|
|
Expected
life of options
|
|
5.75
to 6 years
|
|
5
years
|
|
Expected
dividend yield
|
|
0%
|
|
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) to the end of the applicable
quarter. The volatility calculation is based on the reported trading of Elcom’s
common stock on the Over-the-Counter Bulletin Board and NASDAQ Capital 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, as of the
end
of the applicable quarter. The expected life of options is generally the
simplified method allowed under Staff Accounting Bulletin 107. 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 16% has been utilized. 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
December 31, 2006, Elcom had unamortized stock-based compensation, net of
expected forfeitures, aggregating $1,724,269, 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 24 months. The weighted average grant date fair value
of
vested and unvested options outstanding at December 31, 2006 was $22.50 and
$0.0750, respectively. The fair value of options that vested during 2006
and
2005 was approximately $.9894 and $1.407.
Information
relating to Elcom’s option plans (including convertible shares from the elcom,
inc. option plan) during each of, 2006 and 2005 is as follows:
|
|
|
Number
Of Shares
|
|
Option
Price Per Share
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2005
|
|
|
17,094,502
|
|
$
|
0.08
- 22.50
|
|
$
|
1.24
|
|
|
Granted
|
|
|
100,000
|
|
|
0.08
|
|
|
0.08
|
|
|
Terminated
|
|
|
(1,691,165
|
)
|
|
0.08
- 22.50
|
|
|
2.05
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2005
|
|
|
15,503,337
|
|
$
|
0.08
- 22.50
|
|
|
1.14
|
|
|
Granted
|
|
|
23,055,000
|
|
|
0.09
- 0.12
|
|
|
0.10
|
|
|
Terminated
|
|
|
(7,623,624
|
)
|
|
0.08
- 8.00
|
|
|
1.25
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
|
30,934,713
|
|
$
|
0.08
- 22.50
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2005
|
|
|
11,739,586
|
|
$
|
0.08
- 22.50
|
|
$
|
1.46
|
|
|
Exercisable,
December 31, 2006
|
|
|
8,188,464
|
|
$
|
0.08
- 22.50
|
|
$
|
0.99
|
|
The
following table summarizes information about stock options (including
convertible options) outstanding as of December 31, 2006:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
Range
of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.08
- 0.10
|
|
|
15,090,000
|
|
|
8.75
|
|
$
|
0.09
|
|
|
1,820,000
|
|
$
|
0.08
|
|
|
0.12 - 0.14
|
|
|
9,617,500
|
|
|
9.21
|
|
|
0.12
|
|
|
618,750
|
|
|
0.14
|
|
|
0.16 - 0.20
|
|
|
2,025,000
|
|
|
6.77
|
|
|
0.20
|
|
|
1,633,251
|
|
|
0.20
|
|
|
0.22 - 0.45
|
|
|
1,940,500
|
|
|
5.89
|
|
|
0.36
|
|
|
1,854,750
|
|
|
0.37
|
|
|
0.60 - 0.85
|
|
|
274,000
|
|
|
4.77
|
|
|
0.82
|
|
|
274,000
|
|
|
0.82
|
|
|
1.17 - 1.69
|
|
|
860,913
|
|
|
3.69
|
|
|
1.48
|
|
|
860,913
|
|
|
1.48
|
|
|
1.77 - 3.81
|
|
|
403,313
|
|
|
2.75
|
|
|
3.61
|
|
|
403,313
|
|
|
3.61
|
|
|
4.06 - 4.81
|
|
|
395,249
|
|
|
3.04
|
|
|
4.47
|
|
|
395,249
|
|
|
4.47
|
|
|
5.03 - 6.03
|
|
|
286,238
|
|
|
2.23
|
|
|
5.47
|
|
|
286,238
|
|
|
5.47
|
|
|
12.63 - 22.50
|
|
|
42,000
|
|
|
3.00
|
|
|
13.80
|
|
|
42,000
|
|
|
13.80
|
|
|
|
|
|
30,934,713
|
|
|
|
|
|
|
|
|
8,188,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
December 31, 2006, the weighted-average remaining contractual term for options
outstanding was 8.19 years, for options exercisable was 5.65 years, and for
options vested and expected to vest was 8.08 years. As of December 29, 2006
(the
last day of trading in December 2006), based on the closing price of Elcom’s
common stock on the OTCBB of $0.08 per share, the aggregate estimated intrinsic
value for options outstanding, exercisable, and for options vested and expected
to vest was nil.
Elcom’s
wholly-owned technology subsidiary, elcom, inc., also maintains a stock option
plan pursuant to which two million shares of its common stock are reserved
for
issuance. This plan has provisions similar to the option plans discussed
above.
During 2006 and 2005, 20,000 and 7,500 stock options were terminated,
respectively, leaving a balance of 299,750 and 319,750 outstanding at December
31, 2006 and 2005, respectively. All stock options under this plan were issued
at an exercise price of $3.82 and 299,750 were exercisable as of December
31,
2006. In addition, for each elcom, inc. option granted, the optionee received
0.65 of an option to purchase Elcom’s common stock, all of which were included
in Elcom’s SFAS 123 pro forma disclosures. In the event the optionee exercises
this Company stock option, the elcom, inc. stock options automatically
terminate.
Elcom
accounts for non-employee stock-based awards in which goods or services are
the
consideration received for the equity instruments issued based on the fair
value
of the consideration received or the grant date fair value of the equity
instruments issued, whichever is more reliably measurable. In 2005 Elcom
issued
a former employee a nonqualified stock option to purchase 100,000 shares
of
Elcom’s common stock at $0.08 per share, the fair market value on the date of
grant. Elcom recorded an expense of $2,000 in 2006, and $1,000 in 2005, to
reflect the expensing of a portion of the total estimated fair market value
of
the option, based on the contractual vesting term, at the date of the grant,
calculated as $0.07 per share, based on the Black-Scholes option pricing
model,
using a volatility factor of 142%, a risk free interest rate of 4.38%, an
expected dividend yield of 0%, and a contractual life of ten years. At December
31, 2006, all of these options were outstanding, and 30,000 were exercisable.
In
accordance with SFAS No 123R, Elcom utilized the shortcut method to determine
the tax windfall pool associated with stock options at December 31,
2006.
(m)
Net Loss Per Share
Net
loss
per share is based on the weighted average number of common and common
equivalent shares outstanding during each period presented, calculated in
accordance with SFAS No. 128,
Earnings
Per Share.
Basic
earnings per share (EPS) is computed by dividing income (loss) available
to
common stockholders by the weighted average number of common shares outstanding
during the periods. Diluted EPS gives effect to all potential common shares
outstanding during the period. As Elcom was in a net loss position for all
periods presented, diluted EPS is the same as basic EPS because the effect
of
any potential common stock equivalents would be anti-dilutive.
The
following potentially dilutive securities have been excluded from the
computation of diluted net loss per share since their inclusion would be
antidilutive:
|
|
|
Year
Ended
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
30,934,713
|
|
|
15,503,337
|
|
|
Warrants
|
|
|
300,000
|
|
|
450,000
|
|
(n)
Fair Value of Financial Instruments
Elcom’s
financial instruments consist mainly of cash and cash equivalents, accounts
receivable and accounts payable. The carrying amounts of Elcom’s cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
due
to the short-term nature of these instruments.
(o)
Comprehensive Income (Loss)
Elcom
follows SFAS No. 130,
Reporting
Comprehensive Income
,
which
requires presentation of the components of comprehensive earnings. The
difference between the reported comprehensive loss and the reported net loss
represents the foreign currency translation adjustment for the
period.
(p)
Segment Reporting
Elcom
applies SFAS No. 131
,
Disclosures about Segments of an Enterprise and Related
Information
,
which
establishes standards for the reporting of information about operating segments
in annual and interim financial statements. Operating segments are defined
as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker(s)
in deciding how to allocate resources and in assessing performance. SFAS
No. 131
also requires disclosures about products and services, geographic areas and
major clients. Elcom has determined that for all periods presented, there
is one
operating segment (software products) and there are two geographical areas
(the
U.S. and U.K.).
(q)
Concentration of Credit Risk and Significant Customers
SFAS
No.
105,
Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk
,
requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Elcom has no significant off-balance-sheet concentrations
such
as foreign exchange contracts, option contracts or other foreign hedging
arrangements. Elcom maintains the majority of its cash and cash equivalent
balances, which may exceed federally insured limits, with one financial
institution in the U.S and one financial institution in the U.K., both of
which
Elcom believes are stable and well-capitalized financial institutions. Elcom’s
excess cash is invested on an overnight or short-term basis in interest-bearing
accounts with these financial institutions.
The
principal financial instrument that potentially subjects Elcom to concentrations
of credit risk is accounts receivable. The majority of Elcom’s revenues are from
municipalities or relatively large companies who are not required to provide
collateral for amounts owed to Elcom. Elcom’s customers are dispersed over a
wide-geographic area and are subject to periodic review under Elcom’s credit
policies. Elcom does not believe that it is subject to any unusual credit
risks,
other than the normal level of risk attendant to operating its
business.
Concentration
of credit risk with respect to accounts receivable is limited to certain
customers to whom Elcom makes substantial sales. To reduce its credit risk,
Elcom routinely assesses the financial strength of its customers. Elcom
maintains an allowance for potential credit losses, but historically has
not
experienced any losses in excess of the loss allowance related to individual
customers or groups of customers in any particular industry or geographic
area.
One
customer represented 61% of net revenues in 2006, and 65% in 2005, respectively.
As of December 31, 2006 and 2005, one customer individually accounted for
56%
and 50% of trade accounts receivable, respectively.
(r)
Recent Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”),
Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS Statement No.
109,
which
establishes that the financial statement effects of a tax position taken
or
expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits,
that
the position will be sustained upon examination. FIN 48 is effective for
fiscal
years beginning after December 15, 2006. Elcom is currently evaluating the
possible impact of FIN 48, but does not expect any material impact to the
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements (“SFAS 157”),
which
provides guidance on how to measure assets and liabilities that use fair
value.
SFAS 157 will apply whenever another United States GAAP standard requires
(or
permits) assets or liabilities to be measured at fair value but does not
expand
the use of fair value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS 157 will
be
effective for financial statements issued for fiscal years beginning after
December 20, 2007, and will be adopted by Elcom beginning in the first quarter
of 2008. Elcom is currently evaluating the potential impact this standard
may
have on its financial position and results of operations, but does not believe
the impact of the adoption will be material.
(3)
NOTES PAYABLE
Mr.
Crowell’s $120,000 loan was repaid in cash in January 2006, and a total of
approximately $7,600 of interest was paid thereon. As of December 31, 2005,
Mr.
Crowell’s loan is recorded as a related party convertible loan payable in the
accompanying consolidated balance sheet
During
the first and third quarters of 2005, Elcom borrowed bridge loan funds, pursuant
to secured promissory notes, as amended, each in the amount of $120,000 (the
“2005 Notes”), from each of Robert J. Crowell, former Chairman and CEO of Elcom
and William W. Smith, former Vice Chairman of Elcom (each a “Holder” and,
together, the “Holders”), for a total of $240,000. The Holders’ advances
provided a portion of the funds required for Elcom to continue operating
until
Elcom’s 2005 AIM Exchange common stock issuance (see Note 6). Interest upon the
outstanding principal amount of the 2005 Notes accrued at a rate of 8%. The
Crowell and Smith 2005 Notes had different maturity provisions. Mr. Crowell’s
2005 Note provided that the principal amount and interest accrued thereon
was
due and payable within five (5) business days after Elcom notified the payee
that it has adequate funds to repay the 2005 Notes, while Mr. Smith’s 2005 Note
provided that his note is payable in full after Elcom reports two sequential
quarters of positive cash flow from operations. The 2005 Notes, at the option
of
the Holder, were convertible into Elcom’s common stock, issuable in reliance
upon an exemption from registration pursuant to Regulation D promulgated
under
the Securities Exchange Act of 1933, as amended (the “Restricted Shares”). The
2005 Notes also provided the Holders certain “piggy-back” registration rights,
in the event they opted to convert their loan into Restricted Shares.
On
December 21, 2005, Mr. Smith converted his $120,000 loan, plus approximately
$7,000 in accrued interest thereon, into 4,593,287 Restricted Shares of Elcom’s
common stock; in accordance with the 2005 Notes’ conversion terms (see Note
6).
Beginning
in early July 2005 and through December 2005, Elcom borrowed £1,165,000
(approximately $2,029,000) (the “Non-U.S. Loans”). The loan advances provided a
portion of the funds required for Elcom to continue operating until Elcom’s 2005
AIM Exchange common stock issuance. The Non-U.S. Loans bore interest at a
rate
of 8% per annum and matured upon the closing of Elcom’s 2005 AIM Exchange common
stock issuance. The Non-U.S. Loans also provided that the amounts advanced
and
related accrued interest were convertible into common stock in the 2005 AIM
Exchange common stock issuance, at the issuance price. In conjunction with
the
2005 AIM Exchange common stock issuance, Non-U.S. Loans aggregating £300,000,
plus accrued interest thereon of approximately £9,000 (totaling approximately
$547,000), were converted into 20,563,711 shares of common stock issued in
the
2005 AIM Exchange common stock issuance (see Note 6). In addition, Non-U.S.
Loans totaling £180,000 (approximately $318,000) plus interest were paid off in
2005, and the remaining £685,000 (approximately $1,179,000) balance of the
Non-U.S. Loans and related accrued interest were paid off in early January
2006.
(4)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following (in
thousands):
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Salary,
wages and benefits
|
|
$
|
448
|
|
$
|
654
|
|
|
Taxes,
including U.K. Value Added Tax
|
|
|
113
|
|
|
123
|
|
|
Financial
consulting
|
|
|
-
|
|
|
580
|
|
|
Legal
and audit fees
|
|
|
137
|
|
|
216
|
|
|
Deferred
rent
|
|
|
-
|
|
|
603
|
|
|
Interest
|
|
|
53
|
|
|
60
|
|
|
Other
accruals
|
|
|
293
|
|
|
247
|
|
|
|
|
$
|
1,043
|
|
$
|
2,483
|
|
During
2006, Elcom determined that a portion of the cost of capital recorded during
December 2002 for Cripple Creek Securities, LLC was not payable. Therefore,
$580,000 previously accrued as financial consulting was restored to paid
in
capital, and the related accrual account was reduced.
The
other
long term liability recorded on the consolidated balance sheet relates to
a
portion of a long term software license payable over five years, beginning
in
the fourth quarter of 2004. This long term software license requires payments
of
$135,000, $153,000 and $135,000, in 2007, 2008, and 2009,
respectively.
(5)
EMPLOYEE BENEFITS
Elcom
maintains two defined contribution benefit plans, one for eligible employees
in
the U.S. and one for eligible employees in the U.K. The plans contain provisions
allowing for discretionary company contributions to the U.K. defined
contribution plan, in which participating employees are 100% vested, for
the
years ended December 31, 2006 and 2005 were $93,000 and $27,000, respectively.
No discretionary Company contributions were made to the U.S. defined
contribution plan for any of the periods presented. Elcom has no material
obligations for post retirement benefits.
(6)
STOCKHOLDERS' EQUITY
(a)
Common Stock
On
July
31, 2006, the number of authorized shares of Elcom’s common stock, par value
$0.01 per share, was increased from 500,000,000 to 700,000,000.
(b)
Preferred Stock
Elcom
has
authorized 10,000,000 shares of $.01 par value preferred stock, with the
Board
of Directors authorized to fix the rights, privileges, preferences and
restrictions of any series thereof as it may designate. As of December 31,
2006
and 2005, no shares were outstanding.
(c)
Issuances of Common Stock Under Regulation S
On
December 20, 2005, Elcom sold an aggregate of 298,582,044 common shares to
investors in the U.K., and listed the 2005 Regulation S Shares on the AIM
Exchange. Elcom raised a total of approximately $7.2 million in cash, net
of
issuance costs and converted $547,000 of Non-U.S. Loans and related accrued
interest (see Note 3 to Consolidated Financial Statements) via issuance of
the
2005 Regulation S Shares in the U.K. The 2005 Regulation S Shares were sold
at a
price of £0.015 (approximately $0.0266) per share. The holders of the 2005
Regulation S Shares also have certain registration rights. The funds derived
from the sale of the 2005 Regulation S Shares were used to support Elcom’s
working capital requirements.
On
October 23, 2006, Elcom sold a total of 76,336,289 common shares to investors
in
the UK and listed the shares on the AIM Exchange. As was the case in 2005,
the
shares were issued in reliance on the exemption from registration under
Regulation S promulgated under the Securities Act of 1933, as amended (the
“Securities Act”) for offshore placements, and therefore are subject to the same
restrictions as the Regulation S Shares that were sold in 2005. Elcom raised
a
total of $2.5 million in cash in connection with the 2006 Regulation S Shares,
net of issuance costs of $24,000. The funds derived from the 2006 issuance
of
common stock on the AIM Exchange were used to support Elcom’s working capital
requirements.
|
(d)
|
Issuances
of Common Stock Under Regulation
D
|
On
February 24, 2006, Elcom issued 3,458,293 shares of common stock to its landlord
in satisfaction of deferred rent totaling $250,000. The stock was issued
at a
per share price of $0.0723, which represents the mean of the average closing
bid
and ask prices of Elcom’s common stock on the AIM Exchange on June 20, 2005 and
January 31, 2006, as agreed between the landlord and Elcom. These shares
are not
registered under the Securities Act, and were issued in reliance upon an
exemption from registration pursuant to Regulation D promulgated under the
Securities Act.
On
December 21, 2005, Mr. Smith converted his 2005 Note principal of $120,000,
plus
approximately $7,000 in accrued interest thereon (see Note 3), into 4,593,287
shares of Elcom’s common stock, issued in reliance on an exemption from
registration pursuant to Regulation D promulgated under the Securities Act,
issued at a per share price of approximately $0.0276. The per share conversion
price was based upon a weighted average of the 2005 AIM Exchange common stock
issuance and a fifty (50) day average of the closing bid and ask prices of
Elcom’s 2004 Regulation S shares on the AIM Exchange, in accordance with the
terms of the 2005 Notes. Mr. Smith has certain “piggy-back” registration rights,
also in accordance with the terms of the 2005 Notes.
On
December 22, 2005, Elcom’s 10% Senior Convertible Debentures (the “Debentures”)
and all interest accrued thereon, automatically converted into Elcom common
stock as a result of the acquisition of a majority interest in Elcom by Smith
& Williamson Investment Management Limited (“SWIM”) and Smith &
Williamson Nominees Limited (“SWIM Nominees,” and collectively with SWIM, the
“SWIM Entities”). Elcom was informed of this change in control on March 6, 2006
when the SWIM Entities filed a Form 13D with the SEC. The bulk of the SWIM
Entities’ shares are 2005 Regulation S Shares. Based on the SWIM Entities’
Schedule 13D, and Elcom’s records, including the shares issued upon conversion
of the SWIM Nominees’ Debentures, the SWIM Entities owned approximately 64.1% of
Elcom’s outstanding common stock as of December 31, 2005. An aggregate of
34,164,959 shares of Elcom common stock (the “Debenture Shares”) were issued
upon the automatic conversion of Debenture principal of approximately $1,264,000
and cumulative interest accrued (since issuance) of approximately $323,000.
As
further described in the Note (6) (f) below, the Debentures converted at
an
amended per share price of approximately $0.04643. Robert J. Crowell, former
Chairman of Elcom, William W. Smith, former Vice Chairman of Elcom, and John
E.
Halnen, former President, Chief Executive Officer and a Director of Elcom,
each
held Debentures and, as a result of the conversion of the Debentures, 12,121,413
Debenture Shares were issued to Mr. Crowell, 9,496,995 Debenture Shares were
issued to Mr. Smith and 1,636,957 Debenture Shares were issued to Mr. Halnen.
The Debenture Shares are not registered under the Securities Act, and were
issued in reliance upon an exemption from registration pursuant to Regulation
D
promulgated under the Securities Act. The holders of the Debenture Shares
have
certain registration rights.
As
stated
above, these common shares were issued in reliance upon an exemption from
registration provided by Regulation D of the Securities Act. As such, the
shares
so issued may not be offered or sold in the U. S. absent registration or
an
applicable exemption from registration requirements, such as pursuant to
Rule
144 (as described above) under the Securities Act.
(e)
Warrants
|
|
|
Twelve
Months Ended
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Warrants
|
|
|
300,000
|
|
|
450,000
|
|
On
December 30, 1999, the Company signed a Structured Equity Line Flexible
Financing Agreement (the “Equity Line”) with Cripple Creek Securities. In
September 2000, the Company sold 60,952 shares to Cripple Creek under the
Equity
Line for $320,000. The Company terminated the Equity Line on November 29,
2001.
On December 3, 2001, the Company issued warrants to purchase 145,200 and
4,800
shares of common stock to Cripple Creek. The warrants were exercisable, had
an
exercise price of $1.81 and $6.30, respectively, and expired on December
2,
2006. The fair market value of the warrants at the date of the grant was
$1.21
and $1.01 per share, respectively, based on the Black-Scholes option pricing
model, using a volatility factor of 119%, a risk free interest rate of 4.5%,
an
expected dividend yield of 0%, and a contractual life of five years.
On
March
29, 2002, Elcom issued warrants to purchase 300,000 shares of Elcom’s common
stock to the company that acquired Elcom’s U.S. IT products business (see Note
8). The warrants have an exercise price of $1.03 per share and expire on
March
29, 2009. The fair market value of the warrants at the date of the grant
was
$0.91 per share, based on the Black-Scholes option pricing model, using a
volatility factor of 119%, a risk free interest rate of 3%, an expected dividend
yield of 0%, and a contractual life of seven years. At December 31, 2006,
all of
these warrants were outstanding and exercisable
.
(7)
COMMITMENTS AND CONTINGENCIES
(a)
Leases
Elcom
has
entered into capital leases for various software, furniture, computer, telephone
and other equipment. The lease terms range from two to four years and, upon
expiration, all leases provide purchase options at a nominal price. Property,
equipment and software includes assets acquired under capital leases totaling
$1,938,000 and $1,623,000 at December 31, 2006 and 2005, respectively. Related
accumulated amortization was $1,686,000 and $1,589,000 as of December 31,
2006
and 2005, respectively. Amortization of leased assets is included in
depreciation and amortization expense.
Elcom
entered into a non-cancelable operating lease for its headquarters office
space
in 1993. In early 2006, the period covered by the lease was extended from
July
31, 2006 to December 31, 2007. During 2004 and 2005 the lease was amended
to
allow Elcom to defer a portion of the lease payments to future periods. Such
deferrals amounted to $603,000 as of December 31, 2005. In early 2006, Elcom
paid $353,000 of the deferred amount in cash and issued 3,458,293 shares
of its
common stock in satisfaction of the $250,000 balance. The shares were issued
at
a per share price of $0.0723, which represents the median of the average
of the
closing bid and ask prices of Elcom’s Regulation S shares on the AIM Exchange on
June 20, 2005 and January 31, 2006, in accordance with the terms of Elcom’s
lease agreement, as amended on June 20, 2005. These shares of Elcom’s common
stock were issued in reliance on an exemption from registration pursuant
to
Regulation D promulgated under the Securities Act.
The
office lease requires current payment by Elcom of base rent and all related
operating expenses of the building, including real estate taxes and
utilities.
Future
minimum rental payments under non-cancelable leases as of December 31, 2006
are
as follows:
|
Year
Ending December 31 (in thousands)
|
|
Capital
Lease
|
|
Operating
Lease
|
|
|
2007
|
|
$
|
136
|
|
$
|
284
|
|
|
2008
|
|
|
134
|
|
|
—
|
|
|
2009
|
|
|
41
|
|
|
—
|
|
|
Total
minimum lease payments
|
|
|
311
|
|
$
|
284
|
|
|
Less
amounts representing interest
|
|
|
(33
|
)
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
278
|
|
|
|
|
|
Current
portion
|
|
|
114
|
|
|
|
|
|
Long
term portion
|
|
$
|
164
|
|
|
|
|
Rent
expense for operating leases amounted to approximately $284,000 and $430,000,
for the years ended December 31, 2006 and 2005, respectively.
(b)
Employment Contracts and Personnel Expenses
None
of
the key executives have employment contracts, which provide for annual salary,
incentive payments, and severance arrangements. We are currently in the process
of formulating employment contracts for key executives.
In
prior
periods, certain employees elected to receive lower salaries while Elcom
implemented its cost containment programs. The amounts due to executive officers
under these arrangements are included in related party accrued salary, bonuses
and interest, and the balance due other employees is included in accrued
expenses and other current liabilities. Upon the achievement of positive
operating cash flow for two sequential quarterly periods, Elcom will begin
to
repay the amounts owed to these employees. As of December 31, 2006, the
total deferred salary amount was $1,186,000, with approximately $714,000
of such
balance due to Robert J. Crowell, Chairman of Elcom until April 21, 2006;
approximately $42,000 of such amount is due to Gregory King, Elcom’s Executive
Vice President of Business Development, who was appointed a Director of Elcom
in
August 2006; and approximately $237,000 of such amount was due to John E.
Halnen, President and Chief Executive Officer and a Director of Elcom until
June
20, 2007. As of December 20, 2007, the total deferred salary amount was
$856,000, with approximately $714,000 of such balance due to Robert J. Crowell,
approximately $42,000 of such amount is due to Mr. King. As of
December 21, 2005, Elcom and Mr. Crowell entered into an Accrued
Salary Payment Agreement, pursuant to which Elcom shall pay the accrued salary
amount in installments less applicable withholdings. Elcom shall only begin
to
pay the accrued salary amount upon Elcom achieving 2 sequential quarterly
periods of positive operating cash flow (excluding cash-inflows from financing)
and the Board in its sole discretion, shall determine the specific amount
of any
such payment. Elcom has evaluated these liabilities under SFAS 5 and has
determined at this time that the likelihood of incurring additional amounts
than
what has been recorded is remote.
(c)
Contingencies
Elcom’s
customer contracts typically contain customary provisions that indemnify
customers for losses that they may incur in the unlikely event that there
is an
intellectual property infringement claim made against the customer relating
to
use of Elcom’s PECOS products. Elcom believes that the financial risk relating
to these provisions is insignificant.
Elcom
entered into a framework agreement with Mr. Arshad A. Khan, in which Mr.
Khan either directly in conjunction with another company or through his
company(s) has granted Elcom exclusive rights to serve as electronic procurement
platform provider (as a subcontractor) to bid on both private and public
sector
contracts generally, but mainly in the Middle East, subject
to negotiation, execution and delivery of formal legally binding agreements
with
him, his company(s) or associated companies customers. Under the
terms of the agreement, Elcom deposited
€1,000,000
(approximately
$1,200,000)
with Mr. Khan as a performance bond. The funds were held to Elcom’s order but
have not as yet been returned by Mr. Khan notwithstanding Elcom's request
for their return. Elcom has initiated legal action against Mr. Khan
in order to recover the $1.2 million performance bond. The litigation is
in its
initial stages and it is too early to predict the outcome of such claims.
Elcom
is
in a contractual dispute with PA Consulting in respect of the Zanzibar contract,
Elcom is also considering initiating an intellectual property claim against
the
same firm. There can be no assurance that Elcom will be successful in any
potential intellectual property claim against PA
Consulting.
From
time
to time Elcom is party to various litigation related to contractual issues,
employment matters and other issues arising out of the normal conduct of
its
business. Elcom believes that, based on discussions with its counsel, the
estimable range of loss, if any, related to litigation is not material in
relation to the consolidated financial statements.
(8)
DISCONTINUED OPERATIONS
On
December 31, 2001, Elcom sold substantially all of the assets and liabilities
of
Elcom's United Kingdom information technology remarketer business .The results
of discontinued operations were zero for the years ended December 31, 2006
and
2005.
Assets
and liabilities of discontinued operations consisted of accrued expenses
and
other current liabilities of $42,000 at December 31, 2006 and $62,000 at
December 31, 2005
(9)
BUSINESS SEGMENT INFORMATION
Elcom’s
continuing operations are classified as a single business segment, specifically
the development and hosting of purchasing Internet-based software solutions
which automate many supply chain and financial settlement functions associated
with procurement. The basic approach used in respect of corporate allocations
recognizes that in almost all respects the U.K. operates as a sales and limited
service branch of the US parent. Elcom operates both in the U.S. and U.K.
and
geographic financial information for the years ended December 31, 2006 and
2005,
were as follows (in thousands):
|
|
|
For
Years ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Net
revenues
|
|
|
|
|
|
|
U.S.
|
|
$
|
824
|
|
$
|
718
|
|
|
U.K.
|
|
|
2,394
|
|
|
1,987
|
|
|
Net
revenues
|
|
$
|
3,218
|
|
$
|
2,705
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
459
|
|
$
|
505
|
|
|
U.K.
|
|
|
2,087
|
|
|
1,491
|
|
|
Gross
profit
|
|
$
|
2,546
|
|
$
|
1,996
|
|
Identifiable
assets as of December 31, 2006 and 2005 are as follows:
|
|
|
2006
|
|
2005
|
|
|
Identifiable
assets from continuing operations
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,352
|
|
$
|
4,522
|
|
|
U.K
|
|
|
1,617
|
|
|
3,252
|
|
|
|
|
|
2,969
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
2,806
|
|
$
|
7,774
|
|
(10)
INCOME TAXES
Loss
before income taxes consisted of:
|
|
|
2006
|
|
2005
|
|
|
U.S.
|
|
$
|
(3,235
|
)
|
$
|
(3,348
|
)
|
|
Foreign
|
|
|
(3,597
|
)
|
|
(2,492
|
)
|
|
|
|
$
|
(6,832
|
)
|
$
|
(5,840
|
)
|
Due
to
its ongoing operating losses, Elcom does not record an expense or benefit
for
income taxes as any benefit recognized would be fully reserved as discussed
below.
The
following table summarizes the significant differences between the United
States
federal statutory tax rate and Elcom’s effective tax rate for financial
statement purposes:
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
Non
deductible debenture costs and other
|
|
|
(291.9
|
)
|
|
8.3
|
|
|
Valuation
reserve provided against utilization of net operating loss
carryforwards
|
|
|
257.9
|
|
|
(42.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Deferred
tax assets (liabilities) consisted of the following as of December 31 (in
thousands):
|
|
|
2006
|
|
2005
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Nondeductible
reserves
|
|
$
|
29
|
|
$
|
294
|
|
|
Accrued
expenses
|
|
|
539
|
|
|
865
|
|
|
Depreciation
|
|
|
2,643
|
|
|
6,414
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
net operating loss carryforwards
|
|
|
3,369
|
|
|
6,946
|
|
|
FAS
123 R
|
|
|
268
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Net
federal and state operating loss carryforwards
|
|
|
43,407
|
|
|
52,206
|
|
|
|
|
|
50,255
|
|
|
66,725
|
|
|
Valuation
allowance
|
|
|
(50,255
|
)
|
|
(64,193
|
)
|
|
Net
deferred tax assets
|
|
|
—
|
|
|
2,532
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Other
intangible assets
|
|
|
—
|
|
|
(2,532
|
)
|
|
|
|
|
—
|
|
|
(2,532
|
)
|
|
Net
deferred taxes
|
|
$
|
—
|
|
$
|
—
|
|
Elcom
records a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. Based on Elcom’s recent losses and
belief that losses will continue in 2007, Elcom has recorded a valuation
allowance equal to 100% of its net deferred tax assets. In the event Elcom
were
to determine that it would be able to realize its deferred tax assets in
the
future, a reduction to the valuation allowance would increase income in the
period such determination was made.
At
December 31, 2006, Elcom had U.S. federal net operating loss carry forwards
of
approximately $124.8 million, which are available to offset future Federal
taxable income. These losses expire during the years 2012 through
2023.
Section
382 of the Internal Revenue Code of 1986 and the Treasury Regulations
promulgated thereunder subjects the prospective utilization of the net operating
losses and certain other tax attributes, such as tax credits, to an annual
limitation in the event of an ownership change. An ownership change under
Section 382 generally occurs when the ownership percentage of 5-percent
stockholders, or stockholders in the aggregate, change by more than 50
percentage points over a three-year period. As a result of equity offerings,
most of Elcom's net operating losses and tax credits are subject to these
limitations. The losses and tax credits subject to these limitations under
Section 382 would generally be available to Elcom, over time, if Elcom is
in a
position to utilize them.
Elcom's
ability to utilize its net operating loss and general business tax credit
carryforwards may be further limited in the future if Elcom experiences
additional ownership changes as a result of future transactions.
At
December 31, 2006, Elcom had state net operating loss carryforwards of
approximately $22.4 million, which are available to offset future state taxable
income. These losses expire during the years 2003 through 2026.
At
December 31, 2006, Elcom had foreign net operating loss carryforwards of
approximately $10.0 million, which are available to offset future foreign
taxable income. Generally, these losses may be carried forward
indefinitely.
Elcom
believes that it is more likely than not that the deferred tax assets at
December 31, 2006 will not be fully realized in the future. The valuation
allowance as of December 31, 2006 includes a tax effect of approximately
$12.4
million attributable to Federal deductions associated with employee stock
option
plans, the benefit of which will be recorded as an increase to paid in capital
when realized or recognized.
(11)
SUBSEQUENT EVENTS
On
February 5, 2007, Elcom sold 73,230,009 common shares to investors in the
U.K.
and listed the shares on the AIM Exchange. Elcom raised a total of $2.5 million
in cash, net of issuance costs of $23,948. The funds derived from the 2007
issuance of common stock on the AIM Exchange are being used to support Elcom’s
working capital requirements until Elcom achieves positive cash flow.
On
April
26, 2007, the Company received notice from the NASD that it was in violation
of
NASD Rule 6530 as a result of its failure to file this Annual Report on Form
10-KSB with the Securities and Exchange Commission within the prescribed
time
period, and if such delinquency was not cured by 5:30 p.m. Eastern Daylight
Saving Time on May 18, 2007, the Company’s stock would not be eligible for
quotation on the OTC Bulletin Board (the “OTCBB”) and would thereafter be
removed from the OTCBB. On May 18, 2007, our stock was suspended from the
OTCBB
due to a delay in our filing this annual report for the year ended December
31,
2006 with the SEC and since then our stock has been listed in the Pink
Sheets.