Final Results

RNS Number:5448K
Elcom International Inc
21 December 2007

Elcom International, Inc.
("Elcom" or "the Company")

2006 ANNUAL RESULTS

NORWOOD, MA, December 21, 2007 - Elcom International, Inc. (Pink Sheets: ELCO
and AIM: ELC and ELCS), today announces operating results for its year ended
December 31, 2006.
                          Financial Summary Table
                 (in thousands, except per share amounts)

                                                   Year Ended December 31
                                                  2006                2005
                                                     $                   $
Net sales                                        3,218               2,714
Gross profit                                     2,546               1,996
Operating loss                                  (6,841)             (4,242)
                                                 -----               -----
Net loss                                        (6,832)             (5,840)
                                                 =====               =====

Basic and diluted net loss per share             (0.01)              (0.08)

Basic and diluted weighted average
common shares outstanding                      416,209              72,173
                                               =======              ======

The above table, the following description and the condensed consolidated
financial statements should be read in conjunction with the Risk Factors and
other information contained in the Company's 2006 Annual Report on Form 10-KSB.

Trading in the Company's shares on AIM remains suspended pending the
announcement of its interim results to 30 June 2007 which the Company expects to
be able to release in January 2008.

Overview

Elcom International, Inc. ("Elcom"), a corporation formed in Delaware in
December 1992, is a leading provider of Internet-based remotely-hosted,
integrated eProcurement and eMarketplace solutions and services ("ePurchasing")

In the U.K., we have a substantial contract with Capgemini UK Plc ("Capgemini")
associated with the Scottish Executive's eProcurement Scotl@nd Programme, where
Elcom provides an ePurchasing system to agencies, councils, and National Health
Service of Scotland (hospitals) Trusts ("Public Entities") in Scotland. We
signed agreements with five Public Entities in 2005 and one in 2006, bringing
the total number of Public Entities in the eProcurement Scotland program to 26.
There are approximately 47 Public Entities potentially available to join the
eProcurement Scotland program, and possibly more, depending upon the Scottish
Executive's definition of eligibility. We earn implementation fees and monthly
hosting services fees for each Public Entity that joins the eProcurement
Scotland program. Capgemini is the prime contractor in the Scottish Executive
Agreement. Elcom subcontracts under this agreement as the technology service
provider. During 2006 this contract accounted for over 61% of our revenues and
we continue to remain dependent on it.

In addition, we are a member of a consortium led by PA Consulting Group UK Plc
("PA"), a world-wide consulting firm, which has been awarded a contract, and has
executed agreements, including a Framework Agreement between Proc-Serve Shared
Services Ltd. ("PSSL"), 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 "Zanzibar eMarketplace"). The Zanzibar eMarketplace agreements
were signed on August 12, 2005 and have a primary term of five years. PSSL is
the primary contractor and Elcom, as a subcontractor to PSSL, will provide the
eProcurement and eMarketplace components of the Zanzibar eMarketplace system.
Generally, the costs of administrating the Zanzibar eMarketplace contract will
be shared by the consortium members, based upon each member's share of revenues.
Accordingly, we will only realize a portion of its earned revenues, after costs
of the PSSL entity are accounted for. The Zanzibar eMarketplace agreements
provide for one-time installation fees and recurring monthly hosting services
fees, as well as payments for certain development work. The agreements do not
provide PSSL with unfettered rights to the underlying Elcom technology, and
therefore we anticipate that it's realized development fees will be ratably
recognized over the applicable term of the agreement. As of December 2006, four
U.K. Public Entities have officially "gone live". We are currently in a
contractual dispute with PA Consulting in respect of the Zanzibar contract, and
also considering initiating an Intellectual Property claim against the same
firm.

Year ended December 31, 2006 compared to the year ended December 31, 2005

Net Revenues. Net revenues for the year ended December 31, 2006 increased to
$3,218,000 from $2,714,000 in 2005, an increase of $504,000, or 19%. License,
hosting services and other fees for 2006 increased to $2,710,000 from $2,081,000
in 2005, an increase of $629,000 or 30%. This increase is primarily due to
higher hosting services revenue related to the Scottish Executive's eProcurement
Scotl@nd Programme related fees. License, hosting services and other fees
include license fees, hosting services fees, test system fees, supplier fees,
usage fees and eMarketplace agent and affiliate fees. Professional services fees
for 2006 decreased to $508,000, from $633,000 in 2005. Deferred revenue includes
$90,000 related to Zanzibar eMarketplace, the bulk of which relates to
implementation services that are ongoing as of December 31, 2006. We began
accreting professional services revenue to the Zanzibar eMarketplace in May
2007.

Revenues from Capgemini associated with the Scottish Executive Department of the
Government of Scotland (the "Scottish Executive"), comprised 61% and 53% of net
revenues for the years ended December 31, 2006 and 2005, respectively.

Gross Profit. Gross profit for the year ended December 31, 2006 increased to
$2,546,000 from $1,996,000 in 2005, an increase of $550,000, or 28%. This
increase is primarily the result of an increase in license, hosting services and
other fees recognized in 2006 over that in 2005. In addition, we recorded a
lower level of cost of revenues in 2006, primarily as a result of decreased
personnel time required to support the established customer base.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the year ended December 31, 2006 were
$8,156,000 compared to $5,413,000 in 2005, an increase of $2,743,000, or 50%.
The main increase relates to a bad debt write off of the Khan deposit of
$1,200,000. In addition, because of the cash constraints experienced over the 
last several years, we have operated with as few personnel as possible. In order
to address staffing requirements related to the increasing level of business 
activity, we engaged third party contractors during late 2005 and through the 
beginning of the second quarter of 2006, and began to hire additional personnel 
in April 2006. Personnel expenses recorded in 2006 include $462,000 of stock 
option expense related to the adoption of SFAS 123R, which requires the 
expensing of stock-based compensation (stock options). In addition to the 
increase in personnel expenses, the primary reasons for the increase in SG&A 
expenses as compared to 2005 relate to additional software licensing, computer 
supplies and other computer infrastructure expenses of $113,000 related to our 
growing business, as well as an increase in legal expenses of $128,000 related 
to the change in control. Increases in travel and marketing expenses in 2006 
were offset by a reduction in facilities expenses in 2006, as we renegotiated 
our headquarters lease in the first quarter of 2006.

Research and Development Expenses. Research and development expenses for the
years ended December 31, 2006 and 2005 were $1,231,000 and $825,000
respectively, an increase of $406,000, or 49%, in 2006 over 2005. The increase
in expense in 2006 primarily relates to ongoing work associated with improving
the data interchange inbound interface capabilities of our PECOS technology.
Additionally, the increase in research and development expense is due to an
increased level of development activity as noted above, as well as stock-based
compensation expense of $139,000.

Operating Loss. We reported a loss from operations of $6,841,000 for the year
ended December 31, 2006 compared to a loss of $4,242,000 for the year ended
December 31, 2005, an increase in the operating loss of $2,599,000 or 61%. This
increased operating loss in 2006 compared to 2005 was primarily due to the
increase in SG&A expenses and research and development expenses in 2006.

Interest Expense. Interest expense for the year ended December 31, 2006 was
$69,000, a decrease of $1,536,000 over the $1,605,000 of interest expense
recorded for the year ended December 31, 2005. The decrease in interest expense
was due primarily to $1,419,000 recorded in 2005 as non-cash amortization of the
beneficial conversion feature on the ten-year 10% Senior Convertible Debentures
due 2013 issued by us. The Debentures converted into common stock in December
2005.

Interest and Other Income, Net. Interest and other income, net for the year
ended December 31, 2006 was $78,000 versus $7,000, for the year ended December
31, 2005. The change from 2005 to 2006 is largely due to the interest income
related to funds raised during 2006.

Net Loss. We generated a net loss for the year ended December 31, 2006 of
$6,832,000, versus a net loss of $5,840,000 for the year ended December 31,
2005, an increase in the loss of $992,000, or 17%.

Liquidity and Capital Resources

Net cash used in operating activities from continuing operations for the year
ended December 31, 2006 was $6.3 million, resulting primarily from a net loss
from continuing operations of $6.8 million. This cash outflow included the $1.2
million of the performance bond that was deposited with an individual, Mr.
Arshad A Khan. The funds advanced as a performance bond to Mr. Khan were due to 
be returned to us on or before the May 15, 2007. As of the date of this filing, 
the funds have not been returned. In light of this, we have written off the 
entire balance as a bad debt (SG&A expense) as of December 31, 2006. We have 
initiated legal proceedings against Mr. Khan personally to recover this amount. 
This transaction has had a material effect on our cash position and will require 
the raising of additional capital. There can be no assurances that we will be 
successful in its actions against Mr. Khan.

As previously announced, on October 23, 2006, we agreed to issue an aggregate of
76,336,289 shares to investors in the U.K., and listed the Shares on the AIM
Exchange. We raised a total of $2.5 million in cash, net of issuance costs. The
Regulation S Shares were sold at a price of £0.0175 (approximately $0.03297) per
share. The funds derived from the 2006 issuance of common stock are being used
to support our working capital requirements.

Subsequent to year-end, on February 5, 2007, we agreed to issue 73,230,009
shares to investors in the U.K. and listed the shares on the AIM Exchange. As
was the case in 2005 and 2006, the shares were issued in reliance on the
exemption from registration under Regulation S promulgated under the Securities
Act of 1933, as amended for offshore placements, and therefore are subject to
the same restrictions as the Regulation S Shares sold previously. 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 our working capital requirements.

At December 31, 2006, our principal sources of liquidity were cash and cash
equivalents of $1,086,000 and net accounts receivable of $692,000.

Our principal commitment consists of a lease on our headquarter office facility.
We will also require ongoing investments in research and development and
property, equipment and software in order to further increase operating revenues
and meet the requirements of its customers.

Risk Factors Relating to Liquidity

Our consolidated financial statements as of December 31, 2006 have been prepared
under the assumption that we will continue as a going concern for 2007. Our
independent registered public accounting firm, Malone & Bailey, P.C., have
issued a report dated December 17, 2007 that included an explanatory paragraph
referring to the significant operating losses and substantial doubt in its
ability to continue as a going concern without generating incremental operating
revenues or, if required, additional capital becoming available. Our ability to
continue as a going concern is dependent upon its ability to raise additional
capital. We are currently in discussions with a number of financing sources with
a view to securing additional capital. It is anticipated that the outcome of
these discussions will be finalized in the first quarter of 2008.

Factors Affecting Future Performance

A significant portion of our revenues are from license 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 our ePurchasing solution 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 ePurchasing solution; the
procurement of additional services from us by Public Entities associated with
the Scottish Executive; Capgemini's relationship with the Scottish Executive;
and their compliance with the terms and conditions of their agreement with the
Scottish Executive and our ability to perform under our agreement with
Capgemini.

In addition, during July 2007 we committed incremental resources to provide the
eProcurement and eMarketplace components of the Zanzibar eMarketplace for public
sector organizations in the U.K. under our agreements with PASSL and PA. Future
revenue under this arrangement is contingent primarily on the timing and rate of
adoption by U.K. Public Entities of the Zanzibar eMarketplace. The Zanzibar
eMarketplace agreements provide for one-time installation fees and recurring
monthly hosting services fees, as well as payments to us for certain development
work. The agreements do not provide PASSL with unfettered rights to the
underlying Elcom technology, and therefore we anticipate that our realized
development fees will be ratably recognized over the applicable term of the
agreement. As of December 2006, four U.K. Public Entities officially "went
live", and as of December 2007, this number had increased to nine. We are
currently in a contractual dispute with PA Consulting in respect of the Zanzibar
contract; we are also considering initiating an intellectual property claim
against the same firm. There can be no assurance that we will be successful in
any potential IP claim against PA Consulting.

If further business fails to develop under the Capgemini agreement or if the
Zanzibar eMarketplace does not attract a profitable level of clients, or if the
U.S. initiatives do not expand as expected, or if we are unable to perform under
any of these agreements, it would have a material adverse effect on our future
financial results.

Outlook

As evidenced by the level of SG&A and research and development, our expenditures
in 2006 have increased as compared to 2005 and years prior to 2005. Because of
cash constraints experienced over the last several years, we had to address
staffing requirements related to its increasing level of business activity. The
number of our employees increased by eleven in 2006, although it has
subsequently decreased by eight. SG&A and research and development expenses
included $666,000 of combined stock option expense related to the initial
implementation of SFAS 123R, which requires the expensing of stock-based
compensation (stock options). In addition to personnel increases and stock-based
compensation, increases in expenditures related to additional software
licensing, computer supplies and other computer infrastructure expenses related
to our growing business were experienced. Improvements in revenues and operating
results from operations in future periods will not occur without our being able
to generate incremental operating revenues from existing and new clients.

Independent accountants and internal controls

On September 20, 2007, we dismissed Vitale Caturano & Company, Ltd ("VCC") as
our principal independent accountants. The decision to dismiss VCC was approved
by our audit committee and board of directors.

The report of VCC for our 2005 financial statements did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to audit
scope or accounting principles, except that the report contained an explanatory
paragraph relating to the Company's ability to continue as a going concern.

During the fiscal year ended December 31, 2005 , there were no disagreements
between the Company and VCC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to VCC's satisfaction would have caused VCC to
make reference to the subject matter of the disagreement in connection with its
report.

In preparing the audit for the fiscal year ended December 31, 2006, management
and VCC discovered that, during the fourth quarter of 2006, a cash deposit made
by the Company with a sales agent of Euro1,000,000 (approximately $1,200,000) in
connection with a potential bid for government contracts outside the United
States was completed without approval of our board. As a result of this
discovery, we investigated the transaction and further reviewed our internal
controls. During this review, we and VCC identified certain material weaknesses
in our internal controls relating to approval of transactions and cash
management. Since such review, we have strengthened our internal controls by
adopting additional internal controls policies and procedures relating to cash,
cash management and corporate governance. VCC performed no work subsequent to
the commencement of the Company's additional review and investigation.

On August 30, 2007, we engaged Malone & Bailey PC ("MB") as our new principal
independent accountant to audit our financial statements for, 2006 and 2007.
During the two most recent fiscal years and the interim period preceding the
engagement of MB, we did not consult with MB regarding either (i) the
application of accounting principles to a specific transaction, either completed
or proposed, or the type of audit opinion that might be rendered on our
financial statements, and MB did not provide a written report or oral advice to
us that was an important factor considered by us in reaching a decision as to
the accounting, auditing or financial reporting issue, or (ii) any matter that
was either the subject of a disagreement or an event identified in Item 304(a)
(1)(iv) of Regulation S-B.

In deciding to select MB, our Audit Committee considered MB's experience and
expertise related to public companies, as well as reviewed auditor independence
issues and existing commercial relationships with MB. The Audit Committee
concluded that MB has no commercial or other relationship that would impair its
independence and has the appropriate expertise that we required regarding our
current operations.

Management, including the Chief Executive Officer and Executive Vice President
of Finance, have evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by the 2006 Annual
Report on Form 10-KSB. Based upon that evaluation, the Chief Executive Officer
and Executive Vice President of Finance have concluded that the disclosure
controls and procedures were not effective at the reasonable assurance level
because of material weaknesses.

The Public Company Accounting Oversight Board has defined a material weakness as
a "significant deficiency or combination of significant deficiencies that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected." In
relation to the audit for the year ended December 31, 2006, management and our
independent registered public accounting firm identified the following material
weaknesses in our internal controls:a contract in which a cash performance bond 
of Euro1,000,000 (approximately $1,200,000) was posted was entered into in the 
4th quarter of 2006 without proper Board approval.

Following the identification of this material weakness, the Board consulted with
the independent registered public accounting firm and engaged outside counsel to
provide advice to the Board as to the remedial action to be adopted in these
circumstances. Based on outside counsel's advice, the Board appointed two
Directors who had no involvement or visibility in connection with this
transaction to undertake an investigation of the transaction in the first
instance, followed by a full evaluation of corporate governance. We delayed the
submission of the Form 10-KSB in order to conclude the investigation. The
investigation concluded that the corporate governance procedures were inadequate
during the period in question and that these deficiencies constituted a material
weakness in the corporate governance and the disclosure controls and procedures.

STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

Except for the historical information contained herein, the matters discussed
herein could include forward-looking statements or information. All statements,
other than statements of historical fact, including, without limitation, those
with respect to our 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 we believe that such forward-looking statements are
reasonable, we can give no assurance that our expectations are, or will be,
correct. These forward-looking statements involve a number of risks and
uncertainties which could cause our future results to differ materially from
those anticipated, including: (i) the necessity for us 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, and control of expenses and revenue growth; (ii) the consequent
results of operations given the aforementioned factors; (iii) the necessity to
achieve profitable operations within the constraints of its existing resources
and, if it can not, the availability of incremental capital funding; and (iv)
other risks detailed from time to time in the Annual Report on Form 10-KSB and
in our other SEC reports and statements. We assume no obligation to update any
of the information contained or referenced herein or in the Annual Report on
Form 10-KSB.

The financial data set forth below should be read in conjunction with the
Consolidated Financial Statements and other disclosures contained in the
Company's 2006 Annual Report on Form 10-KSB, as amended and Forms 10-QSB for the
periods ended March 31, June 30, and September 30, 2006, as well as the
Company's 2005 Annual Report on Form 10-KSB.


            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
            (Unaudited, in thousands, except per share data)

                                              For the year ended December 31
                                                       2006             2005
                                                          $                $

Net revenues:
License hosting services and other fees               2,710            2,081
Professional services                                   508              633
                                                   --------         --------
                                                      3,218            2,714
Cost of revenues                                        672              718
                                                   --------         --------
Gross profit                                          2,546            1,996
Operating expenses:
Selling, general and administrative                   8,156            5,413
Research and development                              1,231              825
                                                   --------         --------
Total operating expenses                              9,387            6,238
                                                   --------         --------
Operating loss                                       (6,841)          (4,242)
Interest expense                                        (69)          (1,605)
Interest and other income, net                           78                7
                                                   --------         --------
Income loss before income taxes                      (6,832)          (5,840)
Income taxes                                              -                -
                                                   --------         --------
Net loss                                             (6,832)          (5,840)
Comprehensive income (loss), net of tax                 281              (29)
                                                   --------         --------
Comprehensive loss                                   (6,551)          (5,869)
                                                   --------         --------
Basic and diluted net loss per share                  (0.01)           (0.08)
                                                   --------         --------
Weighted average number of basic and
diluted shares outstanding                          416,209           72,173


                   CONDENSED CONSOLIDATED BALANCE SHEETS
                        (Unaudited, in thousands)

                                                            December 31
                                                       2006             2005
                                                          $                $

Assets
Current assets:
Cash and cash equivalents                             1,086            6,399
Accounts receivable, net                                692              503
Prepaids and other current assets                       218              119
                                                    -------          -------
Total current assets                                  1,996            7,021
                                                    -------          -------
Property, equipment and software, net 
of depreciation                                         959              743
Other assets                                             14               10
                                                    -------          -------
                                                      2,969            7,774
                                                    =======          =======
Liabilities and stockholders' equity
Current liabilities:
Loans payable                                             -            1,299
Other current liabilities                             3,812            4,765
Current liabilities of discontinued                      42               62
operations
                                                    -------          -------
Total current liabilities                             3,854            6,126

Capital lease obligation, net of current                164                -
portion
Other long term liabilities                             288              423
                                                    -------          -------
Total liabilities                                     4,306            6,549
                                                    -------          -------
Total stockholders' (deficit) equity                 (1,337)           1,225
                                                    -------          -------
                                                      2,969            7,774
                                                    =======          =======

                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Unaudited, in thousands)

                                              For the year ended December 31
                                                          2006          2005
                                                             $             $
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                (6,832)       (5,840)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization                              399         1,752
Non-cash interest expense                                    -           145
Stock based compensation                                   666             1
Deferred rent expense                                        -           312
Provisions for (reversals of) allowance for doubtful       (35)            2
accounts
Changes in current assets and liabilities:
Accounts receivable                                       (154)         (198)
Prepaids and other current assets                         (103)          (66)
Accounts payable                                           100            79
Deferred revenue                                           398            35
Accrued expenses and other current liabilities            (706)        1,113
                                                       -------       -------
Net cash used in continuing operations                  (6,267)       (2,665)
Net cash used in discontinued operations                   (20)         (241)
                                                       -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software              (301)          (57)
                                                       -------       -------
Net cash used in investing activities                     (301)          (57)
Net cash provided by investing activities of                 -            48
discontinued operations
                                                       -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations                     (65)          (30)
Proceeds from loans payable                                  -         2,269
Repayment of related party notes                          (120)            -
Repayment of convertible loans                          (1,179)         (318)
Decrease in other long term liability                     (135)         (123)
Proceeds from issuance of common stock, net              2,493         7,155
                                                       -------       -------
Net cash provided by financing activities                  994         8,953
                                                       -------       -------
FOREIGN EXCHANGE EFFECT ON CASH                            281           (29)
                                                       -------       -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    (5,313)        6,009
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD           6,399           390
                                                       -------       -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                 1,086         6,399
                                                       -------       -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid                                               68            26
Income taxes paid                                            -             -
Discount on convertible debentures                           -           517
Conversion of convertible debentures to equity               -         1,587
Conversion of loans payable to equity                        -           674
Issuance of common stock in satisfaction of deferred       250             -
rent
Cost of capital reduction                                  580             -


The financial information contained herein is unaudited and has been extracted
from the Company's 2006 Annual Report on Form 10-KSB which contains audited
financial information. A summary of the significant accounting policies used by
the Company is set out in the Company's Annual Report.
  




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